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Cardwell v. Bankruptcy Estate of Spivey (In re Douglas Asphalt Co.)
Citation: 483 B.R. 560Docket: Bankruptcy No. 09-51272; Adversary No. 11-05013
Court: United States Bankruptcy Court, S.D. Georgia; November 20, 2012; Us Bankruptcy; United States Bankruptcy Court
The court denied the amended motion for summary judgment filed by Defendants Kenneth E. Futch and Savage Turner, P.C., which sought a determination of their attorney's charging lien against post-petition settlement proceeds. The primary issue was whether the attorneys had a lien given their roles as both pre-petition counsel and post-petition special counsel for the Debtor's bankruptcy estate. The court concluded that the attorneys' work as special counsel, which led to the post-petition settlement, did not justify a charging lien on the settlement proceeds. Furthermore, the court recognized that a pre-petition settlement offer allowed the attorneys to claim a pre-petition unsecured amount for reasonable fees. Due to the need for significant factual determinations, the motion for summary judgment was denied. The background includes the involvement of Douglas Asphalt Company, the Debtor, in litigation resulting in two settlements—one pre-petition and one post-petition. The Chapter 7 Trustee, Mary Jane Cardwell, initiated this adversary proceeding to clarify valid pre-petition liens and claims against the settlement proceeds. The attorneys had initially claimed a lien of $1,050,000, later increasing their claim to $2.04 million, prompting responses from the Trustee and various insurance companies involved as surety creditors. The parties have agreed on several undisputed facts regarding the case involving Debtor Joel Spivey and a lawsuit against Applied Technical Services (ATS) and other defendants. Prior to the Debtor's involuntary bankruptcy, Spivey and Kyle Spivey initiated a lawsuit in the United States District Court, represented by Attorneys under a contingency fee agreement. The case settled for $2 million and an assignment of other causes of action from ATS before a jury verdict was rendered. Subsequently, on October 1, 2009, a jury awarded the plaintiffs $150 million, but an involuntary bankruptcy petition was filed against the Debtor on December 2, 2009. The case was converted to Chapter 11, and Attorneys were appointed as special counsel on February 5, 2010. After the case was re-converted to Chapter 7, Trustees appointed Attorneys again on June 17, 2010. Before the 11th Circuit's decision on the ATS appeal, Attorneys negotiated a post-petition settlement that guaranteed between $3 million and $12 million based on the appeal's outcome. The Trustee sought approval for this settlement on September 29, 2011, which was granted on December 1, 2011. The 11th Circuit later overturned the jury verdict, resulting in a $3 million payout from the settlement. Attorneys have filed an Amended Motion asserting a valid charging lien against the Second Settlement proceeds, claiming their representation in the ATS litigation resulted in this settlement rather than their role as special counsel in the bankruptcy case. They argue that in Georgia, attorneys acquire charging liens on judgments and settlements upon the commencement of their employment, which they assert occurred in 2006 when they began representing the Debtor. They believe the lien was perfected with the jury's $150 million verdict. Consequently, they claim their lien arose and was perfected prior to the bankruptcy filing. Attorneys seek a determination of the lien's value, stating it should be based on the Fee Agreement's settlement provision, which entitles them to 35% of the $3 million settlement, totaling $1,050,000. The Trustee counters that the Fee Agreement was rejected as an executory contract in bankruptcy, arguing that Attorneys are entitled only to reasonable fees for their work as special counsel. Attorneys filed an Amended Motion asserting that if the Trustee rejected the Fee Agreement and terminated their contract, the value of their lien should be calculated using the dismissal clause of the Fee Agreement, rather than the settlement provision. They claim entitlement to a percentage of a $6 million settlement offer allegedly proposed at the time of their "dismissal," arguing that this amounts to a charging lien of $2.04 million for their work on the Second Settlement. Respondents counter that Attorneys do not possess a valid charging lien on the Second Settlement proceeds, asserting that the settlement resulted from Attorneys’ work as special counsel for the estate. They argue that the Trustee’s rejection of the Fee Agreement constituted a total rejection of an executory contract, preventing Attorneys from claiming a lien based on the rejected contract’s terms. Respondents insist that Attorneys should be compensated according to their appointment as special counsel instead. Additionally, Respondents dispute the assertion that only the ATS Litigation contributed to the Second Settlement, noting that the settlement includes provisions related to the dismissal of other cases. They argue that the Second Settlement lacks clarity on how the proceeds are divided among the various cases, making it impossible for Attorneys to determine a percentage of the proceeds attributable to their work in the ATS Litigation without additional factual support. Lastly, while Respondents do not concede that the Fee Agreement should determine Attorneys’ compensation, they contend that even if it did, Attorneys have failed to demonstrate that the dismissal clause is applicable in this instance. Respondents reference three clauses from the Fee Agreement regarding payment to Attorneys: (1) in the case of a material breach, Attorneys are entitled to reasonable compensation for services performed; (2) upon termination, Attorneys also receive reasonable compensation; and (3) if dismissed, they are owed either $350 per hour or a percentage of any existing settlement offer. Respondents argue that since Attorneys were never formally dismissed, they should be compensated under the breach or termination clauses rather than the dismissal clause. The Trustee disputes the existence of a $6 million Settlement Offer at the time of termination, claiming the $6 million represented claims of multiple individuals, with the Debtor's claim only amounting to $3 million. She asserts she was unaware of any settlement offer before the bankruptcy filing. The court outlines the summary judgment standard under Rule 56, stating that summary judgment is granted when there are no genuine disputes over material facts. The moving party must demonstrate the absence of such disputes, with any ambiguity resolved against them. Three factual disputes are identified: (1) the estate's interest in the Second Settlement, (2) the existence of a Settlement Offer when the Fee Agreement terminated, and (3) the value of that offer. The first legal issue examined is whether Attorneys possess a charging lien on the Second Settlement proceeds, defined under Georgia law as an attorney's equitable right to recover fees from a judgment obtained through their services. This lien is established upon employment and is perfected with the recovery of a judgment, with O.C.G.A. 15-19-14(b) asserting its superiority over all but tax liens. An attorney's lien on settlement or judgment proceeds can be enforced if the attorney's work contributed to the recovery prior to the client's bankruptcy filing. Instead of being treated as a general unsecured creditor under 11 U.S.C. 507, the attorney's fees are paid from the proceeds of the judgment linked to the pre-petition lien. For a charging lien to be valid, three conditions must be met: the attorney must be hired as counsel, their work must have produced the recovery, and there must be a recovery that perfects the lien. In the current case, there is a dispute regarding whether the attorney's pre-petition representation or their post-petition role as special counsel for the bankruptcy estate led to the Second Settlement. The recovery occurred post-petition, raising questions about whether it can relate back to pre-petition actions to perfect the charging lien. Upon filing a bankruptcy petition, the debtor's assets and claims become part of the bankruptcy estate, with the trustee holding exclusive rights to pursue legal claims unless the trustee abandons or participates in them. The trustee, or the debtor-in-possession in a Chapter 11 case, is responsible for managing these claims. When the bankruptcy petition was filed, the debtor's rights in the ATS Litigation passed to the estate, and the attorneys' prior representation ceased until they were reappointed as special counsel. Their assertion of continued entitlement to a fee, based on the claim that they were dismissed as counsel, indicates that they had no involvement in the Second Settlement at that time. The Second Settlement was established after Attorneys were appointed as special counsel to the estate, contrasting with the First Settlement, which was finalized before the bankruptcy filing. The Second Settlement was incomplete at the time of the bankruptcy petition. While Attorneys attempted to negotiate the Second Settlement before their representation of the Debtor ended, their role changed upon becoming special counsel for the Trustee, meaning they were negotiating on behalf of the estate rather than the Debtor. Consequently, the Second Settlement resulted from their representation of the estate, not their prior representation of the Debtor. The issue of whether a charging lien on a post-petition settlement can be perfected pre-petition is deemed unnecessary to address. However, Attorneys claim their lien against the Second Settlement relies on the court’s decision in In re Diamond Mfg. Co. Inc., which involved an attorney not appointed as special counsel seeking a lien against a post-petition settlement. The current situation differs because Attorneys were serving as special counsel when the Second Settlement was reached. Even if Attorneys argue that the timing for lien perfection relates back to their initial employment or the first judgment, a lien only attaches if the attorney’s work directly resulted in the recovery. Here, two representations contributed to the Second Settlement—one before and one during bankruptcy. Since the Second Settlement arose after Attorneys transitioned from representing the Debtor to representing the estate, their pre-petition representation does not support a valid charging lien against the proceeds related to the ATS Litigation. Regarding the portion of the Second Settlement proceeds unrelated to the Debtor, Attorneys may have a charging lien against the proceeds from dismissals. The Second Settlement lacks clarity on the dismissed actions, making it difficult to ascertain whether the entirety or only a portion of it was negotiated by Attorneys as special counsel. While it is established that the ATS Litigation became estate property after converting the bankruptcy case, it remains uncertain if the dismissed actions were pre-petition causes of action belonging to the Debtor. If not, Attorneys could have negotiated the Second Settlement both as special counsel for the estate regarding the ATS Litigation and as counsel for other parties concerning the dismissals; however, the limited details prevent a definitive determination. Respondents claim a genuine issue of material fact exists regarding the Second Settlement, particularly due to its failure to specify the value of the ATS Litigation and other dismissals. This ambiguity prevents the determination of any charging lien Attorneys may hold against the Second Settlement, as the values of both the ATS Litigation and dismissal portions must be established first. The unclear valuation is a material fact affecting the amount and priority of Attorneys’ fees. While Attorneys did not meet their burden for summary judgment, they may still be entitled to a charging lien if they provide evidence concerning the values of the dismissed cases. Regarding Attorneys’ fees from the Second Settlement, although their work as special counsel contributes to the Settlement, it does not automatically grant them a charging lien against its proceeds. Attorneys retain a right to fees for post-petition work, even though the adversary case focuses on pre-petition claims. The statutory framework of 11 U.S.C. §§ 327-330 governs fee discussions, indicating that a contingency fee of 35% for work was proposed but not approved. The subsequent order stated that Attorneys' compensation would be determined by the Court later, following a review of completed work, thus making the original contingency request inapplicable. The order's language concerning compensation was carried over after the case transitioned from Chapter 11 to Chapter 7, indicating that the determination of fees would be made post-service, in accordance with Section 330, rather than Section 328. Attorneys argued that their charging lien should be valued based on a provision in their Fee Agreement, allowing them a percentage of settlement offers existing at the time of their dismissal. However, the court determined that Attorneys do not have a charging lien against the bankruptcy estate's proceeds from the Second Settlement, prompting a need to assess their compensation for securing the Settlement Offer. Evidence indicates that the Settlement Offer was in existence when the bankruptcy petition was filed, supported by affidavits from both Attorneys and counsel for Association Casualty Insurance Company, as well as confirming emails. Despite the Trustee's lack of knowledge regarding pre-bankruptcy offers, this does not negate the existence of the Settlement Offer at the time of filing. Next, it was established that the Fee Agreement constituted an executory contract, as it involved reciprocal obligations—specifically, the need for Attorneys to provide further services related to the ongoing ATS Litigation, which included an appeal and negotiations for a settlement. Under the Bankruptcy Code, the trustee or debtor-in-possession can assume or reject executory contracts. In this case, the bankruptcy was initially filed as an involuntary Chapter 7 case and later converted to Chapter 11 before the 60-day period for rejection commenced. When the case reverted to Chapter 7, the newly appointed Trustee had 60 days to act on the Fee Agreement. The Trustee's inaction within this timeframe resulted in the Fee Agreement being deemed rejected. Per 11 U.S.C. § 365(g)(1), the rejection of the executory contract constitutes a breach, which entitles the non-debtor party to seek remedies for that breach. The date of breach in bankruptcy proceedings is established as the moment preceding the debtor's bankruptcy filing, categorizing the non-debtor's claim for damages as a pre-petition claim. Rejection of a contract under 11 U.S.C. § 365(g) constitutes a breach but does not terminate the contract itself. The Bankruptcy Code's treatment of rejection as a breach provides a damages remedy for the non-bankrupt party; however, it does not determine the rights of the parties regarding the contract, which are governed by state law. Under Georgia law, if an attorney's contingency fee agreement is breached before the contingency occurs, the attorney can only recover the reasonable value of services rendered unless the parties have specified otherwise in their contract. In this case, the Fee Agreement included clauses addressing the end of employment, and since the end arose from a breach under 11 U.S.C. § 365(g), the breach provision of the Fee Agreement applies. Consequently, the attorneys hold a general unsecured claim for the reasonable value of their services from the time they secured the First Settlement on October 1, 2009, until the bankruptcy filing on December 2, 2009, including work done on October 2, 2009. The amount of the Settlement Offer is not pertinent to the amended motion for summary judgment, which seeks to establish the amount of a Charging Lien based on the Settlement Offer, as it does not affect the determination of the attorneys' unsecured claim for their pre-petition work. Thus, the potential outcomes of the Settlement Offer do not obstruct the summary judgment process. Insurance Companies argue that Attorneys cannot assert a Charging Lien against the Settlement Offer at this stage because their prior claims did not specify such a lien as required by the Fee Agreement's dismissal clause. Attorneys' request for a Charging Lien is deemed a response to the Trustee’s argument that the Fee Agreement was an executory contract rejected in bankruptcy, which was introduced in the Trustee's initial response. The Attorneys’ assertion that the dismissal clause determines the Charging Lien's measure is a counter to this new argument from the Trustee. The Court concludes that any inadequacies in the proofs of claim do not preclude the summary judgment motion. Regarding a separate claim, Attorneys seek a Charging Lien against the Second Settlement for their defense in a 2007 declaratory judgment action in Cobb County Superior Court. They argue that their defense work was critical for ACIC’s decision to settle the ATS Litigation. However, the Court finds that Attorneys' role as special counsel to the estate, rather than their prior representation of the Debtor, is what led to the Second Settlement, thus denying their claim for a Charging Lien related to the Cobb County case. The Court concludes that since Attorneys do not possess a Charging Lien against the ATS Litigation portion of the Second Settlement proceeds, a genuine issue remains regarding the estate’s interest in the Second Settlement, which affects the Attorneys’ payment priority. Consequently, Attorneys have not met the criteria for summary judgment, and their motion is denied. Turner, P.C. is moving either on its own behalf or for Brent J. Savage individually, creating ambiguity regarding whether Kenneth E. Futch is acting solely for himself or also for his firm, Kenneth E. Futch, P.C. Throughout the bankruptcy case, Turner, P.C. has been referred to by various names, and Brent J. Savage is identified both individually and in association with Savage and Turner, P.C. Similarly, Kenneth E. Futch and his firm are referred to interchangeably in the proceedings. Both attorneys have filed responses in the adversary proceeding under their respective names and firms. The "Attorneys" are defined collectively as Kenneth E. Futch, Kenneth E. Futch, P.C., Brent J. Savage, and Savage Turner, P.C. A previous adversary proceeding awarded the Attorneys liens totaling $966,945.97 against a pre-petition settlement, which included $750,000 in fees and $216,945.97 in expenses. To date, the Attorneys have received $1 million of the $2 million pre-petition settlement, leaving $1 million in the registry along with an additional $3 million from a post-petition settlement, totaling $4 million available. Although the pleadings do not clarify whether the current adversary proceeding exclusively pertains to pre-petition liens, it is treated as such based on party consensus. The case, initiated as a chapter 7 involuntary bankruptcy on December 2, 2009, never resulted in an order for relief; instead, it was converted to chapter 11 on December 28, 2009, and re-converted back to chapter 7 on April 12, 2010, with Mary Jane Cardwell appointed as the chapter 7 Trustee. The Attorneys were initially appointed under the chapter 11 case to manage ongoing litigation outside the bankruptcy court. After the case was reconverted to Chapter 7, the Trustee sought to continue the representation of Attorneys for the estate. Two separate appointments were made related to this representation. On August 29, 2012, Attorneys filed an Amended Fee Application for work performed pre- and post-petition, reiterating arguments for pre-petition liens. Additionally, on August 16, 2012, Attorneys submitted a fee application in an involuntary bankruptcy case against Joel Spivey, claiming rights to Second Settlement proceeds. A hearing on August 30, 2012, resulted in a stay of the fee applications pending the outcome of a summary judgment motion. The fee agreement stipulated that Attorneys would receive 37.5% of settlements between $1 million to $3 million and 35% for those between $4 million to $6 million. Since the First Settlement yielded $2 million and Attorneys received 37.5% of that amount, they claimed entitlement to 35% of the next $3 million. Their calculations indicated total earnings from the ATS Litigation of $8 million. They asserted additional fees: 37.5% of the first $1 million from the Second Settlement ($375,000), 35% of the next $2 million ($700,000), 33.3% of the subsequent $2 million ($666,000), and 30% of the final $1 million ($300,000), totaling $2.04 million. In their reply concerning the Sureties' Response to the Amended Motion, Attorneys mentioned that some cases listed in the high/low settlement agreement were assignments from the first settlement with ATS. However, they acknowledged that this did not account for all cases in the Second Settlement, making it insufficient to definitively assert that the ATS Litigation accounted for the entire Second Settlement. Additionally, since not all parties from the Second Settlement were included in the Fee Agreement, Attorneys would need to demonstrate a proper percentage for a Charging Lien. The trustee holds the authority to assume or reject executory contracts, a power similarly granted to a debtor in possession.