## Facts

- Capitol Hill Group, Inc. (CHG) filed a Chapter 11 case and retained Pillsbury, Winthrop, Shaw, Pittman, LLP as court-approved bankruptcy counsel.
- The firm also represented CHG in a zoning dispute involving CHG’s principal asset, a commercial property in the District of Columbia.
- After counsel’s representation ended, the D.C. Board of Zoning Adjustment issued an order and sent it to the firm rather than CHG.
- CHG later alleged malpractice based on (a) counsel’s failure to forward the zoning order to CHG and (b) counsel’s failure to raise a specific legal argument in the zoning proceedings.
- In the bankruptcy case, the firm sought approval of its fees; CHG opposed the fee applications, disputing the reasonableness of the fees in light of the quality of representation.
- The bankruptcy court approved the fee requests, and the district court affirmed.
- CHG then sued its former counsel for malpractice in D.C. Superior Court; the firm removed to federal district court.
- The district court denied remand and granted summary judgment for the firm, concluding the malpractice claims were barred by res judicata.

## Issues

1. Whether a state-law malpractice action against court-approved bankruptcy counsel falls within federal bankruptcy “arising in” jurisdiction under 28 U.S.C. § 1334(b).
2. Whether CHG’s malpractice claims were barred by res judicata because fee-approval litigation in the bankruptcy case already adjudicated matters arising from the same representation.

## Decision

- The D.C. Circuit affirmed the district court.
- The court held the district court had subject-matter jurisdiction because the malpractice claims “arose in” the bankruptcy case, as they were inseparable from counsel’s court-approved role in the bankruptcy and related proceedings.
- The court held res judicata barred the malpractice suit because:
  - the fee litigation and malpractice claims arose from the same nucleus of facts concerning the quality of the firm’s services,
  - the fee award (affirmed on appeal) was a final judgment on the merits by a court of competent jurisdiction, and
  - a malpractice recovery would effectively nullify or impair the earlier fee judgment.
- The court rejected CHG’s argument that it lacked sufficient knowledge of the malpractice theories during the fee dispute, concluding CHG knew or should have known enough to raise the claims then.
- The court further concluded that even if the malpractice allegations could be characterized as permissive counterclaims, claim preclusion still applied because the later action would undermine the earlier judgment.

## Legal Principles

- A malpractice claim against court-approved bankruptcy professionals for conduct occurring during the bankruptcy may “arise in” bankruptcy and fall within § 1334(b) bankruptcy jurisdiction because such claims, by their nature, arise only in the bankruptcy context.
- Claim preclusion applies when (1) the later action involves the same claim (including claims arising from the same nucleus of facts), (2) between the same parties or their privies, and (3) after a final judgment on the merits by a court of competent jurisdiction.
- When fee-approval proceedings adjudicate the quality and reasonableness of a professional’s services, a later malpractice action based on the same representation may be precluded if success would contradict or impair the earlier fee judgment.
- A party cannot avoid claim preclusion by withholding a theory that it knew or should have known during the earlier proceeding, where the theory arises from the same transactional facts.

## Conclusion

The D.C. Circuit held that CHG’s malpractice claims against its court-approved bankruptcy counsel fell within bankruptcy “arising in” jurisdiction and were barred by claim preclusion because CHG had already litigated the quality of counsel’s services in the bankruptcy fee-approval proceedings, resulting in a final fee judgment that a malpractice verdict would undermine.


Capitol Hill Grp., Inc. v. Pillsbury, Winthrop, Shaw, Pittman, LLP, 569 F.3d 485 (D.C. Cir. 2009)