Opinion
No. 77-2502
March 30, 1972
Preferences — Attorney Fees — Statutory Lien — Waiver — Conflict of Interest
The court refused to recognize a statutory lien in favor of the bankrupt's attorney for fees where the fees were earned in a conflict of interest situation. Therefore, the transfer to the attorney of the fees within foir months preceding the filing of the bankruptcy petition was a voidable preference under Section 60 of the Bankruptcy Act and not subject to the exception for statutory liens set forth in Section 67b of the Act.
The bankrupt entered into a contingent fee agreement with its attorney whereby the attorney would receive 40% of any settlement of accounts receivable claims in the event a lawsuit had to be filed. To quickly obtain needed funds, the parties agreed to disputed claims should be compromised. The attorney negotiated a settlement of a case for $3,000.00 in which a lawsuit had been filed although the normal settlement value of the lawsuit would have been $6,000.00. The bankriptcy petition was filed the day the $3,000.00 was deposited in the attorney's account.
The attorney claimed the $1,200.00 pursuant to the contingent fee agreement which the trustee admitted was a valid claim. The remaining $1,800.00 was claimed by the attorney as payment on a past bill under a state retaining lien statute, ORS 87,430.
A conflict situation exists when an attorney is both a creditor and counsel for the same bankrupt. At the time the settlement was effected, a conflict situation had developed which mandated full disclosure by the attorney. Because such disclosure was not made, the attorney was considered to have waived any right to assert a lien since not to have done so would give rise to unethical conduct. Therefore, the transfer was a voidable preference under Section 60a(1) and not protected by the statutory lien exception of Section 67b. See Sec. 60a(1) [§ 547(b)] at ¶ 9529 and Sec. 67b [§ 545] at ¶ 9524.