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District Court Declines to Impose Charging Lien on Plan Proceeds

Tuesday, August 23, 2011
Jenelle M. Chalmers | Bloomberg Law Thaddeus Freeman, PLLC v. Summit View, LLC (In re Summit View, LLC), No. 11-cv-724, 2011 BL 199230 (M.D. Fla. Aug. 1, 2011) The United States District Court for the Middle District of Florida affirmed the bankruptcy court's decision to enforce a settlement agreement, while declining to impose an attorney's charging lien on plan payments that his client assigned under the terms of the settlement agreement. Further, the district court found that the attorney's charging lien only attached to the proceeds that his client actually received under the settlement agreement.

The Confirmation of the Plan and the Settlement Agreement

In early 2009, Summit View, LLC and certain related entities ("Summit View" or "Debtors"), filed voluntary petitions for chapter 11 bankruptcy protection. Nearly a year later, on March 17, 2010, the bankruptcy court confirmed Debtors' plan, which included a secured claim in the amount of $1,002,093.77 in favor of WDG Construction, Inc. ("WDG"). At the time of confirmation, WDG had several pending adversary proceedings, in which it had filed counterclaims, all of which were settled post-confirmation. Thaddeus Freeman, PLLC ("Appellant") represented WDG in the adversary proceedings and settlement negotiations, whereby the parties executed an Hourly/Contingency Fee Agreement, whereby WDG agreed to pay Appellant the greater of $350.00 an hour or 33 1/3 percent of the gross amount of any recovery paid. As part of the settlement agreement ("Settlement Agreement") reached by the parties as to all claims and adversary proceedings, WDG agreed to assign its rights to receive payments under Debtors' plan to CWES II, LLC ("CWES") and in return CWES agreed to pay WDG $200,000 without assuming any of WDG's obligations or liabilities. Once the court had approved the Settlement Agreement and CWES transferred the settlement funds, Appellant filed a motion seeking to disburse one-third of the settlement funds, $66,000, to it under the terms of the Hourly/Contingency Fee Agreement, arguing that it was entitled to a charging lien on the settlement funds received by WDG. The court approved the transfer and Appellant received its share of the proceeds.

Debtors' Motion to Enforce the Settlement Agreement

After receiving proceeds fees of $66,000, Appellant claimed that it was also entitled to receive one-third of the plan payments that WDG assigned to CWES arguing that it had retained a valid charging lien as to the plan payments. In response, Summit View filed a motion to enforce the Settlement Agreement, seeking a determination that neither CWES nor Summit View was required to make payments to Appellant. After a hearing on the matter, the bankruptcy court granted Summit View's motion, holding that Appellant's charging lien did not extend to the plan payments. The bankruptcy court explained that none of the parties had ever considered that Appellant's lien would extend to the plan payments, nor should they have contemplated such a notion. Noting that Appellant was retained as a collection lawyer by WDG, the court observed that Appellant was only entitled to the agreed upon percentage of the actual funds received by WDG and that Appellant had properly received his share of these proceeds. In appealing the bankruptcy court's decision, Appellant argued that the bankruptcy court erred in declining to impose a charging lien on the plan payments due to CWES under the Settlement Agreement because its charging lien extended to not only the proceeds recovered by WDG, but also the plan payments. In response, the Appellees argued that Appellant's recovery was limited to its share of the $200,000 settlement proceeds and that Appellant should be estopped from recovering any fees related to the plan payments.

Appellant's Charging Lien Does Not Attach to Plan Payments

Asserting that a charging lien is an equitable remedy and a matter of state law, Weed v. Washington, 242 F.3d 1320, 1323 (11th Cir. 2001), the district court pointed out that under Florida law, in order to impose a charging lien, an attorney must show (1) an express or implied contract between attorney and client; (2) an express or implied understanding for payment of attorney's fees out of the recovery; (3) either an avoidance of payment or a dispute as to the amount of fees; and (4) timely notice. Daniel Mones, P.A. v. Smith, 486 So. 2d 559, 561 (Fla. 1986). Additionally, the district court declared that charging liens apply to the proceeds of a lawsuit, or the amount of money actually received by the client. To this end, the district court noted that the purpose of the charging lien is to ensure that after a client collects his judgment, he pays his attorney for his work in securing it. In re Estate of Warner, 35 So. 2d 296, 298 (Fla. 1948). The district court observed that, in the instant case, both parties had agreed that Appellant had a valid charging lien that attached to the settlement funds recovered by its client. However, the district court determined that Appellant's notice of a charging lien as to the confirmation plan payments was untimely and inappropriate. In reaching its decision, the district court noted that Appellant had not mentioned its assertion of a charging lien over the plan payments until two months after confirmation of the plan, well after the confirmation order became a final judgment. Moreover, the district court stated that even if Appellant's notice of a charging lien was timely as to the plan payments, a charging lien can only attach to proceeds obtained by an attorney on behalf of its client, Mitchell v. Coleman, 868 So. 2d 639, 641 (Fla. 2d DCA 2004). Elaborating, the district court explained that since WDG no longer had a right to the plan payments, nor did its attorney have a right to a charging lien on such payments.

District Court Affirms Ruling

Accordingly, the district court affirmed the bankruptcy court's decision concluding that a charging lien did not attach to plan payments that WDG had never received. Disclaimer This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy. ©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.

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