In re Gianasmidis

• Decision Date: 03 August 2018
• Docket Number: CIVIL ACTION NO. 17-11440-WGY
• Citation: In re Gianasmidis, 318 F.Supp.3d 442 (D. Mass. 2018)
• Parties: IN RE: Savvas V. GIANASMIDIS, Debtor.
• Court: U.S. District Court — District of Massachusetts

318 F.Supp.3d 442

IN RE: Savvas V. GIANASMIDIS, Debtor.

CIVIL ACTION NO. 17-11440-WGY

United States District Court, D. Massachusetts.

Filed August 3, 2018

Christopher M. Condon, Harold B. Murphy, Michael K. O'Neil, Murphy & King Professional Corporation, Kathleen R. Cruickshank, Hanify & King P.C., Nicholas J. Rosenberg, Gardner & Rosenberg P.C., Boston, MA, George J. Nader, Riley & Dever PC, Lynn, MA, Bill N. Jacob, Bill N. Jacob, Esq., Herbert Weinberg, Rosenberg & Weinberg, North Andover, MA, for Debtor.

MEMORANDUM AND ORDER

YOUNG, DISTRICT JUDGE

I. INTRODUCTION

This appeal from the Bankruptcy Court deals with whether the Appellants Stephen J. Kuzma ("Kuzma"), The Law Offices of Russo & Minchoff ("Russo & Minchoff"), and India L. Minchoff ("Minchoff" and collectively, the "Lawyer Creditors"), are able to obtain interest on the legal fees they were awarded in binding arbitration, and, if so, what the appropriate interest rate ought be from the Debtor and Appellee, Savvas V. Gianasmidis ("Gianasmidis"). Although interest generally stops accruing when a debtor files for bankruptcy, 11 U.S.C. § 506(b) provides for an exception. Section 506(b) grants over-secured creditors a right to earn interest in the period between the filing of the bankruptcy petition and confirmation of the bankruptcy plan ("pendency interest"). It is not contested that the Appellants were over-secured creditors since they had various liens attached to real property, the value of which exceeded their claims.

Due to the protracted procedural history described below, the Appellants also argue on appeal that the Bankruptcy Court erred in not granting them interest on their claims prior to the filing of the bankruptcy petition ("prepetition interest").

II. FACTS¹

A. Procedural History and Relevant Facts

In 2009, Gianasmidis, an attorney by profession, entered into an agreement (the "2009 Fee Agreement") with Minchoff and her firm Russo & Minchoff to represent him in a suit to recover real property from his daughter (the "Palangas Case"). Bankruptcy Dock. R. ("R.") No. 360-1 at 19-22, ECF No. 2. In 2011, Kuzma joined Minchoff and they entered into a new contingency fee agreement with Gianasmidis (the "2011 Fee Agreement"). Id. at 49-52. Both the 2009 and 2011 Fee Agreements required that in the case of a dispute over the legal fees, the parties would submit to binding and final arbitration before the Legal Fee Arbitration Board (the "LFAB") of the Massachusetts Bar Association. Id. at 21-22, 52. The Palangas Case was tried in the Suffolk Superior Court and resulted in a jury verdict in favor of Gianasmidis, which was later affirmed on appeal. Id. at 54, 56; Appellants' Br. 2-3, ECF No. 14.

Gianasmidis eventually secured the assets, including several real properties (the "Properties"), from his win in the Palangas Case. R. No. 360-1 at 56-81. Pursuant to the 2011 Fee Agreement, the Lawyer Creditors sought forty percent of the jury award as compensation for their legal services. Id. at 2; 49-50. After some delay and disagreement over the legal fees that Gianasmidis owed the Lawyer Creditors, the Lawyer Creditors filed notice of an attorney's lien pursuant to Mass. Gen. L. ch. 221 § 50, which was subsequently attached to the Properties and recorded. R. No. 14-1 at 21-30.

After several unsuccessful attempts to force Gianasmidis to arbitrate, the Lawyer Creditors filed suit for breach of contract in the Suffolk Superior Court. R. No. 360-1 at 2-7. On June 27, 2014, the Superior Court granted, pursuant to Massachusetts Rule of Civil Procedure 4.1, an $800,000 prejudgment attachment on the Properties, which was recorded in the Suffolk County Register of Deeds. Id. at 9. Gianasmidis did not answer the complaint and several months later, on March 11, 2015, the Superior Court entered a default judgment against Gianasmidis. R. No. 360-2 at 30. Two months later, Gianasmidis moved to remove the default and also filed a motion to compel arbitration. Id. at 8-26. The Superior Court denied the motions after a hearing and entered a monetary judgment for the Lawyer Creditors on May 27, 2015. R. No. 360-3 at 20. The Superior Court awarded the Lawyer Creditors $1,527,931.30, which included interest running from the "date of breach" on December 15, 2012.² Id. at 17-18. Gianasmidis appealed the Superior Court's denial of his motions to set aside the default judgment and compel arbitration. Id. at 34.

Shortly before filing the appeal, however, Gianasmidis filed a Chapter 13 voluntary petition for bankruptcy under 11 U.S.C. §§ 101 etseq ;³ R. No. 1. The Lawyer Creditors filed proofs of claim totaling $1,528,935.97 on August 12, 2015, to which Gianasmidis objected. R. No. 230. The Bankruptcy Court granted the Lawyer Creditors a stay to allow them to defend against the appeal pending in the state court. R. No. 47. The Massachusetts Appeals Court vacated the default judgment, concluding that despite a lengthy delay on the part of Gianasmidis, the Fee Agreement evinced a clear intent to arbitrate. R. No. 402-1 at 4. Accordingly, it reversed and remanded the Superior Court's denial of the motion to compel arbitration. Id. The Bankruptcy Court disagreed with the Lawyer Creditors that it needed to wait for the Superior Court to do anything on remand and ordered the parties to arbitrate. R. No. 435; R. No. 438.

The arbitration proceeded before the LFAB and on January 20, 2017, the arbitration panel issued an award for the Lawyer Creditors. R. No. 452 at 2-3. After discounting the initial fee Gianasmidis had paid, the LFAB awarded the Lawyer Creditors $646,755.00 in "fees, costs and disbursements." Id. at 2. The award does not contain any statement or reasoning setting forth how the LFAB calculated the award; it acknowledges the Lawyer Creditors' request for $1,257,158.65 but also does not explain how the Lawyer Creditors arrived at this number.⁴ Id.

The Lawyer Creditors subsequently filed a motion in the Bankruptcy Court to allow interest on the LFAB's award. R. No. 480. The Lawyer Creditors acknowledged that the arbitration was not appealed as it was "final, binding and represents a final adjudication," but characterized the arbitration as only determining the "principal amount" of the legal fees owed. Id. at 5. Accordingly, the Lawyer Creditors requested that, per Massachusetts law, the Bankruptcy Court add to the award a 12% per annum interest beginning from the date it filed suit for breach of contract on June 27, 2014. Id. at 14. A hearing on the motion was held on July 12, 2017, at which the Bankruptcy Court made an oral ruling that it later issued as an order granting in part and denying in part the Lawyer Creditors' request to include interest. R. Nos. 509, 516.

B. Proceedings at the Bankruptcy Court

Although the Fee Agreements do not prescribe an interest rate, the Lawyer Creditors argued before the Bankruptcy Court that as contracts they are covered by Massachusetts General Laws Chapter 231, section 6C, which provides in relevant part that:

In all actions based on contractual obligations, upon a verdict, finding or order for judgment for pecuniary damages, interest shall be added by the clerk of the court to the amount of damages, at the contract rate, if established, or at the rate of twelve per cent per annum from the date of the breach or demand.

See, e.g., R. No. 480 at 9; see also Mass. Gen. Laws ch. 231, § 6C. Thus, the Lawyer Creditors claimed, they were entitled to a 12% annual increase on the contingency fee from the date⁵ the Fee Agreements were breached until Gianasmidis filed a bankruptcy petition (the prepetition interest). R. No. 480 at 9-14. Additionally, the Lawyer Creditors asserted they are entitled to post-petition interest, or pendency interest, because their claim was over-secured -- a point the Bankruptcy Court noted was not in dispute because the value of the properties attached (either under the judicial lien or the attorney's lien) greatly exceeded the Lawyer Creditors' claim. Bankruptcy Ct. Tr. July 12, 2017 ("Bankr. Hr'g & Order") 38, ECF No. 5-6.

The Lawyer Creditors' pendency interest claim is based on 11 U.S.C. § 506(b), which provides that:

To the extent that an allowed secured claim is secured by property the value of which, ... is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest on such claim, and any reasonable fees, costs, or charges provided for under the agreement or State statute under which such claim arose.

(emphasis added). Arguing that the relevant "State statute" was again Massachusetts' Chapter 231, Section 6(c), the Lawyer Creditors contended the pendency interest rate should also have been 12% per annum from the date Gianasmidis filed the bankruptcy petition (May 28, 2015) until any reorganization plan was confirmed. R. No. 480 at 11.

Gianasmidis opposed the motion primarily on the basis that the LFAB had not included interest in its award and that the Bankruptcy Court was not permitted to "look behind" the arbitration award. Bankr. Hr'g & Order 31.

The Bankruptcy Court rejected Gianasmidis's argument that the LFAB's failure to include interest in its arbitration award precluded the Bankruptcy Court from assessing interest. Id. at 40. It gave two reasons why it was not precluded from assigning interest: (1) the LFAB's rules "make clear that the arbitrator only decides the amount of the fee"⁶ and (2) Section 506(b) is the relevant "statutory credit predicate," and it authorizes the Bankruptcy Court to assign interest if permitted under state law or per the terms of the agreement. Id.

The Bankruptcy Court further concluded that the Chapter 231, Section 6(c) of the Massachusetts General Laws did not apply because it requires a "verdict" or "judgment" and the Massachusetts Appeals Court had vacated the Superior Court's judgment without any "conditions or restrictions on the vacator." Id. at 40-41. The Bankruptcy Court thus rejected the 12% interest rate since there "is no judgment in this...