Opinion
Case No. 02-30483-7.
August 2, 2007
MEMORANDUM OF DECISION
At Butte in said District this 2nd day of August, 2007.
On March 8, 2007, the Chapter 7 trustee, Donald W. Torgenrud, Jr. ("Torgenrud"), of Saint Ignatius, Montana, filed an objection to proofs of claim no. 7, filed by Wayne Buhler, Michael Steele, and Michael Miller, and 14, filed by Sharon Childress and several other creditors, with notice. The Court set Torgenrud's objection for hearing on April 2, 2007, in Missoula.
Milodragovich, Dale, Steinbrenner Nygren, P.C., of Missoula, Montana ("MDSN"), filed proofs of claim nos. 7 and 14, and any amendments thereto, on behalf of the respective creditors. G. Patrick HagEstad, of Milodgragovich, Dale, Steinbrenner Nygren, P.C., filed a response to Torgenrud's objection. No other party in interest filed a response and requested a hearing. At the time of the hearing Exhibits ("Ex.") D, A1, B1 and B2 were offered and admitted. The Court further took judicial notice of the proofs of claim nos. 7 and 14, and any amendments thereto and the global settlement agreement. Torgenrud was called as a witness and testified. Lon Dale of MDSN argued on behalf of the creditors; Torgenrud argued in support of his objection. At the conclusion of the hearing, the Court provided the creditors fifteen days to file an additional brief. Torgenrud elected not to file any brief. The additional brief has been filed.
After the Court's initial review of this contested matter, the Court on its own motion reopened the record on May 16, 2007, subject to objection, for MDSN to file a copy of its contingency fee agreement as an exhibit on or before May 25, 2007, with any interested party having the right to file a response and request a hearing on the Court's reopening the record and allowing an exhibit to be filed. Torgenrud filed a response on May 30, 2007, and informed the Court he had no objection to the Court reopening the record or allowing the filing of the contingency fee agreement. On May 25, 2007 MDSN filed an affidavit through Lon J. Dale and attached three exhibits marked as Exhibits ("Ex.") A, B and C. Ex. A is an hourly fee agreement. Ex. B is letter disclosing that the hourly fee arrangement was converted to a forty percent contingency agreement. Ex. C, identical to Ex. B1, is Chief Judge Molloy's Order awarding attorneys' fees to MDSN using a lodestar method. Ex. A and B are admitted without objection.
This contested matter is ready for a decision. This memorandum contains the Court's findings of fact and conclusions of law.
This contested matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B).
OBJECTION TO PROOF OF CLAIM NO. 7
Torgenrud raises the following objections:
1. Proof of Claim No. 7 was filed on behalf of Wayne Buhler, Michael Steele and Michael Miller, who were Darby Lumber employees who contacted the Milodragovich, Dale, Steinbrenner [Nygren] firm too late to be added to the WARN Act claim already filed before Judge Molloy and decided on summary judgment.
2. Trustee objects to Proof of Claim No. 7 filed by Plan Plaintiffs on April 23, 2003 in the amount of $20,000.00 by and for the reason that the claim is for wages under the WARN Act and pursuant to statute, Darby Lumber was liable for "back pay for each day of violation" to be "calculated for a period of the violation, up to a maximum of 60 days." . . . Judge Molloy entered summary judgment against Darby Lumber by Order dated January 4, 2001, in the case of all of the claimants listed in Amended Proof of Claim No. 14. That judgment was affirmed by the Ninth Circuit Court of Appeals on February 6, 2004.
These cases of these three employees is factually congruent with the case of the claimants listed in Amended Proof of Claim No. 14. For that reason the Trustee objects to Proof of Claim No. 7 on the basis of the fact that these three employees' wages were earned within 90 days before the filing of the bankruptcy petition or cessation of the Debtor's business, whichever, is earlier, and pursuant to 11 U.S.C. § 507(a)(3) these claims were limited, at the time of the filing of the Darby Lumber bankruptcy petition, to $4,650.00 per claimant.
The Trustees believes that under the facts and circumstances pertinent, these claimants are each due $4,650.00 for a total of $13,950.00, not $20,000.00 as they have claimed.
MDSN does not provide any evidence or argument opposing Torgenrud's objection to proof of claim no. 7 that the limitation of 11 U.S.C. § 507(a)(3) limits the wages earned within 90 days of filing Debtor's petition or cessation of Debtor's business to $4,650 as allowed by the statute effective on March 1, 2002, the date Debtor filed the petition. Based on the Court's reading of the statute existing on the date of the petition, the Court sustains Torgenrud's objection as to proof of claim no. 7. Each of the three claimants shall receive the amount of $4,650.
OBJECTION TO PROOF OF CLAIM NO. 14
Torgenrud files the following objection to proof of claim no. 14:
2. The Trustee objects to Amended Proof of Claim No. 14 in the amount of $227,363.05 because the claim for wages, earned within 90 days before the filing the bankruptcy petition or cessation of the Debtor's business, whichever is earlier, and pursuant to 11 U.S.C. § 507(a)(3) the statutory cap, as of the date of the filing of the Darby Lumber bankruptcy petition, was in the amount of $4,650.00 per claimant. The Proof of Claim includes, besides the employers' wages, their pre-petition attorney's fees.
Attached to the Amended Proof of Claim as Exhibit C is a schedule of the lost wages and benefits, all of which are under the $4,650 cap with the exception of Brandon Zeiler, whose claim is in the amount of $4,693.04. The Trustee objects to that amount but agrees that Brandon Zeiler ought to be paid the statutory cap of $4,650.00.
With respect to the attorney's fees provided for in the Proof of Claim, the Trustee objects to the pre-petition attorney's fees but not to the post-petition attorney's fees incurred by [MDSN] on behalf of the employees for the following reasons. While the employees are clearly due wages under the WARN Act up to the statutory cap set by § 507(a)(3), the employees' pre-petition attorney's fees, awarded by Judge Molloy under the WARN Act, are not, strictly speaking, wages due to the employees. While the employees' attorneys have an equitable argument available based upon the nature and purposes of the WARN Act, the Trustee can find no law on point that would allow for the payment of the pre-petition attorney's fees, and therefore objects to the pre-petition attorney's fees.
Torgenrud, in his objection to proof of claim no. 14, as amended, continues by analyzing and arguing that MDSN is entitled to its postpetition fees in the amount of $33,213.96 and costs in the amount of $2,005.22, for a total of $35,219.18, given the appeal undertaken by Debtor's prior counsel and the Russell's. Torgenrud relies upon Irmas Family Trust v. Madden (In re Madden), 185 B.R. 815, 818 (9th Cir. BAP 1995), for his argument that MDSN should be allowed a postpetition administrative priority as to a portion of the debt identified in the proof of claim. MDSN does not dispute Torgenrud's position on the postpetition fees. As neither Torgenrud nor any interested party has raised any objection to the postpetition fees, the prima facie effect of the proof of claim as it relates to the postpetition fees remains in effect, has not be rebutted and that portion of the proof of claim no. 14, as amended, involving postpetition fees and costs are deemed allowed pursuant to 11 U.S.C. § 502(a) and FED. R. BANKR. P. 3001(f).
But see Abercrombie v. Hayden Corp. (In re Abercrombie), 139 F.3d 755, 759 (9th Cir. 1998), that implicitly overrules Irmas Family Trust v. Madden (In re Madden), 185 B.R. 815, 818 (9th Cir. BAP 1995) ("The BAP panel held that the award was an administrative expense, reasoning that the continued prosecution of the case subjected the bankruptcy estate to an independent obligation. Madden, however, did not address our circuit precedent establishing the postpetition transaction requirement, and indeed Madden conflicts with that precedent and with Hemingway [ 954 F.2d 1 (1st Cir. 1992)], the only other circuit case that has addressed a similar issue. We agree with the decision in Hemingway."). In a subsequent case, Kadjevich v. Kadjevich (In re Kadjevich), 220 F.3d 1016, 1020-21 (9th Cir. 2000), a panel disapproved of the decision in In re Execuair Corp., 125 B.R. 600 (Bankr.C.D.Cal. 1991), which provided persuasive authority for the bankruptcy judge in Barnett v. Jamesway Corp (In re Jamesway Corp., 242 B.R. 130, 134 (Bankr. S.D.N.Y. 1999), to conclude that attorneys fees incurred postpetition under a fee shifting statute [like the WARN act] were entitled to an administrative expense priority classification when "the debtor violated that statute pre-bankruptcy, but continued to defend and lost litigation post-bankruptcy."
Each claimants' priority wage claims shall be allowed as stated in the attachment to amended proof of claim no. 14, except that no claim amount shall exceed $4,650. Two named claimants: Gregg Holt and Brandon Zeiler, consequently, have their total claims reduced to $4,650, as unsecured priority claims. Gregg Holt additionally has an unsecured nonpriority claim in the amount of $1.83, and Brandon Zeiler additionally has an unsecured nonpriority claim in the amount of $43.04.
The Court now considers the Trustee's objection to that portion of the amended proof of claim no. 14, attributable to the employees' prepetition attorneys' fees and costs in the total amount of $133,803.64 asserted by MDSN. MDSN asserts that such prepetition fees are entitled to an administrative priority pursuant to 11 U.S.C. §§ 503 and 507 and pursuant to a common fund doctrine. In considering this issue of priority, the Court specifically notes that the claimants raised the WARN Act claims through litigation initiated on February 8, 1999, in the U.S. District Court for the District of Montana. On January 4, 2001, Chief Judge Molloy granted the WARN Act claimants summary judgment in their favor and awarded $60,345.45 as damages. Chief Judge Molloy further awarded attorneys' fees to the WARN Act claimants in the amount of $123,033.44, on June 4, 2001, and additional attorneys fees of $10,770.20, on May 23, 2000, for total fees of 133,803.64. On March 1, 2002, approximately nine months later after the District Court entered the last of the noted orders and during the pendency of the appeal by Debtor's corporate representatives before the Ninth Circuit, Debtor filed a bankruptcy case. The Ninth Circuit Court of Appeals affirmed Chief Judge Molloy' decisions in Childress v. Darby Lumber, Inc., 357 F.3d 1000 (9th Cir. 2004).
At the hearing conducted on April 2, 2007, before this Court on Torgenrud's objections to proofs of claim nos. 7 and 14, as amended, the Court requested the parties to consider two additional cases: In re Patton, 358 B.R. 911 (Bankr. S.D. Tex. 2007) (priority for fees through common fund doctrine inconsistent with Bankruptcy Code priority scheme), and In re Willis, 143 B.R. 428 (Bankr. E.D. Tex. 1992) (application of common fund doctrine justified to provide priority for fees). MDSN included discussion of such cases in its supplemental brief.
In In re Willis, 143 B.R. 428 (Bankr. E.D. Tex. 1992), the debtor pursued a prepetition personal injury claim by retaining counsel to settle or prosecute alleged tort claims. Counsel achieved a settlement for debtor, but debtor and trustee objected on the grounds that the fee agreement was executory and had been terminated by the trustee. The court concluded that an attorney fee lien did not exist under Texas law, but that the common fund doctrine should be applied. On procedural grounds the court declined to award the fees requested.
In In re Patton, 358 B.R. 911 (Bankr. S.D. Tex. 2007), the trustee filed a nunc pro tunc application to employ debtor's attorney. Debtor, prepetition, through a contingency fee agreement, retained Johnson to pursue a Fen-Phen claim. Postpetition, a global settlement was achieved. The court concluded Johnson did not have an attorneys' lien on the settlement proceeds based on the requirements of Texas law. The court further concluded that whether the common fund doctrine applies is immaterial. "The common fund doctrine only determines whether and how much an attorney should be paid for the work that produced the common fund. It does not establish the priority of that entitlement vis-a-vis other creditors of a bankrupt estate. In this case, awarding priority based on the common fund doctrine is not consistent with the priority scheme set out in the Bankruptcy Code." Patton, 358 B.R. at 915. This Court concludes that Patton is the better reasoned decision and further concludes that the common fund doctrine does not establish a priority for the fees in bankruptcy associated with the global settlement in Darby Lumber.
"[P]roofs of claim have been held analogous to complaints initiating civil actions; an objection to a claim should therefore meet the standards of an answer. It should make clear which facts are disputed; it should allege facts necessary to affirmative defenses; and it should describe the theoretical bases of those defenses." 9 COLLIER ON BANKRUPTCY, ¶ 3007.01[3] (15th ed. rev.). In that regard, the Court may also conform the pleadings to the evidence after allowing the parties the opportunity to request a hearing concerning such conformation of the pleadings by the court. F.R.B.P. 7015(b).
Such process is critical in this contested matter as MDSN has not claimed that the prepetition fees awarded by Chief Judge Molloy in the U.S. District Court case may constitute a secured claim pursuant to the provisions of MONTANA CODE ANNOTATED ("MCA") § 37-61-420. Although neither Ex. A nor B (MDSN's fee agreements) contain a lien provision, this section provides a statutory lien that this Court concludes is applicable. This section provides:
(1) The compensation of an attorney and counselor for his services is governed by agreement, express or implied, which is not restrained by law.
(2) From the commencement of an action or the service of an answer containing a counterclaim, the attorney who appears for a party has a lien upon his client's cause of action or counterclaim which attaches to a verdict, report, decision, or judgment in his client's favor and settlement between the parties before or after judgment.
"An attorney's right to compensation pursuant to a contingency fee agreement is a property right determined under applicable state law. Barnhill v. Johnson, 503 U.S. 393, 112 S.Ct 914, 918 (1992); Butner v. United States, 440 U.S. 48, 54, 99 S.Ct. 914, 918 (1979)." Willis, 143 B.R. at 431. The following discussion by the Montana Supreme Court in Galbreath v. Armstrong, 121 Mont. 387, 395-96, 193 P.2d 630, 634 (1948), is instructive.
Under this section there is no need to file a notice of lien. The commencement of an action or the service of an answer containing a counterclaim is sufficient notice of the lien of the attorney. Marvin v. Marvin, City Ct., 19 N.Y.S. 371; Vrooman v. Pickering, 25 Misc. 277, 54 N.Y.S. 389; Santi Peri v. New York Cent. H. R. R. R. Co. 87 Hun., N.Y., 499, 34 N.Y.S. 1009.
The attorney is given by statute a first and prior lien on his client's cause of action (Hardware Mutual Casualty Co. v. Butler, 116 Mont. 73, 148 P.2d 563) and the statute is a remedial one and should be construed to secure and protect the rights of attorneys and furnish them security for the efforts they have expended. Baker v. Tullock, 106 Mont. 375, 77 P.2d 1035. The lien operates as an equitable assignment of the judgment or funds produced by the effort of the attorney. Coombe v. Knox, 28 Mont. 202, 72 P. 641.
The general rule is that while an attorney's lien is subordinate to the rights of the adverse party to offset judgments in the same actions or in actions based on the same actions or in actions based on the same transaction, it is nevertheless superior to any right to offset judgments obtained in wholly independent actions. 2 Freeman, Judgments, 5th Ed., sec. 1148.
The lien is upon the cause of action. "A cause of action is the right which a party has to institute a judicial proceeding. Meyer v. Van Collem, 28 Barb., N.Y., 230." . . .
The lien then is upon the amount recovered by the plaintiff. . . .
Judge Pray considered such a statutory lien in U.S. v. Hudson, 39 F.Supp. 797, 802 (D. Mont. 1941), in a slightly different context where a resolution between the parties had been reached through a settlement and not through a judgment or order.
"Whether an agreement creates a lien is a matter of construction. Ingersoll v. Coram, C.C., Mass., 127 F. 418. A charging lien may cover an attorney's fee only to the extent allowed by applicable statutory provisions in the absence of a special agreement providing otherwise. Check v. Kaplan, 280 Mass. 170, 182 N.E. 305; Delval v. Gagnon, 213 Mass. 203, 99 N.E. 1095."
U.S. v. Hudson, 39 F.Supp. 797, 802 (D. Mont. 1941). Judge Pope, in U.S. v. Moulton Powell, 188 F.2d 865, 868-69 (9th Cir. 1951), discussed Hudson and stated, "It appears to be the settled rule that judgements rendered in federal courts in states where such charging liens are recognized by statute or local law, will be held subject to such liens."
As noted above, the lien, by statute, arises upon the commencement of the case. The WARN Act claimants filed the federal district court litigation on February 8, 1999. Commencement of the WARN Act litigation occurred on February 8, 1999. Pursuant to MCA § 37-61-420, MDSN held a lien on the WARN Act litigation from the commencement of such action and it attached to the judgment entered in federal district court on January 4, 2001, in the amount of $60,345.45, to the fee order of June 4, 2001, in the amount of $123,033.44, and to the order of May 23, 2000, in the amount of $10,770.20, in MDSN's clients' favor and to any settlement arising between the parties before or after such judgment. Debtor filed its bankruptcy petition on March 1, 2002. A global settlement on numerous law suits and claims against Debtor and its officers and directors occurred in August 2004. The Court concludes that MDSN holds a secured claim in the amount of $133,803.64, and that the $600,000 paid to the Debtor's bankruptcy estate as a consequence of a global settlement serves as collateral for the payment of such claim.
Pursuant to F.R.B.P. 7015(b), the Court conforms the claim classification of amended proof of claim no. 14 to the evidence and concludes that MDSN, in part and in addition to the unsecured priority claim in the amount of $35,219.18 previously discussed, holds a prepetition secured claim, not an unsecured nonpriority claim, in the amount of $133,803.64. As the Court amends the amended proof of claim to conform with the evidence, without a prior motion by a party in interest, the Court grants to any party in interest to this contested matter the opportunity to file an objection with an accompanying brief on or before August 13, 2007, to this finding and conclusion as to MDSN holding a secured claim in the amount of $133,803.64, and any objecting party may request a hearing that shall be heard on August 16, 2007, in Missoula, at 9:00 a.m.
Consistent with upon the foregoing memorandum, the Court will issue the following separate order:
IT IS ORDERED that chapter 7 trustee, Donald W. Torgenrud, Jr.'s objections to proofs of claim no. 7 and 14, as amended, are sustained in part and denied in part; that the claimants identified in proof of claim no. 7: Wayne Buhler, Michael Steele and Michael Miller, are each allowed an unsecured priority claim in the amount of $4,650; that each claimant identified in the attachment to amended proof of claim no. 14, is allowed an unsecured priority claim in the amount stated in the attachment to such proof of claim with such amount not exceeding $4,650; that two claimants in amended proof of claim no. 14: Gregg Holt and Brandon Zeiler, in addition to the allowed unsecured priority claim in the amount of $4,650, are allowed the following unsecured nonpriority claims: Gregg Holt — $1.83; and Brandon Zeiler — $43.04; that Milodragovich, Dale, Steinbrenner, and Nygren, P.C. is allowed an unsecured priority claim in the amount of $35,219.18; and that Milodragovich, Dale, Steinbrenner, and Nygren, P.C. is allowed a secured claim in the amount of $133,803.64, subject to any party in interest to this contested matter having the opportunity to file an objection with an accompanying brief on or before August 13, 2007, to this Court's finding and conclusion that Milodragovich, Dale, Steinbrenner, and Nygren, P.C. holds a secured claim in the amount of $133,803.64, and such objecting party may request a hearing pursuant to Mont. LBR 9013-1 that shall be heard on August 16, 2007, in Missoula, at 9:00 a.m., or as soon thereafter as counsel can be heard, in the BANKRUPTCY COURTROOM, RUSSELL SMITH COURTHOUSE, 201 EAST BROADWAY, MISSOULA, MONTANA.