Opinion
NOT FOR PUBLICATION
Argued and Submitted at San Francisco, California: September 17, 2008
Appeal from the United States Bankruptcy Court for the Northern District of California. Bk. No. 06-30387, Adv. No. 06-03180. Honorable Thomas E. Carlson, Bankruptcy Judge, Presiding.
Before: TAYLOR, [ DUNN, JURY, Bankruptcy Judges.
Hon. Laura S. Taylor, Judge of the U.S. Bankruptcy Court for the Southern District of California, sitting by designation.
MEMORANDUM
The chapter 7 trustee in the bankruptcy case of Maria O. Segovia (" Debtor") filed this adversary proceeding to avoid alleged preferential transfers. Two of the defendants filed cross-complaints against each other. This is an appeal from the judgment entered by the bankruptcy court after a three-day trial on the cross-complaints. The appellant, Victor Segovia (" Segovia"), appeals pro se the bankruptcy court's judgment: (1) denying in its entirety Segovia's objection to appellee Bach Construction, Inc.'s (" BCI") claim based on its state court judgment; and (2) sustaining, in part, BCI's objection to Segovia's secured claim for prepetition services as attorney for Debtor and others in the state court litigation with BCI (the " State Court Action").
Although Segovia represented himself at trial and appeals pro se, he is an attorney licensed in California and the claim at issue is his attorney's fees claim in connection with his prepetition representation of the Debtor, and others, in the State Court Action.
The bankruptcy court dismissed Segovia's cross-claim against BCI, summarily overruling Segovia's objection to BCI's claim because BCI's claim arose from a final state court judgment. Segovia contends that the bankruptcy court erred by applying the Rooker-Feldman doctrine so as to bar consideration of the merits of his objection to the BCI claim.
As to BCI's cross-complaint, the bankruptcy court found unreasonable Segovia's claim for $726,000 in prepetition attorney's fees. The bankruptcy court allowed the claim in the reduced amount of $50,000, pursuant to section 502(b)(4) of the Bankruptcy Code, and did not grant it secured status because the bankruptcy court found that the " voluntary attorney's lien" recorded against Debtor's real property (" Property") was unenforceable under California law.
The total claim was filed in the amount of $820,830, which included interest at 10%.
Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. § § 101-1532, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.
Segovia contends that the bankruptcy court erred in its application of federal law to his state-law contractual attorney's fee claim and in its factual conclusion as to reasonableness. He further contends that it misinterpreted and misapplied Rule 3-300 of the California Rules of Professional Conduct to invalidate his lien. On appeal, Segovia also now accuses the bankruptcy court of violating his constitutional rights to due process, equal protection, freedom from forced labor, and freedom of association.
Segovia also accuses the bankruptcy court of discriminating against him, apparently based on ethnicity, but does not include this allegation among his grounds for reversal.
After careful consideration of the parties' briefs, conscientious review of the record that has been provided, and independent analysis and application of the law, we discern no reversible error. Accordingly, we affirm.
This Memorandum necessarily relies on the facts set forth in the Memorandum Decision of the bankruptcy court filed March 20, 2008, published at 387 B.R. 773.
In early 2000, approximately six years before filing her voluntary chapter 7 petition, Debtor entered into a written contract (" Remodel Contract") with BCI providing for a remodel of residential real property she owned jointly with her mother (" Olga") and her sister (" Patricia"). The Remodel Contract contained an attorney's fee provision providing that the prevailing party in litigation thereunder shall be entitled to reasonable attorney's fees and expenses. BCI performed work under the Remodel Contract to Debtor's complete satisfaction, and the Debtor paid BCI as agreed.
Shortly thereafter (spring 2001), Debtor and BCI entered into an oral contract to remodel another residential property owned by Debtor with Olga and Patricia. The work on this project progressed throughout 2001 and most of 2002 without any dispute as to BCI's bills or work. Problems arose, however, in November of 2002 when Debtor was unable to refinance existing obligations secured by the Property.
The properties may have been contiguous, but it is not clear from the Record. The term " Property" herein refers to both properties jointly.
Debtor began to question certain costs that exceeded BCI's original estimates. BCI responded and promptly agreed to prepare a list of the additional work as Debtor had requested. Despite BCI's efforts, Debtor continued to question BCI about a limited portion of the charges for the second remodel. Notwithstanding, and although Debtor was behind in payments, BCI did not stop work or charge interest or late payments on the outstanding invoices at that time.
BCI issued invoices showing outstanding amounts due twice in 2003. The first invoice, issued in March, showed the amount due as $15,613, BCI having waived $6,123 in normal charges for labor, profit, and overhead. The second invoice, issued in November, showed $24,425 as the principal amount owed. This amount included additional fees for outside subcontractors plus a 20% charge for overhead and profit. The second invoice also requested payment of $25,011 in accrued interest. Debtor did not pay either the March or November invoice.
Instead, in December 2003, Debtor, Olga, and Patricia, retained Segovia, Debtor's brother and a licensed attorney, to represent them in their dispute with BCI pursuant to a written fee agreement (" Fee Agreement"). The Fee Agreement contained the following provision:
Clients grant Attorney a lien on all their claims and causes of action that are the subject of the representation of Clients under this Agreement, on all proceeds of any recovery obtained (whether by settlement, arbitration award, or court judgment) and on all real property for attorney's fees and costs advanced. . . . If there is no settlement or no recovery or the recovery is insufficient to reimburse Attorney in full for outstanding attorneys [sic] fees earned and costs advanced, Clients grant Attorney permission to file a notice of lien upon their real property in substantially the same form as shown in Attachment 2.
The Fee Agreement informed the Debtor, Olga and Patricia of the right to seek independent counsel for advice regarding the Fee Agreement, and waiver of same. It is not clear whether Attachment 2 was attached to the Fee Agreement.
Upon retention, Segovia immediately wrote to BCI's counsel disputing the March and November invoices. BCI's counsel responded with two written settlement offers, one agreeing to settle for the principal amount of $24,425 and a second offering a reduced settlement of $21,425. BCI gave Debtor notice that absent immediate resolution it would file, and then submitted the matter for arbitration.
Segovia challenged arbitration by letter dated February 16, 2004 and, without advance notice, filed a complaint the following day and initiated the State Court Action. The first amended complaint filed by Segovia nine days later sought recovery of $973,000 (the total amount paid for remodeling the Property) based on nine claims consisting of fraud, reformation-of-contract, violations of Bus. & Prof. Code § 7159, breach of the covenants of good faith and fair dealing, negligence, and unspecified common counts. BCI filed a cross-complaint seeking to recover the amount owing under the November invoice.
Almost two years later, in September and October of 2005, the State Court Action went to trial before a jury. The jury returned a verdict against Debtor, Olga, and Patricia on all claims (except 17200, which was to be tried to the court); and an award of $15,189 to BCI for the reasonable value of its services. The final judgment entered in favor of BCI in early 2006 included 10% post-judgment interest and attorneys' fees and costs in a final stipulated amount of $511,076. BCI recorded an abstract of judgment on March 8, 2006.
Segovia had filed two summary judgment motions that were denied in toto.
The state court denied the 17200 claim after hearing held in January 2006.
Meanwhile, on December 16, 2005, Debtor, Olga, and Patricia signed a form entitled California Voluntary Attorney's Lien (the " Lien"), specifying fees to be secured in the amount of $726,000. Segovia recorded the Lien against the Property the same day.
On May 17, 2006 (less than 90 days after BCI filed its abstract and less than 1 year after Segovia recorded the Lien), Debtor filed her chapter 7 petition. Thereafter, Segovia filed a secured claim seeking recovery of $820,830 for legal services he provided to Debtor commencing on December 1, 2003. BCI also filed a claim seeking recovery of its judgment in the State Court Action. Eventually, the chapter 7 trustee sold the Property for $2,240,000 free and clear of liens, including those asserted by BCI and Segovia, and then filed the subject adversary proceeding against BCI, Segovia, and Wells Fargo Bank seeking to avoid liens filed prepetition against the Property within the relevant preference periods.
Olga and Patricia likewise each filed chapter 7 petitions.
The applicable preference periods are 90 days for BCI and Wells Fargo Bank, but one year for Segovia based on his status as an insider.
In BCI's answer in the adversary proceeding, BCI asserted a cross-claim against Segovia seeking to have Segovia's claim disallowed or reduced on multiple grounds. First, BCI sought disallowance under section 502(b)(1) on the basis that the Lien was unenforceable under state law as Segovia failed to comply with applicable state law and California State Bar requirements for written fee agreements and disclosures. BCI then raised objections under section 502(b)(4) asserting that Segovia's fee request was overstated, over-billed, and grossly exceeded the reasonable value of the services provided. Finally, BCI sought equitable subordination of Segovia's claim under section 510(c)(1) on the grounds that the claim and the Lien, in particular, had been filed solely and improperly to reduce BCI's recovery on its judgment-based claim.
The cross-complaint initially sought total disallowance of the claim under state law theories, but the arguments finally advanced under state law theories ultimately took issue only with the Lien and the claim's secured status.
BCI also sought declaratory relief, but this cause of action was dismissed prior to trial. The bankruptcy court held that the section 510(c)(1) claim was rendered moot because the court's allowance of Segovia's claim in the amount of $50,000 leaves the estate solvent.
Segovia answered BCI's cross-complaint and filed his own cross-complaint objecting to BCI's claim, first as unenforceable under state law pursuant to section 502(b)(1) on the grounds that BCI had violated the California Unfair Practices Act and section 7159, et seq. of the California Business and Professions Code in connection with the Remodel Contract, and second, pursuant to section 502(b)(4), alleging that the fee recovery portion of BCI's claim exceeded the reasonable value for the services.
Trial on BCI's and Segovia's cross-claims was held before the bankruptcy court on December 3-5, 2007, and the bankruptcy court issued its Memorandum Decision and separate Judgment on the Cross-Complaints and Rule 54(b) Certification on March 20, 2008. Segovia timely appealed.
JURISDICTION
The bankruptcy court had jurisdiction under 28 U.S.C. § § 1334 and 157(b)(2)(O). The judgment was entered on all the claims in the two cross-complaints, but less than all the claims in the adversary proceeding. Ordinarily, an appeal from such a judgment could be considered interlocutory. In this case, however, the bankruptcy court certified that the judgment was final pursuant to Rule 7054 (incorporating Federal Rule of Civil Procedure (" FRCP") 54(b)). In actions involving multiple claims or multiple parties, FRCP 54(b) permits a court to direct entry of a final judgment as to one or more (but fewer than all) of the claims or parties, but " only if the court expressly determines there is no just reason for delay." FRCP 54(b).
The bankruptcy court appropriately certified the judgment on the cross-complaints filed by BCI and Segovia as final as the judgment fully and finally disposed of BCI's objection to Segovia's claim and Segovia's objection to BCI's claim. The legal and factual issues raised in conjunction with these parties' objections to each other's claim are different from those related to the trustee's avoidance and recovery of preferential transfers. Because the judgment underlying Segovia's appeal is final, we have jurisdiction pursuant to 28 U.S.C. § 158.
ISSUES
1. Whether the bankruptcy court abused its discretion in disallowing as unreasonable all but $50,000 of Segovia's claim for prepetition attorney's fees for services provided to Debtor in the State Court Action.
2. Whether the bankruptcy court erred by finding the Lien to be unenforceable under state law.
3. Whether the bankruptcy court violated Segovia's constitutional rights by disallowing all but $50,000 of Segovia's claim for prepetition attorney's fees and/or by disallowing the Lien.
4. Whether the bankruptcy court erred by declining to review alleged state law defenses to BCI's judgment-based claim and/or the reasonableness of the attorney's fees awarded to BCI as prevailing party, all of which had been fully litigated by the Debtor in the State Court Action.
STANDARDS OF REVIEW
We review " the bankruptcy court's conclusions of law and questions of statutory interpretation de novo, and factual findings for clear error." Clear Channel Outdoor, Inc. v. Knupfer (In re PW, LLC), 391 B.R. 25, 32 (9th Cir. BAP 2008), quoting Village Nurseries v. Gould (In re Baldwin Builders), 232 B.R. 406, 410 (9th Cir. BAP 1999) (citations omitted). " A court abuses its discretion if it does not apply the correct law or if it rests its decision on a clearly erroneous finding of material fact." Ho v. Dowell (In re Ho), 274 B.R. 867, 871 (9th Cir. BAP 2002) (citing United States v. Sprague, 135 F.3d 1301, 1304 (9th Cir. 1998). A factual determination is clearly erroneous if the appellate court, after reviewing the record, has a definite and firm conviction that a mistake has been committed. Anderson v. Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985). We review the application of the Rooker-Feldman doctrine de novo. Carmona v. Carmona, 544 F.3d 988, (9th Cir.).
We were unable to locate a reported decision that specifically addresses the standard of review for an order disallowing as unreasonable claims for prepetition attorneys fees/insider payments under 11 U.S.C. § 502(b)(4). We have no reason, however, to believe the standard of review should be anything other than abuse of discretion.
DISCUSSION
I. State of the Record and Procedures
We first address the problematic state of the record in this appeal. Segovia provided only a partial transcript of the trial proceedings below, consisting of twenty pages of testimony of his sister, Patricia. Thus, Segovia failed to provide sufficient trial transcripts to enable precise review of all testimony and argument. Similarly, he did not submit as part of the record on appeal the exhibits admitted at trial. An appellant has the burden of providing an adequate record. See Drysdale v. Educ. Credit Mgmt. Corp. (In re Drysdale), 248 B.R. 386, 388 (9th Cir. BAP 2000). This requirement is mandatory and failure to comply may result in dismissal or in the appellate panel simply looking " for any plausible basis upon which the bankruptcy court might have exercised its discretion to do what it did." McCarthy v. Prince (In re McCarthy), 230 B.R. 414, 417 (9th Cir. BAP 1999).
Appellate procedures before this Panel are set forth in Part VIII of the Federal Rules of Bankruptcy Procedure and the Ninth Circuit BAP Rules of Procedure. Segovia, a licensed attorney representing himself, not only failed to provide an adequate record of the trial, he has also failed to fully adhere to the briefing and format requirements. Segovia failed to include a table of contents in Appellant's Reply Brief and has included a significant portion of his brief in single-spacing. Fed.R.Bankr.P. 8010; 9th Cir. BAP R. 8010(a)-1.
The Excerpts of Record are contained in 8 volumes totaling 762 pages, without benefit of tabs (failing to comply with 9th Cir. BAP R. 8009(b)-1), and include pleadings unrelated to the claim objections tried by the bankruptcy court. As identified in Appellee's Brief, Segovia included in the record two deposition transcripts not included in the designation of the record. It is not possible for the Panel to determine if any of the deposition testimony was used in the trial based on the partial transcript in the record, and therefore, the Panel has not reviewed the deposition transcripts in connection with this appeal. Segovia's cavalier offer in an addendum to the Reply Brief to allow the appellee additional time to augment the record and provide the full transcript of the trial (at appellee's expense), does not negate the fact that he has failed to meet his burden.
Here, we have conscientiously reviewed the record that has been provided and, as discussed below in connection with the issues, cannot say that the trial court's careful and detailed findings of fact were clearly erroneous. We do not have a definite and firm conviction that a mistake has been committed with regard to factual findings. Hence, we perceive no clear error on the record before us.
II. Reasonableness of Prepetition Attorney's Fees.
A. The Bankruptcy Court Applied the Correct Law.
Segovia seeks allowance of his proof of claim in the full filed amount and enforcement of an alleged contractual right under state law to full compensation under the Fee Agreement. There is a general presumption that: " claims enforceable under applicable state law will be allowed in bankruptcy unless they are expressly disallowed." Travelers Casualty & Surety Co. v. Pacific Gas & Elec. Co., 549 U.S. 443, 452, 127 S.Ct. 1199, 1206, 167 L.Ed.2d 178 (2007). However, while state law governs Segovia's rights under his contract with the Debtor, bankruptcy law governs the allowance of Segovia's claim against the Debtor's estate. See Butner v. United States, 440 U.S. 48, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). The bankruptcy court did not err by finding that Segovia's claim for his services, both as an insider and attorney of the Debtor, falls squarely under section 502(b)(4) of the Bankruptcy Code and that the claim may be disallowed to the extent it exceeds the reasonable value of such services. Travelers Casualty & Surety, 127 S.Ct. at 1206 (section 502(b)(4) " expressly disallows claims for a particular category of attorney's fees-those 'for services of an . . . attorney of the debtor, ' to the extent the claimed fees 'excee[d] the reasonable value of such services'"). Section 502(b)(4): " . . . was designed to 'prevent[] overreaching by the debtor's attorneys and [the] concealing of assets by debtors.'" Joseph F. Sanson Investment Co. v. 268 Limited (In re 268 Limited), 789 F.2d 674, 677 (9th Cir. 1986) (citation omitted).
Here, the bankruptcy court acknowledged Segovia's contractual right to attorney's fees under the Fee Agreement, but then, as is appropriate, analyzed the reasonableness of the attorney's fees under section 502(b)(4). The bankruptcy court did not commit error by conducting the section 502(b)(4) review expressly mandated by the Bankruptcy Code.
The bankruptcy court's analysis started with Segovia's proof of claim, implicitly acknowledging its prima facie validity under section 501, and then proceeded immediately to review reasonableness under section 502(b)(4).
B. The Bankruptcy Court Properly Analyzed the Reasonableness of Segovia's Fees.
Appellant takes issue with the bankruptcy court's alleged lack of attention to his " accounting of his labor", and seeks reversal of the bankruptcy court's holding that only $50,000 of his attorney's fee claim is reasonable. He argues that the full amount of his fees must be allowed, because the bankruptcy court failed to make factual findings that Segovia's fees exceeded the value of such services, that charges were overstated or overbilled, or that charges were made for work not performed, and improperly relied on legal authority outside section 502(b)(4) cases.
Appellant's Opening Brief 15.
The reasonableness of attorney's fees under section 502(b)(4) is a question of federal law. Landsing Diversified Properties-II v. First Nat'l Bank & Trust Co. of Tulsa (In re Western Real Estate Fund, Inc.), 922 F.2d 592, 597 (10th Cir. 1991). " [A]ppellate courts generally defer to fee determinations by the bankruptcy court. . . " Id . at 598 (citations omitted). Bankruptcy courts have wide discretion in making the determination of reasonableness of fees, and the appellate court will not overturn the bankruptcy court's decision unless the lower court abused its discretion. Eliapo v. Devin Derham-Burk (In re Eliapo), 468 F.3d 592, 596 (9th Cir. 2006). Based on the record here, we find no abuse of the bankruptcy court's discretion in its reduction of Segovia's claim to $50,000.
Contrary to Segovia's contention, the bankruptcy court found that Segovia's fees exceeded the value of the services. In the Memorandum Decision, the bankruptcy court clearly set forth its review of the State Court Action, including analysis of whether Segovia exercised appropriate billing judgment. This review included careful analysis of the reasonably expected level of recovery in the State Court Action, which included a detailed analysis of the claims litigated and a careful comparison of the likelihood of success and the risk of loss. Based on an analysis that was thorough and detailed, the bankruptcy court concluded that Segovia's clients had a " reasonable possibility of recovering less than $150,000." Segovia, 387 B.R. at 782 (emphasis in original). As a result, it then found that the $726,000 fee sought by Segovia " is grossly disproportionate to the amount realistically at stake in the litigation." Id . The bankruptcy court then proceeded to calculate a reasonable fee without use of the lodestar method. In doing so, the Court clearly stated the facts and circumstances on which it relied.
(Cal.App. 6th Dist. 2002). In Appellant's Opening Brief, Segovia criticized the bankruptcy court for its reliance on this unpublished decision. Tersol, however, was the only written decision the bankruptcy court could find that addressed " whether a violation of section 7159 was an unfair business practice under section 17200 " [as claimed in the State Court Action]. Segovia, 387 B.R. at 781 n. 19. Ironically, review of the Tersol unpublished opinion was entirely in Segovia's favor as it enabled the bankruptcy court's determination that Segovia's clients had at least a colorable claim in the State Court Action. Segovia, thus failing to recognize a gift when given, fails to recognize that: (1) the bankruptcy court " relies" on this decision only in the sense that it exists and, therefor, that Segovia might have reasonably felt he had a chance for a similar recovery; and (2) that if the bankruptcy court ignored this unpublished decision, the range of possible recovery diminishes and with this diminution the level of fees awarded might decline as well. In reaching this conclusion, the bankruptcy court relied on an unpublished state court decision that the bankruptcy court felt provides some limited justification for this level of recovery. Mallery-Feiner Co. v. Tersol,
These facts included that: (1) Segovia had reason to know that his clients might lose and be required to pay BCI's fees; (2) Segovia has already been reimbursed by his clients for $150,000 costs; and (3) Segovia's clients ended up owing BCI $526,625 when BCI had earlier offered to accept $21,425 in full satisfaction.
Segovia does not attempt to cite to specific error in the bankruptcy court's findings, but, instead, contends that the bankruptcy court improperly relied on case law determining the reasonableness of fees under other bankruptcy code sections and other federal law. We cannot assign error to the bankruptcy court's review of and reliance on published decisions by courts that considered the reasonableness of attorney's fees under sections 330 and 506 of the Bankruptcy Code, especially in light of the relative paucity of published opinions considering section 502(b)(4) reasonableness. In looking to such decisions, the bankruptcy court aptly followed one of the basic canons of statutory construction: " words and phrases in the Bankruptcy Code should presumptively receive the same construction, even if found in different parts of the code." PW, LLC, 391 B.R. at 28. The bankruptcy court, thus, reasonably assumed that a determination of the " reasonable" value for services of an attorney under section 502(b)(4), has the same meaning as " reasonable" compensation under section 330 and " reasonable" fees under section 506(b).
The bankruptcy court conducted a " close examination" of Segovia's billing judgment as an important component of the analysis. Segovia, 387 B.R. at 780. As discussed earlier, the court found that Segovia's clients had a reasonable possibility of recovering less than $150,000 and that Segovia's fee claim of $726,000 was grossly disproportionate. In light of the level of possible recovery we find no error in the bankruptcy court's allowance of $50,000, or one third of the highest possible recovery amount, as reasonable attorney's fees.
Segovia, in effect, contends that as long as the clients did not object to the amount of the attorney's fees, the amount was " unassailable." Appellant's Opening Brief 15-16. Thus, although he argues that the bankruptcy court used the incorrect legal standards when reviewing his fees, what he really wants is no review at all. The bankruptcy court acted in accordance with the correct law and within its discretion in disallowing Segovia's attorney's fees claim to the extent it exceeds the reasonable amount of $50,000. Because the bankruptcy court clearly articulated the well-reasoned basis for its decision, we find no error on this record.
III. Invalidation of the Lien.
Segovia also claims that the bankruptcy court erred when it found his lien invalid. This issue may be moot because we affirm the bankruptcy court's judgment allowing Segovia's claim in the reduced amount of $50,000, and the bankruptcy court found the estate to be solvent when Segovia's claim was reduced to this amount. Thus, Segovia may be paid in full whether or not his claim is secured, and the validity of his lien may be irrelevant. If that is the case, there is no longer a live controversy as regards the Lien. See PWC, LLC, 391 B.R. at 33 (federal courts are limited to adjudication of only " actual cases and live controversies").
Notwithstanding the strong possibility that this issue may be moot, we cannot make such a conclusion with certainty based on this limited record. As a result, we consider Segovia's claims of error with respect to disallowance of the Lien.
Segovia claims that the bankruptcy court erroneously found that Segovia's attorney's lien was executed in two separate stages two years apart and that it then erred as a matter of law by sustaining BCI's objection for non-compliance with California Rule of Professional Conduct 3-300.
" California recognizes the parties to an attorney retainer agreement can create a lien in favor of the attorney upon the proceeds of the client's prospective recovery in a lawsuit." Saltarelli & Steponovich v. Douglas, 40 Cal.App.4th 1, 7, 46 Cal.Rptr.2d 683 (1995). " When an attorney wishes to secure payment of hourly legal fees and costs of litigation by obtaining a charging lien against client's future recovery, . . . rule 3-300 of the Rules of Professional Conduct of the State Bar of California [], which requires the client's informed written consent to the attorney's acquisition of an interest adverse to the client, applies . . .." Fletcher v. Davis, 33 Cal.4th 61, 64, 14 Cal.Rptr.3d 58, 90 P.3d 1216 (2004) (emphasis in original). Rule 3-300 requires that an attorney who takes any lien in his client's property to secure payment of attorney's fees may only take the lien under the following circumstances:
(A) The transaction or acquisition and its terms are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner which should reasonably have been understood by the client;
(B) The client is advised in writing that the client may seek the advice of an independent lawyer of the client's choice and is given a reasonable opportunity to seek that advice; and
(C) The client thereafter consents in writing to the terms of the transaction or the terms of the acquisition.
Cal. R. Prof. Conduct 3-300.
Segovia argues that the Lien is a charging lien and that it was created and automatically effective as a secured claim against the Property as of December 2003 when Debtor executed the Fee Agreement and initialed certain waivers contained therein. He argues the document filed and recorded in December 2005 was merely a notice of lien, which was not required to be filed in order to validate the Lien under state law. He also argues that to the extent Rule 3-300 were applicable to the Lien, he had satisfied its requirements by specific disclosures and client waivers contained in the Fee Agreement. In particular, Segovia quotes the following text from the Fee Agreement:
Segovia improperly refers the Panel to certain deposition testimony of Patricia not included in the Designation of the Record to support his contention that his clients understood the effects of granting him a lien. The very limited portion of the trial transcript included in the record, Patricia's testimony, actually contradicts Segovia's contention.
Attorney advises you to seek other competent legal counsel with respect to the lien rights you are granting Attorney here. By initialing below you are acknowledging full and complete understanding that you grant Attorney by this Agreement a lien interest in your real property and you have received, or you waive seeking, other legal counsel concerning the lien interest you grant Attorney herein: [Initialed by all three clients.]
[Appellant's Opening Brief 31]
The bankruptcy court disagreed, finding that although the Fee Agreement informed Segovia's clients that they could obtain independent counsel at their own expense to advise them regarding the Fee Agreement, it was otherwise deficient.
It is unclear whether a blank attorney lien form was actually attached to the Fee Agreement that was submitted to the clients. There is no evidence that the attorney lien form was completed and signed by the clients before December 2005 (two years after execution of the Fee Agreement). It is also unclear how much time the clients were afforded to consult independent counsel between the time they were presented with the Fee Agreement and the time they signed that Agreement.
Segovia, 387 B.R. 773, 783 (Bankr. N.D. Cal. 2008).
On the record before us, there is no basis to question these findings, much less to find them clearly erroneous.
The bankruptcy court further found from evidence at trial that: the lien form signed by Debtor in December 2005 and recorded the same day does not inform her of the right to consult independent counsel; it was not clear to the bankruptcy court how much time Debtor was allowed to consult other counsel; Segovia did not explain the effect of recordation of the Lien on Debtor's ability to sell or borrow against the Property without getting consent or providing for payment of the Lien or that he could force a sale of the Property without Debtor's consent; and none of Segovia's clients actually obtained independent legal advice.
Based on the bankruptcy court's factual findings, it concluded first, that the Fee Agreement did not create an enforceable lien against the Property because it did not adequately describe the property to be encumbered, and second, that the Lien was unenforceable for failure to comply with the requirements of Rule 3-300, which requires full disclosure and that the transaction be fair and reasonable.
In Segovia's Reply Brief he argues that the bankruptcy court erred when it stated that the " asserted attorney lien is technically a mortgage, . . ." Segovia, 387 B.R. at 784. Based on the poor state of the record, we cannot know the full quantum of evidence on which the bankruptcy court based this statement. If the statement is error, it is harmless error. A mortgage conveys legal title, a charging lien does not - however we know from the Memorandum Decision that the bankruptcy court found that the attorney's lien is not a charging lien, and we found no case law to support Segovia's contention that a charging lien can be taken on any property other than litigation recovery or proceeds thereof. To the extent the bankruptcy court looked to the formal requirements necessary to create a mortgage lien as more relevant to the identification of the nature and validity of the Lien than the provisions governing charging liens, we cannot disagree. Regardless, as discussed herein, even if the Lien were assumed to be a charging lien, under California law it is void due to Segovia's failure to comply with the requirements of Rule 3-300.
Interpretation of a contract is a question of law, which we review de novo. In re Bennett, 298 F.3d 1059, 1064 (9th Cir. 2002); Litton Loan Servicing, LP v. Garvida (In re Garvida), 347 B.R. 697, 703 (9th Cir. BAP 2006). We concur with the bankruptcy court's evaluation of the Fee Agreement's inadequacies.
The Fee Agreement is ambiguous as to when the attorney's lien actually arises and what it covers. The quoted Fee Agreement provision purportedly granting Segovia a lien " on all real property, " followed by the conditional grant of permission to file a " notice of lien upon the real property, " is vague and ambiguous on its face. Absent any description of the real property, and in light of the ambiguity in the text, it is not possible to discern whether Segovia's clients understood and intended this to be an immediate grant or one conditioned upon the failure of adequate litigation recovery or other payment, or what real property was to be affected. Generally, contracts and instruments affecting real property should describe the property with reasonable certainty. Witkin, Summ. of Cal. Law, Real Property § 271 (10th ed. 2005). Moreover, it fails to disclose the consequences of such a blanket lien, including the possible inequity if one client owns or later obtains real estate not commonly owned. It is ambiguous as to Segovia's rights to proceed first against the real property and is unfair and unreasonable, as his characterization allows exactly this option. Further, it appears that formalities were otherwise not observed as discussed above. We find no error in the bankruptcy court's conclusions.
Segovia appears to argue now that the Lien was a charging lien against the Property because the Property was factually involved in the litigation. Therefore, the lien was automatically created and perfected by the terms of the Fee Agreement and the filed notice of the Lien was an unnecessary formality under California law. We can agree that the case law cited by Segovia might support his argument if the Lien were a lien on the recovery in the litigation. It is not. Segovia's attempt to bring it within the definition of a charging lien by identifying the Property as perhaps the subject of the litigation fails. Based on our review of the bankruptcy court's findings, such a characterization is not accurate. The State Court Action involved a dispute over BCI's performance of and charges for remodeling work at the Property. The ownership of the Property was never at issue in the State Court Action.
Due to Segovia's failure to provide the full trial transcripts in the record, we are unable to determine whether this argument was considered by the trial court.
Regardless of whether the bankruptcy court considered and dismissed this argument at trial, it is not necessary for this Panel to decide the issue of whether a purported lien right granted in a Fee Agreement on property other than a recovery in the litigation is legally a charging lien. Even if we were to assume so, because Segovia failed to fully comply with Rule 3-300, the Lien is unenforceable under California law. Fletcher v. Davis, 33 Cal.4th at 71-72 (attorney's charging lien not enforceable where the attorney fails to comply with rule 3-300).
The bankruptcy court found Segovia failed to make the disclosures required under Rule 3-300 and could not find Debtor had been given adequate opportunity to consult with independent counsel either in December 2003 or December 2005. Based on the record, we can find no error in fact or law, and we affirm the bankruptcy court's legal conclusion that the Lien is unenforceable against the estate.
IV. Constitutional Rights Not Violated.
Next, Segovia contends that the bankruptcy court violated several of his constitutional rights. Nothing in the record indicates that he raised any of these constitutional challenges at trial. To the extent the challenges should have been, but were not, raised during the trial, they are waived on appeal. See In re E.R. Fegert, Inc., 887 F.2d 955, 957 (9th Cir. 1989) (appellate courts will not consider arguments that are not properly raised in the trial courts). Nonetheless, we will briefly address Segovia's constitutional claims.
Generally, Segovia claims that the bankruptcy court violated his rights when it considered case authority that analyzed attorney's fee claims outside the context of section 502(b)(4), ruled on the invalidity of the Lien, and disallowed a portion of his claim.
The point heading for this section of Appellant's Opening Brief also refers to " imposition of new requirements" as violative of his constitutional rights. Appellant's Opening Brief 24. He does not further develop this argument within the section or elsewhere in his brief, and it is therefore not addressed here.
First, Segovia argues that his right to due process was violated, because he was not given notice that the bankruptcy court would base judgment on section 506 and that it would address the validity of his lien. Whether notice satisfies due process requirements involves questions of law that this Panel reviews de novo. Owens-Corning Fiberglas Corp. v. Center Wholesale, Inc. (In re Center Wholesale, Inc.), 759 F.2d 1440, 1445 (9th Cir. 1985); Alonso v. Summerville (In re Summerville), 361 B.R. 133, 139 (9th Cir. BAP 2007); Garner v. Shier (In re Garner), 246 B.R. 617, 619 (9th Cir. BAP 2000). Our review of the record does not support Segovia's argument.
The bankruptcy court did not base its judgment on section 506, and Segovia's statement of the issue is thus factually incorrect. Instead, the bankruptcy court reviewed analogous case law assessing the reasonableness of fees under section 506. As discussed above, such analysis was appropriate.
Further, the bankruptcy court properly considered the validity of the Lien. BCI objected to the allowance of Segovia's claim in its entirety. Such an objection necessarily encompassed a challenge to the Lien. Again, the record is incomplete, but even in its truncated state it evidences that challenges to the Lien were discussed before trial in at least two hearings held by the bankruptcy court, and it contains no evidence that Segovia sought to exclude this issue or to obtain additional time for discovery, preparation, or briefing in connection therewith. Thus, Segovia had appropriate notice that this issue would arise at a trial on the cross-complaint, the record does not indicate that Segovia raised any concerns regarding lack of notice at or before the trial, and his newly raised due process complaints must be disregarded.
The Excerpts of Record contain transcripts of a hearing on Segovia's Motion for Summary Judgment, held November 16, 2007, and regarding Motions in Limine, held November 30, 2007.
Second, Segovia contends that he was denied equal protection. Although difficult to follow, his argument appears to be that he was placed at a disadvantage in the bankruptcy case because the bankruptcy court ruled against him on several matters in the bankruptcy case and in the adversary proceeding. In Appellant's Reply Brief, Segovia appears to attribute discriminatory motivation to the bankruptcy court's consideration of his familial relationship with the Debtor, calling it " subterfuge hinged on race." Appellant's Reply Brief 9. He further states that the court improperly " exploit[ed] the biological relationship", and imputed Debtor's litigation decisions to Segovia. Appellant's Reply Brief 10. The record establishes that the bankruptcy court considered the familial relationship determinative of Segovia's insider status, status that is specifically defined in the Bankruptcy Code and that raises many issues to be given special attention in a bankruptcy case including those arising under section 502(b)(4). Nothing in the record, however, supports any equal protection clause argument in this case.
Specifically, he alleges that " [w]ere Segovia Black, Asian, or Caucasian no such witting 'confusion' could ever be made." Appellant's Reply Brief 10.
Third, Segovia apparently claims that the disallowance of any portion of the contractual attorney's fees claim is the equivalent of imposing involuntary servitude upon him and, thus, is prohibited under the Thirteenth Amendment and the California Constitution. Segovia bases his argument on the facts and law discussed in Cunningham v. Superior Court of Ventura County, 177 Cal.App.3d 336, 222 Cal.Rptr. 854 (1986), where the California Court of Appeal found that requiring an attorney to provide legal services without compensation through involuntary court appointment as counsel for the indigent denied the appointed attorney equal protection of the law.
In support of this argument, Segovia asserts that the bankruptcy court found that the Fee Agreement was in compliance with applicable state law and did not find any fault in Segovia's performance or billing records. Segovia's factual and legal arguments are not well supported by the record. The bankruptcy court implicitly found the Fee Agreement enforceable under state law, because its analysis of the allowability of the claim focused entirely on reasonableness of the fees. Thereafter, the bankruptcy court did not directly address Segovia's performance under that contract, but focused instead on billing judgment and other facts and circumstances arising in the State Court Action. Moreover, the bankruptcy court noted that Segovia did not have contemporaneous time records, which was an additional justification for not calculating the fee to be allowed on the basis of time spent. The record, therefore, does not support Segovia's assertions.
Segovia's citation to the record at ER v8:p705-61 refers to what appears to be reconstructed time records for the entire State Court Action. At oral argument before this Panel, Segovia did not agree that he lacked contemporaneous time records, stating that he had submitted them to the state court in connection with a motion therein seeking an award of the fees as prevailing party. He conceded, however, that BCI was determined to be the prevailing party in the State Court Action, not Debtor. It is not possible to determine from the partial transcript of the trial whether these time records were admitted into evidence at trial and, thus, they do not help this Panel in its review of the bankruptcy court's decision.
Nor is the bankruptcy court's decision an order to Segovia to perform legal services without compensation. The judgment is a determination of the debtor-creditor relationship, a matter that is a core proceeding in the bankruptcy case and as to which the bankruptcy court must apply relevant federal law. As discussed above, that law is set forth in section 502(b)(4) and we find no error in the bankruptcy court's application of that law.
Based on this record, we can assign no error to the bankruptcy court's findings of fact or conclusions of law with respect to Segovia's claim, and, further, we find no violation of constitutional rights in any of the bankruptcy court's rulings or actions.
Without any reasoned attempt to relate the argument to the decision of the bankruptcy court, Segovia also adds an argument entitled " Right of Freedom of Association." Appellant's Opening Brief 27. Segovia cites no legal authority nor facts in the record, but nonetheless apparently feels the bankruptcy court discriminated against him and/or his family members, perhaps based on ethnicity. As noted above, Segovia did not raise this issue as a basis for reversal on appeal.
V. Dismissal of Objection to BCI's Claim.
Segovia seeks reversal of the bankruptcy court's summary dismissal of his objection to BCI's claim. The bankruptcy court dismissed Segovia's cross-complaint " because that claim is based on a final state-court judgment in favor of BCI" and cites to Exxon Mobil Corp. v. Saudi Basic Industries Corp., 544 U.S. 280, 284, 125 S.Ct. 1517, 161 L.Ed.2d 454 (2005). Segovia, 387 B.R. at 779 n. 15. The Memorandum Decision contained minimal reference to the bankruptcy court's reasoning for its dismissal of Segovia's objections to BCI's claim. However, the parenthetical provided with the Exxon Mobil citation refers to the Rooker-Feldman doctrine. Stated in one sentence in Appellant's Opening Brief, Segovia argues only that the Rooker-Feldman doctrine is not applicable because he was not a party to the State Court Action.
Segovia's objections to the claims filed against Debtor and/or Debtor's estate are necessarily made on behalf of the Debtor and/or Debtor's estate. Segovia did not argue nor cite any authority to the contrary. Therefore, we disregard as irrelevant, Segovia's argument for the inapplicability of the Rooker-Feldman doctrine.
On the incomplete record filed by Segovia in this appeal, it is not possible for this Panel to review the full analysis performed by the bankruptcy court. The Memorandum Decision contained extensive discussion concerning the legal claims made on behalf of the Debtor in the State Court Action, the basis for the judgment on the merits after jury trial, the post-trial proceedings to determine prevailing party status, and the award of attorneys' fees and costs against Debtor. As discussed below, regardless of the reasoning most heavily relied upon by the bankruptcy court, the thoroughness of its discussion and review of the circumstances of the State Court Action provide ample grounds for this Panel to affirm the bankruptcy court's conclusion.
Segovia objected to BCI's claim on two grounds. First, he argued BCI's claim was unenforceable under state law because BCI allegedly " violated the Unfair Practices Act and other provisions of the California Business and Professions Code" - the very issues litigated and finally adjudicated against Debtor in the State Court Action. Second, he argued that the major portion of the judgment, for prevailing party's attorneys' fees, should be disallowed as unreasonable.
ER 22:12-13.
The Panel notes that documents included in the Excerpts of Record contained inconsistencies regarding whether the state court judgment in favor of BCI was final; however, on appeal Segovia did not object to or argue against the bankruptcy court's finding that the judgment is now final.
A. The Rooker-Feldman Doctrine Bars Substantive Review of a State Court Judgment by the Bankruptcy Court.
The Supreme Court of the United States has exclusive jurisdiction over appeals from final state-court judgments. Lance v. Dennis, 546 U.S. 459, 463, 126 S.Ct. 1198, 163 L.Ed.2d 1059 (2006). " Accordingly, under what has come to be known as the Rooker-Feldman doctrine, lower federal courts are precluded from exercising appellate jurisdiction over final state-court judgments." Id . The U.S. Supreme Court warned in Exxon Mobil, that " lower courts have at times extended Rooker-Feldman 'far beyond the contours of the Rooker and Feldman cases, overriding Congress' conferral of federal-court jurisdiction concurrent with jurisdiction exercised by state courts, and superseding the ordinary application of preclusion law pursuant to 28 U.S.C. § 1738 '" (citations omitted). Exxon Mobil Corp. v. Saudi Basic Industries Corp., 544 U.S. 280, 125 S.Ct. 1517, 161 L.Ed.2d 454 (2005); and see Lopez v. Emergency Service Restoration, Inc. (In re Lopez), 367 B.R. 99 (9th Cir. BAP 2007) (in context of non-dischargeability proceeding, Rooker-Feldman doctrine held to be inapplicable in bankruptcy court).
A suit brought in federal district court is a " de facto appeal" forbidden by Rooker-Feldman when " a federal plaintiff asserts as a legal wrong an allegedly erroneous decision by a state court, and seeks relief from a state court judgment based on that decision." [Citing Noel v. Hall, 341 F.3d 1148, 1164 (9th Cir. 2003)]. In contrast, if a plaintiff " asserts as a legal wrong an allegedly illegal act or omission by an adverse party, Rooker-Feldman does not bar jurisdiction." Id.
Carmona v. Carmona, 544 F.3d 988, *10-11.
Segovia's objection to BCI's claim that is based on section 502(b)(1) is essentially an assertion that the state court decision was wrong and therefore the judgment based thereon was unenforceable against the Debtor. The record does not show that Segovia asserted any wrongful acts by BCI against the Debtor that had not already been asserted and addressed in the State Court Action. Based on the limited record, the bankruptcy court appears to have believed that Segovia's first claim objecting to BCI's claim could not be addressed under the Rooker-Feldman doctrine because it was barred as a direct attack on the state court judgment.
The fact that it would be Segovia, not the Debtor, asking the bankruptcy court to improperly exercise jurisdiction held exclusively by the U.S. Supreme Court would not create jurisdiction otherwise barred under the Rooker-Feldman doctrine.
Under Segovia's second claim, he alleged that BCI had unnecessarily inflated its costs of litigation and that the claim exceeded the reasonable value of the services. He specifically asked the bankruptcy court to disallow the prevailing party's attorneys' fees as unreasonable under section 502(b)(4). It appears that the bankruptcy court believed this objection to fees on reasonableness grounds also constituted a direct attack on the state court judgment not permitted under the Rooker-Feldman doctrine.
Lacking the full and complete record, but informed by the bankruptcy court's in-depth investigation and apparently clear understanding of the State Court Action, this Panel cannot conclude that the bankruptcy court's reasoning was not sound. The bankruptcy court clearly has jurisdiction under the Bankruptcy Code to rule on objections to proofs of claim. However, it is possible that the bankruptcy court believed that it lacked jurisdiction to consider challenges that had been previously litigated in the State Court Action, based on the Rooker-Feldman doctrine. Even if such application of the narrow Rooker-Feldman doctrine were to be viewed as exceeding the limits of the doctrine, the bankruptcy court's dismissal of Segovia's objections to BCI's claim alternatively was proper under the issue preclusion laws of California.
B. Summary Dismissal of Segovia's Cross-Complaint Is Affirmable Under Ordinary Preclusion Laws of California.
Federal courts must give " full faith and credit" to judgments of state courts. 28 U.S.C. § 1738. " [T]he preclusive effect of a state court judgment in a subsequent bankruptcy proceeding is determined by the preclusion law of the state in which the judgment was issued." In re Harmon, 250 F.3d 1240, 1245(9th Cir. 2001).
In California, " collateral estoppel precludes relitigation of issues argued and decided in prior proceedings." [] California courts will apply collateral estoppel only if certain threshold requirements are met, and then only if application of preclusion furthers the public policies underlying the doctrine. There are five threshold requirements:
First, the issue sought to be precluded from relitigation must be identical to that decided in a former proceeding. Second, this issue must have been actually litigated in the former proceeding. Third, it must have been necessarily decided in the former proceeding. Fourth, the decision in the former proceeding must be final and on the merits. Finally, the party against whom preclusion is sought must be the same as, or in privity with, the party to the former proceeding.
Id. (internal citations omitted).
The bankruptcy court overruled the objection to BCI's claim because the claim is " based on a final state-court judgment in favor of BCI" . Segovia, 387 B.R. at 779 n. 15. BCI's claim is a claim that seeks enforcement against the Debtor's estate of a final state court judgment, which was entered against the Debtor, after jury trial on the merits, and included post-trial proceedings to determine prevailing party status and reasonable attorneys' fees. Enforcement of the Judgment in the bankruptcy case furthers the public policies in favor of finality of litigation and according full faith and credit to final state court judgments. It was within the bankruptcy court's discretion to apply preclusion law, and on this record, we can and do affirm the dismissal of Segovia's objection to BCI's claim on such alternate grounds. Tahoe-Sierra Pres. Council v. Tahoe Reg'l Planning Agency, 322 F.3d 1064, 1076-77 (9th Cir. 2003) (appellate courts may affirm the judgment on any ground supported by the record).
C. BCI's Prevailing Party's Attorneys' Fees Are Not Reviewable Under Section 502(b)(4).
Segovia's second claim sought review of BCI's prevailing party's attorneys' fee award for reasonableness under section 502(b)(4). Based on a plain reading of the statute, BCI's attorneys' fee award does not fall within the claims subject to review under section 502(b)(4) because BCI was neither an insider of nor an attorney for the Debtor. Therefore, we can affirm the dismissal of Segovia's second claim on a third legal ground -- the facial inapplicability of section 502(b)(4). Tahoe-Sierra Pres. Council v. Tahoe Reg'l Planning Agency, 322 F.3d at 1076-77.
CONCLUSION
For the reasons stated above, we AFFIRM the bankruptcy court's judgment.