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.

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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,

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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

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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

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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.

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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

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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.

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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

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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.

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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.