WGH Communications, Inc. v. Penachio Malara LLP

Background

WGH Communications, Inc. brought a single legal-malpractice claim against Penachio Malara LLP, Anne Penachio, Bronson Law Offices, PC, and Bruce Bronson. WGH alleged that the defendants failed to timely appeal a May 10, 2018, confirmation order in the bankruptcy proceeding involving CM Wind Down Topco Inc. WGH alleged that the amended reorganization plan violated the absolute priority rule.

The court had previously allowed WGH to amend its complaint, but required it to address whether the court had subject-matter jurisdiction. WGH’s First Amended Complaint alleged that Penachio Malara LLP was a citizen of New York but did not allege the citizenship of the firm’s members, including its partners and any limited partners, except for Anne Penachio.

Motions and analysis

The defendants filed two motions to dismiss. They argued that the First Amended Complaint failed to establish diversity jurisdiction because it did not identify the citizenship of Penachio Malara LLP’s members. They also argued that the complaint failed to state a legal-malpractice claim because its assertion that the bankruptcy plan violated the absolute priority rule was conclusory and because WGH did not adequately allege ascertainable damages.

The court stated that it could not reach the merits until it determined that subject-matter jurisdiction existed. Because the First Amended Complaint omitted allegations about the citizenship of Penachio Malara LLP’s members, the court granted the defendants’ motions to dismiss the complaint to the extent they sought dismissal for failure to allege a basis for federal subject-matter jurisdiction.

The court did not decide whether WGH’s legal-malpractice claim was adequately pleaded on the merits. In a footnote, it advised WGH that the complaint also appeared to lack facts supporting its allegations that the amended plan violated the absolute priority rule and that WGH suffered ascertainable damages. The court identified examples of missing damages allegations, including what WGH received under the plan and what it might have received under an alternative distribution scheme.

Disposition

The court permitted WGH to file a motion for leave to amend by August 21, 2020, attaching a proposed Second Amended Complaint and a comparison showing the changes. The court stated that if WGH failed to file that motion by the deadline, it would dismiss the action without prejudice and without further opportunity to amend. Docket Entry Nos. 48 and 51 were resolved. Judge Laura Taylor Swain signed the order.