In Re Susan Hagen, A/K/A S.D. Hagen, A/K/A Susan Dianne Hagen, Debtor. Charles W. Grant, Trustee v. Mark Jay Kaufman, P.A.

922 F.2d 742, 24 Collier Bankr. Cas. 2d 1216, 1991 U.S. App. LEXIS 1130, 21 Bankr. Ct. Dec. (CRR) 432, 1991 WL 1751

• Court: Court of Appeals for the Eleventh Circuit
• Decided: January 29, 1991
• Docket: 90-3239
• Status: Published

Opinions

DYER, Senior Circuit Judge:

This appeal involves the recovery by a bankruptcy trustee of $7,500 paid to appellant 47 days before the filing of the debt- or’s bankruptcy petition. Appellant is an attorney who represented the debtor prior to bankruptcy in a personal injury action and was paid in accordance with a contingent fee contract. The appellee is the bankruptcy trustee who filed the action to avoid the alleged preference under 11 U.S.C. § 547, and prevailed in the bankruptcy court and on appeal to the district court. The attorney appeals the district court’s judgment affirming the decision of the bankruptcy court to authorize the trustee’s recovery of the payment. The bankruptcy court ruled against the trustee on two separate issues, an alleged fraudulent transfer under 11 U.S.C. § 548, and examination of a fee paid in connection with the bankruptcy case under 11 U.S.C. § 329, both relating to the same $7,500 payment. The district court affirmed. The trustee has not appealed that decision, but uses the arguments relative to those issues to assert that the only disputed element of § 547(b)(5) has been satisfied, ie., that the attorney received more than he would have received if the payment had not been made and he would have been paid by a distribution from the estate of this chapter 7 bankruptcy. The debtor entered into the contract with appellant on March 20, 1984, and the attorney claims to be a secured creditor based on a charging lien that relates back to the commencement of this representation. The bankruptcy court concluded that the fixing of the lien on the settlement proceeds, even though it relates back to the date the contingent fee contract was entered into, was a transfer that occurred within the 90-day period preceding bankruptcy, and is, therefore, avoidable pursuant to Section 547(b). We disagree and reverse.

FACTS

Susan Hagen was injured when she was hit by an automobile on March 19, 1984. She was released from the hospital the next day, and called appellant Kaufman after seeing his television commercial for legal services. Appellant went to Hagen’s home on March 20, told her she could expect to recover approximately $60,000, explained the terms of the contract, and after he unbandaged her hand, she signed a 50% contingent fee contract for his services. A settlement on May 14, 1985 resulted in payment of $7,500 to appellant. The settlement was the amount covered by insurance. Appellant did not pursue a greater amount through litigation. During the period of his representation of Hagen, appellant was generally unavailable when she tried to contact him about her case. Hagen received nothing from the settlement proceeds. It was appellant who recommended that Hagen file bankruptcy to discharge the medical expenses which were not paid due to insufficient remaining proceeds of the settlement. In fact, the bankruptcy attorney was selected by appellant, and the filing fees were paid out of a portion of the settlement proceeds.¹

Hagen filed her chapter 7 petition on July 1, 1985, and the bankruptcy trustee filed an adversary complaint to recover the fee paid to appellant under 11 U.S.C. § 547 (preference within 90 days of bankruptcy) and Section 548 (fraudulent transfer), and sought examination of the reasonableness of the fee under Section 329. The bankruptcy judge found that the payment was a preferential transfer under Section 547(b), and ruled against the trustee on the other two theories of recovery. The attorney appealed and the trustee cross-appealed to the district court, which affirmed the bankruptcy judge’s decision on all three issues.

DISCUSSION

The sole issue is whether the payment to an attorney 47 days before bankruptcy is a preference under 11 U.S.C. § 547(b), where the attorney claims a charging lien under a contingent fee contract entered into outside the 90-day preference period, and it is acknowledged as a matter of law² that the charging lien relates back to the commencement of the attorney’s representation.

Appellant contends that the transfer of $7,500 in settlement proceeds 47 days prior to filing of the debtor’s bankruptcy petition did not constitute a preference because the charging lien put him in the position of a secured creditor relating back prior to the 90-day period. Appellee contends that the payment satisfies all of the statutory elements of a preference³ including the only disputed element, that if the transfer had not been made and the appellant had received distribution from the bankruptcy estate, that payment would have been less than the $7,500 received by appellant, because the bankruptcy court would exercise its authority to determine the reasonableness of the attorney's fee paid in connection with the charging lien. Appellee assumes that the court would have reduced appellant's fee as unreasonable and excessive. Appellee's reliance on the bankruptcy court's authority to examine the reasonableness of the fee paid in connection with a charging lien cannot be considered in light of the trustee's failure to cross-appeal the adverse ruling of the district court on that issue.

The fundamental issue is whether appellant was a secured or unsecured creditor when the transfer was made. Appellant's argument relies on the relation back feature of an attorney's charging lien. If appellant would have received the same amount under a distribution of the estate's assets as he actually received prepetition, his position was not improved.⁴ The authority for the relation back of the lien and its taking effect from the date of the creation of the attorney-client relationship and the attorney's commencement of services is the common law, as there is no statutory provision in Florida relative to attorneys' liens. Randall v. Archer, 5 Fla. 438 (1854); Matter of TLC of Lake Wales, Inc., 13 B.R. 593, 595 (Bankr.M.D.Fla.1981); 4 Fla. Jur.2d, Attorneys At Law §§ 156-162. Appellant distinguishes the decision in In re Herman's Tops `N Bottoms, Inc., 88 B.R. 442 (Bankr.S.D.Fla.1988), where the lien arose five days before bankruptcy when the attorney recovered a client's rent deposit, as it pertains to a retaining lien under Florida law, that has no relation back feature. See In re Banks, 94 B.R. 772, 773-74 (M.D.Fla.1989) (lien valid in bankruptcy for services and costs in connection with lawsuit from which funds were recovered).

Appellant argues that the charging lien is contractual in nature and is based upon the amount agreed upon with the client, not an amount to be determined as reasonable by the court. That issue was decided in appellant's favor when the bankruptcy court ruled against the trustee on the Section 548 and Section 329 issues, which was affirmed by the district court.

Appellee argues that the "more than would receive" element under Section 547(b)(5) was satisfied because the personal injury settlement was effective within the 90-day period, and the language of Section 547(e)(3) states that a transfer is not made until a debtor has acquired rights to the property transferred. Under 11 U.S.C. § 101(50),⁵ the creation of a lien in favor of a previously unsecured creditor is a transfer for purposes of Section 547. A transfer to an unsecured creditor during the 90-day preference period satisfies the fifth element of Section 547(b).

The bankruptcy court found that the fixing of the lien when the settlement proceeds became available, and payment made to appellant from those proceeds, was a transfer and constituted an avoidable preference. The error of the bankruptcy court was, in effect, aiming its arrow at the wrong target by analyzing when the transfer took place, rather than whether the appellant received, by means of the transfer, more than he would have received if the transfer had not been made and he had received payment as a creditor in the bankruptcy case to the extent provided by the provisions of title 11 [11 U.S.C.S. §§ 101 et seq.] for distribution of the estate.⁶ A transfer to a secured creditor in the amount of its lien during the preference period does not constitute an avoidable preference. See Deel Rent-A-Car, Inc. v. Levine, 721 F.2d 750, 756 (11th Cir.1983) (citing Walker v. Wilkinson, 296 F. 850 (5th Cir.1924) and Azar v. Morgan, 301 F.2d 78 (5th Cir.1962)). This matter is resolved by establishing when appellant achieved its secured status. The language of Section 547(e)(3) pertains to when a transfer is made, not when the creditor attained secured status if the lien has a relation back element. The bankruptcy court erred in not correctly applying the principle that by relation back, the appellant was a secured creditor prior to the time of the transfer and prior to the 90-day period under the statute. Matter of Pacific Far East Line, Inc., 654 F.2d 664, 669-70 (9th Cir.1981). The situation where an unsecured creditor becomes secured by the creation of a lien during the preference period is not identical to the facts here. The court’s erroneous conclusion does not address this distinction which is critical under Section 547(b)(5). The affirmance by the district court of the bankruptcy court’s decision does not address this point.

We conclude that the law was not properly applied to the facts and, accordingly, the judgment of the district court affirming the decision of the bankruptcy court must be REVERSED. The case is remanded to vacate the judgment entered in favor of the trustee and to deny relief under 11 U.S.C. § 547(b).

REVERSED and REMANDED with directions.

1 . Here we have facts that make lawyers squirm and members of the public scream. But we cannot twist the principle of law for the sake of righting wrongs unrelated to that principle, which is solely the recovery of a preferential payment under 11 U.S.C. § 547(b), if all statutory elements are satisfied. The asserted lack of value and “reprehensible conduct” are not relevant to the issue, nor is the asserted link to the bankruptcy filing, which was not a basis for the court's finding that the payment was a preference.

2 . It is agreed that state law applies in determining the creation of a lien and the consequences and rights attributable to the lien, other than the bankruptcy statutory issues. See Matter of Fitterer Engineering Associates, Inc., 27 B.R. 878, 880 (Bankr.E.D.Mich.1983).

3 .Section 547(b) provides that:

(b) Except as provided in subsection (c) of this section, the trustee may avoid any transfer of an interest of the debtor in property—

(1) to or for the benefit of a creditor;

(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;

(3) made while the debtor was insolvent;

(4) made—

(A) on or within 90 days before the date of the filing of the petition; ... and

(5) that enables such creditor to receive more than such creditor would receive if—

(A) the case were a case under chapter 7 of this title [11 USCS §§ 701 et seq.];

(B) the transfer had not been made; and

(C) such creditor received payment of such debt to the extent provided by the provisions of this title [11 USCS §~ 101 et seq.].

There is no dispute that four of the five statutory elements of a preference are present in this case.

4 . A charging lien survives bankruptcy if the fund to which it would attach has not come into existence prior to or in the course of the bankruptcy proceeding. Matter of TLC of Lake Wales, Inc., 13 BR. 593, 595 (Bankr.M.D.Fla.1981) (citing 4B Collier on Bankruptcy, at 1003 (14th ed.) and In re Browy, 527 F.2d 799 (7th Cir.1976)); see also Matter of Fitterer Engineering Associates, Inc., supra note 2.

5 . This provision defining "transfer" under title 11, states in part:

"`transfer' means every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or with an interest in property...."

6 . If the bankruptcy court’s view of appellant’s ethics clouded the proceedings to divert its attention away from the legal point at issue, this court, in its review, has focused only on the relevant point. The target is the disputed statutory element, Section 547(b)(5).