Court Opinion

ID: 1020273
Source: CourtListenerOpinion
Date Created: 2013-07-04 22:48:49.711793+00
Date Added: 2024-06-11T15:20:24.978855
License: Public Domain

UNPUBLISHED

                    UNITED STATES COURT OF APPEALS
                        FOR THE FOURTH CIRCUIT

                             No. 05-1518

KRONISH LIEB WEINER AND HELLMAN, LLP,

                                              Plaintiff - Appellant,

           and

LAWRENCE C. GOTTLIEB; JAMES BELDNER; RICHARD
S. KANOWITZ,

                                                           Plaintiffs,

           versus

JOHN K. FORT, Chapter 7 Trustee for Spartan
International, Incorporated,

                                               Defendant - Appellee.

Appeal from the United States District Court for the District of
South Carolina, at Greenville. Henry F. Floyd, District Judge.
(CA-04-1312-6-HFF; BK-01-10254; AP-03-80324)

Argued:   May 24, 2006                  Decided:     September 1, 2006

Before WILKINSON, TRAXLER, and GREGORY, Circuit Judges.

Affirmed by unpublished opinion. Judge Gregory wrote the opinion,
in which Judge Wilkinson joined. Judge Traxler wrote a separate
concurring opinion.
ARGUED: Tara Elizabeth Nauful, HAYNSWORTH, SINKLER & BOYD, P.A.,
Columbia, South Carolina, for Appellant.   George Barry Cauthen,
NELSON, MULLINS, RILEY & SCARBOROUGH, L.L.P., Columbia, South
Carolina, for Appellee.     ON BRIEF: William H. Short, Jr.,
HAYNSWORTH, SINKLER & BOYD, P.A., Columbia, South Carolina, for
Appellant. Linda K. Barr, Jody A. Bedenbaugh, NELSON, MULLINS,
RILEY & SCARBOROUGH, L.L.P., Columbia, South Carolina, for
Appellee.

Unpublished opinions are not binding precedent in this circuit.
See Local Rule 36(c).

                               2
GREGORY, Circuit Judge:

       In this appeal, we are asked to decide whether a consent order

(“Consent Order”) entered into by bankruptcy trustee John K. Fort

(“Trustee”) and the law firm of Kronish Lieb Weiner & Hellman, LLP

(“Kronish”) precludes the Trustee from bringing a malpractice

action against Kronish.        For the reasons set forth below, we

conclude, as did the bankruptcy and district courts, that it does

not.

                                    I.

       Debtor Spartan International (“Spartan”) was a South Carolina

corporation engaged in textile manufacturing.           Spartan retained

Kronish in September 2000 to assist in Chapter 11 bankruptcy pre-

petition activities.     Spartan prepared for, but never filed, a

Chapter 11 bankruptcy petition. Instead, on the advice of Kronish,

it turned over control and possession of its assets to its lender.

At the end of Kronish’s representation of Spartan in May 2001,

Spartan had incurred $26,246.63 in unpaid legal fees.         J.A. 8.

       Spartan’s creditors filed an involuntary Chapter 7 bankruptcy

petition   against   Spartan   on   May   31,   2001.   Thereafter,   the

bankruptcy court granted the bankruptcy petition and appointed the

Trustee.

       In December 2001, the Trustee asked Kronish to turn over files

related to Kronish’s earlier representation of Spartan.          Kronish

                                    3
refused, asserting a lien for unpaid attorneys’ fees. For the next

five months, Kronish and the Trustee negotiated the terms of the

turnover of the files.

     Ultimately, in May 2002, the parties reached an agreement,

which was memorialized in (1) the Trustee’s application for an

administrative claim for Kronish (“Application for Administrative

Claim”)   and    (2)   the   Consent   Order.   In   the   Application   for

Administrative Claim, the Trustee expressly stated that he was

requesting an administrative claim for Kronish in exchange for

access to Kronish’s files:

     Kronish provided bankruptcy and other legal advice to the
     Debtor at the time that the Debtor ceased operating.
     Kronish has asserted an attorneys’ lien on Spartan files
     and records for unpaid attorneys’ fees. In resolution of
     such asserted lien, the parties have agreed that Kronish
     will receive an administrative claim for $13,057.16. The
     files and records held by Kronish are of assistance to
     the estate in determining further assets which the estate
     might pursue. Therefore, the Trustee believes that an
     administrative claim is an equitable resolution to the
     asserted lien which will then allow the Trustee free
     access to the files and records. The parties have also
     agreed that the remainder of Kronish’s fees will be
     treated as an allowed, unsecured claim.

J.A. 6-7.       The Consent Order granted Kronish an administrative

priority claim in the amount of $13,123.321 and an unsecured claim

for the remainder of its legal fees in the amount of $13,123.31.

Id. at 8-9.      Moreover, the Consent Order reaffirmed that “[t]he

allowance of Kronish’s administrative and unsecured claim resolve

     1
      The Trustee paid Kronish’s administrative claim on September
3, 2003.

                                       4
[sic] its asserted attorneys’ lien on the files it holds from

services performed on behalf of the Debtor. Kronish agrees to copy

and turnover [sic] all documents requested by the Chapter 7 trustee

in this matter.”    Id. at 8.   On July 3, 2002, the bankruptcy court

approved the Consent Order without modification. Upon entry of the

Consent Order, Kronish allowed the Trustee access to the files.

     During the following year, the Trustee brought suit against

Kronish, Kronish attorneys, and certain of Spartan’s officers and

directors.     The Trustee contended that but for the advice of the

Kronish firm and attorneys, “Spartan would have filed a Chapter 11

proceeding, would have continued operating while going forward

under [Debtor in Possession] or under the leadership of a Chapter

11 trustee, assets would have been sold for substantially greater

value and Spartan would have emerged successfully from Chapter 11.”

J.A. 23.

     Kronish moved to dismiss the malpractice action, claiming that

the Consent Order was “a final order issued by [the bankruptcy

court] on the merits of the reasonableness and value of [Kronish’s]

legal services, it cannot be attacked in a subsequent adversary

proceeding.”    J.A. 49.   The Trustee responded on January 30, 2004,

by moving for reconsideration of the Consent Order, pursuant to 11

U.S.C. § 502(j).     In its motion for reconsideration, the Trustee

represented that

     [t]he quality of Kronish’s services was never discussed
     as the parties were focused on resolving an asserted

                                   5
       lien. In fact, the parties resolved the lien issue prior
       to the [sic] any review of Kronish files . . . . The
       parties had no intention of addressing matters in the
       Consent Order (defined below) other than resolution of
       the asserted lien so that the Trustee could gain access
       to the Kronish files in order to conduct a thorough
       evaluation of Spartan’s pre-petition events.

J.A. 328.     Likewise, a Kronish attorney stated in his affidavit

that “[d]uring the course of [his] negotiations with Trustee [over

the retaining lien and attorneys’ fees], the quality of [Kronish’s]

representation of Spartan was never raised or mentioned.”                J.A.

216.

       On March 9, 2004, the bankruptcy court issued an amended

order, declaring that the Consent Order had no res judicata effect

on   the   malpractice   claim.     J.A.   531.     The    bankruptcy   court

concluded “it is evident that the consent order did not, and was

not intended to, resolve issues relating to the reasonableness and

necessity    of   [Kronish’s]     services,   but   was    only   to   satisfy

[Kronish’s] lien on the debtor’s files so that the trustee could

obtain possession thereof.”          Id. at 532.          In so doing, the

bankruptcy court drew upon its inherent authority to interpret its

own orders.

       Kronish appealed the bankruptcy court order to the United

States District Court for the District of South Carolina, which

affirmed on April 5, 2005.          Thereafter, Kronish filed a timely

notice of appeal of the district court’s order.

                                      6
                                     II.

                                     A.

      “We review the judgment of a district court sitting in review

of a bankruptcy court de novo, applying the same standards of

review that were applied in the district court.”          Devan v. Phoenix

Am. Life Ins. Co. (In re Merry-Go-Round Enters.), 400 F.3d 219, 224

(4th Cir. 2005).     Accordingly, we review the bankruptcy court’s

factual findings for clear error.          Id.    By contrast, its legal

conclusions, including its interpretation of the Consent Order, are

reviewed de novo. Id. (the legal conclusions of a bankruptcy court

are subject to de novo review); Am. Canoe Ass’n v. Murphy Farms,

Inc., 326 F.3d 505, 512 (4th Cir. 2003) (consent orders are

reviewed de novo); McDowell v. Phila. Hous. Auth., 423 F.3d 233,

238 (3d Cir. 2005) (“The proper construction of the consent decree

is a question of law that receives plenary review.”); cf. United

States v. ITT Continental Baking Co., 420 U.S. 223, 236 (1975)

(“[S]ince consent decrees and orders have many of the attributes of

ordinary   contracts,      they   should   be    construed   basically   as

contracts”).

                                     B.

      Kronish contends that the Trustee is precluded from bringing

a   malpractice   action   because   the   quality   of   Kronish’s   legal

services was necessarily at issue when the Consent Order was

entered.   Kronish’s argument goes as follows: (1) an attorney who

                                      7
commits malpractice has no entitlement to fees; (2) in paying fees,

a client indicates that an attorney did not commit malpractice; and

therefore (3) an order setting fees necessarily resolves any

dispute involving malpractice.        We disagree.

                                      1.

     We first consider whether the elements of res judicata are

satisfied here.        A prior judgment has res judicata or claim

preclusive    effect    on   future    litigation    when   the   following

conditions are met:

     1) [T]he prior judgment was final and on the merits, and
     rendered by a court of competent jurisdiction in
     accordance with the requirements of due process; 2) the
     parties are identical, or in privity, in the two actions;
     and, 3) the claims in the second matter are based upon
     the same cause of action involved in the earlier
     proceeding.

First Union Commer. Corp. v. Nelson, Mullins, Riley, & Scarborough

(In re Varat Enters.), 81 F.3d 1310, 1315 (4th Cir. 1996).

     Only the first two elements of res judicata are satisfied

here.      First, this Court has repeatedly held that a consent

judgment is “for claim preclusion purposes, a final one on the

merits.”     Keith v. Aldridge, 900 F.2d 736, 740 (4th Cir. 1990).

Second, without question, the parties to the Consent Order are

identical to the parties in the malpractice action.

     In evaluating whether the third element is shown, i.e.,

whether there is identity of claims, “the appropriate inquiry is

whether the new claim arises out of same transaction or series of

                                      8
transactions as the claim resolved by the prior judgment.”                   Keith,

900 F.2d at 740 (quoting Harnett v. Billman, 800 F.2d 1308, 1313

(4th       Cir.    1986)).      Where     the    “same    series    of     connected

transactions,” is involved, “and the same ‘operative facts’ are at

issue,” the third res judicata factor is made out.                   Id.    In this

case,      it     cannot   fairly   be   said    that    the   Consent   Order   and

malpractice action involve the same operative facts.                 In approving

the Consent Order, the court had no need to consider any facts

pertaining to the nature, quality, or extent of Kronish’s services

to Spartan.2          Nor could the court have properly evaluated the

quality of Kronish’s services.                  Because Kronish provided pre-

petition services, the bankruptcy court had no basis for evaluating

the quality of Kronish’s services.               Not even the Trustee had full

knowledge of the quality of services provided. Those services were

       2
      For this reason, Kronish’s reliance on Grausz v. Englander,
321 F.3d 467 (4th Cir. 2003), is misplaced. In that case, this
Court held that the resolution of a fee dispute involving a debtor
and the attorney who represented him during bankruptcy proceedings
had a preclusive effect on a subsequent malpractice action. Id. at
469. Unlike here, that case involved an award of fees rendered by
the bankruptcy court upon receipt of a professional fee application
under 11 U.S.C. § 330. We concluded that the malpractice action
and prior fee proceeding were based on the same cause of action,
because “[t]he fee application proceeding necessarily included an
inquiry by the bankruptcy court into the quality of professional
services rendered by the [law] firm.” Id. at 473. Pursuant to 11
U.S.C. § 330, “[t]he court was required to ‘consider the nature,
the extent, and the value of such services’ before awarding fees.
By granting the [law] firm’s second and final fee application, the
bankruptcy court impliedly found that the firm’s services were
acceptable throughout its representation of Grausz.” Id. (quoting
11 U.S.C. § 330(a)(3)) (citations omitted).

                                           9
provided to Spartan, before the Trustee was even appointed, and

Kronish had deprived the Trustee of access to files pertaining to

Kronish’s   representation      of   Spartan,    potential   evidence     of

malpractice.     For these reasons, we conclude that the third res

judicata factor is not met here.

                                     2.

      Even if we were to find that the elements of res judicata were

not satisfied, the parties’ intent would lead us to conclude that

the   Consent   Order   does   not   preclude   the   malpractice    action.

Specifically, “[w]hen a consent judgment entered upon settlement by

the parties of an earlier suit is invoked by a defendant as

preclusive of a later action, the preclusive effect of the earlier

judgment is determined by the intent of the parties.”               Keith v.

Aldridge, 900 F.2d 736, 740 (4th Cir. 1990).          We elaborated:

      [t]his approach, following from the contractual nature of
      consent judgments, dictates application of contract
      interpretation principles to determine the intent of the
      parties. If the parties intended to foreclose through
      agreement litigation of a claim, assertion of that claim
      in a later suit, whether or not formally presented in the
      earlier action, is precluded. . . . Claim preclusion will
      not apply, however, if the parties intended to settle
      only one part of a single claim and intended to leave
      another part open for future litigation.

Id. at 740-41.

      With this principle in mind, this Court in Keith concluded

that the plaintiff was precluded from bringing his action because

“the parties mutually manifested their intentions . . . to preclude

any future litigation having the objective of obtaining Keith’s

                                     10
reemployment with the Air Force.” 900 F.2d at 741.       The Court

observed that “both the agreement and the dismissal order expressly

reserve[d] Keith’s claim for attorney’s fees,” but those documents

“d[id] not expressly reserve to Keith the right to raise due

process or other substantive claims in subsequent litigation.” Id.

According to the Court, those facts did not reflect an intent to

preserve claims other than the attorney’s fees claim for future

litigation.   Id.

     The following year, this Court revisited the question of the

res judicata effect of consent judgments in Young-Henderson v.

Spartanburg Area Mental Health Ctr., 945 F.2d 770 (4th Cir. 1991).

This time, the Court concluded that the language of the consent

order specifically reserved for the plaintiff the right to bring

the claim at issue.

     By the terms of the Consent Order here, the parties and
     the court below agreed that it would “only terminate[]
     the claims raised in the complaint [and that the Consent
     Order would] not in any way affect any other charges or
     claims filed by the Plaintiff subsequent to the
     commencement of this . . . action.” Fairly interpreted,
     the Consent Order manifests an intent to preclude only
     those claims that were raised in the complaint in
     Henderson I. It does not manifest an intent to preclude
     claims which could have been brought but were not, and it
     does not manifest an intent to preclude claims which did
     not arise until after the complaint was filed. If the
     parties intended to preclude all claims that could have
     been brought at the time the Henderson I complaint was
     filed, or if they wished to preclude claims that might
     have arisen after the complaint was filed, they surely
     could have worded the Consent Order to achieve that
     effect.

Id. at 774-75.

                                11
       Although the Consent Order at issue here does not speak in

terms that are quite as clear as the orders in Keith and Young-

Henderson, it nonetheless reflects an intent on the part of the

parties to “settle only one part of a single claim and . . . to

leave another part open for future litigation.” Keith, 900 F.2d at

741.   By its terms, the Consent Order has a limited purpose: “The

allowance of Kronish’s administrative and unsecured claim resolve

[sic] its asserted attorneys’ lien on the files it holds from

services performed on behalf of the Debtor. Kronish agrees to copy

and turnover [sic] all documents requested by the Chapter 7 trustee

in   this   matter.”   J.A.   8    (emphases   added).   Likewise,   the

Application for Administrative Claim evinces that in entering the

Consent Order, the parties focused solely on the turnover of the

files in Kronish’s possession:

       The files and records held by Kronish are of assistance
       to the estate in determining further assets which the
       estate might pursue.   Therefore, the Trustee believes
       that an administrative claim is an equitable resolution
       to the asserted lien which will then allow the Trustee
       free access to the files and records.

J.A. 6 (emphases added).          Thus, by the clear language of the

Consent Order and Application for Administrative Claim, it is quite

clear that the Consent Order was only intended to resolve the

Trustee’s right to access Kronish’s files, documents, and records.

The conspicuous absence of any mention or allusion to the quality

                                    12
of Kronish’s legal services persuades us that the Consent Order was

not intended to resolve that issue.3

                               III.

     Having concluded that the elements of res judicata are not

satisfied here, and that the parties did not intend for the Consent

Order to preclude a subsequent action for legal malpractice, we

affirm the district court’s decision.

                                                          AFFIRMED

     3
      Likewise, we are not persuaded that “like any order fixing
attorneys’ fees, an order resolving a retaining lien necessarily
determines whether or not counsel committed malpractice.” Br. of
Appellant at 15.    As discussed above, in entering the Consent
Order, the bankruptcy court did not consider the quality or value
of Kronish’s pre-petition services to Spartan. And, the parties
did not manifest an intent for the Consent Order to resolve the
quality of services provided by Kronish. Our conclusion is not
affected by the principle in New York law that “upon asserting a
retaining lien, outgoing counsel is entitled to a summary
determination fixing the value of his services and the amount so
fixed must be paid or otherwise secured before a turnover of the
papers relating to the client’s case may be ordered.” Brenner v.
Miller, 121 Misc. 2d 1, 2 (N.Y. Sup. Ct. 1983)). Federal law, not
New York law, controls the question of the preclusive effect of the
Consent Order.   Keith v. Aldridge, 900 F.2d 736, 739 (4th Cir.
1990) (“federal law controls [this Court’s] assessment of the
preclusive effect of the earlier federal judgment . . . .”).

                                13
TRAXLER, Circuit Judge, concurring:

     I concur in the opinion of my colleague Judge Gregory.       I

write only to emphasize that when a party contends that the entry

of a Consent Order has preclusive effect as to a subsequent action,

the application of the res judicata doctrine is modified.       See

Keith v. Aldridge, 900 F.2d 736, 740-41 (4th Cir. 1990).    In such

a case, “preclusive effect . . . is determined by the intent of the

parties” because of “the contractual nature of consent judgments.”

Id. at 740, 741; see also Young-Henderson v. Spartanburg Area

Mental Health Cntr., 945 F.2d 770, 774 (4th Cir. 1991).   A judgment

entered “based upon the parties’ stipulation, unlike a judgment

imposed at the end of an adversarial proceeding, receives its

legitimating force from the fact that the parties consented to it.”

Norfolk S. Corp. v. Chevron, U.S.A., Inc., 371 F.3d 1285, 1288

(11th Cir. 2004).   It follows that we apply traditional “contract

interpretation principles to determine . . . [i]f the parties

intended to foreclose through agreement litigation of a claim.”

Keith, 900 F.2d at 741.     “The best evidence of [the parties’]

intent is, of course, the settlement agreement itself.”    Norfolk,

371 F.3d at 1289; see United States v. Armour & Co., 402 U.S. 673,

682 (1971) (observing that “the scope of a consent decree must be

discerned within its four corners”). Only if the Consent Decree is

ambiguous or unclear should we look beyond the Order itself to

                                14
determine whether the parties intended preclusive effect.     See

Norfolk, 371 F.3d at 1290.

     Thus, the terms of the Consent Order drive our analysis, not

the original complaint, and there is no need to engage in an

identity of claims analysis that is not dependent on principles of

contract.   In this case, for the reasons Judge Gregory rightly

points out, the Consent Order does not evidence an intent to

foreclose the Trustee’s malpractice claim.

                               15