Opinion
ORDER ON APPLICATION TO EMPLOY FIRM
PETER W. BOWIE, Chief Judge United States Bankruptcy Court
The debtor has applied to employ the law firm of Milberg & DePhillips as its general counsel in this Chapter 11 case.
The debtor is a limited liability company which has a 36.938% interest as a tenant in common in a piece of real property which the debtor and others are in the process of subdividing and developing. Another LLC, JDSK Investments, holds a 53.591% interest in the same property.
The debtor is managed by John DeWald & Associates, which is yet another LLC. John DeWald & Associates and JDSK Investments are owned by John DeWald and Scott Kelly, each with a 50% interest in each of those two LLCs.
Prepetition, the debtor paid the Milberg firm a $25,000 retainer, about 25% of which was consumed by prepetition work, leaving a balance of approximately $18,719. To further ensure payment of its fees and costs, the firm has also asked for a lien on any recovery the debtor might obtain, whether the firm had already withdrawn or been relieved. Under the terms of the lien agreement itself, it appears the lien would attach to the real property and any proceeds from a sale of it. The lien agreement recites in relevant part:
The lien will attach to: all funds and property in the possession or control of M&D; all claims and causes of action that are the subject of M&D's representation under this Agreement . . .; all interests in real property, personal property, or both, which are the subject of our legal representation; and any recovery you may obtain, whether by arbitration award, judgment, settlement or otherwise, in any matter which is the subject of our legal representation.
The Court is troubled by the firm's request for a lien on the debtor's assets without any explanation of why one is necessary, much less why unsecured administrative claim priority is not a sufficient priority for payment of fees the firm has earned.
The Court is also concerned with the possible conflict of interest such a lien creates for the firm because in these troubled times it is at least theoretically possible the debtor might be obliged to sell the property for less than the total of secured debt on it. If the firm is a junior secured lienholder and potentially out of the distribution, the firm has a conflict in its representation of the debtor.
The court is always troubled when a law firm seeks to take a security interest in a client's property to secure fees. See Hawk v. State Bar of California, 45 Cal.3d 589 (1988). California Rule of Professional Conduct 3-300 recognizes doing so may be permissible, but imposes requirements which include "(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 . . .." Here, the lien agreement, which is page 6 of the overall fee agreement, does advise the debtor that it "may seek the advice of an independent lawyer . . .." The next sentence reads: "By signing this Lien Agreement and signing the Fee Agreement You acknowledge that You have been so advised and given a reasonable opportunity to seek that advice." Whether that is an accurate statement, or only lip service to Rule 3-300 is for another day, if there is a case or controversy over it.
Of concern here is that independent of Rule 3-300, 11 U.S.C. § 327(a) requires that an attorney or firm seeking to be employed "not hold or represent an interest adverse to the estate, and that are disinterested persons . . .."
In the present instance Mr. DePhillips' declaration states that John DeWald and Scott Kelly are jointly and severally liable for the firm's fees and costs, although the Court was unable to find any such recitation in the Fee Agreement itself. That apparent omission raises other issues about just what the terms of any agreement are with respect to Mr. DeWald and Mr. Kelly.
Under all the circumstances set out above, the Court is unwilling to approve employment of Milberg & DePhillips as general counsel for the debtor. The Court has no reservations about the firm, its integrity, or the caliber of its practice. The Court's concern is with the purported lien and with what appears to be some sort of side agreement between the firm and Mr. DeWald and Mr. Kelly. That raises additional issues about the firm's duty to the debtor as distinct from other interest holders.
Were the firm to revise the fee agreement to delete the lien provision and co-liability of Mr. DeWald and Mr. Kelly, the Court would quickly approve such employment.
IT IS SO ORDERED.