Western Real Estate Fund, Inc., In re

• Decision Date: 28 December 1990
• Docket Number: PROPERTIES-I,P,No. 89-6277,89-6277
• Court: U.S. Court of Appeals — Tenth Circuit
• Parties: 24 Collier Bankr.Cas.2d 1012, 21 Bankr.Ct.Dec. 320, Bankr. L. Rep. P 73,754 In re WESTERN REAL ESTATE FUND, INC., et al., Debtors. LANDSING DIVERSIFIEDlaintiff-Appellee, v. The FIRST NATIONAL BANK AND TRUST COMPANY OF TULSA, Defendant-Appellee, v. Kevin M. ABEL; Abel & Busch, Inc., Third-Party-Defendants-Appellants.

Page 592

922 F.2d 592

24 Collier Bankr.Cas.2d 1012, 21 Bankr.Ct.Dec. 320,

Bankr. L. Rep. P 73,754

In re WESTERN REAL ESTATE FUND, INC., et al., Debtors.

LANDSING DIVERSIFIED PROPERTIES-II, Plaintiff-Appellee, v. The FIRST NATIONAL BANK AND TRUST COMPANY OF TULSA, Defendant-Appellee, v. Kevin M. ABEL; Abel & Busch, Inc., Third-Party-Defendants-Appellants.

No. 89-6277.

United States Court of Appeals Tenth Circuit.

Dec. 28, 1990.

Rehearing Denied Jan. 23, 1991.

L. Gene Gist (Tim D. DeGiusti with him, on the brief), Andrews, Davis, Legg, Bixler, Milsten & Price, Oklahoma City, Okl., for plaintiff-appellee Landsing Diversified Properties-II.

Burk E. Bishop (Lance Stockwell and Emily Y. Duensling with him, on the brief), Boesche, McDermott & Eskridge, Tulsa, Okl., for defendant-appellee First Nat. Bank & Trust Co. of Tulsa.

Steven R. Hickman (James E. Frasier, on the brief), Frasier & Frasier, Tulsa, Okl., for third-party defendants-appellants.

Before BALDOCK, BARRETT and EBEL, Circuit Judges.

PER CURIAM.

Third-party defendants Kevin M. Abel and Abel & Busch, Inc. (Abel) appeal from an order of the United States District Court for the Western District of Oklahoma affirming a decision of the bankruptcy court that (1) approved in limited amount Abel's proof of claim for attorney's fees due in connection with services rendered under a pre-petition contract with plaintiff Landsing Diversified Properties, II (LDP), his former client, and (2) enjoined Abel from collecting the remainder of the claimed fee from a third party in state court under Oklahoma's attorney's lien provisions, Okla.Stat. tit. 5, Secs. 6-9 (West 1984).

The origins of this case reach back to late 1983 and 1984, when two transformers maintained by Public Service Company of Oklahoma (PSO) exploded, causing substantial damage to an LDP facility. LDP retained Abel to pursue litigation against PSO. The retainer agreement provided for a hybrid form of compensation, consisting of a reduced hourly fee supplemented with a reduced contingency fee. In December of 1984, Abel filed suit for LDP against PSO and, eventually, obtained a settlement offer of $3 million. In the meantime, Abel secured his contract fee by filing an attorney's lien under state law.

In September of 1986, LDP petitioned for bankruptcy under Chapter 11. Several months later, LDP filed an adversary proceeding against First National Bank and Trust Company of Tulsa ^B, which held a mortgage on the damaged LDP property, to determine the relative priority of their rights in any potential settlement of the suit against PSO. Abel was subsequently brought into the proceeding as a third-party defendant to resolve what rights, if any, he would have in PSO settlement proceeds, and his outstanding proof of claim against LDP for attorney's fees was consolidated as well.

Following a hearing on March 20, 1986, the bankruptcy court made several preliminary determinations regarding the existence and nature of Abel's attorney's lien and associated fees claim against LDP. First, the bankruptcy court held that the lien survived the filing of LDP's Chapter 11 petition and would also remain intact should LDP formally reject its pre-petition retainer agreement with Abel under 11 U.S.C. Sec. 365 (assumption and rejection of executory contracts). The court denied LDP's objection to Abel's claim for hourly fees under the agreement for both pre- and post-petition work, reserving calculations for a later time. The court further held that in the event the retainer agreement was affirmed by LDP, Abel would also be entitled to recover a share of any PSO settlement under the retainer's (contingency fee) terms, subject only to objections regarding excessiveness under 11 U.S.C. Sec. 502(b)(4). Finally, however, the court held that should LDP reject the retainer agreement, Abel's recovery, if any, in this regard would be determined (i.e., limited) by quantum meruit principles. Shortly thereafter, LDP rejected the retainer agreement and discharged Abel.

In October of 1987, the PSO litigation settled. PSO paid LDP and FNB a sum in excess of its previous offer, unreduced by any fee owing to Abel. In return, LDP and FNB agreed to indemnify PSO should it be held liable to Abel for ignoring his attorney's lien. Abel has since filed suit against PSO in state court pursuant to Okla.Stat. tit. 5, Secs. 6-9, to recover whatever portion of his fee remains unsatisfied in this Chapter 11 proceeding. The injunction issued against Abel with respect to this ancillary state court action will be taken up following our review of the disposition of Abel's claim for fees against LDP.

The bankruptcy court's final order in this matter was entered on August 24, 1988. The court basically adhered to the analysis indicated in its preliminary rulings, approving some remaining hourly fees sought by Abel but rejecting his contingency fee claim to twenty-five percent of either the $3-million settlement offer he had obtained from PSO or the actual value of the settlement ultimately reached. The latter claim was essentially treated instead as a request for an enhancement over the (reduced) hourly fee already approved. The court considered the lodestar figure reasonable compensation for the services rendered and, accordingly, deemed enhancement inappropriate. On appeal, the district court concurred in the bankruptcy court's determination of Abel's claim and affirmed. Because, as explained in detail below, the analytical process followed by the bankruptcy court contravened the controlling statutory provisions, we reverse.

Underlying the bankruptcy court's approach is the premise that the contingency portion of Abel's pre-petition fee contract did not survive rejection of the contract by LDP, leaving Abel nothing to stand on in this regard except equitable principles. But the legal rights and obligations created by the various provisions of a contract cannot simply be ignored upon rejection by the trustee of any remaining executory portion. On the contrary, under 11 U.S.C. Sec. 365(g), the rejection of an executory contract "constitutes a breach of that contract" (emphasis added), for which damages ordinarily allowed in contract are available. See International Bhd. of Teamsters, Chauffeurs, Warehousemen & Helpers v. IML Freight, Inc., 789 F.2d 1460, 1463 (10th Cir.1986); Leasing Serv. Corp. v. First Tenn. Bank Nat'l Ass'n, 826 F.2d 434, 436 (6th Cir.1987); In re Cochise College Park, Inc., 703 F.2d 1339, 1351-53 (9th Cir.1983); In re Murphy, 694 F.2d 172, 174 (8th Cir.1982). Since a pre-petition contingency fee agreement between the debtor and an attorney is, with one exception to be discussed shortly, "like any other contract claim against the estate," In re Yermakov, 718 F.2d 1465, 1470 (9th Cir.1983), Abel was legally entitled to full contract damages rather than the court's discretionary award of an equitable fee.

The source of allowable contract damages in this context, as in bankruptcy in general, is state law. See, e.g., In re Pacific Far E. Line, Inc., 654 F.2d 664, 668-70 (9th Cir.1981); see also In re Community Medical Center, 623 F.2d 864, 866 (3d Cir.1980). See generally In re James E. O'Connell Co., 799 F.2d 1258, 1260-61 (9th Cir.1986). In Oklahoma, contingency fee contracts of fifty percent or less are valid and enforceable. See Okla.Stat. tit. 5, Sec. 7; see, e.g., State ex rel. Howard v. Oklahoma Corp. Comm'n, 614 P.2d 45, 49 n. 5 (Okla.1980); Town of Mannford v. Watson, 394 P.2d 506, 509 (Okla.1964). More to the point, when a client circumvents such an agreement by settling litigation in a manner excluding counsel's participation, counsel may still recover his contractual contingency fee. See, e.g., Walker v. Telex Corp., 583 P.2d 482, 484, 485 (Okla.1978); Mayor v. Wilkerson, 188 Okl. 600, 111 P.2d 1069, 1070-72 (1941); Mathews v. Smith, 169 Okl. 518, 39 P.2d 48, 49, 53 (1934); Callahan v. Cowley & Riddle, 117 Okl. 58, 245 P. 48, 50 (1926). Indeed, as Abel has pointed out, even where circumstances beyond the client's control (counsel's death) precluded counsel's participation in the conclusion of settlement, contingency fee compensation was awarded, as the reasonable value of counsel's services, in City of Barnsdall v. Curnutt, 198 Okl. 3, 174 P.2d 596, 600 (1945).

Considerable additional authority for Oklahoma's recognition of contingency fee damages in this context is supplied by appellees. They cite White v. American Law Book Co., 106 Okl. 166, 233 P. 426 (1924), as the source of Oklahoma's rule that an attorney discharged without fault by a client prior to final resolution of the subject matter of their relationship is entitled to his bargained-for compensation, "even though the agreement was for a contingency fee, provided the contingency has taken place." Id., 233 P. at 427. Appellees consider this proposition favorable to them because they misread the final conditional phrase as "provided the contingency ha[d ] taken place [prior to the discharge ]." But if the contingency must necessarily have occurred prior to the discharge for this particular rule to apply, the rule would be utterly superfluous--ordinary principles of contractual obligation would entitle the fully performing attorney to his fee. Moreover, the very case cited by White for the quoted proposition, Dolph v. Speckart, 186 P. 32 (Ore.1920), specifically held that an attorney who procured a settlement offer (rejected by the client), and who was fired before the client obtained a favorable judgment with the assistance of other counsel, was nevertheless entitled to a contingency fee. Id. at 35. The same is true of Bartlett v. Odd Fellows' Sav. Bank, 79 Cal. 218, 21 P. 743, 744 (1889), one of the "cases cited therein [in Dolph ]" derivatively relied upon by White. See White, 233 P. at 427. Furthermore, despite appellees' attempt to distinguish the similar holding of Okmulgee Bldg. & Loan Ass'n v. Cutler, 174 Okl. 614, 51 P.2d 709 (1935), on the basis of...