In re Edl, Bankruptcy No. 96-31040-7

• Citation: 207 BR 611
• Decision Date: 01 April 1997
• Docket Number: Bankruptcy No. 96-31040-7,Adversary No. 96-3087-7.
• Parties: In re Maryann EDL, Debtor. Maryann EDL, Plaintiff, v. Frank KINAST, Defendant.
• Court: United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Western District of Wisconsin

207 B.R. 611 (1997)

In re Maryann EDL, Debtor.

Maryann EDL, Plaintiff, v. Frank KINAST, Defendant.

Bankruptcy No. 96-31040-7, Adversary No. 96-3087-7.

United States Bankruptcy Court, W.D. Wisconsin.

April 1, 1997.

MEMORANDUM DECISION

ROBERT D. MARTIN, Chief Judge.

Attorney Frank Kinast represented Maryann Edl in her divorce. They had no written fee agreement, but he asked that she pay him a retainer of $600 and thereafter $100 per hour. After receiving the retainer Mr. Kinast did not bill her, nor did Ms. Edl pay anything until the divorce was granted. On November 3, 1995, after a contested hearing, Mr. Kinast secured for Ms. Edl a property division judgment of $3,400. The judgment was satisfied on February 18, 1996 by a check which Mr. Kinast had his opposing counsel make payable in both his name and Ms. Edl's. He held the check until she came to his office on February 21, 1996. She left that day refusing to sign the check and demanding that she receive its entire amount. She offered to pay Mr. Kinast $100 per month in the future but declined to pay the entire bill then due. The next day, Ms. Edl returned to Mr. Kinast's office, grudgingly endorsed the check and accepted a check for $1,740 (the divorce proceeds minus $1,660 in attorney's fees). Ms. Edl filed this bankruptcy 25 days thereafter.

The trustee decided not to pursue a preference action against Mr. Kinast. However, Ms. Edl moved to avoid any lien that may exist in the divorce proceeds under 11 U.S.C. § 522(h)¹ and (g)(1) and to recover the fees as a preference under § 547(b).² In response, Mr. Kinast claims he had a commonlaw, possessory attorney's lien for the fees and received no preference.

Before trial, the issues were narrowed to (1) whether Ms. Edl voluntarily transferred part of her divorce proceeds to Mr. Kinast in payment of his fees; and (2) whether Mr. Kinast had a lien in the divorce proceeds. At trial, the parties focused on the "voluntariness" of Ms. Edl endorsing the property settlement check and accepting her share less the attorney's fees. However, the transfer which gave Mr. Kinast a preference, if there is one, was made when the check was made payable to him. It was that transfer which enforced the alleged attorney's lien. I found that transfer to be involuntary because there was no prior agreement to create a lien. The issue remaining is whether a lien existed in the absence of an agreement.

Ms. Edl stands in the shoes of a trustee in bankruptcy pursuant to § 522(h) and (g)(1) and may avoid any transfer meeting the five requirements of § 547(b). All elements of § 547(b) have been admitted except those under § 547(b)(5) which provides:

The trustee may avoid any transfer of an interest of the debtor in property —

(5) that enables such creditor to receive more than such creditor would receive if —

(A) the case were a case under chapter 7 of this title;

(B) the transfer had not been made; and

(C) such creditor received payment of such debt to the extent provided by the provisions of this title.

If Mr. Kinast lacked an enforceable attorney's lien in the divorce proceeds, he received more than other unsecured creditors. However, if he had a lien, general creditors would have had no right to share in the amount he received, and no preference would be established.

Whether an attorney's lien can exist in the divorce proceeds is an issue of state law. Wisconsin courts recognize three types of attorney's liens. Matter of Richland Bldg. Systems, Inc., 40 B.R. 156 (Bankr.W.D.Wis. 1984). The first, statutory attorney's liens, exist only by agreement between attorney and client and can only attach to funds awarded in a tort or contract case. The second type is a retaining lien on clients' papers. The third type is an equitable lien. It is only this third type that Attorney Kinast alleges he had.

The equitable lien, or "charging lien," arises from the common law. It attaches to the proceeds of a judgment decree or award obtained by the attorney for her client. Like the statutory lien, it is upheld on the theory that the attorney's services and skills created the fund. James T. Flaherty, Attorney Liens and The Code of Professional Responsibility, 14 J. of Legal Prof. 137, 139 (1989). Wisconsin codified an attorney's lien in 1891, and for a long time after 1900 Wisconsin cases considered only liens meeting the statutory definition. However, in 1966 the Wisconsin Supreme Court gave life to the old common law equitable lien in Wurtzinger v. Jacobs, 33 Wis.2d 703, 148 N.W.2d 86 (1966), when it found that an attorney's lien could exist even if there was no written agreement. This court followed Wurtzinger in Matter of Richland, supra at 158, reiterating that the equitable lien is a remedy where the statutory attorney's lien is inapplicable:

The equitable lien appears more broadly to be a remedy to prevent unjust enrichment to a client whose attorney has performed well and secured a judgment. . . . Equity may thus allow a lawyer to have a lien for some or all of the services and disbursements leading to the recovery without regard to the terms of the fee agreement when such a lien is necessary to prevent unjust enrichment of the client.

Were there no other requirements, it would seem Mr. Kinast could claim an equitable attorney's lien to prevent the "unjust enrichment" of his client. Mr. Kinast worked to get a divorce settlement for Ms. Edl and unless allowed to have a lien in the divorce proceeds will get nothing but the business end of the injunction enforcing the discharge in her "no-asset" bankruptcy.

However, under Wisconsin law it is an open question whether any type of attorney's lien can attach to the proceeds of a divorce settlement. The Wisconsin Supreme Court stopped short of addressing this issue in Stasey v. Miller, 168 Wis.2d 37, 483 N.W.2d 221 (1992). In Stasey, a circuit court granted an attorney a judgment lien on her client's divorce settlement proceeds. The attorney and client had agreed upon this fee arrangement in writing before the case went to trial. The client appealed, and the court of appeals certified the issue to the supreme court. The supreme court reversed, holding that the circuit court did not have subject matter jurisdiction to determine the fees a client owed to an attorney in a divorce action. Id. at 228. In dicta, the court cited Matter of Richland, supra, in recognizing equitable liens, but declined to decide whether attorney's liens are appropriate in divorce actions. Despite the court's coyness, it can be inferred from Stasey that an attorney's lien claimed on divorce funds may warrant different consideration from an attorney's lien claimed on funds derived from contract and tort judgments.

Wis.Stat. § 757.36 was enacted because the common law did not allow liens to attach in every case. Before the statute, the "liquidated"³ or "unliquidated"⁴ nature of the client's claim dictated if and when an attorney could claim a lien on the client's recovery. An attorney's lien was valid and enforceable before a judgment was granted if the case was founded upon a written contract or negotiable instrument. Courtney v. McGavock, 23 Wis. 619 (1869). Pre-judgment attachment in such cases gave the attorney's lien priority over other liens that attached at or after judgment. One such case was Rice v. Garnhart, 35 Wis. 282 (1874), where the claim was "liquidated" because it was founded upon a written contract. In Rice, when there was evidence that the client had "duly assigned to the attorneys the judgment . . . in part payment for their services" the attorney's lien took priority over the competing creditor's post-judgment claim. Even if the client had not assigned the judgment, the attorneys would still have had lien priority because the claim was ascertainable and assignable.

On the other hand, where the action was for unliquidated damages in tort or contract, the court vacillated on whether the common law allowed a lien to attach before judgment without a written agreement. First, in Courtney, supra, an agreement was required.⁵ Then, in Kusterer v. The City of Beaver Dam, 56 Wis. 471, 14 N.W. 617 (1883), the court held that even if the attorney and client had a written agreement for an attorney's lien, there was no lien if the claim was unliquidated. Kusterer was a "slip and fall," which the client settled before judgment. In finding that the attorneys did not have a lien despite a written agreement, the court in Kusterer regretted the inequitable result but could not ignore the unassignable, unliquidated nature of the tort claim.

Finally, in Voell v. Kelly, 64 Wis. 504, 25 N.W. 536 (1885), the court once again found there was no lien in an unliquidated claim without a written agreement. However, the absence of an agreement was not the dispositive issue when the client accepted a settlement of the personal injury claim. The court found there was no lien because "it is doubtful if the attorney has any lien upon the judgment for fees which would prevent his client from settling or discharging it." Id. at 505, 25 N.W. 536. In these pre-statute cases, when an attorney's fees were secured by a client's unliquidated, unassignable claim, no lien could attach before judgment. An attorney was out-of-luck if the client settled before trial.

In response to this unfair situation, in 1891, the legislature enacted the statutory attorney's lien which must arise under a written agreement. The current version, Wis. Stat. § 757.36 provides:

Any person having or claiming a right of action, sounding in tort or for unliquidated damages on contract, may contract with any attorney to prosecute the action and give the attorney a lien upon the cause of action and upon the proceeds or damages derived in any action fought for the enforcement of the cause of action, as security for fees in the conduct of the litigation.

(Emphasis added.) Because the statute's reference to tort and unliquidated contract claims seems to be based in...