…issue of collateral estoppel concerning a matter previously litigated…

In Gobindram v Ruskin Moscou Faltischek, P.C., 175 AD3d 586, 589-91 [2d Dept 2019], the state court considered the issue of collateral estoppel concerning a matter previously litigated in the federal bankruptcy court. The court held:

Scales of justice

“The doctrine of in pari delicto mandates that the courts will not intercede to resolve a dispute between two wrongdoers” (Kirschner v. KPMG LLP, 15 N.Y.3d 446, 464, 912 N.Y.S.2d 508, 938 N.E.2d 941). “[T]he principle that a wrongdoer should not profit from his own misconduct is so strong in New York that … the defense applies even in difficult cases and should not be weakened by exceptions” (id. at 464, 912 N.Y.S.2d 508, 938 N.E.2d 941 [internal quotation marks omitted] ). “The defense requires intentional conduct on the part of the plaintiff” (Sacher v. Beacon Assoc. Mgt. Corp., 114 A.D.3d 655, 657, 980 N.Y.S.2d 121; see Kirschner v. KPMG LLP, 15 N.Y.3d at 474, 912 N.Y.S.2d 508, 938 N.E.2d 941).

Collateral estoppel precludes a party from relitigating in a subsequent action or proceeding an issue raised in a prior action or proceeding and decided against that party, whether or not the tribunals or causes of action are the same (see Buechel v. Bain, 97 N.Y.2d 295, 303, 740 N.Y.S.2d 252, 766 N.E.2d 914; Shifer v. Shifer, 165 A.D.3d 721, 723, 85 N.Y.S.3d 92). There must be an identity of issue which has necessarily been decided in the prior action and is decisive of the present action, and there must have been a full and fair opportunity to contest the decision now said to be controlling (see Buechel v. Bain, 97 N.Y.2d at 303–304, 740 N.Y.S.2d 252, 766 N.E.2d 914; Shifer v. Shifer, 165 A.D.3d at 723, 85 N.Y.S.3d 92).

Here, the federal courts in the plaintiff’s bankruptcy proceeding finally adjudicated a mixed issue of law and fact identical to that raised by the in pari delicto defense asserted by the defendants in the current legal malpractice action, i.e., the plaintiff’s culpability in connection with the filing of the inaccurate bankruptcy petition. Those courts found that the plaintiff knowingly and intentionally made a false and fraudulent statement under oath by swearing that he had read the SOFA and that it was true and correct, and that the plaintiff’s alleged reliance on the defendants to accurately prepare the bankruptcy submissions did not negate his fraudulent intent. These findings established that the plaintiff was in pari delicto with the defendants to the extent that he alleges they acted negligently in preparing and filing the inaccurate bankruptcy petition. Accordingly, we agree with the Supreme Court’s determination granting that branch of the defendants’ motion which was to dismiss so much of the legal malpractice cause of action as sought to recover damages for the defendants’ preparation and filing of the inaccurate bankruptcy petition based on the doctrines of collateral estoppel and in pari delicto.

However, we disagree with the Supreme Court’s determination granting that branch of the defendants’ motion which was to dismiss so much of the legal malpractice cause of action as sought to recover damages for the defendants’ failure to amend the bankruptcy petition. The findings of the federal courts regarding the knowing and fraudulent conduct on the plaintiff’s part related solely to the initial filing; they made no determination that the plaintiff acted knowingly and fraudulently in failing to file an amended petition. Accordingly, that part of the plaintiff’s legal malpractice cause of action is not subject to dismissal on the grounds of collateral estoppel and in pari delicto.

As an alternative ground for affirmance (see Parochial Bus Sys. v. Board of Educ. of City of N.Y., 60 N.Y.2d 539, 545–546, 470 N.Y.S.2d 564, 458 N.E.2d 1241), the defendants contend that the legal malpractice cause of action should have been dismissed in its entirety pursuant to CPLR 3211(a)(7), since the parties’ evidentiary submissions on the motion established that the plaintiff hired subsequent counsel who had ample opportunity to rectify their alleged error in this regard (see e.g. Perks v. Lauto & Garabedian, 306 A.D.2d 261, 262, 760 N.Y.S.2d 231). This contention lacks merit.

On a motion to dismiss a complaint pursuant to CPLR 3211(a)(7), the court must “accept the facts as alleged in the complaint as true, accord plaintiffs the benefit of every possible favorable inference, and determine only whether the facts as alleged fit within any cognizable legal theory” (Leon v. Martinez, 84 N.Y.2d 83, 87–88, 614 N.Y.S.2d 972, 638 N.E.2d 511; see Nonnon v. City of New York, 9 N.Y.3d 825, 827, 842 N.Y.S.2d 756, 874 N.E.2d 720). “When evidentiary material is considered, the criterion is whether the proponent of the pleading has a cause of action, not whether [she or] he has stated one, and, unless it has been shown that a material fact as claimed by the pleader to be one is not a fact at all and unless it can be said that no significant dispute exists regarding it, … dismissal should not eventuate” (Guggenheimer v. Ginzburg, 43 N.Y.2d 268, 275, 401 N.Y.S.2d 182, 372 N.E.2d 17).

Here, the record reveals that the plaintiff did not retain the services of new counsel until December 2011. By that time, the bankruptcy trustee had already noted inconsistencies in the petition and requested an accounting relating to the omitted tax refund transfers, and the plaintiff’s creditors had commenced the adversary proceeding. Giving the plaintiff the benefit of every favorable inference (see Leon v. Martinez, 84 N.Y.2d at 87–88, 614 N.Y.S.2d 972, 638 N.E.2d 511), this time line suggests that the defendants, not the subsequent attorney, represented the plaintiff at the time when a voluntary amendment to the petition could have significantly reduced the prospect of a finding that the plaintiff made a false and fraudulent statement in the bankruptcy petition (see In re Tully, 818 F.2d 106, 111 [1st Cir.]; Matter of Kilson, 83 B.R. 198, 203 [D. Conn.]). Accordingly, at this preliminary stage of the litigation, the defendants have failed to conclusively demonstrate that the plaintiff’s subsequent attorney had a sufficient opportunity to correct their alleged error in failing to amend the petition, such that they did not proximately cause any damages flowing from that error (see generally Tooma v. Grossbarth, 121 A.D.3d 1093, 1096, 995 N.Y.S.2d 593; Grant v. LaTrace, 119 A.D.3d 646, 647, 990 N.Y.S.2d 227).

We find unpersuasive the defendants’ additional alternative contention that the legal malpractice cause of action was properly dismissed pursuant to CPLR 3211(a)(3) because that cause of action belongs to the bankruptcy estate and the plaintiff lacked standing to assert it. “On a defendant’s motion to dismiss the complaint based upon the plaintiff’s alleged lack of standing, the burden is on the moving defendant to establish, prima facie, the plaintiff’s lack of standing” (BAC Home Loans Servicing, LP v. Rychik, 161 A.D.3d 924, 925, 77 N.Y.S.3d 522; see CPLR 3211[a][3]; MLB Sub I, LLC v. Bains, 148 A.D.3d 881, 881–882). “[T]he motion will be defeated if the plaintiff’s submissions raise a question of fact as to its standing” (U.S. Bank N.A. v. Clement, 163 A.D.3d 742, 743, 81 N.Y.S.3d 116 [internal quotation marks omitted]; see MLB Sub I, LLC v. Bains, 148 A.D.3d at 882, 50 N.Y.S.3d 410).

Here, in response to the defendants’ prima facie showing that the plaintiff’s legal malpractice cause of action was the property of the bankruptcy estate (see Wright v. Meyers & Spencer, LLP, 46 A.D.3d 805, 849 N.Y.S.2d 274; Williams v. Stein, 6 A.D.3d 197, 198, 775 N.Y.S.2d 255; In re Strada Design Assoc., Inc., 326 B.R. 229, 237–240 [S.D. N.Y.]), the plaintiff raised a question of fact as to whether the bankruptcy trustee had abandoned the cause of action in accordance with Bankruptcy Code (11 USC) § 554(a) and had authorized the plaintiff to pursue it. Accordingly, dismissal of the legal malpractice cause of action for lack of standing is not available at this juncture.

R. A. Klass
Your Court Street Lawyer

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