Capitol Hill Group v. Pillsbury, Winthrop, Shaw, Pittman, LLC

 United States Court of Appeals
         FOR THE DISTRICT OF COLUMBIA CIRCUIT



Argued May 11, 2009                 Decided June 26, 2009

                       No. 08-7109

    CAPITOL HILL GROUP, A CALIFORNIA CORPORATION,
                     APPELLANT

                             v.

PILLSBURY, WINTHROP, SHAW, PITTMAN, LLC, A DELAWARE
         LIMITED LIABILITY PARTNERSHIP, ET AL.,
                      APPELLEES


        Appeal from the United States District Court
                for the District of Columbia
                    (No. 1:07-cv-01936)



    Emil Hirsch argued the cause and filed the briefs for
appellant.

    Jack McKay argued the cause and filed the brief for
appellees.

    Before: HENDERSON, BROWN and KAVANAUGH, Circuit
Judges.

    Opinion for the Court filed by Circuit Judge BROWN.
                              2
     BROWN, Circuit Judge: Appellant Capitol Hill Group
(CHG) filed suit in the Superior Court of the District of
Columbia against its former counsel, Shaw Pittman (now
Pillsbury Winthrop Shaw Pittman LLP) and various
associated attorneys, for claims stemming from alleged legal
malpractice. Appellees removed the case to federal court,
asserting federal jurisdiction under 28 U.S.C. § 1334(b),
so-called “arising in” bankruptcy jurisdiction. The district
court denied appellant’s motion to remand for lack of
jurisdiction, and later granted summary judgment for
appellees because CHG’s claims are barred by res judicata.
Finding no error, we affirm.

                              I.

     To make a long and already well-documented story short
—well, somewhat shorter—we summarize the relevant facts.
CHG filed for bankruptcy in February 2002. CHG’s primary
asset, commercial property in the District of Columbia, was
embroiled in a zoning dispute with the District’s Department
of Consumer and Regulatory Affairs regarding the amount of
off-street parking required. The controversy continued during
the bankruptcy proceedings and Shaw Pittman, CHG’s court-
approved bankruptcy counsel, represented CHG in the zoning
process.

     Initially CHG was told it would have to provide 225
parking spaces, but in March 2003 the Zoning Administrator
decided 85 spaces would suffice. In January 2004, after a
neighborhood association appealed, the Board of Zoning
Adjustment (BZA) affirmed, but then decided to reconsider
its ruling. On February 24, 2004, the BZA finally settled on
a total of 177 spaces, an announcement it made orally. The
ruling was not issued in written form until September 9, 2004,
at which time it was transmitted by the BZA to Shaw Pittman,
                                3
but not to CHG itself. According to CHG, such an expansive
parking requirement “effectively precludes CHG from either
utilizing a substantial portion of the Property itself, or leasing
it to others[.]”

     In the interim the bankruptcy court granted Shaw
Pittman’s request to terminate its court-approved
representation of CHG. Shaw Pittman returned its BZA-
related files to CHG but did not tell the BZA it had stopped
representing CHG. As a courtesy, Shaw Pittman informed
CHG of the BZA’s decision to reconsider its favorable
January ruling at a hearing to take place on February 24—
information a Shaw Pittman attorney gleaned while present at
the BZA on other business.

     CHG and Shaw Pittman’s post-representation relations
were rocky. CHG first complained that Shaw Pittman’s fees
were unreasonable. After contested hearings, the bankruptcy
judge granted summary judgment to Shaw Pittman and
“awarded the firm fees based primarily on its conclusion that
CHG had agreed not to contest the amount of the fees. The
bankruptcy judge also made oral findings that Shaw Pittman’s
services were professional and that Shaw Pittman deserved to
be compensated for those services.” Capitol Hill Group v.
Pillsbury Winthrop Shaw Pittman, LLP, 574 F. Supp. 2d 143,
146 (D.D.C. 2008).        The district court affirmed the
bankruptcy court’s decision. In re Capitol Hill Group, 313
B.R. 344, 358 (D.D.C. 2004).

     Shaw Pittman then filed an application for fees and costs
incurred during the first fee dispute. After a trial on October
21 and 22, the bankruptcy judge orally ruled that CHG was
responsible for paying all fees and expenses that were
reasonably foreseeable as a result of engaging in the fee
litigation with Shaw Pittman. Nevertheless, the cycle of
                               4
acrimony continued. After a one-day trial on a third fee
application on August 1, 2005, the bankruptcy court approved
the application. The court later entered a fourth and a fifth fee
judgment with the consent of CHG. On April 12, 2006, the
parties made one final appearance before the bankruptcy
court, after Shaw Pittman filed a motion to compel because it
feared CHG was withholding further claims. The bankruptcy
court specifically asked CHG whether it had any other claims
against the firm. CHG’s counsel stated “[t]here are concerns
that CHG has about the representation that Shaw Pittman
provided during its representation of Capitol Hill Group that
began in 1999 or whatever. But nothing’s been filed.” CHG
also represented it “had no outstanding claims against Shaw
Pittman arising out of the bankruptcy proceedings.” Capitol
Hill Group, 574 F. Supp. 2d at 147. In addition, “[t]he
bankruptcy court noted that CHG could have pursued
malpractice claims against Shaw Pittman regarding the
adequacy of its representation,” in addition to claims CHG
had made about excessive fees and related professional
misconduct, “but that it had failed to do so and would
therefore be barred from later asserting such claims by the
doctrine of res judicata.” Id.

     In this suit, CHG alleges Shaw Pittman committed
malpractice in two respects: by failing to notify CHG when
BZA issued the September 2004 order, and by failing to make
a particular legal argument to the BZA. Shaw Pittman
removed the case to federal court. The district court
concluded it had jurisdiction, and granted summary judgment
for appellees because CHG’s claims are barred by res
judicata.

     We have jurisdiction under 28 U.S.C. § 1291 from the
final order of the district court granting summary judgment
for defendants. After such a final order, the district court’s
                               5
earlier denial of the motion to remand for lack of subject
matter jurisdiction also is reviewable. See Geruschat v. Ernst
Young LLP (In re Seven Fields Dev. Corp.), 505 F.3d 237,
244–45 (3d Cir. 2007); see also 14C CHARLES ALAN WRIGHT,
ARTHUR R. MILLER & EDWARD H. COOPER, FEDERAL
PRACTICE AND PROCEDURE § 3740 & n.66 (3d ed. 1998). We
review the district court’s legal conclusions regarding subject
matter jurisdiction, including a denial of a motion to remand,
de novo. E.g., Vill. of DePue v. Exxon Mobil Corp., 537 F.3d
775, 782 (7th Cir. 2008). And, of course, we review the
district court’s grant of summary judgment de novo as well.
E.g., Woodruff v. Peters, 482 F.3d 521, 526 (D.C. Cir. 2007).

                               II.

     CHG insists the district court erred in exercising
jurisdiction over this case under 28 U.S.C. § 1334(b), which
provides “the district courts shall have original but not
exclusive jurisdiction of all civil proceedings arising under
title 11, or arising in or related to cases under title 11.”
“[P]roceedings or claims arising in Title 11 are those that are
not based on any right expressly created by Title 11, but
nevertheless, would have no existence outside of the
bankruptcy.” Grausz v. Englander, 321 F.3d 467, 471 (4th
Cir. 2003) (internal quotations omitted).

     In concluding it had “arising in” jurisdiction, the district
court principally relied on two cases: Southmark Corp. v.
Coopers & Lybrand (In re Southmark Corp.), 163 F.3d 925
(5th Cir. 1999) and Geruschat, 505 F.3d 237. Each holds
there is federal bankruptcy jurisdiction over malpractice
claims brought by debtors against court-appointed
professionals arising while the professionals assisted the
debtor and the court during the bankruptcy process.
Southmark Corp., 163 F.3d at 932; Geruschat, 505 F.3d
                               6
at 260–62. As the Fifth Circuit observed, “[a] sine qua non in
restructuring the debtor-creditor relationship is the court’s
ability to police the fiduciaries, … [including] court-appointed
professionals, who are responsible for managing the debtor’s
estate in the best interest of creditors.” Southmark Corp., 163
F.3d at 931. After all, “[t]he bankruptcy court must be able to
assure itself and the creditors who rely on the process that
court-approved managers of the debtor’s estate are
performing their work, conscientiously and cost-effectively.”
Id. Moreover, “[e]xcessive professional fees or fees charged
for mediocre or, worse, phantom work also cause the estate
and the creditors to suffer.” Id.

     Appellant argues that claims arising post-petition and
post-plan-confirmation are outside the “arising in” jurisdiction
of the court, citing Valley Historic Limited Partnership v.
Bank of New York, 486 F.3d 831 (4th Cir. 2007), and
Community Bank of Homestead v. Boone (In re Boone), 52
F.3d 958 (11th Cir. 1995). Rejecting a similar argument, the
Fifth Circuit in Southmark Corporation specifically
distinguished cases not implicating a “malpractice claim
involving court-appointed professionals” but rather involving
claims that “could stand alone from the bankruptcy case.”
163 F.3d at 931.        The two cases appellant cites are
distinguishable for the same reason. The claim at issue in
Community Bank of Homestead was not a malpractice claim
against professionals involved in the bankruptcy proceeding
but rather was against a bank that allegedly had tortiously
interfered with the sale of the debtors’ house. 52 F.3d at 959–
60. In Valley Historic Limited Partnership, similarly, the
claims at issue were not against bankruptcy professionals, but
rather were tort claims against the bank that held the mortgage
on the corporate debtor’s real estate assets. 486 F.3d at 834.
                                7
     In sum, we agree with our sister circuits that malpractice
claims against court-appointed professionals stemming from
services provided in the bankruptcy proceeding are
“inseparable from the bankruptcy context,” Southmark Corp.,
163 F.3d at 931, and “constitute … a proceeding ‘arising in’
the bankruptcy,” Geruschat, 505 F.3d at 263. Such claims
therefore fall within the bankruptcy jurisdiction of the federal
courts.

                               III.

     CHG argues res judicata should not bar it from pressing
its malpractice claims against Shaw Pittman despite the fee
litigation during the bankruptcy proceedings. “Under the
doctrine of res judicata, or claim preclusion, a subsequent
lawsuit will be barred if there has been prior litigation
(1) involving the same claims or cause of action, (2) between
the same parties or their privies, and (3) there has been a final,
valid judgment on the merits, (4) by a court of competent
jurisdiction.” Smalls v. United States, 471 F.3d 186, 192
(D.C. Cir. 2006).

     CHG’s arguments go to the first element listed, the so-
called “identity” element; the existence of the other three
elements is not contested. As the district court explained,
“there is an identity of the causes of action when the cases are
based on the ‘same nucleus of facts’ because ‘it is the facts
surrounding the transaction or occurrence which operate to
constitute the cause of action, not the legal theory on which a
litigant relies.’” Capitol Hill Group, 574 F. Supp. 2d at 149
(quoting Page v. United States, 729 F.2d 818, 820 (D.C. Cir.
1984)). Put a little more pithily, “claim preclusion precludes
the litigation of claims, not just arguments.” NRDC v. EPA,
513 F.3d 257, 261 (D.C. Cir. 2008); see also id. (“[C]laim
                               8
preclusion is also intended to prevent litigation of matters that
should have been raised in an earlier suit.”).

                               A.

     The district court relied primarily on three cases in
granting summary judgment for appellees under the doctrine
of res judicata: Grausz, 321 F.3d 467, Iannochino v.
Rodolakis (In re Iannochino), 242 F.3d 36 (1st Cir. 2001), and
Osherow v. Ernst & Young LLP (In re Intelogic Trace, Inc.),
200 F.3d 382 (5th Cir. 2000). In each, fee litigation in the
bankruptcy proceeding precluded later malpractice claims
against the bankruptcy professionals to whom the fees had
been awarded. Grausz, 321 F.3d at 475 (“[Debtor’s] legal
malpractice claim is barred by the final fee order in the
bankruptcy case.”); Iannochino, 242 F.3d at 38 (“[A]n award
of fees in bankruptcy to a debtor’s attorney will act as a bar
under claim preclusion principles to a later suit filed by the
debtor alleging professional malpractice arising from the
bankruptcy representation.”); Osherow, 200 F.3d at 388
(“[T]he award of professional fees and the … malpractice
claims concern ‘the same nucleus of operative facts’ and meet
the transactional test.”).

     CHG argues that, as in the Fourth Circuit’s unpublished
decision in Kronish Lieb Weiner & Hellman, LLP v. Fort, 197
Fed. App’x 261 (4th Cir. 2006) (unpublished), this case arises
from a different nucleus of operative facts than the fee
litigation, and therefore Iannochino, Osherow, and Grausz are
inapposite. We disagree. In Kronish, the Fourth Circuit held
a Consent Order resolving a bankruptcy claim for fees
stemming from pre-petition legal services did not bar the
trustee of the bankruptcy estate from bringing a malpractice
action against the law firm. 197 Fed. App’x at 264–65.
Unlike in this case, there was no litigation before the
                              9
bankruptcy court about the adequacy of the representation or
the reasonableness of the fees; the claim was allowed and not
contested by anyone. Id. at 264. Moreover, the legal services
at issue took place prior to the filing of the bankruptcy
petition. Because the claim was for pre-petition services, the
bankruptcy court had no basis on which to evaluate the
quality of the legal services. Id. As a result, the Fourth
Circuit distinguished Grausz, its own precedent. Id. at 264
n.2. In this case, however, there was an adversarial process
before the bankruptcy court and the bankruptcy court was in a
position to judge the quality of Shaw Pittman’s services. We
look to Grausz, rather than Kronish, and thus agree with the
district court that the fee applications and the malpractice
claim arise out of the same nucleus of facts and the identity
element of res judicata is satisfied.

                              B.

     Res judicata may not bar a later suit where the plaintiff
was not aware of its claim at the time of the first litigation.
See, e.g., Grausz, 321 F.3d at 473–74. CHG contends it had
neither actual nor constructive knowledge of its claims during
the bankruptcy fee litigation.

     CHG insists it had no actual knowledge of Shaw
Pittman’s failure to forward the BZA order until March 2005,
and became aware of Shaw Pittman’s failure to make a
particular legal argument on the parking issue in the “Spring
of 2006.” CHG quickly goes on to assert, in the next
paragraph of its brief, “therefore … CHG had neither actual
nor constructive knowledge.” But, of course, when CHG
gained actual knowledge of specific claims tells us nothing
about its actual or constructive knowledge of the operative
facts.
                              10
     The district court found CHG’s claims barred for two
reasons: CHG (1) had actual knowledge of the general nature
of its claims against Shaw Pittman, as evidenced by the
arguments it did raise during the fee litigation, and (2) also
had constructive knowledge. That is, CHG would have
discovered the specifics of each of the two claims, had it acted
with due diligence. Capitol Hill Group, 574 F. Supp. 2d
at 150–51. “We look at the date the final fee order was
entered … and ask whether by that time [the debtor] knew or
should have known there was a real likelihood that [it] had a
malpractice claim.” Grausz, 321 F.3d at 474. In April 2006,
at the last hearing during the bankruptcy court fee litigation,
the bankruptcy judge asked CHG whether it had any other
claims against Shaw Pittman, and CHG’s counsel stated
“[t]here are concerns that CHG has about the representation
that Shaw Pittman provided during its representation of
Capitol Hill Group that began in 1999 or whatever. But
nothing’s been filed.” Moreover, at that same April 2006
hearing, counsel for Shaw Pittman and the bankruptcy judge
each noted it was their understanding that future claims
arising from the representation would be barred by res
judicata. Following that warning and without objection from
CHG, the bankruptcy judge announced the final conclusion of
the fee litigation that same day.

     “[R]es judicata … bars relitigation not only of matters
determined in a previous litigation but also ones a party could
have raised[.]” NRDC v. Thomas, 838 F.2d 1224, 1252 (D.C.
Cir. 1988). In April 2006, CHG was aware of Shaw Pittman’s
failure to forward the written BZA order, and could have
become aware of the failure to make the historic designation
legal argument. As in the Osherow case, here CHG “was
sufficiently aware of the real possibility of there being errors
by [the bankruptcy professional] such as now alleged and of
their likely consequences before the fee hearing.” 200 F.3d
                                 11
at 388. “[R]ather than considering whether the [debtors]
knew of the precise legal contours of their malpractice claim
at the time of the fee application, we must instead determine
whether they knew of the factual basis of that claim.”
Iannochino, 242 F.3d at 48–49. When CHG decided to
litigate Shaw Pittman’s fees, raising broad professional
responsibility arguments questioning the representation,
CHG’s duty to discover the legal errors (if any) committed by
Shaw Pittman was triggered. As the First Circuit observed,
“the breakdown of the attorney/client relationship here is
further evidence that the [debtors] should have raised their
malpractice claims as objections to the fee award.” Id. at 49.
And as CHG was warned they would be, these claims are now
precluded.1

                                 C.

     CHG also argues its claims, which it asserts were
permissive rather than compulsory counterclaims, cannot be
automatically precluded. The First Circuit has described the
principle: the “failure to interpose a counterclaim does not
necessarily act as a bar to later actions.” Iannochino, 242
F.3d at 41. There are two “exceptions” which lead to a later
action being barred by res judicata: (1) compulsory
counterclaims may be barred, and (2) permissive
counterclaims too may be barred when “the relationship
between the counterclaim and the plaintiff’s claim is such that
the successful prosecution of the second action would nullify
the initial judgment or impair the rights established in the
1
  CHG also argues there are disputed issues of material fact as to its
knowledge, precluding summary judgment. Because the district
court accepted CHG’s assertions with respect to the dates on which
it gained actual knowledge, and charged CHG with constructive
knowledge, there are no factual disputes in this case precluding
summary judgment.
                              12
initial action.” Id. at 42 (quoting RESTATEMENT (SECOND) OF
JUDGMENTS § 22(2)(b)). That is, res judicata may generally
bar compulsory counterclaims, but not always permissive
ones; otherwise res judicata would swallow Rule 13. But if
allowing a permissive counterclaim to go forward would
nullify the earlier judgment or impair rights established in the
earlier action, even a permissive counterclaim can be barred.

     In this case, we need not determine whether CHG’s
claims against Shaw Pittman were permissive or compulsory
counterclaims because they are barred under the second
“exception” regardless. The bankruptcy judge repeatedly
awarded fees to Shaw Pittman for the services rendered to
CHG in connection with its bankruptcy proceedings, and the
district court affirmed the awards. E.g., In re Capitol Hill
Group, 313 B.R. 344, 349–51 (D.D.C. 2004) (rejecting
CHG’s equitable breach of fiduciary duty/breach of
professional conduct argument). As the district court noted in
granting summary judgment, the bankruptcy judge also made
oral findings that Shaw Pittman’s services were professional
and that Shaw Pittman deserved to be compensated for those
services. At the final hearing before the bankruptcy court, the
judge informed CHG it “could have pursued claims against
Shaw Pittman regarding the adequacy of its representation …
at the bankruptcy fee hearings but that it failed to do so and
would therefore be barred from later asserting claims based
on Shaw Pittman’s representation by the doctrine of res
judicata.” Capitol Hill Group, 574 F. Supp. 2d at 147.

     To allow CHG to litigate malpractice claims against
Shaw Pittman now, based on the same representation, would
nullify the initial judgment or impair the rights established by
Shaw Pittman in the bankruptcy fee litigation. Unlike in
regular civil litigation, “[i]n bankruptcy … a successful
malpractice action could impair rights that [the bankruptcy
                              13
professionals] 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.” Iannochino, 242 F.3d at 42–43
(internal citation omitted); see Southmark Corp., 163 F.3d
at 931 (“Award of the professionals’ fees and enforcement of
the appropriate standards of conduct are inseparably related
functions of bankruptcy courts.”).

                             IV.

    The judgment of the district court is
                                                    Affirmed.