Labgold v. Regenhardt et al, No. 1:2016cv01469 - Document 28 (E.D. Va. 2017)

Court Description: MEMORANDUM OPINION AND ORDER- it is hereby ORDERED that Defendants' Motion to Dismiss for Lack of Subject Matter Jurisdiction [Doc. No. 8] be, and the same hereby is, GRANTED in part and DENIED in part; and it is further ORDERED that Plaintiff&# 039;s Motion for Leave to File First Amended Complaint [Doc. No. 19] be, and the same hereby is, DENIED; and it is further ORDERED that this case be, and the same hereby is, REMANDED to the Circuit Court for the City of Alexandria. Signed by District Judge Anthony J Trenga on 4/14/2017. (See Order for further details)(dest, )

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Labgold v. Regenhardt et al Doc. 28 IN TE UNITED STATES DISTRICT COURT FOR TE EASTEN DISTRICT OF VIRGNIA Alexandria Division MARC R. LABGOLD, Plaintif, v. LNDA D. EGERDT, et al., Deendants. ) ) ) ) ) ) ) ) ) Civil Action No. 1-16-cv-01469 (JT/IDD) EMOANDUM OPINION AND ORDER Pending beore the Court re Defendnts' Motion to Dismiss or Lack of Subject Matter Jurisdiction [Doc. No. 8] nd Plainti's Motion or Leave to File First Amended Complaint [Doc. No. 19] (the "Motions"). Plaintif Mrc Labgold ("Plaintif' or "Dr. Labgold") sserts a claim or legal malpractice against his omer banuptcy counsel, Deendnt Linda Regenhardt ("Ms. Regenhardt"), nd her m, Defendnt Linda Regenhardt, LLC (collectively, "Defendnts"). Defendants removed his action rom the Circuit Court or the City of Alexndria nd now move to dismiss on the rounds that Dr. Labgold lacks snding because his malpractice claim is property of his bauptcy esate and cn thereore be brouht at tis point only by a ustee in bankruptcy as n asset of his bankruptcy estate. he Court held a hearing on Mrch 10, 2017 on Defendnts' Motion to Dismiss or Lack of Subject Matter Jurisdiction, ollowing which it took the matter under advisement. Plaintif then iled is Motion or Leave to File First Amended Complaint in n attempt to address the issues raised in response to the initial Complaint, as they more ully developed at the Mch 10, 2017 hearing. Upon consideration of the Motions, he memornda in support thereof and in opposition heeto, the rguments of counsel at the Mrch 10, 2017 hering, and or the reasons below, the Dockets.Justia.com Court concludes that ( 1) Plainti's claim or legal malpractice accued no later than with the iling of his bankruptcy petition nd thereore was, nd remains, the property of the banuptcy estate; (2) because his malpactice claim emains poperty of the bruptcy estate, Plaintif lacks standing to bring his malpactice claim nd the Cout lacks subject matter jurisdiction over this claim; (3) because it lacks subject matter jurisdiction over this removed cse, the Cot must remnd the action to the state court rom wich it ws removed; nd (4) Plainti's attempt to mend his Complaint, as set orth in his proposed First Amended Complaint ("Amended Complaint"), would be utile because Plainti's malpactice claim, as alleged in the Amended Complaint, constitutes the sme cause of action that is property of the bankruptcy estate, even though he now alleges that only acts of malpractice ater the iling of the bankruptcy petition caused his injury. Thereore, the Defendants' Motion to Dismiss or Lack of Subject Matter Jurisdiction is GNTED in prt, insofar as he Court concludes that the plaintif does not have stnding to bring his claim, and is othewise DENIED; Plaini's Motion or Leave to File First Amended Complaint is DENIED; nd this case is EMANDED to the Circuit Cot or the City of Alexndria. II. BACKGROD The ollowing alleged facts are taken s rue or the purposes of Defendnts' Motion to Dismiss or Lack of Subject Matter Jurisdiction: Plaintif is a patent attoney who in 2006 becme the chief executive oicer of a biotechnology company, Antra Biosciences ("Antara"), which be let in July 2007. Antara was unsuccessul. Investors and omer employees iled a seies of lawsuits against Antara in late 2007. In September 2012, Plaintif was joined s a defendnt in the lawsuit by the ormer 2 employees. On December 21, 2012, Plaintif maried his wie. On Jnuy 7, 2013, on the advice of counsel not paty to this action, he ransfered onersip of his house (the "Property") to himself and his wie as tennts by the entirety. At this ime, Dr. Labgold's law pacice ws geneating siniicnt monthly revenues, nd he expectd the Antaa litigation against him to be settled. In Spring 2013, the Antara litigation settlements filed, nd the monthly revenues rom his law practice siniicantly declined. In April 2013, Dr. Labgold met with Ms. Regenhardt to discuss his inncial situation nd the possibility of iling or Chapter 11 bankuptcy. Ms. Regenhdt lened of Dr. Labgold's anser of the Property at this meeting. Dr. Labgold retained Ms. Regenhrdt on April 23, 2013 nd sined a ritten areement with resect to hat representation. In June 2013, Dr. Labgold infomed Ms. Regenhardt that he wished to proceed with the prepration nd iling of a Chapter 11 bankuptcy petition, which she begn preparing wih infomation provided by him. Based on her review of the infomation, Ms. Regenhardt advised Dr. Labgold to immediately ile a Chapter 7 bankruptcy petition. She then prepared the Chapter 7 peition that he iled on July 23, 2013. In preparing the petition, Ms. Regenhardt understated Mrs. Labgold's income nd did not ully list the assets of Dr. Labgold's law practice. She also failed to disclose the nser of the Propery, even though it was nsfered within one yer of iling the peition. The bankruptcy stee discovered this ansfer in the bankruptcy proceengs nd, on Jnuy 27, 2014, brought n adversary complaint in those proceedings alleging that the anser was made within two yers of the iling of the petition with the intent to hinder, delay, or deraud creditors, or, altenatively, that it was made or less thn its value while Dr. Labgold ws insolvent. Dr. Labgold eventually paid $180,000 to the bruptcy estate to settle this adversry complaint. 3 Also on Januay 27, 2014, the U.S. rustee iled nother adversy complaint against Dr. Labgold in the banruptcy proceedings, this time objecting to his dischrge on the rounds that his nsfer of the Property ws made within one yer of the iling of the petition with the intent to hinder, delay, or deraud creditors. The United States Banruptcy Court or the Easten Disrict of Virginia tried that claim on December 11, 12, nd 15, 2014. At that rial, Ms. Regenhardt testiied that she made a number of mistakes in the petition, including failing to disclose the transfer of the Property, which Dr. Labgold hd disclosed to her. Despite this testimony, Ms. Regenhardt never advised Dr. Labgold to mend the petition or about the consequences of not mending it. On Jnuay 15, 2015, the Banuptcy Court denied Dr. Labgold's discharge of his unsecured debts in excess of $600,000 pursunt to 11 U.S.C. § 727(a)(2)(A). As the basis or its decision, the Bruptcy Cout ound "given the cicmstnces surounding the nser, that the [Plainti] intended to hinder, delay or deraud his creditos when he ransfered the [Property] to himself nd his wife as tennts by the enirety." [Doc. No. 27-1 at 15.] In suppot of that inding, the Banruptcy Court concluded that "[t]he nsfer of the [Propery] evidenced vially all of the badges of aud with the exception of conceament of the ransfer." [Id. at 11.] It also rejected Plainti's claim that the nsfer ws or estate pling puposes. [Id. at 12.] It urther ound that "[t]he [Plainti], while not a real esate attoney, went to law school nd would have nderstood that the efect of a ransfer of property to himself and his wie as tennts by the entirely would have been to put the property beyond the reach of the Antaa creditors, who were not joint creditors of the [Plaini] nd his wife." [Id at 15.] Given the manitude of his liabilities listed in his petition relative to his listed ssets nd his additional, unlisted potential 4 liabilities to he Antara creditors, the Bkruptcy Cout ound "unconvincing" Plaintifs claim hat he believed that in he event of a judment in the Calioia Antara litigation, he, along with his co-investor in Ant, would have been able to satisy the judment. [Id. at 13.] On August 14, 2015, this Court med the decision of the Buptcy Cot, as did the United States Cout of Appeals or the Fourh Circuit on April 5, 2016. On October 4, 2016, Dr. Labgold's bruptcy case ws closed nd the rustee ws dismissed without ny disclosure of his malpactice clim against Ms. Regenhrdt. Because he ws not dischrged, the claims against Dr. Labgold in the Anta litigation continued, as a result of which Dr. Labgold has expended substanial sums in settlement nd attoneys' fees. On July 21, 2016 (beore the buptcy cse ws closed nd the ustee dismissed), Dr. Labgold iled this action in the Circuit Court or the City of Alexndria, which Defendnts removed to this Cot on November 28, 2016. In his Complaint, Plaintif alleges that Ms. Regenhrdt committed various acts of malpractice, both beore nd ater the iling of the buptcy peiion, that caused his unsecured debts not to be dischrged. See Compl. [Doc. No. 1-1] l 19-37. In pticulr, Dr. Labgold alleges that Ms. Regenhrdt committed malpractice when she advised Dr. Labgold to ile the Chapter 7 banuptcy petition ithin a yer of the ranser of the Property nd thereater with resect to her post-petition advice conceng how to hndle the buptcy litigation sronding that ansfer. He alleges that "Ms. Regenhrdt's most eregious erornd the reson both the Buptcy Cout nd the United States Disrict Cout or the asten Disrict of Virinia gave or the continued denial of discharge or Dr. Labgold's debt-was that Ms. Regenhrdt did not disclose the nser of the real estate on the peiion even though she knew that Dr. Labgold had ransfered the property approximately six 5 monh prior to the bnkruptcy petition." [Id i 21.] He alleges that "[t]his failure led directly to the bankruptcy Tustee questioning Dr. Labgold's motives nd credibility." [Id. i 22.] III. STDDOFREVIEW The party invoking the court's jurisdiction typically bears the buden of proving the existence of ederal subject matter jurisdiction. See Elenburg v. Spartan Motors Chassis, Inc., 519 F.3d 192,200 (4th Cir. 2008). The cout's review of subject matter jurisdiction is generally bsed on the allegations in the complaint, taken as ue,but the court may in certain circmstnces resolve actual disputes. See Kens v. United States, 585 F.3d 187,193 (4th Cir. 2009) ("[W]hen a deendnt asserts that the complaint fails to allege suicient acts to support subject matter jurisdiction,the rial court must apply a standrd pattened on Rule 12(b)(6) nd ssume the uness of the acts alleged. On the other hnd,when the deendnt challenges the veacity of the acts underpinning subject matter jurisdiction, the ial court may go beyond the complaint, conduct evidentiy proceedings,and resolve the disputed jurisdictional acts. And when the jrisdictional facts are inexricably intetwined with those cenral to the merits,the court should esolve the relevnt factual disputes only ater appropriate discovery,unless the juisdictional allegations re clearly immaterial or wholly unsubstntial nd rivolous."). Hee, because resolution of Defendants' Motion to Dismiss or Lack of Subject Matter Jurisdiction does not n on factual disputes,the Cout will accept s ue the actual allegations in the Complaint. 6 IV. ANALYSIS Under he relevnt bankruptcy statute,the bankruptcy estate consists of"all legal or equitable interests ofthe debtor in property as ofthe commencement ofthe cse." 11 U.S.C. § 54 l(a)(l ). It also includes "[a]ny interest in property that the estate acquires ater the commencement ofthe case." Id. § 54l (a)(7). "The scope ofSection 541 is broad nd includes intnible property such as a cause ofaction." In re Wilson, 94 B.R. 886,888 (E.D. Va. 1989). When a bankruptcy case closes,property that ws disclosed to the ustee and not administered is bndoned back to the debtor. 11 U.S.C. § 554(c). On the other hand,property that ws not disclosed remains the property ofthe estate even ater the case is closed. See id § 554(d). The parties agree that Dr. Labgold did not disclose his legal malpractice claim duing the pendency ofhis bankruptcy proceeding. Consequently,ifthat claim ws the propety ofthe buptcy estate,it emains the property ofthe estate,not ofDr. Labgold. The issue is thereore whether Dr. Labgold's claim or malpractice existed at the time his Chapter 7 peiion ws iled. That question is detemined by when that cause ofaction accued under Virgia law. In this regrd,the Cout ollows the weight ofauthority in holding that ifa malpactice claim accued post-petition,it is property ofthe debtor raher thn the estate nd thereore not a pt of the estate. 1 See, e.g., In re Holstein, 321 B.R. 229,235 (Bankr. N.D. Ill. 2005) ("Put simply, '(p]re-petition causes ofaction re pt ofthe bankruptcy estate nd post-petition causes of action re not."') (quoting Wito v. Menotte (In re Wito), 374 F.3d 1040,1042 (11th Cir. 2004)) (alteation in original). 1 The Cot econies that in its unpublished, non-precedential opinion in In re Richman, 117 F.3d 1414 (Table), 1997 L 36044 (4th Cir. 1997) (per curiam), the Fourth Circuit made an altenative holding that legal malpactice claims arising post-petition re property of the banuptcy estate. See 4th Cir. R. 32.1 (ciation of unpublished opinions). There re three elements to a legal malpactice claim under Virginia law: " 1) the existence of n attoney-client relationship creating a duty; 2) a breach of that duty by the atoney; nd 3) damages that were proximately caused by the attoney's breach of duty." Wiliams v. Joynes, 677S.E.2d 261, 264 (Va. 2 009). A legal malpractice clim is a breach of conract claim. Shipman v. uck, 593 S.E.2d 319,3 22 (Va. 2 004) ("The statute of limitations or legal malpactice actions is the sme as those or breach of conact because although legal malpractice actions sound in tot,it is the conract that ives rise to the duty."). By statute,a "right of action " in a conract claim accues on the date of breach. See Va. Code§ 8.01-23 0("[T]he right of action shall be deemed to accue ... when the breach of conract occurs in actions ex conractu nd not when the resulting dmage is discovered....") In Shipman, a lawyer committed malpractice when he iled a bruptcy peition or the Shipmans.The issue considered by the Supreme Court of Virginia was "whether on that date,or at a later time, the Shipmns susined injuy or dmage suicient to constitute a cause of action." Shipman, 593 S.E.2d at 3 23. The Cout reiterated that "it is immaterial whether all the dmages resulting rom the negligent act were susained at the time that act occred " nd,relying on Va.Code§ 8.01-23 0 concluded that "[u]pon the iling of the , bruptcy petition the Shipmns incured a legal injuy." Id at 3 23. "Althouh the injuy could not be delineated as a sum cein or reflected as a inal judment on the merits," it explained,''thee was injuy suicient to commence a cause of action or legal malpractice." Id As a esult,"[]irst nd oremost, the Shipmns lost conrol of their ssets to the Bakruptcy Tustee," nd "[e]ven the Shipmns' riht to bring a legal malpactice clim vested in the Buptcy Tustee." Id Here, as in Shipman, Plainti's "cause of action or malpractice," as 8 alleged in he Complaint, accued "s of the commencement of the cse," 11 U.S.C. § 541(a)(l ), nd the cause of action becme property of the estate. Plaintif thereore does not have sanding to bring that claim nd the Court is without subject matter jurisdiction over it. In his proposed Amended Complaint, Dr. Labgold hs abndoned his originally pied theoy of causaion nd now contends that his malpractice claim against Ms. Regenhrdt is a separate nd distinct cause of action bsed solely on her post-petition breaches: "[T]he injuy Dr. Labgold sustained was the denial of dischrge. Dr. Labgold does not allege that the denial of discharge ws caused by the improper iling of the petition. Rather, the denial of dischrge was caused by Ms. Regenhrdt's breaches nd advice that she provided ter the petition ws iled." Pl.'s Reply in Supp. of Mot. or Leave to File First Am. Compl. [Doc. No. 27], at 3. For the purpose of deteng whether the Cot would have subject matter jurisdiction over the proposed mended Complaint, the question theeore reduces to whether Dr. Labgold's malpacice clam, s lleged in his proposed Amended Complaint, constitutes the sme or a difeent case of action than that which had accued s of the iling of the buptcy petition nd ws thereore poperty of the banuptcy estate. In support of his contenion that he is entitled to psue what he hs alleged is a completely sepate nd distinct cause of action, Plaintif rgues that "[w]hether the denial [of dischrge in bkruptcy] ws caused by Ms. Regenhardt's post-petition breaches-s Dr. Labgold alleges-goes to the meris of the legal malpacice claim, not to standing," and that "at he vey least it is a jury question as to whether the subsequent breaches caused a distinct hm." [Id. at 3 & n.2.] In hat regard, Plaintif now alleges, directly conray to his previous allegaions, that Ms. Regenhardt's failure to disclose the ranser in the petition, ''while a beach 9 of standards of cre, did not cause mage to Plaintif' nd that "[b]ut or Defendnts' breaches of the sndrds of care [that re alleged to have occred ater the iling of the petition], ...the U.S.Tustee would not have iled the action to deny Labgold's dischrge or would not have prevailed." [Proposed] First Am. Compl.[Doc.No. 19-1] ii 18, 40. Plaintifs position cnnot be reconciled with the holding in Shipman. he Shipmans argue s Plinf does here, that they were not suiciently injured by he acts of legal malpactice that had occured with he iling of the banuptcy petition. The Supreme Cot of Virginia rejected that claim on the rounds that as a matter of law, he Shipmns, by virtue of the negligent banuptcy iling, had sustained a "legal injy" "suicient to ommence a cause of action or legal malpactice." Shipman, 593 S.E.2d at 323. So too here. The alleged pre-petiion negligence caused as a matter of law a "legal injy" suicient or a cause of acion or malpractice to accue. This cause of acion also encompasses the alleged post-petition breaches, all of wich mount to a continuing failure to corect the original (and principal) breach of iling the petition within a year of ranser of the Property. See [Proposed] First Am. Compl. [Doc.No. 19-1] 139. Bsed on Plainti's allegations in either the Complant or the proposed Amended Complaint, there is only one cause of action or legal malpractice against Defendants. That 2 claim accued no later thn the iling of the Petition. 2 The accual date on plainti's malpractice claim or the pupose ofdetemining whether it is baruptcy estate propety is not afcted by the "continuous epesentaion ule" that tolls the unning ofthe statute oflimitations. As Shipman makes clar, the continuous represention ule does not alter when the legal malpactice claim comes into existence but ather detemines the date that the sute oflimiation begins to un. Id ("In other words, the Shipmans could have brought an action against ock at any time ater the buptcy peition was iled. However, that does not necesily establish the date the statue oflimitations began to un or puposes ofa legal malpactice action."); see also Hris v. K & K Is. Ageny, Inc., 453 S.E.2d 284, 286 (Va. 1995) ("As a geneal ule, the statute oflimitations begins to un against a cause ofaction at the time ofits accual. But where there is an undertaking which requires a continuation of sevices, the staute oflimitations does not begin to n until the temination of the undeng.") (alteration in original) (intenal quotation marks omitted). 10 Plaintif relies upon the principle,supported by case authority,that thee may be multiple causes of action resulting rom multiple breaches of the sme conract. See, e.g., Waites v. Wells Fargo Ban, .A., No. 2:15-cv-353,2016 WL 659084,at •2 (E.D. Va. Feb. 16,2016) ("[W]hen rongul acts re not continuous but occur only at intevals,each occrence inlicts a new injuy nd gives rise to a new and sepate cause of action.") (quoting Hampton Roas Sanitation Dist. v. McDonnell, 360 S.E.2d 841, 843 (Va. 1987)). But that principle is pemised on "[a] distinct rongul act that inlicts a new injury." Id at *3. It does not apply where there is only one injy arising rom multiple beaches of the sme conact. See Kiser v. A. . Chesterton Co., 736 S.E.2d 910,916 (2013) ("he mere multiplication of grounds of negligence alleged as causing the sme injury does not result in multiplying the causes of acion.") (quoting Baltimore Steamship Co. v. Phillips, 274 U.S. 316,321 (1927)). Here,the alleged injury in boh the original Complaint and the Amended Complaint is the sme-the denial of discharge nd legal fees. Compare Compl. [Doc. No. 1-1] ii 29,40,with [Proposed] First Am. Compl. [Doc. No. 19-1] 1135,40. All of he alleged breaches,both pre- nd post-petition,rise out of a continuous course of representation peng to a single scope of representation (plainti's banuptcy), established through a single conract or representation. Thee is no disinct injuy atibutable to post-petition negligence rather thn pe-petition negligence. Plaintif rgues that it is or a jury to detemine which acts of negligence caused the alleged injury. But the actual allegations of both complants mke clear hat the lleged injury lowed directly rom the pre-petition breaches nd that it is impossible to divorce the pe-petition breaches, including the iling of he petition itself, rom the post-petition breaches in detemining what caused the undesired outcome in Dr. Labgold's buptcy case. Indeed,based on he 11 actal allegations, it is diicult to see how the pre-petition negligenc-the advice to ile and the iling of the petitio-was anything other n a "but or" cause of the alleged injury that the plaintif sserts in his proposed Amendd Complaint. See [Doc. No. 27-1], at 15 (where the Bankruptcy Cot denied the dischrge based on "the circumstances surounding the ranser," not the litigation posture). For the above resons, the Court concludes that Plainti's legal malpracice claim, as alleged in the Complaint, was popery of the bauptcy estate under 11 U.S.C. § 54l(a)(l). Because Dr. Labgold did not disclose that cause of acion in the bkruptcy cse, it was not abndoned back to him upon the closing of the bauptcy cse under 11 U.S.C. § 554. The baruptcy trustee is thereoe the only party who cn cently decide whether to bring this claim against Deendnts. Accordingly, Plaintif lacks standing to bring this claim, nd the Cout lacks subject matter jurisdiction over it. See Nat 'I Am. Is. Co. v. Ruppert Lanscaping Co., 187 F.3d 439, 441 (4th Cir. 1999) ("If a cause of acion is part of the esate of the baupt then the ustee alone hs stnding to bring that claim."); Vanderheyden v. Peninsula Airport Comm'n, No. 4:12-cv-46, 2013 WL 30065, at •9 (E.D. Va. Jn. 2, 2013). For the same reasons, the Cout concludes that it would not have subject mater jurisdicion with respect to the malpractice claim asserted in the proposed Amended Complaint; nd Plaini's Motion or Leave to File First Amended Complaint must be denied on the ounds of utility. Because the Court lacks jurisdiction, it must, by statte, remnd the cse to state court in these circumstances. See 28 U.S.C. § 1447(c) ("If at ny time beore inal judment it appers that the disrict court lacks subject matter jurisdiction, the case shall be remnded.") (emphasis added); Ellenburg v. Spartan Motors Chassis, Inc., 519 F.3d 192, 200 (4th Cir. 2008) ("Of course, if the court on 12 remnd concludes that it does not have subject matter jrisdiction, then it will be obligated under § 1447(c) to remnd the case to the state court."); Roach v. . irginia Reg'/ Jail & Corr. Faciliy Auth., 74 F.3d 46, 49 (4th Cir. 1996) (holding that remnd ather thn dismissal ws required in removed cse where the disrict cout lacked subject matter jurisdiction because of the Eleventh Amendment). VI. CONCLUSION For the above resons, the Court concludes that (1) Plaini's case of action or legal malpactice was, and remains, the property of the buptcy estate; (2) because his malpractice claim emains property of the buptcy estate, Plaintif lacks standing to ssert his malpracice claim nd the Court lacks subject mater jurisdiction over this claim; (3) because the Court lacks subject matter jurisdiction over this removed case, it must remnd the action to the state cot rom which it ws removed; nd (4) Plainti's attempt to mend his Complaint, s set oth in his proposed Amended Complaint, is utile. Accordingly, it is hereby ORDERED that Deendants' Motion to Dismiss or Lack of Subject Matter Jurisdicion [Doc. No. 8] be, nd the sme hereby is, GANTED in pt nd DENIED in part; it is ranted to the extent that the Court concludes that Plaintif does not have standing to bring his claim nd the Court is thereore without subject matter jurisdiction; nd it is otherwise DENIED; nd it is urther ORDERED that Plainti's Motion or Leave to File First Amended Complaint [Doc. No. 19] be, and he sme hereby is, DENIED; nd it is ther ORDERED that this case be, nd the sme hereby is, EMANDED to the Circuit Cot or the Ciy of Alexndria 13 The Clerk of the Court is directed to forward copies of this Memorandum Opinion and Order to all counsel. Anthony J. Treng United States Distri Alexandria, Virginia April 14, 2017 14

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