In re Oiltech, Inc.

• Decision Date: 19 March 1984
• Docket Number: Bankruptcy No. BK-R-82-999,Adv. No. 83-182.
• Citation: 38 BR 484
• Court: U.S. Bankruptcy Court — District of Nevada
• Parties: In re OILTECH, INC., a Nevada corporation, Debtor. OILTECH, INC., Plaintiff, v. NELSON & HARDING, Defendant, and Keene, Munsinger & Stuckey, Nominal Defendant.

38 B.R. 484 (1984)

In re OILTECH, INC., a Nevada corporation, Debtor.

OILTECH, INC., Plaintiff, v. NELSON & HARDING, Defendant, and Keene, Munsinger & Stuckey, Nominal Defendant.

Bankruptcy No. BK-R-82-999, Adv. No. 83-182.

United States Bankruptcy Court, D. Nevada.

March 19, 1984.

Stephen Harris and Jeffrey Hartman, Stephen Harris, Ltd., Reno, Nev., for plaintiff.

Bruce Anderson, Nelson & Harding, Denver, Colo., for defendant.

Stephen M. Munsinger, Keene, Munsinger & Stuckey, Denver, Colo., for nominal defendant.

ORDER

ROBERT C. JONES, Bankruptcy Judge.

Background

On 19 April 1983 the then debtor in possession, Oiltech, Inc. (debtor), filed the above-styled 11 U.S.C. § 542 turnover complaint against its former corporate counsel, Nelson & Harding (N & H) and nominal defendant, Keene, Munsinger & Stuckey (KM & S). The property the debtor seeks to recover includes a $30,000.00 deposit held by KM & S in an interest-bearing account, and $7,000.00 held by N & H in its client trust account.

The $7,000.00 came into N & H's possession during the course of its pre-petition representation of Oiltech in a lawsuit against a third party, and was paid to N & H on behalf of the debtor in settlement of that lawsuit. The $30,000.00 arose in a less conventional way. In February 1982 N & H withdrew as Oiltech's counsel and notified its client of the attorney's lien it was asserting against all of Oiltech's files, records and documents in N & H's possession and the $7,000.00 in its trust account. These liens were asserted to secure the payment of $37,713.04 in fees. Oiltech refused to pay, disputing the amount due N & H, and the law firm filed suit in Colorado state court to recover its fees. Before this suit was resolved, Oiltech found itself in a difficult position—the files in N & H's possession were necessary to complete Oiltech's Form 10K filing for 1981. In order to obtain the files and maintain the lawsuit's status quo, Oiltech and N & H joined in a stipulation that provided for the release of the files to Oiltech's securities lawyers upon the deposit of $30,000.00 into KM & S's trust account (KM & S was Oiltech's counsel in the state court action with N & H). This stipulation expressly allowed N & H to recover from either the $7,000.00 or $30,000.00 or both any amount adjudged due in the state court matter.

Following this June 1982 stipulation Oiltech filed for Chapter 11 relief in this district. N & H filed a timely proof of claim for its pre-petition fees and the debtor filed an objection to the claim. The debtor's reorganization plan confirmed on 6 October 1983 reserved to the Court jurisdiction to determine the amount of contested claims, and following a November 1983 claim objection hearing the Court allowed N & H's claim in the amount of $33,752.30.

The question to be resolved by this adversary proceeding¹ is whether the $33,752.30 claim is secured or unsecured. This issue, which both sides agree is dependent upon the validity of the asserted attorney's liens, will dictate the claim's treatment under Oiltech's confirmed reorganization plan or otherwise applicable law.²

Discussion

Colorado law allows for the creation of two different attorney's liens—a "charging lien" and a "retaining lien." People ex rel. MacFarlane v. Harthun, 195 Colo. 38, 581 P.2d 716 (1978). As creatures of statute they are set forth in COLO.REV.STAT. §§ 12-5-119 and 120:

12-5-119. All attorneys- and counselors-at-law shall have a lien on any money, property, choses in action, or claims and demands in their hands, on any judgment they may have obtained or assisted in obtaining, in whole or in part, and on any and all claims and demands in suit for any fees or balance of fees due or to become due from any client. In the case of demands in suit and in the case of judgments obtained in whole or in part by any attorney, such attorney may file, with the clerk of the court wherein such cause is pending, notice of his claim as lienor, setting forth specifically the agreement of compensation between such attorney and his client, which notice, duly entered of record, shall be notice to all persons and to all parties, including the judgment creditor, to all persons in the case against whom a demand exists, and to all persons claiming by, through, or under any person having a demand in suit or having obtained a judgment that the attorney whose appearance is thus entered has a first lien on such demand in suit or on such judgment for the amount of his fees. Such notice of lien shall not be presented in any manner to the jury in the case in which the same is filed. Such lien may be enforced by the proper civil action. 12-5-120. An attorney has a lien for a general balance of compensation upon any papers of his client which have come into his possession in the course of his professional employment and upon money due to his client in the hands of the adverse party in an action or proceeding in which the attorney was employed from the time of giving notice of the lien to that party.

While analyzing this present statute's predecessor (both are nearly identical), the Colorado Supreme Court described the distinct difference between the two types of liens—

A general, retaining or possessory lien, and a special, particular, or charging lien. The former attaches to all papers, books, documents, securities, and money coming into an attorney\'s possession in the course of his professional employment. The attorney has a right to retain them in his possession until the general balance due him for legal services is paid, whether such services grew out of the special matters then in his hands, or other legal matters. The right to the special, particular, or charging lien, on the other hand, rests, not on possession, but on the equity of an attorney to be paid his fees and disbursements out of the judgment obtained as a result of his service and skill.

Collins v. Thuringer, 92 Colo. 433, 21 P.2d 709, 710 (1933) quoted in Donaldson, Hoffman & Goldstein v. Gaudio, 260 F.2d 333, 335 (10th Cir.1958). The Gaudio court reiterated a principal point made in Collins by holding that a charging lien "could not attach for services in matters not involved in the suit. . . . This is consistent with the view that under the statute no lien attaches until the claim is in suit." Id. at 336-37. Furthermore, a "claim does not become `in suit' through threat of actions nor preparatory services rendered in contemplation of suit. Rather, there must be a proceeding commenced in a court of justice." Id. In addition to the "actual suit" prerequisite for attachment of the lien, for the charging lien to be enforceable "against third parties, notice must be given." MacFarlane, 581 P.2d at 718. This is the record notice procedure described in § 12-5-119 (notice of claim filed with the court in which the action is pending.)

Unlike the charging lien, the statute does not condition the enforceability of the retaining lien against third parties upon the requirement of notice. In its brief discussion of retaining liens, the MacFarlane court observed: "The statute provides that an `attorney has a lien for a general balance of compensation upon any papers of his client.' This language can only be construed to mean that a lien attaches to the client's papers once an attorney has completed compensable work." Id. at 718 (emphasis in original). The court made no mention of notice and, indeed, this Court can perceive no purpose for such a requirement. A competing third party creditor would certainly be placed on inquiry notice of any possible lien asserted by an attorney upon the client's files, records, money, or other property in the attorney's possession. The MacFarlane opinion's statement that "the principles established in connection with the `charging lien' apply equally well to `retaining liens,'" id., read in context, refers only to the attachment of such liens, not to their perfection as to third parties.

Since the $7,000.00 was in N & H's possession at a time when compensable work had been completed, a retaining or possessory attorney's lien in favor of N & H attached to this property. Although the money was due N & H's client (Oiltech) it was not in the hands of the adverse party to the suit and, therefore, a charging lien was not created. This retaining lien was wholly effective (perfected) as to third parties such as a trustee or debtor in possession when Oiltech's Chapter 11 petition was filed, and remains so. As such, 11 U.S.C. § 545(2), which provides for the avoidance of certain unperfected statutory liens, has no effect.

Likewise, at least a portion of the $30,000.00 is the object of a valid retaining lien. This fund was, by N & H's own admission, designed as "substitute collateral" and posted by the debtor to replace the books, records, and files Oiltech needed for its securities work and to preserve the Colorado lawsuit's status quo. The lien attaching to the substitute collateral is of the same character as and can be accorded no greater dignity than the lien attaching to the original collateral, and the parties have not argued the contrary. Clearly, there was a retaining lien on the books, records, and files possessed by N & H; therefore, the lien attached to the cash upon its substitution. However, the value of this particular attorney's lien is subject to some question because of 11 U.S.C. § 542(e).³

Section 542(e) reads: "Subject to any applicable privilege, after notice and a hearing, the court may order an attorney, accountant, or other person that holds recorded information, including books, documents, records, and papers, relating to the debtor's property or financial affairs, to disclose such recorded information to the trustee." The corresponding legislative history says "subsection (e) . . . is a new provision that deprives accountants and attorneys of the leverage that they have today, under State law lien provisions, to receive payment in full ahead of...