In re Carlson

• Decision Date: 31 August 2001
• Docket Number: DEBTOR-APPELLANT,No. 00-2902,00-2902
• Citation: 263 F.3d 748
• Parties: (7th Cir. 2001) IN RE: DENNIS E. CARLSON,
• Court: U.S. Court of Appeals — Seventh Circuit

Page 748

263 F.3d 748 (7th Cir. 2001)

IN RE: DENNIS E. CARLSON, DEBTOR-APPELLANT.

No. 00-2902

IN THE UNITED STATES COURT OF APPEALS FOR THE SEVENTH CIRCUIT

Argued March 27, 2001

August 31, 2001

Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 99 C 6021--Marvin E. Aspen, Chief Judge.

Before Bauer, Posner, and Manion, Circuit Judges.

Posner, Circuit Judge

The debtor in this bankruptcy case appeals from the denial of a discharge of his debts, the usual relief sought by the debtor in a bankruptcy proceeding. The grounds for the denial were various and abundant, resulting in suspension of the debtor (a personal-injury lawyer) from the practice of law--he was lucky to escape criminal prosecution for bankruptcy fraud. The only ground we need discuss is whether he concealed from the trustee in bankruptcy and improperly transferred property of the estate in bankruptcy, in violation of 11 U.S.C. sec. 727(a)(4)(A). Carlson's challenges to the jurisdiction of the bankruptcy court are frivolous--and if they succeeded would deprive him of the relief he seeks, which is a discharge by the bankruptcy court!

A few months before declaring bankruptcy, Carlson formed with his friend and fellow attorney William Hourigan what they called a "practice merger agreement" purporting to merge their two practices and entitle Hourigan to a share of the fees in cases that Carlson assigned him to handle. Shortly after the formation of the agreement, the defendant in a case that Carlson was handling for a person named Gonzalez agreed to settle the case for $58,000, to which Carlson under his retention agreement would be entitled to one-third. A few weeks later, before Carlson received the check from the defendant for the $58,000, he declared bankruptcy, and a few days later the check came--to Hourigan, who after paying the client's share deposited the balance in his own bank account but in the following months paid out this balance to Carlson and Carlson's designees, in particular Carlson's ex-wife. Carlson did not list the fee from Gonzalez in the schedule of assets that he filed with the bankruptcy court. His position was and is that the expectation of a contingent fee is not property under the law of Illinois and so doesn't have to be listed. He relies on a case which holds that such an expectation is not part of the marital estate in divorce, In re Marriage of Zells, 572 N.E.2d 944, 945 (Ill. 1991); on the client's interest in preserving his lawyer's incentive to press the client's claim with utmost vigor; and on the "practice merger agreement," under which, he argues, Hourigan was entitled to the fee.

The last argument is the very weakest. The agreement did not obligate Carlson to assign any specific cases to Hourigan, let alone one in which all the work had been done and all that remained was to cash a check and disburse two-thirds of the proceeds to the client. And anyway the agreement was obviously made in contemplation of impending bankruptcy and was a transparent effort to conceal assets from the bankruptcy court. It was, therefore--to the extent if any that it actually purported to transfer any of Carlson's already earned fees to Hourigan--a transfer made without consideration and with intent to defraud Carlson's creditors, and thus a fraudulent conveyance and indeed one involving both constructive and actual fraud. 11 U.S.C. sec.sec. 548(a)(1), (a)(2); McClellan v. Cantrell, 217 F.3d 890, 894- 95 (7th Cir. 2000); In re FBN Food Services, Inc., 82 F.3d 1387, 1395 (7th Cir. 1996); Capitol Indemnity Corp. v. Keller, 717 F.2d 324, 327 (7th Cir. 1983); Rubin v. Manufacturers Hanover Trust Co., 661 F.2d 979, 989 (2d Cir. 1981).

A more substantial question is whether a merely potential contingent fee is property. The Bankruptcy Code requires the debtor to list as assets of the estate in bankruptcy "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. sec. 541(a). The term "legal or equitable interests . . . in property" has been broadly interpreted to include any legally enforceable right, United States v. Whiting Pools, Inc., 462 U.S. 198, 204-05, 209 (1983); Cable v. Ivy Tech State College, 200 F.3d 467, 472-73 (7th Cir. 1999); In re Jones, 768 F.2d 923, 926 (7th Cir. 1985); In re Parsons, 262 B.R. 475, 480 (8th Cir. B.A.P. 2001), except (so far as bears on this case), as the statute goes on to state, "earnings from services performed by an individual debtor after the commencement" of the bankruptcy proceeding. 11 U.S.C. sec. 541(a)(6). That a lawyer has a legally enforceable interest in a potential contingent fee is shown by the fact that if the client terminates his employment before judgment or settlement (for reasons other than wrongful conduct by the lawyer) and so before the lawyer receives any fee, he is entitled to the fair value of the services that he performed up to the termination. Estate of Callahan, 578 N.E.2d 985, 988 (Ill. 1991); Storm & Associates, Ltd. v. Cuculich, 700 N.E.2d 202, 208 (Ill. App. 1998); Kenseth v.Commissioner, 259 F.3d 881, 882 (7th Cir.2001); Maksym v. Loesch, 937 F.2d 1237, 1245 (7th Cir. 1991); Skeens v. Miller, 628 A.2d 185, 188 (Md. 1993); Tillman v. Komar, 181 N.E. 75 (N.Y. 1932). This is true even if he withdraws rather than being terminated, provided the withdrawal is for good cause. Kannewurf v. Johns, 632 N.E.2d 711, 716 (Ill. App. 1994); Leoris & Cohen, P.C. v. McNiece, 589 N.E.2d 1060, 1064-65 (Ill. App. 1992); Reed Yates Farms, Inc. v. Yates, 526 N.E.2d 1115, 1124-25 (Ill. App. 1988); International Materials Corp. v. Sun Corp., 824 S.W.2d 890, 894 (Mo. 1992). It follows that the fair value of the services rendered by a contingent-fee lawyer up to the date of his bankruptcy (though not after, by virtue of section 541(a)(6)) is property of his estate in bankruptcy. In re Jess, 169 F.3d 1204, 1207 (9th Cir. 1999); Turner v. Avery, 947 F.2d 772, 774 (5th Cir. 1991).

But because the property interests that bankruptcy enforces are property interests created by state law, Barnhill v. Johnson, 503 U.S. 393, 398 (1992); Butner v. United States, 440 U.S. 48, 55 (1979); In re Krueger 192 F.3d 733, 737 (7th Cir. 1999), we must consider whether, as Carlson argues, the decision of the Supreme Court of Illinois in In re Marriage of Zells, supra, creates a different rule for Illinois regarding the interest in a potential contingent fee. It does not. The cases we cited in the preceding paragraph show that in Illinois as in other states the lawyer whose employment ends before the litigation is complete is (with the usual exceptions) entitled to the fair value of his services up to the date of termination. All that Zells holds is that because the value of the potential contingent fee is uncertain, it is not to be part of the marital estate. The court did express concern that if the potential contingent fee were property of the marital estate the lawyer would be in effect splitting the fee with a non-lawyer, his spouse (unless the spouse happened to be a lawyer), which is forbidden. This does not mean that the potential contingent fee is not property under Illinois law, however--an issue not discussed in Zells. It means only that the Illinois courts don't think it should be subjected to the control or influence of a non-lawyer. That may be right or wrong (which isn't our business), but it does not rule the status of the potential contingent fee in bankruptcy. Illinois has not declared potential contingent fees not to be property. Nor has it purported to exempt them from bankruptcy under 11 U.S.C. sec. 522(b). To prevent debilitating uncertainty regarding creditors' rights in bankruptcy, the courts require that state exemptions from federal bankruptcy be declared explicitly rather than left to inference from judicial opinions that may seem to limit creditors' rights. In re Geise, 992 F.2d 651, 659 (7th Cir. 1993).

A further difference between the cases is that, in Zells, once the uncertain contingent fee was earned, it would "contribute to the annual income figures relied upon in awarding maintenance and support." 572 N.E.2d at 945. Creditors of Carlson will never benefit from fees he obtains after his discharge from bankruptcy.

And because Carlson earned his entire fee before declaring bankruptcy, there was no possibility that entitling the trustee in bankruptcy to the fee would interfere with Carlson's representation of his client. That representation was over. Suppose it hadn't been; suppose a lawyer declares bankruptcy halfway through a case that he's handling on a standard 33.3 percent contingent-fee basis and the value of his work to date, as measured by the opportunity cost of his time is, $10,000. And suppose that if he completes his work on the case he can expect a settlement of $60,000, entitling him to a contingent fee of $20,000 of which half will go to the trustee. His incentive to continue working hard on the case will be less than if his stake were $20,000. Suppose he discovers he'll have to invest not another $10,000 worth of his time, as he had thought, but $15,000. With only $10,000 to gain from successful completion of the case, he has little...