UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 05-1518
KRONISH LIEB WEINER AND HELLMAN, LLP,
Plaintiff - Appellant,
and
LAWRENCE C. GOTTLIEB; JAMES BELDNER; RICHARD
S. KANOWITZ,
Plaintiffs,
versus
JOHN K. FORT, Chapter 7 Trustee for Spartan
International, Incorporated,
Defendant - Appellee.
Appeal from the United States District Court for the District of
South Carolina, at Greenville. Henry F. Floyd, District Judge.
(CA-04-1312-6-HFF; BK-01-10254; AP-03-80324)
Argued: May 24, 2006 Decided: September 1, 2006
Before WILKINSON, TRAXLER, and GREGORY, Circuit Judges.
Affirmed by unpublished opinion. Judge Gregory wrote the opinion,
in which Judge Wilkinson joined. Judge Traxler wrote a separate
concurring opinion.
ARGUED: Tara Elizabeth Nauful, HAYNSWORTH, SINKLER & BOYD, P.A.,
Columbia, South Carolina, for Appellant. George Barry Cauthen,
NELSON, MULLINS, RILEY & SCARBOROUGH, L.L.P., Columbia, South
Carolina, for Appellee. ON BRIEF: William H. Short, Jr.,
HAYNSWORTH, SINKLER & BOYD, P.A., Columbia, South Carolina, for
Appellant. Linda K. Barr, Jody A. Bedenbaugh, NELSON, MULLINS,
RILEY & SCARBOROUGH, L.L.P., Columbia, South Carolina, for
Appellee.
Unpublished opinions are not binding precedent in this circuit.
See Local Rule 36(c).
2
GREGORY, Circuit Judge:
In this appeal, we are asked to decide whether a consent order
(“Consent Order”) entered into by bankruptcy trustee John K. Fort
(“Trustee”) and the law firm of Kronish Lieb Weiner & Hellman, LLP
(“Kronish”) precludes the Trustee from bringing a malpractice
action against Kronish. For the reasons set forth below, we
conclude, as did the bankruptcy and district courts, that it does
not.
I.
Debtor Spartan International (“Spartan”) was a South Carolina
corporation engaged in textile manufacturing. Spartan retained
Kronish in September 2000 to assist in Chapter 11 bankruptcy pre-
petition activities. Spartan prepared for, but never filed, a
Chapter 11 bankruptcy petition. Instead, on the advice of Kronish,
it turned over control and possession of its assets to its lender.
At the end of Kronish’s representation of Spartan in May 2001,
Spartan had incurred $26,246.63 in unpaid legal fees. J.A. 8.
Spartan’s creditors filed an involuntary Chapter 7 bankruptcy
petition against Spartan on May 31, 2001. Thereafter, the
bankruptcy court granted the bankruptcy petition and appointed the
Trustee.
In December 2001, the Trustee asked Kronish to turn over files
related to Kronish’s earlier representation of Spartan. Kronish
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refused, asserting a lien for unpaid attorneys’ fees. For the next
five months, Kronish and the Trustee negotiated the terms of the
turnover of the files.
Ultimately, in May 2002, the parties reached an agreement,
which was memorialized in (1) the Trustee’s application for an
administrative claim for Kronish (“Application for Administrative
Claim”) and (2) the Consent Order. In the Application for
Administrative Claim, the Trustee expressly stated that he was
requesting an administrative claim for Kronish in exchange for
access to Kronish’s files:
Kronish provided bankruptcy and other legal advice to the
Debtor at the time that the Debtor ceased operating.
Kronish has asserted an attorneys’ lien on Spartan files
and records for unpaid attorneys’ fees. In resolution of
such asserted lien, the parties have agreed that Kronish
will receive an administrative claim for $13,057.16. The
files and records held by Kronish are of assistance to
the estate in determining further assets which the estate
might pursue. Therefore, the Trustee believes that an
administrative claim is an equitable resolution to the
asserted lien which will then allow the Trustee free
access to the files and records. The parties have also
agreed that the remainder of Kronish’s fees will be
treated as an allowed, unsecured claim.
J.A. 6-7. The Consent Order granted Kronish an administrative
priority claim in the amount of $13,123.321 and an unsecured claim
for the remainder of its legal fees in the amount of $13,123.31.
Id. at 8-9. Moreover, the Consent Order reaffirmed that “[t]he
allowance of Kronish’s administrative and unsecured claim resolve
1
The Trustee paid Kronish’s administrative claim on September
3, 2003.
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[sic] its asserted attorneys’ lien on the files it holds from
services performed on behalf of the Debtor. Kronish agrees to copy
and turnover [sic] all documents requested by the Chapter 7 trustee
in this matter.” Id. at 8. On July 3, 2002, the bankruptcy court
approved the Consent Order without modification. Upon entry of the
Consent Order, Kronish allowed the Trustee access to the files.
During the following year, the Trustee brought suit against
Kronish, Kronish attorneys, and certain of Spartan’s officers and
directors. The Trustee contended that but for the advice of the
Kronish firm and attorneys, “Spartan would have filed a Chapter 11
proceeding, would have continued operating while going forward
under [Debtor in Possession] or under the leadership of a Chapter
11 trustee, assets would have been sold for substantially greater
value and Spartan would have emerged successfully from Chapter 11.”
J.A. 23.
Kronish moved to dismiss the malpractice action, claiming that
the Consent Order was “a final order issued by [the bankruptcy
court] on the merits of the reasonableness and value of [Kronish’s]
legal services, it cannot be attacked in a subsequent adversary
proceeding.” J.A. 49. The Trustee responded on January 30, 2004,
by moving for reconsideration of the Consent Order, pursuant to 11
U.S.C. § 502(j). In its motion for reconsideration, the Trustee
represented that
[t]he quality of Kronish’s services was never discussed
as the parties were focused on resolving an asserted
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lien. In fact, the parties resolved the lien issue prior
to the [sic] any review of Kronish files . . . . The
parties had no intention of addressing matters in the
Consent Order (defined below) other than resolution of
the asserted lien so that the Trustee could gain access
to the Kronish files in order to conduct a thorough
evaluation of Spartan’s pre-petition events.
J.A. 328. Likewise, a Kronish attorney stated in his affidavit
that “[d]uring the course of [his] negotiations with Trustee [over
the retaining lien and attorneys’ fees], the quality of [Kronish’s]
representation of Spartan was never raised or mentioned.” J.A.
216.
On March 9, 2004, the bankruptcy court issued an amended
order, declaring that the Consent Order had no res judicata effect
on the malpractice claim. J.A. 531. The bankruptcy court
concluded “it is evident that the consent order did not, and was
not intended to, resolve issues relating to the reasonableness and
necessity of [Kronish’s] services, but was only to satisfy
[Kronish’s] lien on the debtor’s files so that the trustee could
obtain possession thereof.” Id. at 532. In so doing, the
bankruptcy court drew upon its inherent authority to interpret its
own orders.
Kronish appealed the bankruptcy court order to the United
States District Court for the District of South Carolina, which
affirmed on April 5, 2005. Thereafter, Kronish filed a timely
notice of appeal of the district court’s order.
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II.
A.
“We review the judgment of a district court sitting in review
of a bankruptcy court de novo, applying the same standards of
review that were applied in the district court.” Devan v. Phoenix
Am. Life Ins. Co. (In re Merry-Go-Round Enters.), 400 F.3d 219, 224
(4th Cir. 2005). Accordingly, we review the bankruptcy court’s
factual findings for clear error. Id. By contrast, its legal
conclusions, including its interpretation of the Consent Order, are
reviewed de novo. Id. (the legal conclusions of a bankruptcy court
are subject to de novo review); Am. Canoe Ass’n v. Murphy Farms,
Inc., 326 F.3d 505, 512 (4th Cir. 2003) (consent orders are
reviewed de novo); McDowell v. Phila. Hous. Auth., 423 F.3d 233,
238 (3d Cir. 2005) (“The proper construction of the consent decree
is a question of law that receives plenary review.”); cf. United
States v. ITT Continental Baking Co., 420 U.S. 223, 236 (1975)
(“[S]ince consent decrees and orders have many of the attributes of
ordinary contracts, they should be construed basically as
contracts”).
B.
Kronish contends that the Trustee is precluded from bringing
a malpractice action because the quality of Kronish’s legal
services was necessarily at issue when the Consent Order was
entered. Kronish’s argument goes as follows: (1) an attorney who
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commits malpractice has no entitlement to fees; (2) in paying fees,
a client indicates that an attorney did not commit malpractice; and
therefore (3) an order setting fees necessarily resolves any
dispute involving malpractice. We disagree.
1.
We first consider whether the elements of res judicata are
satisfied here. A prior judgment has res judicata or claim
preclusive effect on future litigation when the following
conditions are met:
1) [T]he prior judgment was final and on the merits, and
rendered by a court of competent jurisdiction in
accordance with the requirements of due process; 2) the
parties are identical, or in privity, in the two actions;
and, 3) the claims in the second matter are based upon
the same cause of action involved in the earlier
proceeding.
First Union Commer. Corp. v. Nelson, Mullins, Riley, & Scarborough
(In re Varat Enters.), 81 F.3d 1310, 1315 (4th Cir. 1996).
Only the first two elements of res judicata are satisfied
here. First, this Court has repeatedly held that a consent
judgment is “for claim preclusion purposes, a final one on the
merits.” Keith v. Aldridge, 900 F.2d 736, 740 (4th Cir. 1990).
Second, without question, the parties to the Consent Order are
identical to the parties in the malpractice action.
In evaluating whether the third element is shown, i.e.,
whether there is identity of claims, “the appropriate inquiry is
whether the new claim arises out of same transaction or series of
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transactions as the claim resolved by the prior judgment.” Keith,
900 F.2d at 740 (quoting Harnett v. Billman, 800 F.2d 1308, 1313
(4th Cir. 1986)). Where the “same series of connected
transactions,” is involved, “and the same ‘operative facts’ are at
issue,” the third res judicata factor is made out. Id. In this
case, it cannot fairly be said that the Consent Order and
malpractice action involve the same operative facts. In approving
the Consent Order, the court had no need to consider any facts
pertaining to the nature, quality, or extent of Kronish’s services
to Spartan.2 Nor could the court have properly evaluated the
quality of Kronish’s services. Because Kronish provided pre-
petition services, the bankruptcy court had no basis for evaluating
the quality of Kronish’s services. Not even the Trustee had full
knowledge of the quality of services provided. Those services were
2
For this reason, Kronish’s reliance on Grausz v. Englander,
321 F.3d 467 (4th Cir. 2003), is misplaced. In that case, this
Court held that the resolution of a fee dispute involving a debtor
and the attorney who represented him during bankruptcy proceedings
had a preclusive effect on a subsequent malpractice action. Id. at
469. Unlike here, that case involved an award of fees rendered by
the bankruptcy court upon receipt of a professional fee application
under 11 U.S.C. § 330. We concluded that the malpractice action
and prior fee proceeding were based on the same cause of action,
because “[t]he fee application proceeding necessarily included an
inquiry by the bankruptcy court into the quality of professional
services rendered by the [law] firm.” Id. at 473. Pursuant to 11
U.S.C. § 330, “[t]he court was required to ‘consider the nature,
the extent, and the value of such services’ before awarding fees.
By granting the [law] firm’s second and final fee application, the
bankruptcy court impliedly found that the firm’s services were
acceptable throughout its representation of Grausz.” Id. (quoting
11 U.S.C. § 330(a)(3)) (citations omitted).
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provided to Spartan, before the Trustee was even appointed, and
Kronish had deprived the Trustee of access to files pertaining to
Kronish’s representation of Spartan, potential evidence of
malpractice. For these reasons, we conclude that the third res
judicata factor is not met here.
2.
Even if we were to find that the elements of res judicata were
not satisfied, the parties’ intent would lead us to conclude that
the Consent Order does not preclude the malpractice action.
Specifically, “[w]hen a consent judgment entered upon settlement by
the parties of an earlier suit is invoked by a defendant as
preclusive of a later action, the preclusive effect of the earlier
judgment is determined by the intent of the parties.” Keith v.
Aldridge, 900 F.2d 736, 740 (4th Cir. 1990). We elaborated:
[t]his approach, following from the contractual nature of
consent judgments, dictates application of contract
interpretation principles to determine the intent of the
parties. If the parties intended to foreclose through
agreement litigation of a claim, assertion of that claim
in a later suit, whether or not formally presented in the
earlier action, is precluded. . . . Claim preclusion will
not apply, however, if the parties intended to settle
only one part of a single claim and intended to leave
another part open for future litigation.
Id. at 740-41.
With this principle in mind, this Court in Keith concluded
that the plaintiff was precluded from bringing his action because
“the parties mutually manifested their intentions . . . to preclude
any future litigation having the objective of obtaining Keith’s
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reemployment with the Air Force.” 900 F.2d at 741. The Court
observed that “both the agreement and the dismissal order expressly
reserve[d] Keith’s claim for attorney’s fees,” but those documents
“d[id] not expressly reserve to Keith the right to raise due
process or other substantive claims in subsequent litigation.” Id.
According to the Court, those facts did not reflect an intent to
preserve claims other than the attorney’s fees claim for future
litigation. Id.
The following year, this Court revisited the question of the
res judicata effect of consent judgments in Young-Henderson v.
Spartanburg Area Mental Health Ctr., 945 F.2d 770 (4th Cir. 1991).
This time, the Court concluded that the language of the consent
order specifically reserved for the plaintiff the right to bring
the claim at issue.
By the terms of the Consent Order here, the parties and
the court below agreed that it would “only terminate[]
the claims raised in the complaint [and that the Consent
Order would] not in any way affect any other charges or
claims filed by the Plaintiff subsequent to the
commencement of this . . . action.” Fairly interpreted,
the Consent Order manifests an intent to preclude only
those claims that were raised in the complaint in
Henderson I. It does not manifest an intent to preclude
claims which could have been brought but were not, and it
does not manifest an intent to preclude claims which did
not arise until after the complaint was filed. If the
parties intended to preclude all claims that could have
been brought at the time the Henderson I complaint was
filed, or if they wished to preclude claims that might
have arisen after the complaint was filed, they surely
could have worded the Consent Order to achieve that
effect.
Id. at 774-75.
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Although the Consent Order at issue here does not speak in
terms that are quite as clear as the orders in Keith and Young-
Henderson, it nonetheless reflects an intent on the part of the
parties to “settle only one part of a single claim and . . . to
leave another part open for future litigation.” Keith, 900 F.2d at
741. By its terms, the Consent Order has a limited purpose: “The
allowance of Kronish’s administrative and unsecured claim resolve
[sic] its asserted attorneys’ lien on the files it holds from
services performed on behalf of the Debtor. Kronish agrees to copy
and turnover [sic] all documents requested by the Chapter 7 trustee
in this matter.” J.A. 8 (emphases added). Likewise, the
Application for Administrative Claim evinces that in entering the
Consent Order, the parties focused solely on the turnover of the
files in Kronish’s possession:
The files and records held by Kronish are of assistance
to the estate in determining further assets which the
estate might pursue. Therefore, the Trustee believes
that an administrative claim is an equitable resolution
to the asserted lien which will then allow the Trustee
free access to the files and records.
J.A. 6 (emphases added). Thus, by the clear language of the
Consent Order and Application for Administrative Claim, it is quite
clear that the Consent Order was only intended to resolve the
Trustee’s right to access Kronish’s files, documents, and records.
The conspicuous absence of any mention or allusion to the quality
12
of Kronish’s legal services persuades us that the Consent Order was
not intended to resolve that issue.3
III.
Having concluded that the elements of res judicata are not
satisfied here, and that the parties did not intend for the Consent
Order to preclude a subsequent action for legal malpractice, we
affirm the district court’s decision.
AFFIRMED
3
Likewise, we are not persuaded that “like any order fixing
attorneys’ fees, an order resolving a retaining lien necessarily
determines whether or not counsel committed malpractice.” Br. of
Appellant at 15. As discussed above, in entering the Consent
Order, the bankruptcy court did not consider the quality or value
of Kronish’s pre-petition services to Spartan. And, the parties
did not manifest an intent for the Consent Order to resolve the
quality of services provided by Kronish. Our conclusion is not
affected by the principle in New York law that “upon asserting a
retaining lien, outgoing counsel is entitled to a summary
determination fixing the value of his services and the amount so
fixed must be paid or otherwise secured before a turnover of the
papers relating to the client’s case may be ordered.” Brenner v.
Miller, 121 Misc. 2d 1, 2 (N.Y. Sup. Ct. 1983)). Federal law, not
New York law, controls the question of the preclusive effect of the
Consent Order. Keith v. Aldridge, 900 F.2d 736, 739 (4th Cir.
1990) (“federal law controls [this Court’s] assessment of the
preclusive effect of the earlier federal judgment . . . .”).
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TRAXLER, Circuit Judge, concurring:
I concur in the opinion of my colleague Judge Gregory. I
write only to emphasize that when a party contends that the entry
of a Consent Order has preclusive effect as to a subsequent action,
the application of the res judicata doctrine is modified. See
Keith v. Aldridge, 900 F.2d 736, 740-41 (4th Cir. 1990). In such
a case, “preclusive effect . . . is determined by the intent of the
parties” because of “the contractual nature of consent judgments.”
Id. at 740, 741; see also Young-Henderson v. Spartanburg Area
Mental Health Cntr., 945 F.2d 770, 774 (4th Cir. 1991). A judgment
entered “based upon the parties’ stipulation, unlike a judgment
imposed at the end of an adversarial proceeding, receives its
legitimating force from the fact that the parties consented to it.”
Norfolk S. Corp. v. Chevron, U.S.A., Inc., 371 F.3d 1285, 1288
(11th Cir. 2004). It follows that we apply traditional “contract
interpretation principles to determine . . . [i]f the parties
intended to foreclose through agreement litigation of a claim.”
Keith, 900 F.2d at 741. “The best evidence of [the parties’]
intent is, of course, the settlement agreement itself.” Norfolk,
371 F.3d at 1289; see United States v. Armour & Co., 402 U.S. 673,
682 (1971) (observing that “the scope of a consent decree must be
discerned within its four corners”). Only if the Consent Decree is
ambiguous or unclear should we look beyond the Order itself to
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determine whether the parties intended preclusive effect. See
Norfolk, 371 F.3d at 1290.
Thus, the terms of the Consent Order drive our analysis, not
the original complaint, and there is no need to engage in an
identity of claims analysis that is not dependent on principles of
contract. In this case, for the reasons Judge Gregory rightly
points out, the Consent Order does not evidence an intent to
foreclose the Trustee’s malpractice claim.
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