Pacific Far East Line, Inc., Matter of

• Decision Date: 28 August 1981
• Docket Number: No. 78-3633,78-3633
• Citation: 654 F.2d 664
• Parties: In the Matter of PACIFIC FAR EAST LINE, INC., Debtor. Joseph M. ALIOTO, Plaintiff-Appellee, v. OFFICIAL CREDITOR COMMITTEE, Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 664

654 F.2d 664

8 Bankr.Ct.Dec. 134

In the Matter of PACIFIC FAR EAST LINE, INC., Debtor.

Joseph M. ALIOTO, Plaintiff-Appellee, v. OFFICIAL CREDITOR COMMITTEE, Defendant-Appellant.

No. 78-3633.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Oct. 9, 1980.

Decided Aug. 28, 1981.

Vernon D. Stokes, San Francisco, Cal., for defendant-appellant.

Joseph M. Alioto, San Francisco, Cal., pro se.

Appeal from the United States District Court for the Northern District of California.

Before KILKENNY and KENNEDY, Circuit Judges, and GRAY, ^* District Judge.

KENNEDY, Circuit Judge:

This case presents certain questions regarding the force and effect of an attorneys' contingency fee contract when there is an intervening arrangement under Chapter XI of the Bankruptcy Act of 1898. ¹ The bankruptcy court awarded attorneys' fees to the appellee, Joseph M. Alioto, for services rendered to Pacific Far East Line, Inc. (PFEL). PFEL was the debtor in possession in the arrangement proceeding. Alioto rendered most of his services prior to the arrangement pursuant to a contingent fee contract. PFEL's Official Creditors' Committee (OCC) brings this appeal. ²

The OCC does not here contest the reasonableness of the award, which was $1,500,000. It does contend, however, that the amount awarded to the attorneys for services performed before the arrangement, constituting 95 percent of the fee, should be treated as a general creditor's claim, thus subject to the pro rata reduction applicable to all other unsecured claims. The appellee contends, on the other hand, that the district court was correct in finding that the attorneys had a lien on the funds generated by the settlement and that their fee was payable directly from the settlement fund in discharge of this lien. We agree with this position and affirm the judgment of the district court. Our ruling on this and related points is more fully explained below.

In 1974, PFEL had a substantial and complex claim against Northrop, Inc., for breach of warranty in connection with a contract for the manufacture and purchase of fiberglass barges. Financial considerations caused PFEL to substitute Alioto for the attorneys who had originally filed the suit. The original attorneys charged on an hourly basis, and PFEL determined it could not afford to prosecute the suit in that manner. Alioto, on the other hand, agreed to handle the case for a contingent fee. A written contingency contract was executed, and Alioto and his firm spent over three years attempting to resolve the case. The matter presented questions of antitrust law, Alioto's field of expertise, as well as intricate questions of contract law and admiralty jurisdiction.

In February of 1978, while the case was on appeal to this court, Northrop agreed to settle. The factual background and terms of the settlement are recounted in detail in the district court's published opinion. In re Pacific Far East Line, Inc., 458 F.Supp. 771, 773-75 (N.D.Cal.1978). In brief, the terms of the settlement were as follows: Northrop agreed to pay $10 million in damages, lend PFEL another $7.5 million, and drop.$99 million in counterclaims. In addition, as a result of the agreement, the Federal Maritime Administration released a $1.9 million bond held against PFEL's assets along with $3 million worth of liens held on two PFEL ships.

Alioto's original contract provided that he would receive a "contingent fee of 15 percent of the value of anything recovered by settlement ...." PFEL, however, had filed a Chapter XI petition in January, 1978, and the bankruptcy court appointed Alioto special counsel in April the same year, as required by Bankruptcy Rules 215 and 11-22. ³ By this time, Northrup already had indicated its willingness to come to an agreement. Constrained by this Circuit's rule prohibiting contingent fee contracts for special counsel, Official Creditors' Comm. of Fox Markets v. Ely, 337 F.2d 461, 468 (9th Cir. 1964), the bankruptcy court provided that Alioto would be paid "a general retainer."

On conclusion of the settlement, Alioto submitted his request for a fee of $1,875,000. The amount was his estimate of the value of 15 percent of the settlement. Pursuant to his office's standard practice in contingent fee cases, no time records were kept during the three years preceding the settlement. The bankruptcy judge ruled that Alioto's estimate of the fee would not be taken at face value and that he would have to make an estimate of the time spent on the case. In response, Alioto submitted an affidavit indicating he had spent over 4,700 hours on the case, approximately 95 percent of which was allocable to the period before PFEL's Chapter XI petition. The bankruptcy judge held that Alioto's original contingent fee agreement of 15 percent represented reasonable compensation for Alioto's services if limited to the actual damages paid by Northrop and not to the value PFEL obtained from release of liens and other non-monetary considerations. The bankruptcy court awarded Alioto $1,500,000, payable immediately from the settlement funds. ⁴ The Chapter XI arrangement has since failed and PFEL has been adjudicated a conventional bankrupt.

The OCC argued below, and continues to argue here, that Alioto's claim, insofar as it seeks compensation for pre-petition services, is nothing more than an unsecured contract claim. ⁵ See, e. g., Klein v. Rancho Montana De Oro, Inc., 263 F.2d 764, 769-70 (9th Cir. 1959). As such, it contends Alioto should have been required to submit the claim to the court for payment, and pro rata reduction, along with all other unsecured claims. With respect to the portion of Alioto's claim pertaining to services rendered during the arrangement, the OCC argues that this claim is for a simple expense of administration, payable without any priority over other administrative expenses.

In order to weigh these assertions, we start with the proposition that upon the filing of a Chapter XI petition, "(a) new entity is created with its own rights and duties, subject to the supervision of the bankruptcy court." Shopmen's Local Union No. 455 v. Kevin Steel Products, Inc., 519 F.2d 698, 704 (2d Cir. 1975). See also Local Joint Exec. Bd. v. Hotel Circle, Inc., 613 F.2d 210, 213 (9th Cir. 1980); In re E. C. Ernst, Inc., 4 B. R. 317, 319 (Bkrtcy.S.D.N.Y.1980). Thus, the filing of the petition on January 31, 1978, altered the contractual status between Alioto and PFEL. Specifically, within 60 days of the petition, Alioto was discharged by the failure of the new debtor in possession to assume the contingent fee contract. In re E. C. Ernst, Inc., 4 B. R. at 319; In re Miller, 17 Collier's Bankruptcy Cases 28 (E.D.Pa.1978); see also 11 U.S.C. § 110(a)(6) (1976); Bankruptcy Rule 607.

That Alioto was discharged by operation of law does not mean, however, that he takes nothing under the original contract. Under California law, which governs the nature and status of claims against the debtor here, see 4A Collier's on Bankruptcy P 70.04, at 60-62 n.31 (14th ed. 1978), an attorney retained under a contingent fee contract, and later discharged by the client without cause, holds a claim against the client for the reasonable value of his services. Fracasse v. Brent, 6 Cal.3d 784, 790-91, 100 Cal.Rptr. 385, 494 P.2d 9 (1972); Weiss v. Marcus, 51 Cal.App.3d 590, 598, 124 Cal.Rptr. 297 (1975). See also Brobeck, Phleger & Harrison v. Telex Corp., 602 F.2d 866, 871 (9th Cir. 1979), cert. denied, 444 U.S. 981, 100 S.Ct. 483, 62 L.Ed.2d 407 (1980). When Alioto was discharged by operation of the bankruptcy laws, he retained a claim, under state law, against PFEL in the amount of the reasonable value of his services.

If Alioto possessed a claim for the reasonable value of his services, without more, his claim would be unsecured and subject to pro rata reduction with payment after, not before, administrative expenses. In re Owl Drug Co., 16 F.Supp. 139, 145-46 (D.C.Nev.1936), aff'd sub nom. Cohn v. Edler, 90 F.2d 823 (9th Cir. 1937); 4A Collier's on Bankruptcy P 62.31(2) (14th ed. 1978). Alioto meets this problem by contending he has a valid lien on the settlement proceeds. We now turn to that aspect of the case.

California does not recognize the common law attorneys' charging lien, ⁶ and this court has noted that fact. Desser, Rau & Hoffman v. Goggin, 240 F.2d 84 (9th Cir. 1957). Instead, California attorneys may look to the funds generated by their efforts to collect their fees only as directed by the California Supreme Court. In Isrin v. Superior Court, 63 Cal.2d 153, 45 Cal.Rptr. 320, 403 P.2d 728 (1965), decided after Desser, Rau & Hoffman, the California Supreme Court held that the intent of the parties determines the type of claim an attorney may assert against any fund generated due to his efforts. 63 Cal.2d at 158-59, 45 Cal.Rptr. 320, 403 P.2d 728. In essence, Isrin holds that if the parties intend that the attorney look directly to the settlement for payment, then a lien against that settlement is created in the attorney's favor. Id.; Gelfand, Greer, Popko & Miller v. Shivener, 30 Cal.App.3d 364, 371, 105 Cal.Rptr. 445 (1973); Skelly v. Richman, 10 Cal.App.3d 844, 865, 89 Cal.Rptr. 556 (1970); Wagner v. Sariotti, 56 Cal.App.2d 693, 697, 133 P.2d 430 (1943).

The district court found that under the contingent fee contract, Alioto was "entitled to look to the judgment for his compensation" and thus was "entitled to an equitable line (sic)." 458 F.Supp. at 775. These statements necessarily include a finding of the requisite intent and are consonant with apposite California precedent holding the use of the term "lien" unnecessary to the creation of a valid attorney's lien. ⁷ See Isrin, 63 Cal.2d at 158-59, 45 Cal.Rptr. 320, 403 P.2d 728; Skelly, 10 Cal.App.3d at 865, 89 Cal.Rptr. 556; Bartlett v. Pacific Nat'l Bank, 110 Cal.App.2d 683, 689, 244 P.2d 91 (1952); Wagner, 56 Cal.App.2d at 697, 133 P.2d 430. The evidence also supports...