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Albee Associates v. Orloff

January 11, 1999


Before Judges Baime, Conley and A.a. Rodr¡guez.

The opinion of the court was delivered by: Conley, J.A.D.


Argued December 16, 1998

On Appeal from the Superior Court of New Jersey, Law Division, Passaic County.

This legal malpractice action arises from defendant law firm's representation of plaintiffs in a federal district court civil fraud action that the law firm filed for plaintiffs.

Along the way, it failed to timely file a complaint for non- dischargeability in a Chapter 7 bankruptcy proceeding filed by one of the defendants in the underlying suit, Aldo Medaglia. Default judgment in the amount of $1,545,120 has been obtained against the other defendants in that suit. However, as to Mr. Medaglia, the firm's failure to timely file a nondischargeability claim has, seemingly, *fn1 led to a discharge of plaintiffs' fraud claims against Medaglia in the bankruptcy action. Plaintiffs now appeal a summary judgment granted on the basis of the alleged noncollectibility of a judgment that might have been obtained against Medaglia in the federal suit. We reverse.

As we have said, the law firm's failed efforts to obtain a nondischargeability ruling in Medaglia's bankruptcy proceeding concerned plaintiffs' cause of action against Medaglia in their federal district court civil action against a number of defendants, only one of which was Medaglia. That complaint asserted fraud, conversion, federal and state RICO violations, and other related causes of action against Medaglia, Leonard Fritzson, Mark Hamor, Jeffrey Katz, Joseph Maggio and Metrobrook, Inc. (hereinafter federal defendants), arising out of plaintiffs' unsuccessful $500,000 investment with these defendants in a flea market located in Brooklyn, New York.

The investment occurred under the following circumstances. In June of 1989, the federal defendants began soliciting monies from representatives of plaintiffs for investment in an entity known as Metrobrook, Inc. Metrobrook was a New York corporation which operated the subject flea market. During negotiations, the federal defendants allegedly represented to plaintiffs that they, collectively, were equal shareholders in another corporation, Naphill Enterprises, Inc., which owned an additional flea market located in Queens, New York. It was represented both verbally and in writing that the Brooklyn flea market would be guaranteed and secured by Naphill and the Queens flea market.

These representations, plaintiffs have asserted, were critical to their agreement to invest the money and, unfortunately for them, turned out to be false. After plaintiffs entered into a sales agreement pursuant to which they paid $500,000 for ten percent of the outstanding shares of Metrobrook and which contained the representations as to Naphill and the Queens flea market *fn2 , it was discovered that Naphill Enterprises did not in fact own the Queens flea market. Rather, plaintiffs learned that a different corporation, of which Medaglia was the sole shareholder, owned the Queens flea market and also that Medaglia was the only other shareholder, besides the plaintiffs, in the ownership of the Brooklyn flea market. None of the other federal defendants owned shares in either venture. Plaintiffs also learned that the Brooklyn flea market was not in fact guaranteed by the Queens flea market and that Metrobrook was substantially in arrears with regard to the lease of the Brooklyn flea market location. Eventually, the Brooklyn flea market venture failed and plaintiffs lost most of their investment monies. Ultimately, plaintiffs were able to obtain a default judgment against most of the other federal defendants in the amount of $1,545,120.09. *fn3

The facts that form the basis for plaintiffs' legal malpractice claim are as follows. The federal district court complaint was filed in September 1990. In December 1991, Medaglia filed a petition for bankruptcy relief under Chapter 7 of the Bankruptcy Code, 11 U.S.C. §101 et seq. However, plaintiffs did not receive formal notice of the bankruptcy action because Medaglia's petition did not list plaintiff Albee Associates as a creditor, and the address given for plaintiff GAC Enterprises was insufficient.

The bankruptcy court issued an order that set April 10, 1992 as the "bar" date for any complaints objecting to discharge of debts or to determine the dischargeability of certain debts. Prior to this date the law firm came to learn about the bankruptcy proceeding and in February 1992, sent a letter to Medaglia's bankruptcy attorney requesting that plaintiffs be included on the list of creditors.

The firm did not, however, file an adversary proceeding contesting the nondischargeability of plaintiffs' claims against Medaglia prior to the bar date of April 10, 1992. The parties differ on the reason. Plaintiffs argue that it was caused by simple lack of diligence. The law firm, however, asserts that the decision not to file a complaint was based on its interpretation of a split of authority on the notice provisions under Bankruptcy Rule 4007 and § 523(a)(3) of the Bankruptcy Code, concerning whether known creditors are bound by the passing of a "bar" date if they did not have formal notice of same, which the law firm did not receive.

The firm did eventually file an adversary proceeding in the bankruptcy court in August 1992 seeking to have the claims against Medaglia declared non-dischargeable pursuant to §523(a)(2) and (a)(6) of Title 11 of the Bankruptcy Code, since those claims were based on fraud. As we have said, that adversarial proceeding was ultimately dismissed by summary judgment on the ground that it was time-barred as of April 10, 1992. The dismissal eventually was affirmed by the Court of Appeals.

The summary judgment before us arose in the context of a motion for summary judgment on the part of plaintiffs as to the law firm's liability for the alleged malpractice. That motion was denied. The motion Judge found that, based on the expert reports submitted by the law firm, there was at least a factual question as to whether the law firm had reasonably relied on a split in authority regarding whether a creditor who did not receive formal notice of the bankruptcy petition and the "bar" date was bound thereby, or whether the firm had simply neglected to file a timely ...

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