February 26, 2015 Practice Points

PA Court Holds Legal-Malpractice Claims Barred by Collateral Estoppel

A recent decision nevertheless serves as an important reminder to all attorneys that they should not dabble in practice areas with which they are unfamiliar, given the substantial risk of malpractice exposure.

By Carey L. Menasco

Illustrating the cautionary principles that (1) an attorney should avoid dabbling in practice areas with which he or she is unfamiliar and (2) prior litigation positions can have serious future consequences, a Pennsylvania district court recently dismissed a plaintiff’s legal-malpractice action on grounds that it was barred by a prior decision of a U.S. Bankruptcy Court under the doctrine of collateral estoppel. See Roach v. Verterano, No. 14-947, 2015 U.S. Dist. LEXIS 18745 (W.D. Pa. Feb. 17, 2015).

In Roach, the plaintiff hired the defendant and his law firm to assist her with the filing of Chapter 7 bankruptcy proceedings for the plaintiff, individually, and for her company, GRL Packaging, LLC. The defendant wrongly advised the plaintiff that the debt owed by GRL would be discharged and that the plaintiff could continue to operate her business even after the Chapter 7 bankruptcy petitions had been filed. Relying on this incorrect advice, the plaintiff continued to operate GRL and used funds in the business account to pay creditors and to pay for her own living expenses.

Months later, at the meeting of creditors, the U.S. Trustee learned about the defendant’s mistaken advice to the plaintiff. The Trustee informed both the plaintiff and her attorney that “it was illegal to continue to operate a corporation after filing [] Chapter 7” and directed the plaintiff to immediately turn over all corporate assets, cease doing business, and provide an accurate accounting. The defendant admitted that he was at fault in advising the plaintiff to file a Chapter 7 for her business, and he promised to pay for damage done as a result of his error.

Thereafter, the plaintiff ceased doing business in GRL and began to establish a new corporation to conduct her business. The defendant, however, advised the plaintiff that she could not transfer any assets of GRL to the new company, and allegedly advised her to continue operating GRL because he was going to file a motion to dismiss the GRL bankruptcy case. The defendant filed a motion to dismiss the case, but then later withdrew that motion, presumably because the Trustee’s opposing argument, that the plaintiff failed to establish any legal cause warranting dismissal, had merit.

Subsequently, one of plaintiff’s creditors filed a complaint seeking to deny the plaintiff individually a discharge of her debts because she intended to hinder, delay, or defraud her creditors and because she transferred corporate assets post-petition. The plaintiff defended the denial-of-discharge action by claiming that she was not in bad faith and did not have the requisite intent because she had simply relied on the advice of her attorney. Rejecting the plaintiff’s argument, the bankruptcy court held that the plaintiff’s reliance on her attorney’s advice was unreasonable after the Trustee had expressly instructed her to cease doing business and to turn over all corporate assets. Thus, her reliance on the defendant’s bad advice could not negate her intent.

Following that decision, the plaintiff filed suit against her attorney for professional negligence and breach of contract. Her attorney sought dismissal of all claims on grounds that the plaintiff was collaterally estopped from proving causation of any damages due to the bankruptcy court’s decision that the plaintiff herself intended to hinder, delay, or defraud her creditors, and that plaintiff could not rely on the defendant’s advice in making the post-petition transfers of assets that ultimately led to her denial of discharge.

The district court agreed with the defendant and dismissed all claims, holding that under the doctrine of collateral estoppel, the plaintiff could not “now seek to prove that something other than [her own] conduct was the proximate cause of her nondischarge. To hold otherwise would allow Plaintiffs to relitigate factual issues already resolved by the Bankruptcy Court, namely, whether Plaintiff Roach’s reliance on Attorney Verterano was in good faith and whether Plaintiff acted fraudulently or innocently relied on her incompetent attorney.”  

The Roach decision, and others like it, have interesting legal implications for plaintiffs who find themselves in the undesirable position of having relied on the bad advice of counsel, and who thereafter try to salvage what remains of their cases. It seems that the plaintiff in Roach may have been better off not objecting to the motion to deny discharge, given the risk that an adverse ruling that the plaintiff was not entitled to rely on advice of counsel could negatively impact any future malpractice claim. However, had the plaintiff chosen that strategy, she may have been faced in the legal-malpractice action with the argument that she failed to mitigate her damages. Both options have substantial risks, and neither is appealing.

And, while the district court dismissed malpractice claims against the attorney in Roach, the decision nevertheless serves as an important reminder to all attorneys that they should not dabble in practice areas with which they are unfamiliar, given the substantial risk of malpractice exposure.


— Carey L. Menasco, Liskow & Lewis, APLC, New Orleans, LA

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