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Michele Meyer As Trustee of the Liquidating Trust For Dbsi v. Young Conaway Stargatt & Taylor Llp

March 31, 2011


The opinion of the court was delivered by: Honorable B. Lynn Winmill Chief U. S. District Judge



The Court has before it defendants' motion to dismiss or for change of venue, and plaintiff's motion to remand. The Court heard oral argument on February 10, 2011, and took the motions under advisement. For the reasons explained below, the Court will deny the plaintiff's motion and grant in part the defendants' motion, changing venue of this case to Delaware.


This is a legal malpractice action against two law firms, alleging that they failed to reveal conflicts of interest in their representation of a debtor in bankruptcy before the Delaware Bankruptcy Court. The debtor, Highlands & Southcreek, was dissolved by the bankruptcy, and a Liquidating Trust was created to dispose of the estate's assets for the benefit of the main creditor, Normandin, a Delaware Limited Liability Company.

This action is brought by Michele Meyer, the trustee for the Liquidating Trust. Any recovery by the plaintiff will ultimately go to Normandin. The defendants are two law firms: Young Conaway Stargatt & Taylor, and Foley & Lardner, neither with offices in Idaho.

The two law firms represented Highlands & Southcreek in the Delaware bankruptcy. The Liquidating Trust alleges that both law firms committed malpractice in their representation during that bankruptcy. The complaint alleges that the law firms failed to reveal conflicts of interest and facilitated the allegedly improper transfer of some $700,000 to be used as their retainer. No part of the claim refers to any malpractice committed outside of the Delaware bankruptcy proceedings.

The Liquidating Trust originally filed this action in Idaho state court. The action was removed by defendants, and they filed a motion to dismiss or to change venue. The defendants allege that this Court lacks personal jurisdiction over them, and that proper venue lies in Delaware. The Liquidating Trust responded by filing a motion to remand to state court, alleging that this Court lacks subject matter jurisdiction. The Court will begin by reviewing the subject matter jurisdiction issue.

Subject Matter Jurisdiction

A claim may be removed to a federal district court that has jurisdiction over the claim under 28 U.S.C. § 1334. See 28 U.S.C. § 1452(a). Original and exclusive jurisdiction under 28 U.S.C. § 1334 is conferred to district courts, and derivatively bankruptcy courts, for "all cases under title 11," and original but not exclusive jurisdiction is conferred to "all civil proceedings arising under title 11, or arising in or related to cases under title 11." See 28 U.S.C. § 1334(a)-(b).

Proceedings "arising in" bankruptcy cases are generally referred to as "core" proceedings, and essentially are "proceedings that would not exist outside of bankruptcy, such as matters concerning the administration of the estate, orders to turn over property of the estate, and proceedings to determine, avoid, or recover preferences." In re Pegasus Gold Corp., 394 F.3d 1189, 1193 (9th Cir. 2005). A non-exhaustive list of "core" proceedings is found in 28 U.S.C. § 157(b)(2)(A), and includes "matters concerning the administration of the estate."

The issue here is whether a legal malpractice claim based on counsels' conduct representing debtors in bankruptcy "arises in" the bankruptcy. While the Ninth Circuit has not decided this precise issue, it has found "arising in" jurisdiction over a claim against a bankruptcy trustee for embezzlement, holding that "[n]othing could be more important to the handling of a bankruptcy estate than the fidelity of those who are entrusted with its assets." In re Ferrante, 51 F.3d 1473, 1476 (9th Cir. 1995). The fidelity of bankruptcy counsel cannot be any less important, and other courts have so found. For example, the Fourth Circuit held that a debtor's claim that his attorney committed malpractice in representing him in his bankruptcy "arises in" bankruptcy because the claim "would have no practical existence but for the bankruptcy." Grausz v. Englander, 321 F.3d 467, 471 (4th Cir. 2003). The Second Circuit found Grausz persuasive, and held that a legal malpractice claim "implicates the integrity of the entire bankruptcy process." Baker v. Simpson, 613 F.3d 346, 351 (2nd Cir. 2010). Similarly, a malpractice claim against accountants representing debtors in bankruptcy was found to "arise in" bankruptcy because the claim "implicated the integrity of the entire bankruptcy process" and the "alleged malpractice was inseparable from the bankruptcy context." In re Seven Fields Dev. Corp., 505 F.3d 237, 260-61 (3rd Cir. 2007).

Meyer cites in opposition the case of In re Resorts Int'l, 372 F.3d 154 (3rd Cir. 2004). But that case involved a malpractice action against an accounting firm for conduct occurring after the bankruptcy. In a later decision, the Third Circuit noted this distinguishing fact, and held that a claim for legal malpractice occurring during the bankruptcy did "arise in" bankruptcy. In re Seven Fields, 505 F.3d at 260-61.

Meyer argues that the cases cited above all involve professionals who are appointed by the bankruptcy court, while the malpractice claim at issue here only involves attorneys approved by the court. This distinction is without substance, however. The sweeping statement in Ferrante -- about the indispensable need for professional fidelity in bankruptcy -- does not turn on the hair-splitting distinction of whether that professional is appointed or approved by the bankruptcy court. Either way, the fidelity of these professionals is critical to the administration of the bankruptcy, and hence this malpractice action "arises in" bankruptcy and is a core proceeding under 28 U.S.C. ยง 157(b)(2)(A). Accordingly, the Court finds that it has subject matter jurisdiction over the complaint in this matter. Moreover, the Court rejects Meyer's request that the Court abstain from ...

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