Potter v. Pierce

342 P.3d 54

2015 NMSC 002

Jeffrey POTTER, Plaintiff–Petitioner

v.Chris PIERCE, William Davis, Davis & Pierce, P.C., and John Doe Law Firm, Defendants–Respondents.

34,365.

Supreme Court of New Mexico.

Jan. 8, 2015.

Law Office of Daymon Ely, Daymon B. Ely, Law Office of William G. Gilstrap, William Grant Gilstrap, II, Albuquerque, NM, for Petitioner.

Domenici Law Firm, P.C., Pete V. Domenici, Jr., Lorraine Hollingsworth, Albuquerque, NM, for Respondents.

OPINION

DANIELS, Justice.

{1} Res judicata is a judicially created doctrine designed to promote efficiency and finality by giving a litigant only one full and fair opportunity to litigate a claim and by precluding any later claim that could have, and should have, been brought as part of the earlier proceeding. In this case, we examine the preclusive effect of a fee proceeding in bankruptcy court on a later lawsuit for legal malpractice allegedly committed in the course of the bankruptcy. We hold that the elements of res judicata are met and that Petitioner was sufficiently aware of his malpractice claim, which he could and should have brought in the bankruptcy proceeding. We affirm the dismissal of Petitioner's subsequent malpractice suit but emphasize that barring a claim on res judicata grounds requires a determination that the claimant had a full and fair opportunity to litigate the claim in the earlier proceeding.

I. BACKGROUND

{2} One month prior to filing for voluntary Chapter 11 bankruptcy on May 19, 2005, Petitioner Jeffery Potter sold his interest in a limited partnership known as Monte Mac. Petitioner was represented in the bankruptcy proceedings by Respondents. During these proceedings, Petitioner, through Respondents as counsel, filed his schedules and his statement of financial affairs (SOFA). The SOFA requires that the debtor list all property transferred within the year immediately preceding the bankruptcy petition, other than property transferred in the ordinary course of business or financial affairs. See Official and Procedural Bankruptcy Forms, Form 7, 11 U.S.C. (2003). Petitioner testified under oath that he had reviewed the schedules and the SOFA and that they were true and correct. Neither the schedules nor the SOFA listed Petitioner's sale of the Monte Mac interest.

{3} Referring to “a fundamental disagreement,” Respondents filed a motion to withdraw as counsel for Petitioner, which the bankruptcy court granted one year after Petitioner's Chapter 11 filing. After moving for withdrawal, Respondents also filed an application for fees, to which Petitioner filed an objection on May 22, 2006. The objection from Petitioner did not specifically mention the undisclosed Monte Mac transfer but alleged, among other things, that Respondents had threatened Petitioner with their withdrawal, had caused Petitioner to file inaccurate financial disclosures, and had obtained his signature on these disclosures by fraud. The bankruptcy court held a fee hearing on April 10, 2007. After hearing objections, the bankruptcy court analyzed billing records and disallowed some fees as excessive, duplicative, clerical, or administrative in nature. The bankruptcy court approved the rest in a final fee award entered on June 4, 2007, addressing the services performed, rates charged, and time billed but not specifically mentioning the allegations made in the objections. Petitioner did not appeal or move the bankruptcy court to reconsider its judgment.

{4} Following Respondents' withdrawal, the bankruptcy court converted Petitioner's bankruptcy from Chapter 11 to Chapter 7. When questioned about the Monte Mac sale on the day after the fee hearing and prior to the entry of the final fee judgment, Petitioner testified to his creditors that he had owned an interest in Monte Mac but had sold it for $72,000 and could not recall when he sold it.

{5} On March 21, 2008, Petitioner filed a motion in bankruptcy court alleging damages from malpractice that included over one million dollars for his exposure to a denial of his discharge.

{6} Petitioner never filed an amended schedule or SOFA to include the sale of his interest in the Monte Mac partnership. Finding this to be a knowing and fraudulent omission, the bankruptcy court denied the discharge of Petitioner's debts on June 23, 2009.

{7} Petitioner then brought a separate action for legal malpractice, breach of fiduciary duty, and misrepresentation in the Second Judicial District Court. In his complaint, Petitioner made broad allegations of malpractice against Respondents. Respondents moved to dismiss Petitioner's complaint as barred by the res judicata effect of the bankruptcy court fee award. Petitioner responded that his malpractice claim had not accrued until he had been denied a discharge, because until then he had not suffered injury, and so approval of the fee award did not bar his claim. The district court found that this argument “fails on the facts” because Petitioner alleged both malpractice and damages sustained from that malpractice in the bankruptcy fee proceedings and in subsequent pleadings prior to the denial of his discharge. The district court granted summary judgment for Respondents on grounds of res judicata. Petitioner appealed, the Court of Appeals affirmed, and we granted certiorari. Potter v. Pierce, 2014–NMCA–002, ¶ 1, 315 P.3d 303, cert. granted, 2013–NMCERT–011, 314 P.3d 963.

II. STANDARD OF REVIEW

{8} Summary judgment is appropriate where there are no genuine issues of material fact and the movant is entitled to judgment as a matter of law. Zamora v. St. Vincent Hosp., 2014–NMSC–035, ¶ 9, 335 P.3d 1243; Rule 1–056(C) NMRA. We review a grant of summary judgment de novo. Zamora, 2014–NMSC–035, ¶ 9, 335 P.3d 1243. In reviewing an order on summary judgment, we examine the whole record, considering the facts and drawing all reasonable inferences in a light most favorable to the nonmoving party. Id. “Whether the elements of claim preclusion are satisfied is a legal question, which we [also] review de novo.” Kirby v. Guardian Life Ins. Co. of Am., 2010–NMSC–014, ¶ 61, 148 N.M. 106, 231 P.3d 87.

III. DISCUSSION

{9} Petitioner argues that New Mexico precedent does not allow a nonadversarial fee proceeding to preclude a later claim for legal malpractice; and he reasons that because he did not suffer any injury until the denial of his discharge, his malpractice claim could not have been brought earlier.

{10} “[R]es judicata is designed to relieve parties of the cost and vexation of multiple lawsuits, conserve judicial resources, ... prevent [ ] inconsistent decisions, [and] encourage reliance on adjudication.” Computer One, Inc. v. Grisham & Lawless, P.A., 2008–NMSC–038, ¶ 31, 144 N.M. 424, 188 P.3d 1175 (alterations in original) (internal quotation marks and citation omitted). Federal law and New Mexico law are consistent on the general standards governing claim preclusion. Deflon v. Sawyers, 2006–NMSC–025, ¶ 2, 139 N.M. 637, 137 P.3d 577. A party asserting res judicata or claim preclusion must establish that (1) there was a final judgment in an earlier action, (2) the earlier judgment was on the merits, (3) the parties in the two suits are the same, and (4) the cause of action is the same in both suits. Kirby, 2010–NMSC–014, ¶ 61, 148 N.M. 106, 231 P.3d 87. In addition to those elements, as we discuss in this opinion, res judicata will preclude a malpractice claim only if the claim reasonably could and should have been brought during the earlier proceeding. The decision rests on the prior opportunity to litigate, and neither the type of proceeding nor the damages sought are determinative. We address the two elements contested by Petitioner, whether the cause of action was the same in both proceedings and whether Petitioner's malpractice claim could and should have been brought in the bankruptcy proceedings.

A. The Legal Malpractice Claim Involves the Same Cause of Action for Res Judicata Purposes as the Fee Claim Because Both Were Based on the Nature and Quality of Respondents' Legal Services During the Bankruptcy Representation

{11} Both the Tenth Circuit and New Mexico have adopted the transactional approach in analyzing the single-cause-of-action element of res judicata. See Petromanagement Corp. v. Acme–Thomas Joint Venture, 835 F.2d 1329, 1335–36 (10th Cir.1988) (adopting the Restatement (Second) of Judgments §§ 24 –25 (1982) in determining what constitutes a single cause of action for res judicata purposes in the Tenth Circuit); Three Rivers Land Co. v. Maddoux, 1982–NMSC–111, ¶ 27, 98 N.M. 690, 652 P.2d 240 (same in New Mexico), overruled on other grounds by Universal Life Church v. Coxon, 1986–NMSC–086, ¶ 9, 105 N.M. 57, 728 P.2d 467. The transactional approach considers all issues arising out of a “common nucleus of operative facts” as a single cause of action. Anaya v. City of Albuquerque, 1996–NMCA–092, ¶ 8, 122 N.M. 326, 924 P.2d 735 (internal quotation marks and citation omitted). The facts comprising the common nucleus should be identified pragmatically, considering (1) how they are related in time, space, or origin, (2) whether, taken together, they form a convenient trial unit, and (3) whether their “treatment as a single unit conforms to the parties' expectations or business understanding or usage.” Id. ¶ 12.

{12} Neither New Mexico nor the Tenth Circuit has specifically considered the preclusive effect of a final fee award in bankruptcy court on a later action for legal malpractice, but other jurisdictions that have addressed this issue have uniformly concluded that they are the same cause of action for the purposes of res judicata. See, e.g., Capitol Hill Group v. Pillsbury, Winthrop, Shaw, Pittman, LLC, 569 F.3d 485, 491 (D.C.Cir.2009) (holding that a fee application in bankruptcy court and a malpractice claim based on the same legal services arise out of the same nucleus of facts and satisfy the cause-of-action identity requirement of res judicata); Grausz v. Englander, 321 F.3d 467, 473 (4th Cir.2003) (ho...