In re Ashley
| Decision Date | 11 May 1984 |
| Docket Number | Bankruptcy No. 83-00624. |
| Citation | 41 BR 67 |
| Parties | In re Lillian E. ASHLEY, Debtor. |
| Court | U.S. Bankruptcy Court — Eastern District of Michigan |
Terrence H. Bloomquist, Grayling, Mich., for debtor and secured creditor.
Ralph I. Selby, Bay City, Mich., for Trustee.
William Klintworth, Traverse City, Mich., for debtor.
This case comes before the Court as a motion by the trustee for turnover of funds held by a custodian under § 543(b)1 and a cross-motion by an attorney who represented the debtor in litigation against an insurance company for an award of his attorney fees under a contingency-fee contract with the debtor, where the source of the custodian's funds is the settlement proceeds of the insurance litigation.
On November 22, 1983, the debtor filed her petition for relief under Chapter 7 of the Bankruptcy Code together with a statement of affairs for debtor not engaged in business and her schedules in bankruptcy. Question number 10 of the statement of affairs, which requires the debtor to detail any litigation pending at the time of the filing of the petition in which the debtor is a party, was answered with a response which omitted any reference to the pendency of a lawsuit filed by her and pending in the Roscommon County Circuit Court entitled Ashley v. State Farm Mutual Automobile Insurance Company, No. 82-3075-CK. Schedule B-2(q) also omitted any reference to the existence or value of the cause of action. The debtor's bankruptcy attorney, William F. Klintworth, later explained that he had no knowledge of that lawsuit when the pleadings were being prepared, that the debtor was becoming senile, and that her friends had to assist in the preparation of the schedules and statement of affairs. In short, he explained that the omissions were inadvertent.
Meanwhile, Terrence H. Bloomquist, the attorney who was retained on June 10, 1981 by the debtor to pursue the litigation under a written contingency-fee agreement, did not know that his client had filed bankruptcy. He proceeded to settle the lawsuit for $27,000 on December 19, 1983-27 days post-petition. At the time that case was settled, Mr. Bloomquist was advised that his client was in bankruptcy. The settlement order allocated the $27,000 proceeds as follows:
Mr. Bloomquist and the attorney for the insurance company, Douglas J. Read, agreed that Mr. Read would hold the settlement funds pending direction from this Court.
That is when the trustee first learned of the existence of the insurance lawsuit. The trustee filed her motion to compel Mr. Read, the alleged custodian as defined in § 101(10), to turn over the settlement proceeds to her. Mr. Read answered the motion, admitting the essential facts, and stating his willingness to abide by the Court's directions respecting the disposition of the funds. He also reported the interest the funds had earned while in his custody and requested a flat $500 "fee" for the performance of his "duties", presumably under § 543(c).
On February 14, 1984, the state court entered an order in the insurance litigation "perfecting" Mr. Bloomquist's common-law attorney's charging lien on the settlement proceeds. Thereafter, on March 30, 1984, Mr. Bloomquist filed a motion in this Court requesting an award to him of his fees and the costs he expended on the debtor's behalf —a total of $9,439.90—from the settlement proceeds. He argued that he had a common-law attorney's charging lien on the proceeds derived from his efforts and that the trial judge's order of February 9, 1984, perfected that lien. He argued that § 546(b) permitted the post-petition perfection of this lien. His second theory bootstrapped from the first. Assuming the validity of his lien, he argued that he was therefore a "joint owner" of the fund with the debtor, and would be entitled to his part of the whole, much like a non-debtor spouse receiving her share of joint property sold by the trustee. In another pleading, Mr. Bloomquist alleged that the settlement funds were "not the property of the Estate . . ." ostensibly because the insurance company's draft was made payable jointly to the debtor and himself, and put into a special account which required their joint signatures to withdraw the funds.
Finally, on February 14, 1984, the debtor amended her claim of exemptions to claim the proceeds exempt under § 522(d)(11)(D) & (E). The trustee resists those exemptions.
The Trustee demands turnover from the custodian, resists the allocation of damages in the settlement order, and the debtor's claims of exemption to them; Mr. Bloomquist claims a lien on the settlement proceeds and requests payment thereof; and the custodian requests compensation therefrom.
In their rush to grab the brass ring, all of the parties ignored the issue of whether the settlement was validly entered into by Mr. Bloomquist. On November 22, 1983, when the bankruptcy petition was filed, the cause of action against State Farm became property of the estate. § 541; Tonry v. Hebert, 724 F.2d 467 (5th Cir.1984); In re Ward, 32 B.R. 318 (Bankr.E.D.Va.1983). Accordingly, the debtor ceased to be the real party in interest and was substituted in that role by the trustee. Notwithstanding his lack of knowledge, for all of this occurred by operation of law, Mr. Bloomquist's "client" was the trustee, and not the debtor. Mr. Bloomquist never asked the trustee whether the proposed settlement was acceptable to her, and to date, she has never indicated her approval or disapproval thereof.2
To complicate matters further, enter § 365. That section provides that a Chapter 7 trustee has 60 days to either assume or reject an executory contract, and that in default of an express election within that period, the executory contract is deemed rejected. It is undisputed that the trustee did not expressly assume the contingency-fee contract with Mr. Bloomquist within 60 days of her appointment, nor even within 60 days of her receipt of notice of the litigation.
An executory contract has been defined as: "A contract under which the obligation of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing performance of the other." Countryman, Executory Contracts in Bankruptcy: Part I, 57 Minn.L.Rev. 439, 460 (1973). Tonry v. Hebert, supra, dealt with the question of whether an attorney's contingency-fee contract was an executory contract assumable by the trustee where the debtor was the attorney himself. That case held that such contracts are executory contracts as defined by § 365, but held that since the attorney's responsibilities were for "personal services", the contract was not assumable by the estate. Judge Schwartzberg in In re PDQ Copy Center, Inc., 27 B.R. 123 (Bankr.S.D.N.Y.1983) assumed without discussion that such a contract was executory and held that it was deemed rejected by the trustee's failure to timely assume it.
In this case, when the petition for relief was filed, the litigation was still pending: trial had not been held and settlement had not been made. Clearly, under Professor Countryman's definition, at the time of the filing of the bankruptcy petition, Mr. Bloomquist had further responsibilities not yet performed, while the debtor had the unperformed duty to pay the bargained-for fee. Under either Professor Countryman's definition or under Tonry v. Hebert, supra, and In re PDQ Copy Center, Inc., supra, the Court finds that Mr. Bloomquist's contingency-fee contract was an executory contract.
The logical consequence of this finding when combined with the earlier finding that the trustee did not expressly assume that contract within the 60 days allowed her for that purpose is that that contract is deemed rejected. § 365(d)(1); Alioto v. Official Creditor Committee, 654 F.2d 664 (9th Cir.1981); In re PDQ Copy Center, Inc., supra. That rejection relates back to the moment immediately before the filing of the petition for relief. § 365(g)(1); Alioto v. Official Creditor Committee, supra; In re PDQ Copy Center, Inc., supra; In re E.C. Ernst, Inc., 4 B.R. 317 (Bankr.S. D.N.Y.1980); In re Fitterer Engineering Associates, Inc., 27 B.R. 878 (Bankr.E.D. Mich. 1983); In re TLC of Lake Wales, Inc., 13 B.R. 593 (Bankr.M.D.Fla.1981). On that date, November 22, 1983, no settlement had yet been reached. As a result of the trustee's rejection of it, Mr. Bloomquist's contract was no longer in existence at the time he "settled" the litigation. He, therefore, lacked any contractual authority from his client, the trustee, to enter into the settlement. Accordingly, unless the settlement agreement is ratified by the trustee, it is not binding upon her and she may proceed to litigate the case to its conclusion.
At the hearing upon these various motions held on April 19, 1984, it was apparent that the trustee had never considered the ramifications of her failure to act. Accordingly, the Court directed that the trustee had two weeks to either ratify the settlement or to rescind it. If the trustee rescinds the settlement, she may then seek the appointment of her own attorney—either Mr. Bloomquist or another—to represent her in the litigation.
If the trustee decides to change attorneys, and the litigation is unsuccessful, Mr. Bloomquist may indeed wind up with nothing for his better than two years of effort for the debtor. But that is the same fate he would suffer if his client, the debtor, had refused the offer of settlement and required him to try the case to failure. Those are the risks which come with contingency-fee contracts and why the...
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