Brass Kettle Restaurant, Inc., In re

Decision Date06 May 1986
Docket NumberNo. 85-1508,85-1508
Citation790 F.2d 574
PartiesBankr. L. Rep. P 71,138 In re BRASS KETTLE RESTAURANT, INC., Debtor, Laurence H. KALLEN, as Trustee, Plaintiff-Appellee, v. ASH, ANOS, FREEDMAN & LOGAN, Defendant-Appellant.
CourtU.S. Court of Appeals — Seventh Circuit

George J. Anos, Ash, Anos, Freedman & Logan, Chicago, Ill., for defendant-appellant.

Laurence H. Kallen, Arnstein, Gluck, Lehr, Barron & Milligan, Chicago, Ill., for plaintiff-appellee.

Before BAUER and POSNER, Circuit Judges, and GRANT, Senior District Judge. *

GRANT, Senior District Judge.

The Bankruptcy Court granted summary judgment to plaintiff-appellee finding that certain monies received by defendant-appellant constituted a preferential transfer under 11 U.S.C. Sec. 547(b) and did not qualify as an exception to preferential transfers under 11 U.S.C. Sec. 547(c)(1)-(3) (Supp. V 1981). The district court affirmed and defendant-appellant seeks our review. We reverse.

Facts

On October 11, 1981, debtor, Brass Kettle Restaurant, Inc., and defendant-appellant, the law firm Ash, Anos, Freedman & Logan, entered into a retainer agreement under which Ash, Anos promised to represent Brass Kettle in certain actions arising out of a fire at Brass Kettle's corporate premises. The agreement stated that

[i]n return for said defense, the BRASS KETTLE RESTAURANT, INC. and the undersigned, agree to pay the firm of ASH, ANOS, FREEDMAN & LOGAN, the sum of ONE THOUSAND FIVE HUNDRED DOLLARS plus Forty Percent (40%) of any recovery made in their behalf, with the understanding that there shall be a rebate of the contingency fee of Forty Percent (40%) based upon the actual hours expended in their behalf at the hourly rate of ONE HUNDRED DOLLARS ($100.00) per hour or the then current hourly rate of the firm of ASH, ANOS, FREEDMAN & LOGAN.

Answer to Adversary Complaint, Exhibit A, Bankruptcy Record at 2. On November 17, 1981, Ash, Anos' efforts resulted in a $40,000 settlement in one of the actions. Ash, Anos placed 40% of the settlement, or $16,000, in a segregated account.

Brass Kettle entered bankruptcy proceedings on December 23, 1981, pursuant to an involuntary petition. Ash, Anos remitted $7,085.16 to plaintiff-appellee, Brass Kettle's Trustee in Bankruptcy, which Ash, Anos determined to be the excess portion, over the actual hours expended, of the retained $16,000. Ash, Anos' billing records reflect statements for Brass Kettle's legal fees in the amounts of $5,109.84, $2,055, and $1,750. The statements show that payment of the first amount was made on December 3, 1981 and of the second amounts, on January 4, 1982. After failing to recoup this $8,914.84 from Ash, Anos, the Trustee filed the instant action and recovered these payments as preferential transfers. Brass Kettle's bankrupt estate consists only of the $40,000 settlement obtained by Ash, Anos.

Issue

The resolution of this appeal involves only one issue:

Whether the retainer agreement created an equitable lien.

We look to state law to determine whether property is an asset of a debtor. Weng v. Farb, In re K & L Limited, 741 F.2d 1023, 1030 N. 7 (7th Cir.1984). In Illinois, an equitable lien arises in two situations, the first of which occurs

where the parties express in writing their intention to make a particular property, real or personal, or some fund, the security for a debt, or where there has been a promise to convey or assign the property as security (Oppenheimer v. Szulerecki (1921), 297 Ill. 81, 87-88, 130 N.E. 325; Carlyle v. Jaskiewicz (1984), 124 Ill.App.3d 487, 495, 79 Ill.Dec. 847, 464 N.E.2d 751; 4 Pomeroy's Equity Jurisdiction Sec. 1235 (5th ed. 1941)).... [T]he essential elements of an equitable lien are (1) a debt, duty or obligation owing by one person to another, and (2) a res to which that obligation fastens. Hargrove [v. Gerill Corp.], 124 Ill.App.3d 924, 931, 80 Ill.Dec. 243, 464 N.E.2d 1226; Marshall Savings and Loan Association v. Chicago National Bank (1965), 56 Ill.App.2d 372, 378, 206 N.E.2d 117.

W.E. Erickson Construction, Inc. v. Congress-Kenilworth Corp., 132 Ill.App.3d 260, 87 Ill.Dec. 536, 544, 477 N.E.2d 513, 521. "If the res to which the lien attaches is converted into money, the Court in a proper case will treat the money as substituted for the property." Marshall Savings and Loan Association v. Chicago National Bank, 56 Ill.App.2d 372, 206 N.E.2d 117, 120 (1965) (citations omitted).

In considering claims to equitable liens based on contingent fee agreements, the Illinois courts have drawn a distinction between an actual assignment of a portion of a fund and a mere personal promise by the client to pay attorneys fees in an amount equal to a specified portion of the fund to be recovered or out of the proceeds of such a fund. Lewis v. Braun, 356 Ill. at 478-79, 191 N.E. 56; Cameron v. Boeger, 200 Ill. 84, 65 N.E. 690 (1902); Department of Public Works v. Exchange National Bank, 93 Ill.App.3d 390, 394, 49 Ill.Dec. 218, 417 N.E.2d 1045 (1981)...

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