Sundquist v. Bank of Am., N.A. (In re Sundquist)

• Decision Date: 15 November 2017
• Docket Number: Case 14–02278,Adv. Pro. No. 14–02278,Case No. 10–35624,Docket Control No. ELG–1
• Parties: IN RE: Erik SUNDQUIST and Renée Sundquist, Debtors. Erik Sundquistand Renée Sundquist, Plaintiffs, v. Bank of America, N.A.; Recontrust Company, N.A. ; BAC Home Loans Servicing, LP, Defendants.
• Court: United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Eastern District of California

576 B.R. 858

IN RE: Erik SUNDQUIST and Renée Sundquist, Debtors.

Erik Sundquistand Renée Sundquist, Plaintiffs,

v.Bank of America, N.A.; Recontrust Company, N.A. ; BAC Home Loans Servicing, LP, Defendants.

Case 14–02278

Case No. 10–35624

Adv. Pro. No. 14–02278

Docket Control No. ELG–1

United States Bankruptcy Court, E.D. California.

Signed November 15, 2017

Mark E. Ellis, Ellis Law Group, LLP, Sacramento, California, for Plaintiffs.

Orly Degani, Degani Law Offices, Los Angeles, California; Sandor T. "Ted" Boxer, Law Offices of Sandor T. Boxer, Los Angeles, California, for Dennise Henderson, Attorneys' Lien Claimant.

Before: Christopher M. Klein, Bankruptcy Judge

OPINION ON MOTION TO EXPUNGE ATTORNEYS' FEE LIEN

CHRISTOPHER M. KLEIN, Bankruptcy Judge:

This Motion to Expunge an attorneys' fee lien asserted by the debtors' former attorney involves an important tool in the judicial toolbox for addressing the dilemma of counsel who incompetently represent debtors who have a meritorious case.

Former counsel asserts an attorneys' fee lien as a challenge to the bankruptcy court's power to cancel an attorneys' contract under Bankruptcy Code § 329(b), 11 U.S.C. § 329(b), and to limit fees for debtors' counsel to "reasonable" compensation.

The lien is being used as a device to create "hold-up" value by impeding settlement efforts by plaintiffs and defendant in order to extract a fee "far higher" than what this court authorized as "reasonable" compensation under § 329(b).

The Motion to Expunge is GRANTED; the § 329(b) order requiring that the plaintiffs pay the former attorney $70,000.00 as § 329(b)"reasonable" compensation remains in effect.

Facts

The underlying facts are set forth in this court's reported decision, Sundquist v. Bank of America, N.A., 566 B.R. 563, 571–85 (Bankr. E.D. Cal. 2017), and will be merely summarized here.

Attorney Dennise Henderson represented Erik and Renée Sundquist in their chapter 13 case filed June 14, 2010. A series of automatic stay violations by Bank of America, including foreclosure, prosecution of an unlawful detainer action, and other uncivilized conduct ensued that prompted the Sundquists to give up their effort to use a chapter 13 plan to cure a bank-induced default while they attempted to negotiate a mortgage modification. They voluntarily dismissed the chapter 13 case on September 20, 2010, and Ms. Henderson ceased to represent them.

Presaging what was to come when she re-emerged in 2014 for the eventual stay violation litigation, during the period between filing the case on June 14 and dismissing on September 20, 2010, Ms. Henderson made no complaint to the court and did not figure out an effective strategy to bring Bank of America to book for its stay violations.

After the chapter 13 case was dismissed, Bank of America kept exacerbating the consequences of its prior stay violations.

The Sundquists, represented by another not-very-competent counsel, sued under state law in 2011, which complaint was dismissed by the state trial court. On appeal, the California Third District Court of Appeal, while critical of the poor quality of the drafting of the complaint, reversed the dismissal in 2014, ruling that the complaint stated causes of action on six state-law counts including deceit and various fiduciary breaches.

As to the count alleging wrongful foreclosure, however, the California appellate court invoked conflict preemption to rule that Bankruptcy Code § 362(k)(1) preempts state-law wrongful foreclosure claims that are based solely on violation of the automatic stay and concluded that such claims are within exclusive federal jurisdiction. It ruled that if the Sundquists desired relief on account of the bankruptcy automatic stay violations, they would have to return to federal court.

The Sundquists re-employed Ms. Henderson to prosecute their § 362(k) (1) cause of action in federal court. Upon filing, the district court referred the civil action to this bankruptcy court as a core proceeding.¹ Accordingly, this court presided over the discovery phase, in which there were discovery disputes, and presided over the bench trial.

At trial, the evidentiary presentation orchestrated by Ms. Henderson consisted of little more than the testimony of the Sundquists, accompanied by a long and vague declaration that summarized the contents of Renée Sundquist's diary, which declaration was admitted by agreement of the parties. Ms. Henderson did not attempt to introduce the actual diary, extracts of which came into evidence as exhibits that had been marked by Bank of America and that were admitted under the circumstances described in footnote 58 of the opinion, without sponsorship by Ms. Henderson. Sundquist, 566 B.R. at 590 n.58.

Although various items of physical damages and economic damages were the subject of testimony, there was virtually no corroborative documentary evidence. This left the court in the uncomfortable position of having to note in its decision that "some components of actual damages will be less than what might have been proved with more precise evidence." Sundquist, 566 B.R. at 590. Time and time again, this court was forced to estimate damages in various categories on the low side and include a footnote to the effect that if the case were to need to be retried, the Sundquist evidence likely would be considerably more robust. E.g., Sundquist, 566 B.R. at 604 n.88.

Since § 362(k)(1) is unusual in that it specifies that attorney fees are a component of actual damages, with the consequence that fees could operate to increase punitive damages, and not merely be an additional charge, it was important to ascertain Ms. Henderson's legitimate fees.

Ms. Henderson did not comply with the requirement of Federal Rule of Bankruptcy Procedure 2016(b) that she file, within 15 days after executing the fee agreement with the Sundquists for representing them in the adversary proceeding, the statement required by § 329 disclosing the compensation agreed to be paid. Accordingly, this court issued an order reminding Ms. Henderson of the applicability of § 329 and of Rule 2016(b) and directing her to file the delinquent statement.

The ensuing supplemental statement stated that fees were on an unspecified contingency. Case 10–35624, Dkt. 69 (9/12/16).

This court thereupon, consistent with Federal Rule of Bankruptcy Procedure 2017(b), ordered that Ms. Henderson file a copy of the contingency fee agreement. The order explained that contingency fee agreements are subject to § 329(b) review for reasonable value of services and noted that it is not clear that a contingency fee is consistent with the attorneys' fee structure in § 362(k)(1). The order required that she justify the agreed contingency fees as representing the reasonable value of services within the meaning of § 329(b) and that she explain how the contingency fees comported with the attorneys' fee structure set forth in § 362(k)(1). Case 10–35624, Dkt. 70 (9/14/16).

Ms. Henderson filed a copy of a contingency fee agreement dated October 22, 2014. Case 10–35624, Dkt. 74 (9/23/16). In fact, the "Attorney–Client Fee Agreement" was two different documents pasted together with non-consecutive paragraphs. The first two pages end in the middle of paragraph no. 3; the third page, in a distinctly different typeface, began with paragraph no. 11.² It is now conceded that this was a 2016 document back-dated to 2014. Although Ms. Henderson now explains that she filed an inaccurate copy of her fee agreement and "apologizes,"³ she has not filed a corrected copy.

Ms. Henderson also filed a Supplemental Briefing Regarding Attorneys' Fees in which she urged that § 329(b) reasonable compensation be determined consistent with 11 U.S.C. § 330(a)(3) which looks to the nature, extent, and value of services, taking into account all relevant factors, including, time spent, rates charged, and customary compensation of comparably skilled attorneys in other cases. She added, "I will file a time billing with the actual time expended and will only seek the lesser of the contingency agreement or the reasonable hourly rate times the number of hours expended consistent with the Lodestar method." Other than a naked assertion that customary compensation can be a contingency fee, she offered no justification for the contingency fee agreement. Case 10–35624, Dkt. 73 (9/23/16).

Ms. Henderson filed a declaration documenting 207.56 hours spent on the § 362(k)(1) adversary proceeding at a rate of $300.00 per hour (= $62,268), together with costs for depositions, transcripts, and trial binders of $6,606.55 for a total of $68,874.55. Case 10–35624, Dkt. 75 (9/26/16).⁴

Mindful that lodestar compensation measured by counsel's billing rate multiplied by the number of hours devoted to the case, plus reimbursement of actual costs, is "strongly" presumed to be reasonable, Burgess v. Klenske (In re Manoa Finance Co.), 853 F.2d 687, 691–92 (9th Cir. 1988), this court fixed the attorneys' fee component of § 362(k)(1) actual damages at $70,000.00. This was actually more than the lodestar amount that Ms. Henderson stated that she was requesting.

Ms. Henderson did not seek an enhancement above her lodestar compensation. Nor did she proffer specific evidence to rebut the presumption against a bonus. Pennsylvania v. Delaware Valley Citizens' Council for Clean Air, 478 U.S. 546, 564–69, 106 S.Ct. 3088, 92 L.Ed.2d 439 (1986).

Treating Ms. Henderson's doctored, back-dated contingency fee agreement at face value, this court concluded that the contingency fee exceeded the reasonable value of services within the meaning of § 329(b) and canceled the agreement. Two adequate, independent reasons support that conclusion.

First, as stated in this court's published decision on the merits, the structure of § 362(k)(1) that incorporates fees as an element of actual damages leads to a nonsensical loop.

The second adequate, independent reason was Ms. Henderson's lack of competence. This court, out of distaste for being overtly critical of...