Legal Malpractice

Settlements, Bankruptcy Court and Legal Malpractice

By (Andrew Lavoott Bluestone)

Continuing the trend towards a combination of bankruptcy and legal malpractice, we note that bankruptcy follows, and rarely precedes legal malpractice situations, hence, we expect a swell of the intersection following the financial down-trends of the past year.  Here, Tabner v Drake
2009 NY Slip Op 10006; Decided on December 31, 2009 ; Appellate Division, Third Department is an example of how settlement of an underlying case is handled in Bankruptcy Court, even when the attorneys seeking their fee have nothing to do with the bankruptcy.  Apparently, individual Drake had carved out a portion of the settlement that was then taken away from him by the Bankruptcy Court, and as a result he would not sign a stipulation and release so that the law firm which had produced the settlement sums might get paid.
 

"In 1998, plaintiffs commenced an action to recover legal fees for services allegedly rendered to defendant Ralph H. Drake Jr.'s residential and commercial real estate business — defendant RHD Construction Corporation. In response, Drake and RHD asserted negligence and malpractice counterclaims against plaintiffs. Multiple pretrial proceedings ensued (see e.g. Tabner v Drake, 9 AD3d 606 [2004]) and, in 2001, Drake filed for bankruptcy under chapter 7 of the Bankruptcy Code.

Shortly after the start of trial, the parties entered into a stipulation of settlement in open court which, among other things, contemplated the exchange of general releases from the parties with respect to all aspects of the litigation. The parties acknowledged that the Bankruptcy Court's approval of the settlement was required and, in November 2007, the Bankruptcy Court issued an order approving the settlement and authorizing the bankruptcy estate's trustee to execute general releases in accordance therewith, specifically authorizing the payment of $50,000 to plaintiffs by the trustee. Nevertheless, citing purported inconsistencies between the actual [*2]terms of the settlement and the "Bankruptcy Court approval relative to the amounts to be paid to each defendant," Drake and RHD refused to execute their respective releases. Consequently, plaintiffs moved in Supreme Court for an order directing that defendants execute the releases called for within the agreement and enforcing the stipulation of settlement. Supreme Court granted the motion, prompting this appeal. "

"Accordingly, although the parties agreed to a total settlement of $350,000, with $50,000 going to plaintiffs, $295,000 to RHD and $5,000 to Drake, the Bankruptcy Court properly observed that the bankruptcy estate was the "legal and equitable owner of the litigation whether through [Drake] directly or as the sole shareholder of RHD" (see 11 USC § 541). Its resultant order — that $50,000 be tendered to plaintiffs and $300,000 be tendered to the bankruptcy trustee — thus adequately reflects the terms and conditions of the settlement. In view of the foregoing, we find no reason to disturb Supreme Court's order."

Full post as published by New York Attorney Malpractice Blog on January 06, 2010 (boomark / email).