Richard Schultze v. David Chandler, Sr.
2014 U.S. App. LEXIS 13778
9th Cir.2014Background
- Colusa Mushroom, Inc. filed for Chapter 11 bankruptcy; an unsecured creditors’ committee was appointed to represent creditors, including plaintiffs.
- Chandler was approved by the bankruptcy court to represent the Committee as its counsel under 11 U.S.C. § 1103 and was compensated by the estate.
- After a reorganization, Premier Mushroom, LP purchased Colusa’s assets; the sale included a note secured by a junior lien but not perfected due to missing financing statements.
- Premier eventually defaulted; plaintiffs learned Colusa’s counsel failed to perfect the junior security interest, enabling Premier to incur additional debt and reducing asset recovery.
- Plaintiffs sued Chandler and his firm in state court for legal malpractice, arguing negligence in failing to ensure proper perfection; the suit was later removed to bankruptcy court.
- Bankruptcy court dismissed the malpractice claim, holding Chandler owed no individual duty to plaintiffs and that the claim arose in the administration of the bankruptcy estate.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the malpractice claim is a core bankruptcy proceeding | Plaintiffs contend the claim arises from state law and is not core. | Chandler argues the claim relates to estate administration and is a core proceeding. | Core proceeding; jurisdiction affirmed. |
| Whether the claim arose in or is inextricably linked to the bankruptcy case | Plaintiffs assert no bankruptcy-specific duties or rights were implicated. | Claim arose from administration of the estate and duties created under bankruptcy law. | Arises in bankruptcy; inseparable from estate administration. |
| Whether Chandler owed an individual duty of care to plaintiffs | Plaintiffs rely on privity-based or analogous California malpractice theories. | As committee counsel, Chandler represented the Committee only; no individualized duty to plaintiffs. | No individual duty; dismissal affirmed. |
Key Cases Cited
- Baker v. Simpson, 613 F.3d 346 (2d Cir. 2010) (core proceeding when debtor brings malpractice claim against bankruptcy counsel)
- Grausz v. Englander, 321 F.3d 467 (4th Cir. 2003) (core proceeding for claims against court-appointed professionals)
- Southmark Corp. v. Coopers & Lybrand (In re Southmark Corp.), 163 F.3d 925 (5th Cir. 1999) (fiduciary-policing rationale in reorganization context)
- Billing v. Ravin, Greenberg & Zackin, P.A., 22 F.3d 1242 (3d Cir. 1994) (core proceeding where debtor brought malpractice claim against bankruptcy counsel)
- Sanders Confectionery Prods., Inc. v. Heller Fin., Inc., 973 F.2d 474 (6th Cir. 1992) (core proceeding where debtor brought trustee and lender claim)