Layson's Restorations Inc v. Sterbick, 3:16-cv-05034

Background

Layson’s Restorations (debtor) filed Chapter 11 on counsel John Sterbick’s advice after a judgment against the Laysons personally; Sterbick billed ~ $44,336 and sought multiple fee awards in bankruptcy court.
Layson’s opposed Sterbick’s second and final fee applications, alleging excessive/unreasonable fees, improper hourly rates, double billing, an improper $7,000 retainer, incompetent representation (including improper filing of the petition, failure to move to use cash collateral, and delayed plan filing), and improper garnishments of debtor bank accounts.
The bankruptcy court held hearings, reduced Sterbick’s fee requests and awarded a small final fee; it explicitly considered Sterbick’s alleged errors and misconduct in reaching the fee award.
Layson’s did not appeal the bankruptcy fee decisions; it later filed an adversary malpractice/ breach of fiduciary duty/CPA complaint against Sterbick after reopening the bankruptcy.
The bankruptcy court dismissed the adversary complaint on summary judgment, holding res judicata barred claims that were or could have been raised in the fee proceedings (and noting collateral estoppel also might apply).
The district court affirmed dismissal, finding identity of claims and that the bankruptcy fee order and subsequent plan confirmation constituted a final judgment on the merits that precluded relitigation.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether res judicata bars Layson’s malpractice, fiduciary duty, and CPA claims	Layson’s contends the bankruptcy court’s fee rulings did not resolve those claims and thus do not preclude suit	Sterbick argues the fee hearings considered the same facts/claims and the fee order was a final, appealable judgment that bars subsequent litigation	Held: Res judicata bars the adversary complaint — identity of claims and final judgment satisfied
Whether collateral estoppel bars re-litigation of issues decided in the fee hearings	Layson’s argues collateral estoppel would unfairly bind it to bankruptcy court findings and is raised for first time on appeal	Sterbick argues the bankruptcy court already considered the same issues and could preclude re-litigation	Held: Court did not need to decide because res judicata disposal was dispositive; bankruptcy court noted collateral estoppel may also apply
Whether Layson’s CPA claim survives if malpractice/ fiduciary claims are barred	Layson’s conceded at the bankruptcy hearing that if those claims are barred, the CPA claim is also barred	Sterbick additionally argued Layson’s failed to show public-impact element of CPA	Held: CPA claim dismissed — barred by res judicata and because Layson’s did not show the public-interest element
Whether the bankruptcy court’s reliance on prior circuit authority was appropriate	Layson’s argued those cases are distinguishable and not controlling	Sterbick relied on precedents holding fee awards may preclude malpractice suits where the same services were evaluated	Held: District court found the cited cases (and Ninth Circuit law) sufficiently analogous; reliance appropriate

Key Cases Cited

In re Iannochino, 242 F.3d 36 (1st Cir.) (bankruptcy fee awards can have preclusive effect on subsequent malpractice claims)
In re Intelogic Trace, Inc., 200 F.3d 382 (5th Cir.) (fee application rulings implying value/quality of services can bar malpractice suits based on same services)
In re Yermakov, 718 F.2d 1465 (9th Cir.) (bankruptcy fee determinations under §330 are appealable and can be final determinations of compensation)
Mpoyo v. Litton Electro-Optical Sys., 430 F.3d 985 (9th Cir.) (multi-factor test for identity of claims in res judicata analysis)
Tahoe-Sierra Pres. Council, Inc. v. Tahoe Reg’l Planning Agency, 322 F.3d 1064 (9th Cir.) (elements of res judicata and privity analysis)