Opinion
Civil Action No. 03-4109 (KSH), Bankr. Case No. 02-30306 (DHS).
June 28, 2004
OPINION
Appellant Lasser Hochman, LLC ("Lasser") was ordered to turn over to appellant Charles Forman, the trustee of debtor John J. Rose's bankruptcy estate, files related to a lawsuit in which Lasser had represented Rose. Lasser asserted a common law retaining lien and a statutory charging lien against the files for legal fees that it was owed related to that particular lawsuit and several other matters. The issue in this appeal is whether the bankruptcy court erred in denying Lasser's request for payment of legal fees related to its representation of Rose in the other matters.
For the reasons set forth below, the Court finds that in denying Lasser's request for payment of legal fees pursuant to the retaining lien, the bankruptcy court incorrectly applied the governing law. The bankruptcy court's decision is vacated and this matter is remanded to that court for further proceedings.
I. BACKGROUND
The relevant facts are undisputed. Lasser is a law firm that provided legal services to Rose in several matters, including a securities litigation against Merrill Lynch Price Fenner Smith (the "Merrill litigation"). After Rose filed for Chapter 7 bankruptcy in January 2002, Forman was appointed as trustee of the bankruptcy estate. Forman retained his law firm to represent him as the trustee and to replace Lasser as counsel in the Merrill litigation. At the time Rose filed for bankruptcy, he owed Lasser approximately $70,084.91 in legal fees — $49,811.66 was attributable to the Merrill litigation and the remaining $20,273.25 was related to the other matters. (Record on Appeal ("Record") Ex. 11.)
In March 2002, Forman filed a motion to compel Lasser to turnover its files related to the Merrill litigation. (Record Ex. 3.) Lasser responded by requesting that the bankruptcy court recognize that it had a retaining lien under New Jersey common law and a statutory charging lien under N.J.S.A. 2A:13-5 that attached to the Merrill litigation files. (Record Ex. 6.) By order dated March 15, 2002, the bankruptcy court granted Forman's motion and ordered Lasser to surrender the files. (Record Ex. 7.) The turnover order expressly acknowledged that "Lasser has a valid charging lien in the amount of $49,811.66 under N.J.S.A. 2A:13-5 against any judgment or settlement recovered by the trustee in the Merrill litigation." (Id.) The order further indicated
that the amount of the lien in the Merrill litigation is only subject to the following, which are all reserved and shall be determined by consent of the parties or further order of the court:
1. The trustee's right to contest the reasonableness of the billings and expenses,
2. Lasser's right to have the lien include billings for matters other than the Merrill litigation, and
3. The trustee's right to assert expenses under 11 U.S.C. § 506(c).
[(Id. (emphasis added).)]
The Merrill litigation ultimately settled for $150,000.00. (Record Ex. 12.) In response to Forman's motion to approve the settlement, Lasser filed a cross-motion seeking payment of the $70,084.91 in legal fees that it was owed pursuant to the retaining lien and the charging lien. (Record Ex. 10.) Forman opposed Lasser's cross-motion only to the extent that it sought recovery of the $20,273.25 in fees that were unrelated to the Merrill litigation. (Record Ex. 14.) By consent order filed June 30, 2003, the bankruptcy court ordered Forman to pay Lasser $49,811.66 in satisfaction of the fees owed for Lasser's work on the Merrill litigation. (Record Ex. 16.)
The bankruptcy court denied Lasser's request for payment of the remaining $20,273.25 by letter opinion dated July 21, 2003. (Letter op. at 1.) The court first addressed whether Lasser was entitled to the remaining fees pursuant to its charging lien. Finding that, under New Jersey law, a charging lien applies only to services rendered in a particular cause of action, the court concluded that Lasser's charging lien did not extend to legal fees unrelated to the Merrill litigation. (Id. at 3-4.)
The bankruptcy court's letter opinion is Exhibit 17 in the Record.
The court then addressed whether Lasser could recover the fees under a retaining lien. The court initially found that Lasser "[c]learly has a valid retaining lien for legal services it rendered to the Debtor for which it remains unpaid" and that Lasser's involuntary turnover of the Merrill litigation files "ha[d] no negative effect on that lien." (Id. at 5.) The court further acknowledged that "a retaining lien, unlike a charging lien, covers fees for services rendered on all matters, even when the lien is asserted against property related to only a portion of those matters." (Id.) The court noted, however, that "the value of a retaining lien is not necessarily the full amount owed for services incurred," and that value often is elusive because the property subject to the lien generally has not fixed or market value. (Id. at 6.) After reviewing several valuation methods, the court indicated that it need not determine what method of valuation to use because "the files at issue in this matter are not subject to turnover." (Id. at 7.) The court found that since Forman had not requested the files unrelated to the Merrill litigation and had asserted no interest in them, "the retaining lien upon those files remains in effect but has no value." (Id. at 7-8.) The court thus held that Lasser was not entitled to recover its remaining fees. (Id. at 8.)
Lasser filed its notice of appeal with the bankruptcy court on or about August 1, 2003.
II. STANDARD OF REVIEW
A district court exercises plenary review over a bankruptcy court's conclusions of law. In re Kiwi Int'l Airlines, Inc., 344 F.3d 311, 316 (3d Cir. 2003). A district court may set aside a bankruptcy court's findings of fact if such findings are clearly erroneous. Id. Factual findings "are clearly erroneous when, after reviewing the evidence, the [reviewing] court is `left with the definite and firm conviction that a mistake has been committed.'" In re Cohn, 54 F.3d 1108, 1113 (3d Cir. 1995) (quoting Andersen v. City of Bessemer City, N.C., 470 U.S. 564, 573 (1985)).
III. DISCUSSION
Initially, it should be noted that several of the bankruptcy court's findings are not before this Court on appeal. Lasser has not appealed the court's determination that it could not recover legal fees unrelated to the Merrill litigation under its charging lien. Forman has not appealed the court's finding that Lasser had a valid retaining lien. Finally, the parties do not dispute that New Jersey law governs the attorneys' retaining lien analysis.
The seminal New Jersey case concerning retaining liens isBrauer v. Hotel Associates, Inc., 40 N.J. 415 (1963). As the New Jersey Supreme Court explained,
[t]he common law retaining lien attaches to all papers, books, documents, securities, moneys, and property of the client which come into the possession of the attorney in the course of, and with reference to, his professional employment. It is a general lien which gives an attorney the right to retain possession of his client's property until the entire balance due him for legal services, as well as for costs and disbursements, is paid. It is termed a "passive" lien since it cannot be actively enforced through legal proceedings, and rests wholly upon the right to retain possession until the bill is paid. The retaining lien is distinguishable from the common-law special or charging lien which an attorney may have for services rendered in a particular cause of action and which attaches to the judgment in the cause for which the services were rendered. The charging lien may be actively enforced and does not rest upon possession.
[Id. at 419-20 (internal citations omitted) (emphasis added).]
Lasser asserts that its retaining lien attached to the Merrill litigation files. (Lasser Br. at 10.) According to Lasser, the bankruptcy court "missed the essential point" of its application because the files that it was claiming a retaining lien on were the Merrill litigation files. (Id.) Lasser thus argues that the bankruptcy court "erred because it determined that the files that were the subject of the retaining lien were the files unrelated to the Merrill litigation." (Id.)
The Court agrees. By concluding that Lasser's retaining lien had no value because Forman had not requested and had no interest in the files concerning the other cases in which Lasser had represented Rose, the bankruptcy court apparently viewed the retaining lien as attaching to all files except the Merrill litigation files. (See Letter op. at 8.). This contradicts the bankruptcy court's express recognition that a retaining lien "covers fees for services rendered on all matters, even when the lien is asserted against property related to only a portion of those matters." (Id. at 5 (citing Brauer, 40 N.J. at 421) (emphasis added).)
It appears that the bankruptcy court incorrectly appliedBrauer. Lasser's retaining lien, which the bankruptcy court found to be valid, attached to the Merrill litigation files that Lasser was compelled to turn over to Forman. Concluding otherwise would effectively render the very purpose of a retaining lien a nullity because "[i]t is a general lien which gives an attorney the right to retain possession of his client's property until the entire balance due him for legal services." Brauer, 40 N.J. at 419 (emphasis added).
The majority of Forman's brief is devoted to arguing that Lasser is not entitled to fees for legal services unrelated to the Merrill litigation because those services did not benefit or provide value to the bankruptcy estate. (Forman Br. at 5, 7-9.) That argument is beside the point. Because the bankruptcy court incorrectly assumed that Lasser's retaining lien did not attach to the Merrill litigation files, it did not conduct a proper valuation of Lasser's lien. Indeed, the court found inapplicable the cases cited by Forman that address the issue of lien valuation — the very same cases Forman cited in his brief filed with this Court. (Compare Letter op. at 6-7 with Forman Br. at 7-9.)
Although the bankruptcy court applied Brauer incorrectly, whether Lasser is entitled to recover all of the remaining $20,273.25 under a proper application of Brauer is a separate matter entirely, which may require consideration of additional facts not presently in the record on appeal and an analysis of the interplay between the bankruptcy code and the general principles underlying retaining liens. See Brauer, 40 N.J. at 419-23 (noting that the retaining lien "rests wholly upon the right to retain possession until the bill is paid" and that the value of the lien is not based "upon the objective worth of the property, but upon its subjective worth to the client and those who represent him"); Letter op. at 6-7 (citing bankruptcy cases dealing with various methods of lien valuation when an attorney is compelled to turnover the property securing a lien). This Court remands to the bankruptcy court for a determination of the issue, and will not, as a consequence, grant Lasser's request for an order directing Forman to pay in full the remaining fees.
IV. CONCLUSION
For the foregoing reasons, the bankruptcy court's decision is vacated, and this matter is remanded to that court for further proceedings consistent with this opinion.