Smith Dev., Inc. v. Conway

896 S.E.2d 88

79 Va.App. 360

79 Va.App. 360

SMITH DEVELOPMENT, INC.

v.Martin C. CONWAY, et al.

Record No. 1245-22-4

Court of Appeals of Virginia, Loudoun.

January 9, 2024

FROM THE CIRCUIT COURT OF THE CITY OF ALEXANDRIA, Lisa B. Kemler, Judge

John S. Lopatto, III, for appellant.

Danny M. Howell (Jennifer Lynn Rowlett; Law Offices of Danny M. Howell, PLLC, on brief), for appellees.

Present: Judges Causey, Raphael and Senior Judge Clements

OPINION BY JUDGE STUART A. RAPHAEL

₃₆₇The legal-malpractice claim here is time-barred if the lawyer worked under an unwritten contract, triggering a three-year limitations period, but not if the lawyer worked under a written contract, triggering a five-year period. The parties’ written engagement letter carefully specified the lawyer’s task—file a chapter 11 bankruptcy petition and obtain confirmation of a plan of reorganization. That undertaking ended, however, when the bankruptcy court converted the case from a chapter 11 reorganization to a chapter 7 liquidation, ousting the client as debtor-in-possession and ending the prospects of reorganization. The parties dispute whether the bankruptcy lawyer continued to provide legal services afterward to the client, when the alleged malpractice occurred. But even assuming that happened, such work constituted a different undertaking through an unwritten or implied contract. So the trial court correctly applied the three-year limitations period. It also correctly held that the lawyer was not estopped to assert the statute of limitations as a defense. We thus affirm the judgment dismissing the malpractice claim as time-barred.

₃₆₈Background

In December 2008, Smith Development, Inc. ("SDI") hired Martin Conway and his law firm, Pesner Kawamoto Conway, P.C. (collectively "Conway") to "[f]ile a chapter 11 bankruptcy petition and obtain confirmation of the plan of reorganization."¹ That specific undertaking was spelled out in a written engagement letter signed by Martin Conway and by M. Kevin Smith ("Smith"), the President of SDI. The agreement recited that it did "not include representation or advice on … any other matter not specifically described." It said that the law firm was not responsible for other legal matters unless "specifically requested and confirmed by us in writing." And it added that the document "constitutes the entire [a]greement between the parties."

Conway filed the chapter 11 proceeding in January 2009 and obtained approval from the bankruptcy court to be employed as counsel to debtor-in-possession SDI. Conway subsequently filed adversary actions seeking money damages against three parties that had defaulted on real-estate-purchase agreements with SDI.

But on March 17, 2010, after SDI failed to pay the required fees to maintain a chapter 11 proceeding, the bankruptcy court converted the case to a chapter 7 liquidation. The bankruptcy court, on its "own motion," entered orders substituting the bankruptcy trustee, Richard A. Bartl, as plaintiff in place of SDI in each of the three adversary actions.

In July 2010, the trustee engaged Conway as special counsel under 11 U.S.C. § 327(e) to litigate the three adversary actions that Conway had initiated in the chapter 11 proceeding. The trustee moved the bankruptcy court for approval of Conway’s employment, stating that Conway had "represented the debtor in the chapter 11 stage of this case and still represents the debtor and is experienced in" the matters at issue in the ₃₆₉adversary proceeding. The trustee also stated that Conway "believes and therefore represents that consistent with 11 U.S.C. § 327, he ‘does not represent or hold any interest adverse to the debtor or to the estate with respect to the matter on which such attorney is to be employed.’ "

The parties dispute whether Conway, on top of representing the trustee, also continued to provide counsel to SDI after the bankruptcy case was converted to a chapter 7 liquidation. Martin Conway stated in his affidavit that "[a]t no time [after the conversion] did we agree or enter into an agreement expanding the scope of those services beyond the Chapter 11 proceedings."² He insisted that his "role as counsel for Smith Development as debtor in possession in the Chapter 11 proceedings terminated upon conversion of the estate to Chapter 7," except for certain clean-up matters "to assist with the Trustee’s taking control over what had been the property of the former Chapter 11 estate," namely, "the three adversary proceedings."

SDI, by contrast, insists that Conway continued to give it legal advice after the conversion. Smith said in his declaration that Conway did not recommend that SDI obtain new counsel following the conversion. Smith "continuously considered" the Conway lawyers to be SDI’s lawyers. SDI also points to Conway’s November 2010 letter in which one of the Conway lawyers urged Smith to "cooperate" with the chapter 7 trustee by attending an upcoming deposition. The letter warned that Smith’s failure to participate "could greatly affect the success of these adversary claims being sought on your behalf’ and, "more importantly, … could lead to your debts not being discharged." To SDI, that letter showed that Conway continued to represent it during the chapter 7 proceeding. SDI also claims that the letter proves that Conway’s legal advice was ₃₇₀"incompetent," since a corporation cannot obtain a "discharge" of its debts in a chapter 7 proceed- ing.³

The trustee subsequently settled the three adversary actions for $60,000. SDI contends that the claims were worth far more, about $2 million, according to discovery responses served by Conway in the adversary actions. SDI complains that Conway and the trustee breached their fiduciary duties by settling the claims for a fraction of their value, simply to cover their own professional fees, while the "remaining creditors of Smith Development

got nothing."

In January 2011, Smith filed a pro se objection to the trustee’s motion to approve the settlements. But the defendants in those actions successfully argued that the debtor lacked standing to object because the trustee, not the debtor, controlled the estate in the chapter 7 proceeding. See Shipman v. Kruck, 267 Va. 495, 503, 593 S.E.2d 319 (2004) (noting that the chapter 7 debtors "lost control of their assets to the Bankruptcy Trustee …. The filing of the bankruptcy, in and of itself, vested those rights in the Bankruptcy Trustee as a matter of law.").

The bankruptcy court approved the proposed settlements on March 17, 2011. Two of the adversary proceedings were then dismissed with prejudice as settled on April 15, 2011, and the third on May 13, 2011. After the trustee reduced the assets of the estate to cash, distributed the proceeds, and filed his accounting, the bankruptcy court entered a final order on September 10, 2012, releasing the trustee and administratively closing the case.

Four-and-a-half years later, on April 28, 2017, SDI sued Conway in the Circuit Court for the City of Alexandria, 1371 seeking damages for legal malpractice. The company non-suited and refiled the action within six months. See Code § 8.01-229(E)(3). SDI alleged in the first amended complaint that Conway committed legal malpractice by settling the adversary actions for too little and breaching its duty of loyalty to SDI, which Conway allegedly continued to represent even after the bankruptcy case was converted to chapter 7.

Conway filed a plea in bar based on the statute of limitations. Conway argued that it stopped providing representation for the "Chapter 11 case on March 17, 2010—the date the company was converted to a chapter 7" and that the five-year statute of limitations for a written contract "ran on March 18, 2015, five years after the conversion." Conway denied providing any legal services to SDI after the chapter 7 conversion. And even assuming that Conway had, it would not matter. Citing Shipman, 267 Va. at 505, 593 S.E.2d 319, and Moonlight Enterprises, LLC v. Mroz, 293 Va. 224, 233-34, 797 S.E.2d 536 (2017), Conway argued that those services would have been a different undertaking from the "particular undertaking" governed by the 2008 engagement letter. That separate undertaking would have been subject to the three-year limitations period for an oral or implied contract. See Code § 8.01-246(4). And SDI sued Conway long after that period had elapsed.

Conway moved for summary judgment on that statute-of-limitations defense. SDI responded (among other things) that Conway’s work for SDI after the chapter 7 conversion was "a continuing extension and modification covered by the written engagement letter" and that Conway should be estopped to claim otherwise.⁴

₃₇₂Following oral argument, the trial court granted Conway’s motion for summary judgment on the statute-of-limitations defense. The court found that the parties’ written contract in 2008 "specifically and explicitly set forth the matter in which [Conway was] retained to represent" SDI. By contrast, Conway’s "actions in continuing to represent [SDI], to the extent that they were, after the Chapter 11 was converted to a Chapter 7 in 2010, [were] governed under an implied contract," The court found no "authority to support [SDI’s] argument that the written contract was extended or modified … by the, quote, unquote, ‘significant conduct’ engaged in by [Conway] after the conversion." So the court dismissed the claim with prejudice as time-barred.

SDI noted a timely appeal.

Analysis

[1] "Summary judgment is appropriate in cases where no ‘material fact is genuinely in dispute’ and the moving party is entitled to judgment as a matter of law." Ranger v. Hyundai Motor Am., — Va. —, —, 885 S.E.2d 156 (2023) (quoting Rule 3:20). We review a trial court’s decision granting summary judgment de novo. Id. at —, 885 S.E.2d 156. In doing so, we apply "the same standard a trial court must adopt in reviewing a motion for summary judgment, accepting as true those inferences from the facts that are most...