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Labgold v. Regenhardt

United States District Court, E.D. Virginia, Alexandria Division

April 14, 2017

MARC R. LABGOLD, Plaintiff,
v.
LINDA D. REGENHARDT, et al., Defendants.

          MEMORANDUM OPINION AND ORDER

          Anthony J. Trenga United States District Judge

         Pending before the Court are Defendants' Motion to Dismiss for Lack of Subject Matter Jurisdiction [Doc. No. 8] and Plaintiffs Motion for Leave to File First Amended Complaint [Doc. No. 19] (the "Motions"). Plaintiff Marc Labgold ("Plaintiff' or "Dr. Labgold") asserts a claim for legal malpractice against his former bankruptcy counsel, Defendant Linda Regenhardt ("Ms. Regenhardt"), and her firm, Defendant Linda Regenhardt, LLC (collectively, "Defendants"). Defendants removed this action from the Circuit Court for the City of Alexandria and now move to dismiss on the grounds that Dr. Labgold lacks standing because his malpractice claim is property of his bankruptcy estate and can therefore be brought at this point only by a trustee in bankruptcy as an asset of his bankruptcy estate. The Court held a hearing on March 10, 2017 on Defendants' Motion to Dismiss for Lack of Subject Matter Jurisdiction, following which it took the matter under advisement. Plaintiff then filed his Motion for Leave to File First Amended Complaint in an attempt to address the issues raised in response to the initial Complaint, as they more fully developed at the March 10, 2017 hearing.

         Upon consideration of the Motions, the memoranda in support thereof and in opposition thereto, the arguments of counsel at the March 10, 2017 hearing, and for the reasons below, the Court concludes that (1) Plaintiffs claim for legal malpractice accrued no later than with the filing of his bankruptcy petition and therefore was, and remains, the property of the bankruptcy estate; (2) because his malpractice claim remains property of the bankruptcy estate, Plaintiff lacks standing to bring his malpractice claim and the Court lacks subject matter jurisdiction over this claim; (3) because it lacks subject matter jurisdiction over this removed case, the Court must remand the action to the state court from which it was removed; and (4) Plaintiffs attempt to amend his Complaint, as set forth in his proposed First Amended Complaint ("Amended Complaint"), would be futile because Plaintiffs malpractice claim, as alleged in the Amended Complaint, constitutes the same cause of action that is property of the bankruptcy estate, even though he now alleges that only acts of malpractice after the filing of the bankruptcy petition caused his injury. Therefore, the Defendants' Motion to Dismiss for Lack of Subject Matter Jurisdiction is GRANTED in part, insofar as the Court concludes that the plaintiff does not have standing to bring his claim, and is otherwise DENIED; Plaintiffs Motion for Leave to File First Amended Complaint is DENIED; and this case is REMANDED to the Circuit Court for the City of Alexandria.

         II. BACKGROUND

         The following alleged facts are taken as true for the purposes of Defendants' Motion to Dismiss for Lack of Subject Matter Jurisdiction:

Plaintiff is a patent attorney who in 2006 became the chief executive officer of a biotechnology company, Antara Biosciences ("Antara"), which he left in July 2007. Antara was unsuccessful. Investors and former employees filed a series of lawsuits against Antara in late 2007. In September 2012, Plaintiff was joined as a defendant in the lawsuit by the former employees. On December 21, 2012, Plaintiff married his wife. On January 7, 2013, on the advice of counsel not party to this action, he transferred ownership of his house (the "Property") to himself and his wife as tenants by the entirety. At this time, Dr. Labgold's law practice was generating significant monthly revenues, and he expected the Antara litigation against him to be settled. In Spring 2013, the Antara litigation settlements failed, and the monthly revenues from his law practice significantly declined.

         In April 2013, Dr. Labgold met with Ms. Regenhardt to discuss his financial situation and the possibility of filing for Chapter 11 bankruptcy. Ms. Regenhardt learned of Dr. Labgold's transfer of the Property at this meeting. Dr. Labgold retained Ms. Regenhardt on April 23, 2013 and signed a written agreement with respect to that representation. In June 2013, Dr. Labgold informed Ms. Regenhardt that he wished to proceed with the preparation and filing of a Chapter 11 bankruptcy petition, which she began preparing with information provided by him. Based on her review of the information, Ms. Regenhardt advised Dr. Labgold to immediately file a Chapter 7 bankruptcy petition. She then prepared the Chapter 7 petition that he filed on July 23, 2013. In preparing the petition, Ms. Regenhardt understated Mrs. Labgold's income and did not fully list the assets of Dr. Labgold's law practice. She also failed to disclose the transfer of the Property, even though it was transferred within one year of filing the petition. The bankruptcy trustee discovered this transfer in the bankruptcy proceedings and, on January 27, 2014, brought an adversary complaint in those proceedings alleging that the transfer was made within two years of the filing of the petition with the intent to hinder, delay, or defraud creditors, or, alternatively, that it was made for less than its value while Dr. Labgold was insolvent. Dr. Labgold eventually paid $180, 000 to the bankruptcy estate to settle this adversary complaint.

         Also on January 27, 2014, the U.S. trustee filed another adversary complaint against Dr. Labgold in the bankruptcy proceedings, this time objecting to his discharge on the grounds that his transfer of the Property was made within one year of the filing of the petition with the intent to hinder, delay, or defraud creditors. The United States Bankruptcy Court for the Eastern District of Virginia tried that claim on December 11, 12, and 15, 2014. At that trial, Ms. Regenhardt testified that she made a number of mistakes in the petition, including failing to disclose the transfer of the Property, which Dr. Labgold had disclosed to her. Despite this testimony, Ms. Regenhardt never advised Dr. Labgold to amend the petition or about the consequences of not amending it.

         On January 15, 2015, the Bankruptcy Court denied Dr. Labgold's discharge of his unsecured debts in excess of $600, 000 pursuant to 11 U.S.C. § 727(a)(2)(A). As the basis for its decision, the Bankruptcy Court found "given the circumstances surrounding the transfer, that the [Plaintiff] intended to hinder, delay or defraud his creditors when he transferred the [Property] to himself and his wife as tenants by the entirety." [Doc. No. 27-1 at 15.] In support of that finding, the Bankruptcy Court concluded that "[t]he transfer of the [Property] evidenced virtually all of the badges of fraud with the exception of concealment of the transfer." [Id. at 11.] It also rejected Plaintiffs claim that the transfer was for estate planning purposes. [Id. at 12.] It further found that "[t]he [Plaintiff], while not a real estate attorney, went to law school and would have understood that the effect of a transfer of property to himself and his wife as tenants by the entirely would have been to put the property beyond the reach of the Antara creditors, who were not joint creditors of the [Plaintiff] and his wife." [Id. at 15.] Given the magnitude of his liabilities listed in his petition relative to his listed assets and his additional, unlisted potential liabilities to the Antara creditors, the Bankruptcy Court found "unconvincing" Plaintiffs claim that he believed that in the event of a judgment in the California Antara litigation, he, along with his co-investor in Antara, would have been able to satisfy the judgment. [Id. at 13.] On August 14, 2015, this Court affirmed the decision of the Bankruptcy Court, as did the United States Court of Appeals for the Fourth Circuit on April 5, 2016. On October 4, 2016, Dr. Labgold's bankruptcy case was closed and the trustee was dismissed without any disclosure of his malpractice claim against Ms. Regenhardt. Because he was not discharged, the claims against Dr. Labgold in the Antara litigation continued, as a result of which Dr. Labgold has expended substantial sums in settlement and attorneys' fees.

         On July 21, 2016 (before the bankruptcy case was closed and the trustee dismissed), Dr. Labgold filed this action in the Circuit Court for the City of Alexandria, which Defendants removed to this Court on November 28, 2016. In his Complaint, Plaintiff alleges that Ms. Regenhardt committed various acts of malpractice, both before and after the filing of the bankruptcy petition, that caused his unsecured debts not to be discharged. See Compl. [Doc. No. 1-1] ¶¶ 19-37. In particular, Dr. Labgold alleges that Ms. Regenhardt committed malpractice when she advised Dr. Labgold to file the Chapter 7 bankruptcy petition within a year of the transfer of the Property and thereafter with respect to her post-petition advice concerning how to handle the bankruptcy litigation surrounding that transfer. He alleges that "Ms. Regenhardt's most egregious error-and the reason both the Bankruptcy Court and the United States District Court for the Eastern District of Virginia gave for the continued denial of discharge for Dr. Labgold's debts-was that Ms. Regenhardt did not disclose the transfer of the real estate on the petition even though she knew that Dr. Labgold had transferred the property approximately six month prior to the bankruptcy petition." [Id. ¶ 21.] He alleges that "[t]his failure led directly to the bankruptcy Trustee questioning Dr. Labgold's motives and credibility." [Id. ¶ 22.]

         III. STANDARD OF REVIEW

         The party invoking the court's jurisdiction typically bears the burden of proving the existence of federal subject matter jurisdiction. See Ellenburg v. Spartan Motors Chassis, Inc., 519 F.3d 192, 200 (4th Cir. 2008). The court's review of subject matter jurisdiction is generally based on the allegations in the complaint, taken as true, but the court may in certain circumstances resolve factual disputes. See Kerns v. United States, 585 F.3d 187, 193 (4th Cir. 2009) ("[W]hen a defendant asserts that the complaint fails to allege sufficient facts to support subject matter jurisdiction, the trial court must apply a standard patterned on Rule 12(b)(6) and assume the truthfulness of the facts alleged. On the other hand, when the defendant challenges the veracity of the facts underpinning subject matter jurisdiction, the trial court may go beyond the complaint, conduct evidentiary proceedings, and resolve the disputed jurisdictional facts. And when the jurisdictional facts are inextricably intertwined with those central to the merits, the court should resolve the relevant factual disputes only after appropriate discovery, unless the jurisdictional allegations are clearly immaterial or wholly unsubstantial and frivolous."). Here, because resolution of Defendants' Motion to Dismiss for Lack of Subject Matter Jurisdiction does not turn on factual disputes, the Court will accept as true the factual allegations in the Complaint.

         IV. ANALYSIS

         Under the relevant bankruptcy statute, the bankruptcy estate consists of "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). It also includes "[a]ny interest in property that the estate acquires after the commencement of the case." Id. § 541(a)(7). "The scope of Section 541 is broad and includes intangible property such as a cause of action." In re Wilson,94 B.R. 886, 888 (E.D. Va. 1989). When a bankruptcy case closes, property that was disclosed to the trustee and not administered is abandoned back to the debtor. 11 U.S.C. ยง ...


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