Fletcher v. Davis

• Decision Date: 10 June 2004
• Docket Number: No. S114715.,S114715.
• Court: California Supreme Court
• Parties: Freddie FLETCHER, Plaintiff and Appellant, v. Carlyle DAVIS et al., Defendants and Respondents.

14 Cal.Rptr.3d 58

90 P.3d 1216

33 Cal.4th 61

Freddie FLETCHER, Plaintiff and Appellant, v. Carlyle DAVIS et al., Defendants and Respondents.

No. S114715.

Supreme Court of California.

June 10, 2004.

Rehearing Denied August 11, 2004.

Freddie Fletcher, in pro. per., for Plaintiff and Appellant.

Latham & Watkins, Susan S. Azad, Los Angeles, and Kathryn M. Davis, San Francisco, for Defendants and Respondents Carlyle Davis, TransCoast Financial Inc. Defined Benefit Trust, Carlyle Davis and Barbara Davis as Trustees of TransCoast Financial Inc. Defined Benefit Trust and TransCoast Financial Inc.

Gernsbacher & Associates and David Gernsbacher, Los Angeles, for Defendants and Respondents Arthur Gilbert and David Gernsbacher. Stocker & Lancaster and Jay F. Stocker for Defendant and Respondent Master Washer & Stamping Co., Inc.

Fischbach & Fischbach and Joseph Fischbach, Beverly Hills, for Defendant and Respondent Joseph Fischbach.

BAXTER, J.

When an attorney wishes to secure payment of hourly legal fees and costs of litigation by obtaining a charging lien against a client's future recovery, must the attorney obtain the client's consent in writing? We conclude that rule 3-300 of the Rules of Professional Conduct of the State Bar of California (rule 3-300), which requires the client's informed written consent to the attorney's acquisition of an interest adverse to the client, applies to such a transaction and therefore reverse in part the judgment of the Court of Appeal.

BACKGROUND

Because this case reaches us after the trial court sustained defendants' demurrer, we assume the facts alleged in plaintiff's complaint are true.

In November 1995, Master Washer & Stamping Co., Inc. (Master Washer), was evicted for nonpayment of rent. Subsequently, David Gernsbacher, the attorney for landlord Arthur Gilbert, filed a lawsuit against Master Washer for breach of the lease. He also refused to allow Master Washer to retrieve its equipment, which was Master Washer's only asset. Without it, Master Washer could not conduct its business. Master Washer retained plaintiff, attorney Freddie Fletcher, to defend the breach-of-lease action and to institute a conversion action for damages. Master Washer orally agreed to pay all costs plus Fletcher's fee of $200 per hour. In lieu of a cash retainer, Master Washer agreed to grant Fletcher a lien on any judgment or settlement in its litigation with Gilbert. If the judgment or settlement was insufficient, Master Washer agreed to pay the difference from the income it earned once it resumed operations. Master Washer also promised Fletcher a "bonus" of an unspecified percentage of any judgment obtained against Gilbert if extensive litigation or trial was required and if the recovery in the case was "large."

Fletcher prepared and filed a complaint for conversion against Gilbert and Gernsbacher. Prior to filing the complaint, Fletcher sent Master Washer a memorandum setting forth his understanding of the terms of their oral retainer agreement. Master Washer's president, William Scallon, represented to Fletcher that he would sign a written retainer agreement, but never did so. The suits between Gilbert and Master Washer were consolidated.

While the Gilbert/Master Washer litigation was pending, Fletcher agreed to do additional, personal legal work on behalf of Scallon and Scallon's mother. In each matter, Scallon, on behalf of Master Washer, orally granted Fletcher a lien on Master Washer's prospective recovery against Gilbert in the conversion action.

In Master Washer's conversion action against Gilbert and Gernsbacher, Gernsbacher obtained a summary judgment. In Gilbert's action against Master Washer for breach of lease, Gilbert and Master Washer entered into an agreement under which Master Washer admitted liability to Gilbert for breach of the lease and stipulated a judgment be entered against it and in favor of Gilbert for $85,000 in damages. (Gilbert v. Master Washer & Stamping Co. (2001) 87 Cal.App.4th 212, 214-215, 104 Cal.Rptr.2d 461.) Master Washer's conversion action against Gilbert was tried to a jury and resulted in a mistrial. As Fletcher prepared for a second trial, Master Washer discharged him and replaced him with defendant Joseph Fischbach. Scallon also discharged Fletcher from the other legal matters Fletcher was handling on behalf of Scallon and his mother.

The second trial of Master Washer's conversion action against Gilbert resulted in a judgment in favor of Master Washer in the sum of $504,000 plus interest.

Eleven days after entry of judgment in favor of Master Washer in its conversion action against Gilbert, defendant Carlyle Davis filed a collection suit against Gilbert, Master Washer, and Scallon, seeking to stay disbursement of the judgment proceeds and to satisfy, from that recovery, criminal restitution and civil judgments he held against Scallon. The trial court issued a temporary restraining order prohibiting Scallon's diversion of the proceeds from the Master Washer judgment against Gilbert. The following day, Gilbert deposited in the Davis collection action the sum of $618,194.10, representing the amount of the Master Washer judgment plus accrued interest. A few weeks later, the parties to the Davis action and others claiming an interest in the Master Washer judgment stipulated to a disbursement of the judgment in specified amounts to Davis, Gilbert, Master Washer, and Fischbach. The trial court approved the stipulation and ordered the Master Washer judgment disbursed accordingly. Under the stipulation, nearly all the judgment proceeds were disbursed to Davis, Gilbert, Master Washer, and Fischbach.

Fletcher alleges that he did not learn about the Davis action or the stipulated disbursement of the Master Washer judgment until the day after the funds had been disbursed. Fletcher then filed this action against Master Washer, Davis, Fischbach, Gilbert, and Gernsbacher, alleging that defendants were on notice of his lien at the time they stipulated to the disbursement of the proceeds from the Master Washer judgment.

The trial court sustained the demurrers of Davis, Fischbach, Gilbert, and Gernsbacher and dismissed the action as to them on the grounds Fletcher did not and could not plead facts showing the perfection of a lien on the Master Washer judgment or that the defendants had knowledge of such a lien.¹ The Court of Appeal reversed, holding that Fletcher's lien did not have to be in writing to be valid and that Fletcher did not have to obtain a judgment as to the existence and amount of the lien before asserting a lien on the Master Washer recovery. We granted review.

DISCUSSION

"A lien is a charge imposed in some mode other than by a transfer in trust upon specific property by which it is made security for the performance of an act." (Civ.Code, § 2872.) An attorney's lien "upon the fund or judgment which he has recovered for his compensation as attorney in recovering the fund or judgment . . . is denominated a `charging lien.'" (Goodrich v. McDonald (1889) 112 N.Y. 157, 19 N.E. 649, 651.) A charging lien may be used to secure either an hourly fee or a contingency fee. (Cetenko v. United California Bank (1982) 30 Cal.3d 528, 531-532, 179 Cal.Rptr. 902, 638 P.2d 1299.)

In most jurisdictions, a charging lien is established by operation of law in favor of an attorney to satisfy attorney fees and expenses out of the proceeds of a prospective judgment. (City of Los Angeles v. Knapp (1936) 7 Cal.2d 168, 173, 60 P.2d 127; Wagner v. Sariotti (1943) 56 Cal.App.2d 693, 697, 133 P.2d 430.) But in California, with a few exceptions not pertinent here (see 1 Witkin, Cal. Procedure (4th ed. 1996) Attorneys, § 194, pp. 249-250), "an attorney's lien is created only by contract. . . . Unlike a service lien or a mechanic's lien, for example (Civ.Code, §§ 3051, 3110), an attorney's lien is not created by the mere fact that an attorney has performed services in a case." (Carroll v. Interstate Brands Corp. (2002) 99 Cal.App.4th 1168, 1172, 121 Cal.Rptr.2d 532; see also Haupt v. Charlie's Kosher Market (1941) 17 Cal.2d 843, 845, 112 P.2d 627.)

Fletcher's complaint alleges that Master Washer orally granted him a charging lien for hourly attorney fees on any recovery Master Washer subsequently obtained from Gilbert in the conversion action. The trial court ruled that no valid lien existed because, under rule 3-300, a client must consent in writing to an attorney's charging lien against the client's future recovery. The Court of Appeal disagreed, holding that rule 3-300 was inapplicable in that an attorney's charging lien is not "adverse" within the meaning of Hawk v. State Bar (1988) 45 Cal.3d 589, 247 Cal.Rptr. 599, 754 P.2d 1096 (Hawk).

Rule 3-300, which is entitled "Avoiding Interests Adverse to a Client," provides: "A member shall not . . . knowingly acquire an ownership, possessory, security, or other pecuniary interest adverse to a client, unless each of the following requirements has been satisfied: [¶] (A) The transaction or acquisition and its terms are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner which should reasonably have been understood by the client; and [¶] (B) The client is advised in writing that the client may seek the advice of an independent lawyer of the client's choice and is given a reasonable opportunity to seek that advice; and [¶] (C) The client thereafter consents in writing to the terms of the transaction or the terms of the acquisition." (Italics added.)

An attorney's charging lien is a "security interest" in the proceeds of the litigation. (Isrin v. Superior Court (1965) 63 Cal.2d 153, 158, 45 Cal.Rptr. 320, 403 P.2d 728; see also Wagner v. Sariotti, supra, 56 Cal.App.2d at pp. 697-698, 133 P.2d 430.) Accordingly, the question here becomes whether Fletcher's charging lien was "adverse" to Master Washer. In making that determination, we must be mindful that "`[i]n civil ca...