On appeal from Superior Court of New Jersey, Law Division, Hunterdon County, Docket No. L-00013-11.
The opinion of the court was delivered by: Yannotti, J.A.D.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued September 11, 2012
Before Judges Reisner, Yannotti and Hoffman.
The opinion of the court was delivered by YANNOTTI, J.A.D.
Plaintiff William C. Buchanan (Buchanan) appeals from an order entered by the Law Division on December 16, 2011, which granted a motion by defendants Jeffrey Leonard (Leonard) and Morgan, Melhuish, Arbrutsyn (Morgan Melhuish)*fn1 for summary judgment and dismissed Buchanan's complaint with prejudice. For the reasons that follow, we affirm in part, reverse in part and remand for further proceedings.
We briefly summarize the relevant facts. Earl Kerr and Sherri Kerr (the Kerrs) owned a home in Lambertville and business property in Amwell, New Jersey. Nationscredit had a $129,000 first mortgage and William Wooden (Wooden) had a $85,000 second mortgage on the business property. In April 1992, Buchanan filed a Chapter 13 bankruptcy petition on behalf of the Kerrs. The petition was dismissed because the Kerrs' debts exceeded the limits established for individuals filing Chapter 13 petitions.
On August 21, 1993, Buchanan wrote to the Kerrs and stated that he had advised them they should be filing a Chapter 11 bankruptcy petition rather than a Chapter 13 petition. He stated that the Kerrs would not be eligible to file a Chapter 13 petition if they treated Wooden's claim as "almost entirely unsecured[.]" Buchanan said that he had no experience with Chapter 11 petitions and thought the Kerrs would be "much better served" by an attorney with such experience.
In the August 21, 1993 letter, Buchanan additionally wrote that the Kerrs had declined his advice in part because they would have to pay a "large retainer" to a new attorney. The Kerrs had instead directed him to file a Chapter 13 petition showing Mr. Wooden's claim as being secured or almost entirely secured by inflating the value of the garage to $200,000.00 (the assessed valuation for the garage is approximately $135,000.00). I have agreed to do so with the understanding that if the Trustee, the Court, or any other party determines that this petition is in anyway false based upon that that you agree to be responsible for the liability for same, if any.
The liability, if any, would be a petition for sanctions under Federal Rule 11 for bad faith filings. The reason for the bad faith, if applicable, would be that your unsecured debt exceeded $100,000. Chapter 13 Petitions are limited to Petitions for $350,000.00 secured debt and $100,000.00 unsecured [debt].
In March 2000, the Kerrs filed an action against Buchanan in the Law Division, Mercer County, in which they alleged, among other things, that Buchanan had prepared and on filed legally deficient Chapter 13 bankruptcy pleadings on their behalf and, as a result, they lost their residence, as well as their business and its property. Buchanan had a professional liability insurance policy issued by Legion Insurance Company (Legion), which retained Morgan Melhuish to represent him in the Kerrs' lawsuit. The firm assigned Leonard to handle the matter. Legion did not raise any issue as to Buchanan's coverage at that time.
In July 2003, Legion was declared insolvent, and the New Jersey Property-Liability Insurance Guaranty Association (NJPLIGA) assumed Legion's obligations. According to Buchanan, NJPLIGA's claims examiners reviewed the file pertaining to the Kerrs' suit against Buchanan but the examiners never asserted that he was not entitled to coverage under the policy, nor did they provide a defense subject to a reservation of rights.
During the course of the litigation, the Kerrs produced an expert report from Marc C. Capone, Esq. (Capone), dated April 28, 2004. In his report, Capone stated that a reasonably competent bankruptcy attorney should have first filed a Chapter 7 bankruptcy petition on behalf of the Kerrs and, after discharge, commenced a Chapter 13 proceeding. Capone stated that this would have allowed Wooden's second mortgage on the business property to be treated as wholly unsecured.
According to Capone, in the Chapter 13 proceeding, the Kerrs would have been discharged of all unsecured debt, including Wooden's second mortgage. Capone wrote that the Kerrs could have retained the equity in their residence, which could have been used to pay a substantial portion of the IRS debt. The Kerrs also would have been able to avail themselves of a bankruptcy code exemption and retained $30,000 from the sale proceeds of that property, as well as their business property.
Capone stated that, as a result of the course pursued by Buchanan, the Kerrs had to abandon their residence, thus walking away from valuable equity in the property.
The Kerrs also had to manipulate the value of the business property on their Bankruptcy Petition just to appear eligible for the filing of a Chapter 13 [petition] pursuant to 11 U.S.C. §109(e), a manipulation directed by Mr. Buchanan. This resulted in a Chapter 13 plan whereby the [Kerrs] had to pay the second mortgage on the [business] property to William Wooden in the approximate amount of $85,000.00 over a sixty-month period. Ultimately, the [Kerrs] lost both their residence and the business property, their business, did not receive a discharge for any unsecured ...