Schultze et al v. Chandler et al

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re
COLUSA MUSHROOM, INC., 	No. 05-12180
Debtor(s).
______________________________________/
RICHARD K. SCHULTZE, et al.,
Plaintiff(s),
v. 	A.P. No. 11-1118
DAVID N. CHANDLER, SR., et al.,
Defendant(s).
_______________________________________/
Memorandum on Motion to Dismiss
_________________
Defendant David N. Chandler, Sr., was the attorney for the Official Creditors Committee in the
Chapter 11 proceedings commenced by debtor Colusa Mushroom, Inc., in 2005. Chandler’s
employment was approved by the court pursuant to § 1103(a) of the Bankruptcy Code.
Plaintiffs Richard K. Schultze, et al., were members of the Official Creditors Committee.
After conversion of the case to Chapter 7, they commenced action as individuals against Chandler and
his professional corporation in state court for malpractice.1 They allege that Colusa’s plan of
reorganization called for the sale of its business to a third party with the Colusa taking back a note for
1Conversion to Chapter 7 dissolved the Committee. 11 U.S.C. § 103(g); 	In re Great Northern
Paper, Inc., 299 B.R. 1, 5 (D.Me.2003).
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Entered on Docket
September 21, 2011
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 11-01118 Doc# 23 Filed: 09/21/11 Entered: 09/21/11 15:13:57 Page 1 of 4

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part of the purchase price. The note was to be secured by the business assets. They allege that the
attorney for Colusa negligently failed to file a financing statement to perfect the security interest, and
that Chandler had a duty to make sure the security interest was properly perfected. 	Plaintiffs allege
that they suffered damages as a result. 	Chandler removed the action to this court. 	His motion to
dismiss is now before the court. Chandler advances several arguments based on federal law for
dismissal of the case. However, because the court determines that Chandler owed no duty to plaintiffs
under state law, it will grant his motion without addressing the federal issues.
The court begins its analysis by noting that Chandler was not plaintiffs’ lawyer. “A
professional retained by a committee represents the committee and only the committee, and the
professional’s fiduciary duty runs solely to committee.” 7 Collier on Bankruptcy (16th Ed), ¶
1103.03[7]. 	Plaintiffs argue that under California law Chandler is liable to them even though he was
not their lawyer. The court interprets California law differently.
Traditionally, the law in California was that only a client could sue an attorney for professional
negligence. See Hall v. Kalfayan, 190 Cal.App.4th 927, 933 (2010); Chang v. Lederman, 172
Cal.App.4th 67, 76 (2009). That is still a requirement for a malpractice suit in most areas of California
law. 7A Cal.Jur.3d, Attorneys at Law, §644 [“An attorney’s duty to his or her client depends on the
existence of an attorney-client relationship.”] However, in Biakanja v. Irving, 49 Cal.2d 647 (1958),
the court carved out an exception to the rule in probate-related cases, allowing beneficiaries of
negligently-drafted wills to sue the attorney drafter. See also Lucas v. Hamm, 56 Cal.2d 583 (1961).
More recent cases have narrowly construed Biakanja and Lucas. In both Chang and Hall, the
California appellate court sustained dismissals of the complaints of non-clients attempting to sue
attorneys, finding in each case that the attorney did not owe a duty to the plaintiff.
The court takes its guidance from Biakanja itself. 	The court held, at 650:
The determination whether in a specific case the defendant will be held liable to a
third person not in privity is a matter of policy and involves a balancing of various
factors, among which are the extent to which the transaction was intended to affect the
plaintiff, the foreseeability of harm to him, the degree of uncertainty that the plaintiff
suffered injury, the closeness of the connection between the defendant’s conduct and the
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Case: 11-01118 Doc# 23 Filed: 09/21/11 Entered: 09/21/11 15:13:57 Page 2 of 4

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injury suffered, the moral blame attached to the defendant’s conduct, and the policy of
preventing future harm.
See also Haldane v. Freedman, 204 Cal.App.2d 475 (1962) and anno., “Attorneys - Liability to Third
Parties,” 45 A.L.R.3d 1181, 1193 [“[A]lthough privity of contract is no longer a prerequisite to
recovery in California, a determination whether in a specific case an attorney would be held liable to a
person other than his client for the consequences of his professional negligence is a matter of policy
involving the balancing of various factors.”]. Balancing appropriate factors, the court concludes that
Chandler is not liable to plaintiffs for their disappointment.
First and foremost is the remoteness of Chandler from the failure to perfect the security interest.
The Creditors’ Committee was not a party to the negotiations between Colusa and the purchaser of its
assets, nor was it a proponent of the plan of reorganization. If there was negligence, it was on the part
of Colusa’s counsel. Chandler did not have the right or the power to file a financing statement, nor was
it his responsibility to do so. Plaintiffs allege that Chandler did not check to make sure that Colusa’s
counsel filed the statement properly, but the failure of an experienced commercial lawyer to file a
financing statement is certainly not foreseeable. Applying plaintiff’s theory of expanded duty would
mean that each creditor has a cause of action against its own attorney and the attorneys of the others for
failing to double-check the actions of Colusa’s counsel.
Moreover, there are sound policies militating against holding counsel for a creditors’ committee
liable for failure to discover the negligence of debtor’s counsel. An active creditors’ committee
represented by competent counsel is a blessing to a bankruptcy court, assisting the court in identifying
issues and determining what actions are in the best interests of the bankruptcy estate. Such counsel
usually serve without retainer, relying on confirmation of a plan or unencumbered estate assets for their
fees; many are disappointed. The willingness of counsel to represent committees would certainly be
chilled if they are to be held responsible for the failings of debtor’s counsel. Thus, not only is there no
moral blame attributable to Chandler’s conduct, but more future harm would result from holding him
liable than from exculpating him.
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Case: 11-01118 Doc# 23 Filed: 09/21/11 Entered: 09/21/11 15:13:57 Page 3 of 4

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In California, the existence of a duty is a legal issue to be decided by the court. Kahn v. East
Side Union High School Dist., 31 Cal.4th 990, 1004 (2003). 	Applying state law, the court determines
that Chandler did not have a duty to the individual creditors to insure that debtor’s counsel properly
filed the financing statement.
For the foregoing reasons, Chandler’s motion to dismiss will be granted. Counsel for Chandler
shall submit an appropriate form of order.
Dated: September 21, 2011
SAlan Jaroslovsky
U.S. Bankruptcy Judge
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Case: 11-01118 Doc# 23 Filed: 09/21/11 Entered: 09/21/11 15:13:57 Page 4 of 4