Kallen v. Litas
| Decision Date | 14 March 1985 |
| Docket Number | No. 84 C 8942.,84 C 8942. |
| Citation | 47 BR 977 |
| Court | U.S. District Court — Northern District of Illinois |
| Parties | Laurence H. KALLEN, as Trustee, Plaintiff-Appellee, v. Spiros LITAS, Eleftherios Bozionellos, Ash, Anos, Freeman & Logan, and Makis Nirris, Defendants-Appellants. |
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Robert W. Boos, II, Yvor E. Stoakley, Arnstein, Gluck, Lehr, Barron & Milligan, Chicago, Ill., for plaintiff-appellee.
Bruce T. Logan, David L. Tomchin, Ash, Anos, Freedman & Logan, Chicago, Ill., for defendants-appellants.
The appellant, Ash, Anos, Freeman & Logan (hereinafter the "firm") appeals from a decision of Bankruptcy Judge Hertz, granting summary judgment to the bankruptcy trustee on his claim that a transfer of $8,914.84 to the firm by the debtor, Brass Kettle Restaurant, Inc., made pursuant to a contingent fee agreement constituted a preferential transfer. See 11 U.S.C. § 547(b) (Supp.V.1981). Judge Hertz further held that the subject transfer was not excepted by any of the provisions contained in Section 547(c)(1)-(3) (11 U.S.C. § 547(c)(1)-(3)), and so ordered the firm to return $8,914.84 to the trustee for the benefit of the debtor's creditors. For the reasons given below, the judgment of the Bankruptcy Court is affirmed.
On May 18, 1981, the debtor's business premises were damaged by fire. Thereafter, on October 11, 1981, the debtor retained the firm to represent it in connection with actions that had arisen from the fire loss. Under the terms of the retainer agreement executed on October 11, 1981 the debtor ". . . agreed to pay the firm . . . the sum of . . . plus 40% . . . of any recovery made on their behalf." . The retainer agreement also contained a rebate clause reducing the amount paid to correspond to actual hours spent. The debtor's principals signed the retainer agreement both as corporate officers and as individuals.
On November 11, 1981, the firm negotiated a $40,000 settlement with the owner-lessors of the corporate premises in connection with a forcible detainer action. The firm initially retained $16,000 of the $40,000 settlement as payment for legal services rendered to the debtor. On December 23, 1981, the Brass Kettle's creditors filed an involuntary bankruptcy petition. After the filing of the petition, the firm returned $7,085.65 to the trustee in accordance with the rebate clause contained in the retainer agreement.
The Bankruptcy Court held that the remaining $8,914.84 held by the firm as payment for prepetition legal services constituted a preferential transfer under Section 547(b) and was not subject to exception under Section 547(c)(1)-(3). On appeal, however, the firm contends that: (1) the payment of attorneys' fees pursuant to a contingent fee agreement did not deplete the debtor's assets and so did not constitute a "transfer of property of the debtor" under Section 547(b); (2) its fees were not paid for or on account of an antecedent debt; and (3) the settlement fund was subject to a valid Illinois attorneys' lien so that there was no preferential transfer. The firm also contends that its receipt of legal fees falls within various exceptions to the preferential transfer section, including the Section 547(c)(1) substantially contemporaneous exchange for new value exception, the Section 547(c)(2) ordinary course of business exception, and the Section 547(c)(3) perfected purchase money security interest exception.
A. Preferential Transfer—Section 547(b)
To avoid a prepetition transfer as preferential, the trustee has the burden of proving all five elements of Section 547(b).1 The firm does not challenge the Bankruptcy Judge's findings that it received more through the subject transfer than it would have in a Chapter 7 case, that the transfer was made while the debtor was insolvent and that the transfer was made within 90 days of the filing of the involuntary petition. This Court will therefore not reexamine Judge Hertz's findings as to these three elements. The only elements of a preferential transfer that remain in issue are: (1) whether there was a transfer of the property of the debtor; and (2) whether the transfer was made for or on account of an antecedent debt.
Section 101(40) of the Bankruptcy Code defines transfer as follows:
`Transfer\' means every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property, including retention of title as a security interest.
11 U.S.C. § 101(40) (Supp.V.1981). Under this broad definition the payment of $8,914.84 to the firm on or about November 17, 1981 constituted a "transfer" of the Brass Kettle's property pursuant to Section 547(b). On that date, the debtor had at least an equitable interest in the settlement allegedly reserved for attorneys' fees. In re Penninsula Roofing & Sheet Metal, Inc., 9 B.R. 257, 260-61 (Bankr.W.D.Mich. 1981). See also 11 U.S.C. § 541(a) (Supp.V. 1981).
Notwithstanding the Code's broad definition of transfer, the firm erroneously argues that the debtor never had control or entitlement to that portion of the settlement fund allegedly set aside for attorneys' fees. Relying on Rector v. Huddleston, 14 B.R. 1008 (Bankr.E.D.Tenn.1981) and Lewis v. Braun, 356 Ill. 467, 191 N.E. 56 (1934), the firm contends that the contingent fee arrangement constituted a valid equitable assignment of a portion of the $40,000 settlement fund. As a result, they argue, there was no transfer of the debtor's property or depletion of the debtor's estate, because the portion of the fund allegedly set aside for attorneys' fees never became part of the debtor's estate.2
To argue that the $8,914.84 portion of the settlement fund did not constitute property of the debtor's estate contradicts both the intent of Congress and the realities of the transactions. In the instant case, the debtor had an equitable or legal interest in both the forcible detainer action and any proceeds arising therefrom3 pursuant to Section 541(a)(1).4
In any event, under Illinois law the contingent fee agreement did not constitute an equitable assignment to the firm of an interest in the subject matter of the portion of the fund allegedly set aside for attorneys' fees. Anastos v. O'Brien, 3 Ill. App.3d 1015, 1020, 279 N.E.2d 759, 763 (1st Dist.1972) (). An equitable lien does not arise as a matter of law from the performance of legal duties in an attorney-client relationship. Rather, such a lien arises out of an express contract creating an equitable assignment. Lewis v. Braun, supra. A contingent fee agreement in which a litigant agrees that as compensation for legal services his attorney is to receive a portion of what is realized from a settlement is not an assignment to the attorney of any interest in the subject matter of the litigation. Department of Public Works v. Exchange Nat'l Bank, 93 Ill.App.3d 390, 394, 49 Ill.Dec. 218, 221, 417 N.E.2d 1045, 1048 (2nd Dist. 1981); Anastos, supra.
In order to constitute an equitable assignment on which to base an equitable attorneys' lien, there must be an implied appropriation of some portion of the fund. Lewis v. Braun, 356 Ill. 467, 191 N.E. at 56 ().
In the instant case, the contingent fee agreement does not meet the requisite elements of a valid equitable attorneys' lien. First, the debtor's officers signed the note personally. More importantly, the retainer agreement did not impose the fee directly on the settlement fund or res; but merely set the amount due upon settlement, pro rated on an hourly basis. Exchange Nat'l Bank, supra. Thus, the firm could, but need not have been compensated from the actual funds recovered in the course of settlement. Id.
Exchange Nat'l Bank is directly on point. There the retainer agreement stated: "We hereby agree to pay you . . . an amount equal to 28% of the recovery over $132,000." Id. According to the Illinois Appellate Court that ". . . contract constitutes nothing more than a personal promise to pay . . . an did not purport to assign an equitable interest in the . . . fund." Id. Hence, the firm's retainer agreement did not grant the firm an equitable interest in the fund. Anastos v. O'Brien, 3 Ill.App.3d at 1020, 279 N.E.2d at 764. At best, the firm possessed a valid contract claim against the debtor. The firm's argument that there was no depletion of the debtor's estate due to an alleged equitable assignment of a portion of the settlement fund must therefore be rejected.
Next, the firm contends that the trustee has failed to meet the antecedent debt requirement of Section 547(b). In essence, the firm claims that the debt came into existence and was contemporaneously paid on November 17, 1981. Whether the November 17, 1981 transfer was made for or on account of an antecedent debt depends upon when the debtor incurred the underlying debt. See In re Wathen's Elevator, Inc., 37 B.R. 870, 871 (Bankr.W.D.Ky.1984) and cases cited therein. In addressing this issue the bankruptcy judge found that:
On October 11, 1981, the debtor agreed to compensate the firm for legal services rendered in connection with the fire loss. The retainer agreement between the firm and the debtor appears to be a contingent fee agreement. In reality, however, the firm billed and was compensated on an hourly basis. Regardless of the nature of the retainer agreement, the firm possessed a `claim\' against the debtor as of October 11, 1981.
Memorandum Opinion at 4. This finding, that "the firm billed and was compensated at an hourly rate" is not clearly erroneous. Thus, the transfer of November 17, 1981 was made on account of an antecedent debt. In re Penninsula...
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