Non-Collectibility of Judgment: Affirmative Defense to Legal Malpractice Action
Albee Associates v. Orloff, Lowenbach, Stifelman and Siegel, P.A., 317 N.J.Super. 211 (App. Div. 1999)
NJ Underlying Civil Litigation
Student Contributor: Joshua D. Aronson
Facts: Defendant attorneys were hired by the plaintiffs to represent them in a civil fraud action. An entry of default was granted in favor of the plaintiffs. Following the entry of default, one of the defendants in the underlying action filed for Chapter 7 Bankruptcy. The defendant attorneys failed to list the plaintiffs as creditors in the bankruptcy petition and, subsequently, failed to file an adversary proceeding for non-dischargeability of the debt before the passing of the bar date. This prevented plaintiffs from collecting any money from the debtors due to the discharge in bankruptcy, and thereafter, plaintiffs pursued an action for legal malpractice against their former attorneys. The defendant attorneys submitted a motion for summary judgment under the theory that even if the plaintiffs were successful in a non-dischargeability complaint, they would still not have been able to collect due to the financial status of the debtors. The trial court granted the defendants’ motion for summary judgment, holding that even if the plaintiffs’ judgment had not been discharged, the debtor would not have had the assets to be able to satisfy plaintiffs’ judgment. Plaintiffs appealed the trial court’s decision.
Issue: Did the trial court improperly grant the attorneys’ motion for summary judgment in the legal malpractice action based upon the plaintiff’s inability to collect on their judgment against the debtors?
Ruling: The Appellate Division reversed and held that collectibility is ultimately a question of proximate cause. It remanded for a fuller factual record. The evidence submitted to the motion court did not clearly establish that a reasonable juror could conclude that the debtor would have been unable to satisfy plaintiffs’ judgment.
By virtue of the "no-asset" Chapter 7 bankruptcy proceeding, [the debtor] may, at the time of the asset searches at least, have had no assets. But he was, as far as the record reveals, at one point capable of maintaining an income and acquiring assets. To the extent a substantial portion of his prior debts have been extinguished, he has benefited from the bankruptcy and there is nothing in the record that would suggest that his "no-assets" status is anything but temporary or that he does not now have viable income.
Lesson: It would seem that in order to prevail in a legal malpractice case, the burden of proving a former client's inability to collect an underlying debt, might well have shifted in some cases to the malpractice defendant. Of interest, see also Hoppe v. Ranzini, (PDF) with permission of Thomson/Reuters, Westlaw.
I was wondering what would have happened in this case if the evidence established that a reasonable juror could conclude that the debtor was able to satisfy the plaintiffs. Do you think the result would have been the same?
In response to Cheryl Neuman's post, I believe that the attorney-defendant would have not have been granted the summary judgment if a reasonable juror could conclude that the debtor would be able to satisfy the debt. As long as the plaintiffs-clients established that the defendant's negligence was a proximate cause their injuries, than I feel that summary judgment would have been denied and the case would go to trial.
In this case, the defendant's mistake prevented plaintiffs from collecting any money from the debtors. A jury could reasonable find that "but for" the attorney's negligence, the plaintiff would have been able to collect the monies owed to them.
However, since the debtors would not have been able to pay back the plaintiffs, regardless of the attorney's negligence, the court came to the right conclusion. The plaintiffs should not be able to collect from the attorneys if they couldn't collect from the debtors anyway.
This is a tough issue because either way someone who shouldn't benefit is going to benefit. The lawyer will benefit because he's now not responsible for his malpractice. He got lucky that the Defendant's did not have $$. Allowing recovery would benefit the Plaintiff who only got lucky because his lawyer did commit malpractice.
I like how Melissa used the word lucky. The only reason that the attorney avoided malpractice liability was because a third-party did not have enough assets to pay a judgment against him. I wonder how many other lawyers facing malpractice have similar luck!
I agree with Ms. Goldberg and Mr. Aronson's observations. I also think that the Appellate Division was correct in reversing the trial courts grant of summary judgment on behalf of the defendants. It seems absolutely ridiculous that assumed that the debtors were incapable of satisfying the plaintiff's judgment. It is even more bothersome that the trial court would dismiss a legal malpractice claim just because the underlying judgment may not have been met...where is the justice in that?
I was surprised when reading this summary because it was my understanding that failure to include all your debts in a bankruptcy transaction is grounds for invalidating the discharge of the other debts. I was under the impression that any omission is grounds for having the bankruptcy rescinded and the debts reinstated. Further, if the debt was not included in the bankruptcy, it would seem that that meant that particular debt was NOT discharged and was still owed to the creditor.
In any event, the fact that the attorneys were not in the position to pay at that point should have had little to no bearing on their future ability to pay their judgment. They were not disbarred. They were going to find a way to pay mortgages and eat, so there should be a way to figure out how, in the future to pay this debt as well. It does not seem fair that it rested solely on the attorneys' ability to pay at that time. Their earning potential still had a monetary value. Bankruptcy, unemployment and/or temporary insolvency does not excuse one from paying other debts or responsiblities, like child support, income taxes, and STUDENT LOANS, so I don't see how it is an adequate affirmative defense here.