Glapion v. Mashburn (In re Glapion)

• Decision Date: 30 January 2020
• Docket Number: Bankr. No. 18-14920,BAP No. WO-19-030
• Parties: IN RE RAPHAEL GLAPION, Debtor. RAPHAEL GLAPION, Appellant, v. JOHN D. MASHBURN, Chapter 7 Trustee, Appellee.
• Court: U.S. Bankruptcy Appellate Panel, Tenth Circuit

IN RE RAPHAEL GLAPION, Debtor.RAPHAEL GLAPION, Appellant, v. JOHN D. MASHBURN, Chapter 7 Trustee, Appellee.

BAP No. WO-19-030

Bankr. No. 18-14920

UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE TENTH CIRCUIT

January 30, 2020

NOT FOR PUBLICATION^*

Chapter 7

OPINION

Appeal from the United States Bankruptcy Court for the Western District of Oklahoma

Submitted on the briefs.^**

Before NUGENT, Chief Judge, MICHAEL, and MOSIER, Bankruptcy Judges.

MOSIER, Bankruptcy Judge.

The issue in this case is whether the Bankruptcy Court erred when it concluded that legal fees in a contingent fee case are earned over the duration of the case. The Debtor appeals that conclusion, arguing that legal fees in a contingent fee case are earned upon receipt. We find no error in the Bankruptcy Court's conclusion of law and therefore affirm.

I. FACTUAL AND PROCEDURAL HISTORY

Raphael Glapion (Debtor) is an attorney who represented certain plaintiffs in a civil law suit on a contingent fee basis.¹ That case settled in September 2018, and in November 2018, pursuant to the contingent fee arrangement with the plaintiffs, the Debtor's law firm received the contingent fee (Contingent Fee), which was placed in the Debtor's Interest on Lawyers Trust Account (IOLTA).² On November 28, 2018, after the Contingent Fee was received, the Debtor filed a voluntary chapter 7 petition in the Western District of Oklahoma. Although the Debtor did not disclose the IOLTA in his original schedules, John Mashburn, the chapter 7 trustee in the Debtor's case (Trustee), filed a motion for turnover of the funds in the IOLTA (Turnover Motion).³

In response to the Turnover Motion the Debtor filed amended schedules, stating that he held $48,362.46 in his law firm's IOLTA, "representing wages or earnings for professional services earned during the last ninetey [sic] (90) days prior to filing bankruptcy."⁴ The Debtor also claimed $36,271.85 of the IOLTA exempt pursuant to title 31, section 1(A)(18) of the Oklahoma Statutes, which permits the exemption of seventy-five percent of earnings for professional services earned during the prior ninety days.⁵ The Trustee filed an objection to the Debtor's claimed exemption (Objection to Exemption), arguing that the funds were not "wages or earnings" under § 1(A)(18) and were not "earned" during the ninety days prior to the petition date.⁶

On May 8, 2019 the Bankruptcy Court held an initial hearing (Initial Hearing) on the Turnover Motion, Objection to Exemption, and the Debtor's responses thereto.⁷ The Bankruptcy Court "orally ruled that contingency fees are generally earned over the life of the underl[y]ing contingency fee contract case as the services are rendered rather than when they are received."⁸ The Bankruptcy Court continued the hearing to July 17, 2019 to allow the Debtor to present evidence as to the portion of the fees earned within theninety days prior to the petition date. After the July 17, 2019 hearing, the Bankruptcy Court entered an order sustaining the Objection to Exemption in part and granting the Turnover Motion (Order).⁹

The Bankruptcy Court found that the Debtor had spent a total of 47.5 hours working on the litigation and of those 47.5 hours, only 21 hours of work had occurred during the ninety days prior to the petition date. Accordingly, the Bankruptcy Court found that the Debtor had earned $21,381.30 during the ninety-day exemption period and concluded that, under applicable Oklahoma exemption law, seventy-five percent of that amount, or $16,035.98, was exempt. The remaining twenty-five percent, along with the portion of the Contingent Fee earned prior to the exemption period, which together totaled $32,326.48, were held non-exempt. The Debtor filed a timely notice of appeal of the Order.¹⁰

II. JURISDICTION AND STANDARD OF REVIEW

An order sustaining an objection to a debtor's claim of exemption is a final order for purposes of appellate review.¹¹ The Debtor appeals a conclusion of law the Bankruptcy Court made on the record at the Initial Hearing on the Objection to Exemption and Motion for Turnover. "[I]t is a general rule that all earlier interlocutory orders merge into final orders and judgments . . . ."¹² This Court reviews a bankruptcy court's interpretation of a state's exemption statute de novo.¹³

III. DISCUSSION

The Debtor does not contest any of the Bankruptcy Court's factual findings. The Debtor's only argument is that the Bankruptcy Court erred when it concluded that contingent fees are earned over the life of the underlying contingent fee contract and not when they are received. The Bankruptcy Court stated its conclusions of law on the record at the Initial Hearing, but the Debtor failed to provide this Court with a transcript of that hearing, a failure we need not remedy.¹⁴ This failure is not fatal to the Debtor's appeal, however, because we review the Bankruptcy Court's conclusions of law de novo.

A. The Applicable Law

The Bankruptcy Code allows debtors to exempt property from the bankruptcy estate, but 11 U.S.C. § 522(b)(2) permits states to opt out of the federal exemptions and substitute their own. Oklahoma has elected to do so and has codified its own exempt property rules.¹⁵ When a state has opted out of the federal exemption laws, "bankruptcy courts must resort to state law for interpretation of state exemption rights . . . ."¹⁶ Moreover, because "there is no federal law of property, it is necessary to look to state law to determine the nature, extent, and effect of the debtor's interest" in property.¹⁷

Oklahoma permits the exemption of "[s]eventy-five percent (75%) of all current wages or earnings for personal or professional services earned during the last ninety (90) days, except as provided in Title 12 of the Oklahoma Statutes in garnishment proceedings for collection of child support."¹⁸ Wages or earnings earned prior to that ninety-day period are not exempt under this statutory provision.¹⁹

B. Application of the Law

It is undisputed that the Contingent Fee is property of the Debtor's bankruptcy estate. The issue in this case is what portion of the Contingent Fee is exempt under Oklahoma law, which in turn depends on when the Contingent Fee, or a portion thereof, was earned. The Debtor contends that the entire Contingent Fee was earned within ninety days of his bankruptcy petition because "Oklahoma courts clearly recognize that an attorney's right to recover on a contingency fee contract does not arise until recovery in the underlying case."²⁰ Although not expressly stated, the Debtor's contention is that contingent fees are not earned until they are received. Stated more simply, the Debtor equates "earned" with "received."

The outcome of this case rests entirely on interpretation of Oklahoma law. "When the federal courts are called upon to interpret state law, the federal court must look to the rulings of the highest state court, and, if no such rulings exist, must endeavor to predict how that high court would rule."²¹ If there is no ruling on the issue from the highest statecourt, "federal authorities must apply what they find to be the state law after giving 'proper regard' to relevant rulings of other courts of the State."²²

Outside of the contingent fee context, Oklahoma law appears to draw a distinction between the concepts of when one earns a wage and when one receives it. In Oil Well Supply Co. v. Galbreath,²³ the Oklahoma Supreme Court faced the question of whether a judgment debtor who had already received at least three-fourths of his earnings during the ninety days preceding a garnishment was entitled to exempt seventy-five percent of a sum sought by a judgment creditor that the parties stipulated did not equal or exceed one-fourth of his wages during the ninety-day period. The Galbreath court posed the question in this way:

Was the debtor precluded from claiming any exemptions under the statute before referred to because of the fact that during the ninety days preceding the levy of the garnishment process he had already received from his wages or earnings for personal or professional service more than 75 per cent. of the total amount earned?²⁴

By noting that the debtor had received a percentage of "the total amount earned," the Galbreath court recognized that earned wages and received wages are not equivalent; the latter is a subset of the former, since one may earn a wage without having yet received it. The court made this point again in its holding, where it stated that a debtor is entitled to a seventy-five percent exemption "of any current wages or earnings due him for personalor professional services if earned within the last ninety days prior to the levy of any garnishment, irrespective of what other amounts than that attached he may have earned or received during that period."²⁵

While earned and received appear to be two different concepts in the typical wage-earner's case, the issue here is whether that holds true with respect to contingent fees. Oklahoma courts have addressed various questions concerning the exemption provision under discussion, its predecessors, and related statutes,²⁶ but we have not found one that deals with the question of when a contingent fee is earned for purposes of Oklahoma's exemption statutes. In predicting how the Oklahoma Supreme Court would rule on this issue, we are mindful that Oklahoma law directs courts to liberally construe the state's exemption statutes and, as a general rule, to give the debtor the benefit of the doubt.²⁷

The Debtor relies on Musser v. Musser²⁸ for the proposition that a contingent fee is not earned until received. Musser was not an exemption case, but one involving a divorce proceeding where the parties contested whether future fees from the husband's work on 400 workers' compensation cases, taken on a contingent fee basis, were part of the marital estate that should be divided between the spouses. The court concluded that those cases were not part of the marital estate because the husband had not received and...