Opinion ID: 199309
Heading Depth: 2
Heading Rank: 1

Heading: The malpractice counterclaim

Text: 14 As an initial matter, we must address whether the doctrine of res judicata applies to this case. The Iannochinos argue that res judicata is inappropriate here because they have never pursued a prior remedy or suit against the defendants [or] engaged in multiple attempts to obtain relief. Though this argument is strikingly undeveloped, it adverts to an important issue. At the time of the fee application, the Iannochinos' malpractice claims were counterclaims and/or defenses to that application. The failure to interpose a counterclaim does not necessarily act as a bar to later actions. See, e.g., Restatement (Second) of Judgments §a22(1) (1982); see also Rowland v. Harrison, 577 A.2d 51, 56 (Md. 1990) (refusing to find preclusion for failure to raise counterclaim under Maryland's permissive counterclaim rule). This principle protects putative counterclaimants from the inadvertent loss of their claim. Carried too far, however, this principle would undermine the protective purpose of res judicata. See, e.g., Bay State HMO Mgmt., Inc. v. Trigley Sys., Inc., 181 F.3d 174, 181 (1st Cir. 1999) (The policy behind res judicata is to relieve parties of the cost and vexation of multiple lawsuits, conserve judicial resources, and, by preventing inconsistent decisions, encourage reliance on adjudication.) (internal quotations omitted). Consequently, this principle is subject to two important exceptions that narrow its applicability and reduce the potential waste of judicial resources and costs to the parties associated with multiple suits based upon the same facts. See Restatement (Second) of Judgments § 22(2) (1982). 15 The first of these exceptions applies to compulsory counterclaims. See id. §a22(2)(a). But for the bankruptcy setting of this case, the Iannochinos' malpractice counterclaims would be subject to this exception. A fee application in bankruptcy is akin to an action to recover a debt. Under ordinary federal rules of civil procedure, if a counterclaim arises out of the transaction or occurrence that is the subject matter of the opposing party's claim and does not require for its adjudication the presence of third parties of whom the court cannot acquire jurisdiction, the counterclaim is compulsory and must be raised. Fed. R. Civ. P. 13(a). As both the fee application and the malpractice counterclaim concern the same transaction, the counterclaim would have been subject to Rule 13. Moreover, the compulsory counterclaim rule is applicable in certain bankruptcy contexts. Thus, if the fee application had changed from a contested matter to an adversary proceeding, 2 the Iannochinos' malpractice counterclaims would also have been compulsory and subject to res judicata. See Fed. R. Bankr. P. 7013 (making Fed. R. Civ. P. 13 applicable to adversary proceedings). Alternatively, the bankruptcy court could have ordered Rule 7013 applicable to the fee application, again subjecting the counterclaims to res judicata under this exception. See Fed. R. Bankr. P. 9014 (allowing the bankruptcy court at any stage in a particular [contested] matter [to] direct that one or more of the rules applicable to adversary proceedings apply). Nothing in the record indicates, however, that the fee application ever became an adversary proceeding or that the bankruptcy court ever directed that Rule 7013 apply. Therefore, the Iannochinos' malpractice counterclaim to the fee application was not compulsory and cannot be res judicata under this exception. 16 The second exception is applicable when the relationship between the counterclaim and the plaintiff's claim is such that successful prosecution of the second action would nullify the initial judgment or would impair rights established in the initial action. Restatement (Second) of Judgments § 22(2)(b) (1982). In the normal course of civil litigation, the Iannochinos' malpractice counterclaim could not affect a prior judgment assessing fees. See Rowland, 577 A.2d at 57 (holding claim for professional malpractice against veterinarian would not nullify prior judgment establishing debt for the allegedly substandard services). In bankruptcy, however, a successful malpractice action could impair rights that Aframe and Rodolakis had gained from the order awarding them fees. Under the relevant section of the bankruptcy code governing fee awards, a finding of malpractice would mean that the attorneys were not entitled to compensation for those services found to be substandard. See 11 U.S.C. § 330(a)(4) 3 ; see also In re Southmark, 163 F.3d 925, 931 (5th Cir. 1999) (It is evident that a court-appointed professional's dereliction of duty could transgress both explicit Code responsibilities and applicable professional malpractice standards.). Nor does it matter that the fees may already have been awarded by the time of the malpractice judgment. Fed. R. Civ. P. 59 and 60 are applicable in bankruptcy, thus giving bankruptcy courts broad authority to reconsider judgments. See Fed. R. Bankr. P. 9023 (Fed. R. Civ. P. 59); Fed. R. Bankr. P. 9024 (Fed. R. Civ. P. 60); see also Fed. R. Bankr. P. 3008 (allowing parties in interest to move for reconsideration of an order allowing or disallowing a claim against the estate). Furthermore, a bankruptcy court can order professionals to disgorge fees that it had previously awarded them. See 11 U.S.C. § 105(a) (The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.); In re Hot Tin Roof, Inc., 205 B.R. 1000 (1st Cir. Bankr. App. Panel 1997) (upholding disgorgement for failure to disclose conflict of interest); In re Capgro Leasing Assocs., 169 B.R. 305, 317 (E.D.N.Y. 1994) (ordering disgorgement of fees because services did not benefit the estate in any way). 17 The successful prosecution of the Iannochinos' malpractice claims in the action here has the potential, therefore, to provide the basis for a later order, following a motion to reconsider, forcing Aframe and Rodolakis to disgorge the fees that the bankruptcy court awarded them. Thus, the second exception in section 22 of the Restatement is applicable here. See Restatement (Second) of Judgments § 22 Rptr. Notes (1982) (noting that the exception is applicable where a defendant, having failed to interpose a defense or counterclaim in a prior action which terminated in a judgment for plaintiff, now seeks in a subsequent action to obtain relief which, if granted, would permit recovery of the amount paid pursuant to that judgment on a restitution theory). The Iannochinos cannot escape res judicata on the ground that their malpractice claims were only counterclaims to the fee application. 4