Ulrich v. Schian Walker, P.L.C. (In re Boates)

• Decision Date: 09 June 2016
• Docket Number: Bk. No. 2:14–bk–17115–GBN,Adv. No. 2:15–ap–00269–GBN,BAP No. AZ–15–1279–KuJaJu
• Citation: 551 B.R. 428
• Parties: In re: Craighton Thomas Boates, Debtor. Dale D. Ulrich, Chapter 7 Trustee, Appellant, v. Schian Walker, P.L.C., Appellee.
• Court: U.S. Bankruptcy Appellate Panel, Ninth Circuit

551 B.R. 428

In re: Craighton Thomas Boates, Debtor.Dale D. Ulrich, Chapter 7 Trustee, Appellant

v.Schian Walker, P.L.C., Appellee.

BAP No. AZ–15–1279–KuJaJu

Bk. No. 2:14–bk–17115–GBN

Adv. No. 2:15–ap–00269–GBN

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Argued and submitted on May 20, 2016 at Phoenix, Arizona

Filed June 9, 2016

Terry A. Dake argued for appellant Dale D. Ulrich, chapter 7 trustee;

Mark C. Hudson of Schian Walker, P.L.C. argued for appellee Schian Walker, P.L.C.

Before: KURTZ, JAIME^* and JURY, Bankruptcy Judges.

OPINION

KURTZ

, Bankruptcy Judge:

INTRODUCTION

The judgment on appeal disposed of the parties' cross-motions for summary judgment and dismissed the chapter 7¹ trustee Dale D. Ulrich's adversary proceeding against the debtor's counsel Schian Walker, P.L.C. In the adversary proceeding, Ulrich unsuccessfully sought to recover for the benefit of the bankruptcy estate $60,000 the debtor paid prepetition to Schian Walker pursuant to a retainer agreement. Under the express terms of the retainer agreement, the $60,000 was a flat fee the debtor was fully prepaying in exchange for Schian Walker's promise to defend the debtor in an anticipated nondischargeability proceeding. The retainer agreement further specified that the $60,000 flat fee was earned on receipt and that it would be deposited in Schian Walker's business bank account.

Notwithstanding the debtor's prepetition payment in full of the $60,000, both parties to the retainer agreement still had significant and material contractual duties to perform at the time of the bankruptcy filing, so the retainer agreement qualified as an executory contract for purposes of § 365, and the retainer agreement was rejected by operation of law under § 365(d)(1). Because the bankruptcy court, in granting summary judgment, erroneously determined that the retainer agreement was not an executory contract, we must VACATE AND REMAND for further proceedings consistent with our holding regarding the effect of that rejection on the parties' respective rights and liabilities under the retainer agreement and under Arizona law.

On remand, the bankruptcy court will need to address one lingering factual issue. Absent from the summary judgment record was any undisputed fact demonstrating when Ulrich first exercised his power to liquidate the estate's rights under the retainer agreement by notifying Schian Walker that the agreement was terminated. Under binding Ninth Circuit precedent, rejection of the retainer agreement did not terminate the agreement, nor did it divest the estate of the rights and defenses the debtor enjoyed under the agreement at the time of his bankruptcy filing.

Accordingly, we VACATE AND REMAND.

FACTS

At the time of the debtor Craighton Thomas Boates' bankruptcy filing, he was a defendant in a state court lawsuit brought against him by Metro Phoenix Bank for negligent misrepresentation and fraud. In the state court lawsuit, the bank sought damages in excess of $3.6 million. When Boates disclosed to the bank his intent to commence a bankruptcy case, the Bank, in turn, expressed its intent to file a nondischargeability adversary proceeding against Boates under § 523.

In anticipation of this adversary proceeding, before filing bankruptcy, Boates entered into an adversary proceeding retainer agreement with Schian Walker. Pursuant to the retainer agreement, Schian Walker promised to defend Boates in the anticipated nondischargeability action in exchange for a flat fee of $60,000. More specifically, the retention agreement provided as follows:

The Flat Fee will cover the value of all work we will perform through the conclusion of the Adversary Proceeding. The Flat Fee will be paid by you directly to us, and will be deposited in our business account. The Flat Fee is not an advance against any hourly rate, and the Flat Fee will not be billed against an hourly rate. You agree that the Flat Fee becomes the property of our firm upon receipt, and will be deposited into our business account.

Nondischargeability Retention Letter (Nov. 5, 2014) at p. 2.

Several days before he filed his bankruptcy petition, Boates signed the retainer agreement and paid the $60,000 to Schian Walker, and Schian Walker immediately deposited the $60,000 into its general business account.²

Boates filed his bankruptcy petition on November 17, 2014, and the bank commenced its nondischargeability adversary proceeding four days later on November 21, 2014. Roughly one month later, in December 2014, Ulrich was appointed as successor chapter 7 trustee.

Several months later, in May 2015, Ulrich filed a complaint against Schian Walker for declaratory relief and for a monetary judgment of $60,000. Ulrich's complaint in large part was founded on Gordon v. Hines (In re Hines), 147 F.3d 1185 (9th Cir.1998)

. Ulrich asserted that, based on In re Hines, the adversary proceeding retainer agreement was an executory contract, which had been rejected by operation of law under § 365(d)(1). Ulrich further asserted that he was entitled under In re Hines to claim from Schian Walker the full contract value of Schian Walker's legal services—$60,000—based on the rejection of the retainer agreement and based on his pre-litigation demand that Schian Walker pay him the $60,000. In support of this claim, Ulrich also alleged that Boates' prepaid right to legal services was property of the estate under § 541.

As an alternate basis for recovering the $60,000, Ulrich alleged that the retainer agreement was unenforceable because it violated E.R. 1.5(d)(3)

of the Arizona Rules of Professional Conduct.³ Based on this Ethics Rule, Ulrich claimed that Schian Walker should have but failed to disclose in writing Boates' right to terminate Schian Walker's representation and to seek a refund depending on the actual value of the services Schian Walker provided.

According to Ulrich, under either theory of recovery, any services Schian Walker actually provided postpetition to Boates effectively were irrelevant in calculating the estate's entitlement to a refund of the $60,000 because, from and after the filing of the petition, the right to prepaid legal services belonged to the estate and not to Boates.

Schian Walker filed a motion for summary judgment, and Ulrich filed a cross-motion for summary judgment. In its summary judgment motion, Schian Walker pointed out that, under the terms of the retainer agreement and Arizona law, the $60,000 was not property of the debtor at the time of Boates' bankruptcy filing, so the $60,000 was not estate property under § 541. In addition, Schian Walker asserted that the Boates had substantially completed his required performance under the retainer agreement, so the agreement was not an executory contract covered by § 365. As for the alleged violation of E.R. 1.5(d)(3)

of the Arizona Rules of Professional Conduct, Schian Walker admitted the violation but posited that the statute violation did not justify rendering the retainer agreement unenforceable, especially given the undisputed facts demonstrating that Schian Walker gave Boates verbal notice of the rights referenced in Ethics Rule 1.5(d)(3) and that Boates—himself a practicing attorney—already knew and understood these rights.

Ulrich's arguments in his cross-motion for summary judgment mirrored those he made in his complaint.

At the hearing on the cross-motions for summary judgment, the bankruptcy court ruled in favor of Schian Walker and against Ulrich. In so ruling, the bankruptcy court adopted most of the positions Schian Walker had advocated. For instance, the bankruptcy court held that the retainer agreement was not an executory contract because Boates' payment of the $60,000 constituted substantial performance of his obligations under the retainer agreement. The bankruptcy court additionally held that Schian Walker's violation of Ethics Rule 1.5(d)(3)

was insufficient, by itself, to render the retainer agreement unenforceable. But the bankruptcy court went beyond Schian Walker's advocated positions. The bankruptcy court ruled that In re Hines was distinguishable because the retainer at issue in In re Hines was not a flat fee advance payment retainer fully prepaid before the bankruptcy was filed. The bankruptcy court acknowledged In re Hines's statements regarding the appropriate treatment in bankruptcy of flat-fee, advance-payment retainers, fully prepaid before the bankruptcy is filed. However, according to the bankruptcy court, these statements were dicta.

On August 14, 2015, the bankruptcy court entered judgment dismissing the adversary proceeding, and Ulrich timely filed a notice of appeal.

JURISDICTION

The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334

and 157(b)(2)(A) and (O). We have jurisdiction under 28 U.S.C. § 158.

ISSUE

Did the bankruptcy court err when it granted summary judgment in favor of Schian Walker and against Ulrich?

STANDARDS OF REVIEW

We review de novo the bankruptcy court's summary judgment rulings. Ilko v. Cal. St. Bd. of Equalization (In re Ilko), 651 F.3d 1049, 1052 (9th Cir.2011)

. When we review a ruling de novo, we give no deference to the bankruptcy court's decision. Univ. of Washington Med. Ctr. v. Sebelius, 634 F.3d 1029, 1033 (9th Cir.2011).

In determining whether to uphold the bankruptcy court's summary judgment rulings, we apply the same summary judgment standards as do all other federal courts. Marciano v. Fahs (In re Marciano), 459 B.R. 27, 35 (9th Cir. BAP 2011)

, aff'd, 708 F.3d 1123 (9th Cir.2013). Summary judgment is properly granted when no genuine issues of disputed material fact remain, and, when viewing the evidence most favorably to the non-moving party, the movant is entitled to prevail as a matter of law. Civil Rule 56 (made applicable in adversary proceedings by Rule 7056); Celotex Corp. v. Catrett, 477 U.S. 317, 322–23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). For purposes of ruling on summary judgment motions, a factual issue is considered material if it could affect the outcome of the...