Labgold v. Regenhardt et al

Filing 28

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, )

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF VIRGINIA
Alexandria Division
MARC R. LABGOLD,
Plaintiff,
v.

LINDA D. REGENHARDT, et al.,
Defendants.

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Civil Action No. 1-16-cv-01469 (AJT/IDD)

MEMORANDUM OPINION AND ORDER
Pending before the Court are Defendants' Motion to Dismiss for Lack of Subject Matter
Jurisdiction [Doc. No. 8] and Plaintiff's 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) Plaintiff's 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) Plaintiff's attempt to
amend his Complaint, as set forth in his proposed First Amended Complaint ("Amended
Complaint"), would be futile because Plaintiff's 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; Plaintiff's 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 be 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

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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.
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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 Plaintiff's 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
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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] ,Ml 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
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month prior to the bankruptcy petition." [Id ,i 21.] He alleges that "[t]his failure led directly to
the bankruptcy Trustee questioning Dr. Labgold's motives and credibility." [Id. ,i 22.]
III.

STANDARDOFREVIEW

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.

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IV.

ANALYSIS

Under the relevant bankruptcy statute,the bankruptcy estate consists of"all legal or
equitable interests ofthe debtor in property as ofthe commencement ofthe case." 11 U.S.C. §
54 l(a)(l ). It also includes "[a]ny interest in property that the estate acquires after the
commencement ofthe case." Id. § 54l (a)(7). "The scope ofSection 541 is broad and includes
intangible 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 was disclosed to the trustee and not administered is
abandoned back to the debtor. 11 U.S.C. § 554(c). On the other hand,property that was not
disclosed remains the property ofthe estate even after the case is closed. See id § 554(d).
The parties agree that Dr. Labgold did not disclose his legal malpractice claim during the
pendency ofhis bankruptcy proceeding. Consequently,ifthat claim was the property ofthe
bankruptcy estate,it remains the property ofthe estate,not ofDr. Labgold. The issue is
therefore whether Dr. Labgold's claim for malpractice existed at the time his Chapter 7 petition
was filed. That question is determined by when that cause ofaction accrued under Virginia law.
In this regard,the Court follows the weight ofauthority in holding that ifa malpractice claim
accrued post-petition,it is property ofthe debtor rather than the estate and therefore not a part 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 are part ofthe bankruptcy estate and post-petition causes of
action are not."') (quoting Witko v. Menotte (In re Witko), 374 F.3d 1040,1042 (11th Cir. 2004))
(alteration in original).
1 The Court recognizes that in its unpublished, non-precedential opinion in In re Richman, 117 F.3d 1414 (Table),
1997 WL 360644 (4th Cir. 1997) (per curiam), the Fourth Circuit made an alternative holding that legal malpractice
claims arising post-petition are property of the bankruptcy estate. See 4th Cir. R. 32.1 (citation of unpublished
opinions).

There are three elements to a legal malpractice claim under Virginia law: " 1) the
existence of an attorney-client relationship creating a duty; 2) a breach of that duty by the
attorney; and 3) damages that were proximately caused by the attorney's breach of duty."
Williams v. Joynes, 677S.E.2d 261, 264 (Va. 2 009).

A legal malpractice claim is a breach of contract claim. Shipman v. Kruck, 593 S.E.2d
319,3 22 (Va. 2 004) ("The statute of limitations for legal malpractice actions is the same as those
for breach of contract because although legal malpractice actions sound in tort,it is the contract
that gives rise to the duty."). By statute,a "right of action " in a contract claim accrues on the
date of breach. See Va. Code§ 8.01-23 0("[T]he right of action shall be deemed to accrue ...
when the breach of contract occurs in actions ex contractu and not when the resulting damage is
discovered....") In Shipman, a lawyer committed malpractice when he filed a bankruptcy
petition for the Shipmans.The issue considered by the Supreme Court of Virginia was "whether
on that date,or at a later time, the Shipmans sustained injury or damage sufficient to constitute a
cause of action." Shipman, 593 S.E.2d at 3 23. The Court reiterated that "it is immaterial
whether all the damages resulting from the negligent act were sustained at the time that act
occurred " and,relying on Va.Code§ 8.01-23 0 concluded that "[u]pon the filing of the
,
bankruptcy petition the Shipmans incurred a legal injury." Id at 3 23. "Although the injury
could not be delineated as a sum certain or reflected as a final judgment on the merits," it
explained,''there was injury sufficient to commence a cause of action for legal malpractice." Id
As a result,"[t]irst and foremost, the Shipmans lost control of their assets to the Bankruptcy
Trustee," and "[e]ven the Shipmans' right to bring a legal malpractice claim vested in the
Bankruptcy Trustee." Id Here, as in Shipman, Plaintiff's "cause of action for malpractice," as
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alleged in the Complaint, accrued "as of the commencement of the case," 11 U.S.C. § 541(a)(l ),
and the cause of action became property of the estate. Plaintiff therefore does not have standing
to bring that claim and the Court is without subject matter jurisdiction over it.
In his proposed Amended Complaint, Dr. Labgold has abandoned his originally pied
theory of causation and now contends that his malpractice claim against Ms. Regenhardt is a
separate and distinct cause of action based solely on her post-petition breaches: "[T]he injury
Dr. Labgold sustained was the denial of discharge. Dr. Labgold does not allege that the denial of
discharge was caused by the improper filing of the petition. Rather, the denial of discharge was
caused by Ms. Regenhardt's breaches and advice that she provided after the petition was filed."
Pl.'s Reply in Supp. of Mot. for Leave to File First Am. Compl. [Doc. No. 27], at 3. For the
purpose of determining whether the Court would have subject matter jurisdiction over the
proposed Amended Complaint, the question therefore reduces to whether Dr. Labgold's
malpractice claim, as alleged in his proposed Amended Complaint, constitutes the same or a
different cause of action than that which had accrued as of the filing of the bankruptcy petition
and was therefore property of the bankruptcy estate.
In support of his contention that he is entitled to pursue what he has alleged is a
completely separate and distinct cause of action, Plaintiff argues that "[w]hether the denial [of
discharge in bankruptcy] was caused by Ms. Regenhardt's post-petition breaches-as Dr.
Labgold alleges-goes to the merits of the legal malpractice claim, not to standing," and that "at
the very least it is a jury question as to whether the subsequent breaches caused a distinct harm."
[Id. at 3 & n.2.] In that regard, Plaintiff now alleges, directly contrary to his previous

allegations, that Ms. Regenhardt's failure to disclose the transfer in the petition, ''while a breach
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of standards of care, did not cause damage to Plaintiff' and that "[b]ut for Defendants' breaches
of the standards of care [that are alleged to have occurred after the filing of the petition], ...the
U.S.Trustee would not have filed the action to deny Labgold's discharge or would not have
prevailed." [Proposed] First Am. Compl.[Doc.No. 19-1] ,i,i 18, 40.
Plaintiffs position cannot be reconciled with the holding in Shipman. The Shipmans
argue� as Plaintiff does here, that they were not sufficiently injured by the acts of legal
malpractice that had occurred with the filing of the bankruptcy petition. The Supreme Court of
Virginia rejected that claim on the grounds that as a matter of law, the Shipmans, by virtue of the
negligent bankruptcy filing, had sustained a "legal injury" "sufficient to commence a cause of
action for legal malpractice." Shipman, 593 S.E.2d at 323. So too here. The alleged pre-petition
negligence caused as a matter of law a "legal injury" sufficient for a cause of action for
malpractice to accrue. This cause of action also encompasses the alleged post-petition breaches,
all of which amount to a continuing failure to correct the original (and principal) breach of filing
the petition within a year of transfer of the Property. See [Proposed] First Am. Compl. [Doc.No.
19-1] 139. Based on Plaintiff's allegations in either the Complaint or the proposed Amended
Complaint, there is only one cause of action for legal malpractice against Defendants. That
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claim accrued no later than the filing of the Petition.

2 The accrual date on plaintiff's malpractice claim for the purpose ofdetermining whether it is bankruptcy estate

property is not affected by the "continuous representation rule" that tolls the running ofthe statute oflimitations. As

Shipman makes clear, the continuous representation rule does not alter when the legal malpractice claim comes into
existence but rather determines the date that the statute oflimitation begins to run. Id ("In other words, the

Shipmans could have brought an action against Krock at any time after the bankruptcy petition was filed. However,
that does not necessarily establish the date the statute oflimitations began to run for purposes ofa legal malpractice
action."); see also Harris v. K & K Ins. Agency, Inc., 453 S.E.2d 284, 286 (Va. 1995) ("As a general rule, the statute
oflimitations begins to run against a cause ofaction at the time ofits accrual. But where there is an undertaking
which requires a continuation of services, the statute oflimitations does not begin to run until the termination of the
undertaking.") (alteration in original) (internal quotation marks omitted).

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Plaintiff relies upon the principle,supported by case authority,that there may be multiple
causes of action resulting from multiple breaches of the same contract. See, e.g., Waites v. Wells
Fargo Bank, N.A., No. 2:15-cv-353,2016 WL 659084,at •2 (E.D. Va. Feb. 16,2016) ("[W]hen
wrongful acts are not continuous but occur only at intervals,each occurrence inflicts a new
injury and gives rise to a new and separate cause of action.") (quoting Hampton Roads Sanitation
Dist. v. McDonnell, 360 S.E.2d 841, 843 (Va. 1987)). But that principle is premised on "[a]
distinct wrongful act that inflicts a new injury." Id at *3. It does not apply where there is only
one injury arising from multiple breaches of the same contract. See Kiser v. A. W. Chesterton
Co., 736 S.E.2d 910,916 (2013) ("The mere multiplication of grounds of negligence alleged as
causing the same injury does not result in multiplying the causes of action.") (quoting Baltimore
Steamship Co. v. Phillips, 274 U.S. 316,321 (1927)). Here,the alleged injury in both the
original Complaint and the Amended Complaint is the same-the denial of discharge and legal
fees. Compare Compl. [Doc. No. 1-1] ,i,i 29,40,with [Proposed] First Am. Compl. [Doc. No.
19-1] 11135,40. All of the alleged breaches,both pre- and post-petition,arise out of a
continuous course of representation pertaining to a single scope of representation (plaintiff's
bankruptcy), established through a single contract for representation. There is no distinct injury
attributable to post-petition negligence rather than pre-petition negligence.
Plaintiff argues that it is for a jury to determine which acts of negligence caused the
alleged injury. But the factual allegations of both complaints make clear that the alleged injury
flowed directly from the pre-petition breaches and that it is impossible to divorce the pre-petition
breaches, including the filing of the petition itself, from the post-petition breaches in determining
what caused the undesired outcome in Dr. Labgold's bankruptcy case. Indeed,based on the
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factual allegations, it is difficult to see how the pre-petition negligence-the advice to file and
the filing of the petition-was anything other than a "but for" cause of the alleged injury that the
plaintiff asserts in his proposed Amended Complaint. See [Doc. No. 27-1], at 15 (where the
Bankruptcy Court denied the discharge based on "the circumstances surrounding the transfer,"
not the litigation posture).
For the above reasons, the Court concludes that Plaintiff's legal malpractice claim, as
alleged in the Complaint, was property of the bankruptcy estate under 11 U.S.C. § 54l(a)(l).
Because Dr. Labgold did not disclose that cause of action in the bankruptcy case, it was not
abandoned back to him upon the closing of the bankruptcy case under 11 U.S.C. § 554. The
bankruptcy trustee is therefore the only party who can currently decide whether to bring this
claim against Defendants. Accordingly, Plaintiff lacks standing to bring this claim, and the
Court lacks subject matter jurisdiction over it. See Nat 'I Am. Ins. Co. v. Ruppert Landscaping
Co., 187 F.3d 439, 441 (4th Cir. 1999) ("If a cause of action is part of the estate of the bankrupt

then the trustee alone has standing to bring that claim."); Vanderheyden v. Peninsula Airport
Comm'n, No. 4:12-cv-46, 2013 WL 30065, at •9 (E.D. Va. Jan. 2, 2013). For the same reasons,

the Court concludes that it would not have subject matter jurisdiction with respect to the
malpractice claim asserted in the proposed Amended Complaint; and Plaintiff's Motion for
Leave to File First Amended Complaint must be denied on the grounds of futility. Because the
Court lacks jurisdiction, it must, by statute, remand the case to state court in these circumstances.
See 28 U.S.C. § 1447(c) ("If at any time before final judgment it appears that the district court

lacks subject matter jurisdiction, the case shall be remanded.") (emphasis added); Ellenburg v.
Spartan Motors Chassis, Inc., 519 F.3d 192, 200 (4th Cir. 2008) ("Of course, if the court on

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remand concludes that it does not have subject matter jurisdiction, then it will be obligated under
§ 1447(c) to remand the case to the state court."); Roach v. W. Virginia Reg'/ Jail & Corr.
Facility Auth., 74 F.3d 46, 49 (4th Cir. 1996) (holding that remand rather than dismissal was
required in removed case where the district court lacked subject matter jurisdiction because of
the Eleventh Amendment).
VI.

CONCLUSION

For the above reasons, the Court concludes that (1) Plaintiff's cause of action for legal
malpractice was, and remains, the property of the bankruptcy estate; (2) because his malpractice
claim remains property of the bankruptcy estate, Plaintiff lacks standing to assert his malpractice
claim and the Court lacks subject matter jurisdiction over this claim; (3) because the Court lacks
subject matter jurisdiction over this removed case, it must remand the action to the state court
from which it was removed; and (4) Plaintiff's attempt to amend his Complaint, as set forth in
his proposed Amended Complaint, is futile. Accordingly, 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; it is granted to
the extent that the Court concludes that Plaintiff does not have standing to bring his claim and
the Court is therefore without subject matter jurisdiction; and it is otherwise DENIED; and it is
further
ORDERED that Plaintiff'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
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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

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