Dated: February 25, 2020
I □□
; Benn Perf — 3 Brenda Moody Whinery, Chief Bankruptcy
4 5 6 7 UNITED STATES BANKRUPTCY COURT 8 DISTRICT OF ARIZONA Inre: Chapter 7 10] JOHNS. TRUITT and SHIREEN E. Case No. 4:14-bk-00722-BMW 11 BRUNT RULING AND ORDER RE: MUNGER Debtors. CHADWICK, P.L.C.’S APPLICATION 12 FOR RELEASE OF SETTLEMENT 3 FUNDS UNDER CHARGING LIEN
14 15 This matter came before the Court pursuant to Munger Chadwick, P.L.C.’s Applicatioi for Release of Settlement Funds Under Charging Lien (the “Application’”’) (Dkt. 578) filed bv 17 || Munger, Chadwick, & Denker, P.L.C., formerly named Munger Chadwick, P.L.C. (collectively 18] “Munger Chadwick” or the “Firm’’), on September 5, 2019; the Trustee ’s Objection to Munge Chadwick, P.L.C.’s Application for Release of Settlement Funds Under Charging Lien (th “Objection’’) (Dkt. 581) filed by Trudy A. Nowak, the Chapter 7 Trustee (the “Trustee’’); and al pleadings related thereto. 22 The Court held a hearing on the Application on November 12, 2019, at which time th 23 || parties presented oral argument and the Court took this matter under advisement. Based upon th pleadings, arguments of counsel, and entire record in this case, the Court now issues its ruling. 25} I. Jurisdiction 26 The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334 and 157. Thi is a core proceeding to determine the validity, extent and/or priority of a lien. 28 U.S.C 28] § 157(b)(2)(K).
1 II. Factual Background & Procedural Posture 2 This case was commenced on January 21, 2014 (the “Petition Date”), when John and 3 Shireen Truitt (collectively, the “Debtors”) filed a voluntary petition for relief under chapter 11 4 of the Bankruptcy Code. 5 Pre-petition, Munger Chadwick represented the Debtors and related entity Chasm 6 Investments, Ltd. in connection with various legal matters, including certain litigation. When the 7 Debtors filed for bankruptcy, they were involved in no fewer than four lawsuits, all pending in 8 Arizona state courts. (See Dkt. 37 at 6; Dkt. 87; Dkt. 115; Dkt. 128 at 3). However, Munger 9 Chadwick was never retained as special counsel in this bankruptcy case. 10 On March 12, 2014, Munger Chadwick filed a proof of claim in the amount of 11 $903,313.28 for legal services rendered pre-petition. (Proof of Claim 3-1). In its proof of claim, 12 Munger Chadwick asserts that its claim is both entirely secured as well as entirely unsecured. 13 (Proof of Claim 3-1). Munger Chadwick has asserted that the basis for its secured claim is a 14 charging lien established in the Fee Agreement with Munger Chadwick, P.L.C. (the “Fee 15 Agreement”). (Proof of Claim 3-1; see also Dkt. 581 at 6-10).1 16 On October 8, 2015, the Debtors sought Court approval of a settlement agreement reached 17 by and between the Debtors and Sierra Vista Medical Center, L.L.P resolving two pending 18 lawsuits between the parties (the “Sierra Settlement”). (Dkt. 317). Pre-petition, Munger 19 Chadwick represented the Debtors in these two lawsuits. Munger Chadwick objected to the 20 proposed settlement agreement on the basis that it, not the Debtors, was entitled to the settlement 21 proceeds by virtue of its asserted charging lien. (Dkt. 322). The Court approved the settlement 22 agreement and overruled Munger Chadwick’s objection without prejudice to the parties filing 23 further pleadings to resolve the competing claims to the settlement funds. (Dkt. 339). 24 The case was converted to Chapter 7 on May 25, 2016, and the Trustee was appointed. 25 On May 16, 2019, the Trustee sought Court approval of a settlement with the Debtors in 26 their individual capacities and as trustees of various of their trusts. (Dkt. 568). Munger Chadwick 27
28 1 No objection has been raised as to the amount asserted in Munger Chadwick’s proof of claim. The 1 objected to the proposed settlement on the basis that it was not reasonable. (Dkt. 571). During a 2 hearing on the proposed settlement, counsel for Munger Chadwick raised the unresolved 3 charging lien issue. Ultimately, all objections to the settlement were resolved and the parties 4 agreed that Munger Chadwick would file an application asserting a charging lien on or before 5 October 4, 2019. (Dkt. 582). 6 Munger Chadwick timely filed the Application, in which it asks the Court to release 7 $10,000, representing the settlement proceeds generated by the Sierra Settlement, in accordance 8 with the Fee Agreement, which Munger Chadwick argues provides for a charging lien in its favor 9 on any Compensation obtained, defined in the Fee Agreement as “all reparations, compensation, 10 benefits and civil damages lawfully due Client.” Munger Chadwick has not argued that it is 11 entitled to a lien under any alternative theories. 12 The Trustee has objected to the Application on the basis that: (1) it is procedurally 13 defective in that it attempts to circumvent the requirements set forth in Federal Rule of 14 Bankruptcy Procedure 7001, which require that an adversary be commenced to determine the 15 validity, priority, and/or extent of a lien; and (2) the plain language of the Fee Agreement 16 provides for a charging lien only if litigation proceeds exceed the outstanding balance owed to 17 Munger Chadwick, which condition has not been satisfied. 18 III. Legal Analysis & Conclusions of Law 19 A. Procedure 20 Although Federal Rule of Bankruptcy Procedure 7001(2) provides that proceedings to 21 determine the validity, priority, and/or extent of a lien are to be brought as adversary proceedings, 22 in this case the parties agreed to the procedure followed in this case, specifically the filing of an 23 application. Furthermore, no party will be prejudiced if this proceeding is resolved in the context 24 of the administrative case given that parties in interest have been given notice of these 25 proceedings, there are no disputed issues of fact, and this matter has been fully briefed. 26 B. Entitlement to Charging Lien 27 The Fee Agreement provides in relevant part:
28 In the event you receive Compensation [defined as “all reparations, 1 representation, you agree to bring your account current and 2 expressly grant the Firm a “charging lien” in said Compensation for the full undisputed outstanding balance. 3 (Dkt. 578, Ex. 2 at p.5, ¶ 5). 4 Munger Chadwick argues that the opening conditional phrase “[i]n the event you receive 5 Compensation in excess of the outstanding balance as a result of the Firm’s representation” 6 modifies only “you agree to bring your account current” and not “and expressly grant the Firm a 7 ‘charging lien’ in said Compensation for the full undisputed outstanding balance.” It is the 8 Trustee’s position that the conditional phrase applies to both clauses that follow. 9 “In the event,” which is an equivalent of “if,” introduces a conditional clause. See Bryan 10 A. Garner, Garner’s Modern American Usage 355 (4th ed. 2016). A conditional clause “is a 11 clause that ‘state[s] a condition or action necessary for the truth or occurrence of the main 12 statement of a sentence.’” United States v. Flores, 664 F. App’x 395, 399 (5th Cir. 2016) (quoting 13 Porter G. Perrin, Writer’s Guide and Index to English 500 (rev. ed. 1950)). The dependent clause 14 that expresses the condition is the protasis, and the main statement in which the consequence is 15 expressed is the apodosis. Garner’s Modern American Usage at 990. The apodosis is only 16 triggered if the protasis is satisfied. See Mercer v.
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Dated: February 25, 2020
I □□
; Benn Perf — 3 Brenda Moody Whinery, Chief Bankruptcy
4 5 6 7 UNITED STATES BANKRUPTCY COURT 8 DISTRICT OF ARIZONA Inre: Chapter 7 10] JOHNS. TRUITT and SHIREEN E. Case No. 4:14-bk-00722-BMW 11 BRUNT RULING AND ORDER RE: MUNGER Debtors. CHADWICK, P.L.C.’S APPLICATION 12 FOR RELEASE OF SETTLEMENT 3 FUNDS UNDER CHARGING LIEN
14 15 This matter came before the Court pursuant to Munger Chadwick, P.L.C.’s Applicatioi for Release of Settlement Funds Under Charging Lien (the “Application’”’) (Dkt. 578) filed bv 17 || Munger, Chadwick, & Denker, P.L.C., formerly named Munger Chadwick, P.L.C. (collectively 18] “Munger Chadwick” or the “Firm’’), on September 5, 2019; the Trustee ’s Objection to Munge Chadwick, P.L.C.’s Application for Release of Settlement Funds Under Charging Lien (th “Objection’’) (Dkt. 581) filed by Trudy A. Nowak, the Chapter 7 Trustee (the “Trustee’’); and al pleadings related thereto. 22 The Court held a hearing on the Application on November 12, 2019, at which time th 23 || parties presented oral argument and the Court took this matter under advisement. Based upon th pleadings, arguments of counsel, and entire record in this case, the Court now issues its ruling. 25} I. Jurisdiction 26 The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334 and 157. Thi is a core proceeding to determine the validity, extent and/or priority of a lien. 28 U.S.C 28] § 157(b)(2)(K).
1 II. Factual Background & Procedural Posture 2 This case was commenced on January 21, 2014 (the “Petition Date”), when John and 3 Shireen Truitt (collectively, the “Debtors”) filed a voluntary petition for relief under chapter 11 4 of the Bankruptcy Code. 5 Pre-petition, Munger Chadwick represented the Debtors and related entity Chasm 6 Investments, Ltd. in connection with various legal matters, including certain litigation. When the 7 Debtors filed for bankruptcy, they were involved in no fewer than four lawsuits, all pending in 8 Arizona state courts. (See Dkt. 37 at 6; Dkt. 87; Dkt. 115; Dkt. 128 at 3). However, Munger 9 Chadwick was never retained as special counsel in this bankruptcy case. 10 On March 12, 2014, Munger Chadwick filed a proof of claim in the amount of 11 $903,313.28 for legal services rendered pre-petition. (Proof of Claim 3-1). In its proof of claim, 12 Munger Chadwick asserts that its claim is both entirely secured as well as entirely unsecured. 13 (Proof of Claim 3-1). Munger Chadwick has asserted that the basis for its secured claim is a 14 charging lien established in the Fee Agreement with Munger Chadwick, P.L.C. (the “Fee 15 Agreement”). (Proof of Claim 3-1; see also Dkt. 581 at 6-10).1 16 On October 8, 2015, the Debtors sought Court approval of a settlement agreement reached 17 by and between the Debtors and Sierra Vista Medical Center, L.L.P resolving two pending 18 lawsuits between the parties (the “Sierra Settlement”). (Dkt. 317). Pre-petition, Munger 19 Chadwick represented the Debtors in these two lawsuits. Munger Chadwick objected to the 20 proposed settlement agreement on the basis that it, not the Debtors, was entitled to the settlement 21 proceeds by virtue of its asserted charging lien. (Dkt. 322). The Court approved the settlement 22 agreement and overruled Munger Chadwick’s objection without prejudice to the parties filing 23 further pleadings to resolve the competing claims to the settlement funds. (Dkt. 339). 24 The case was converted to Chapter 7 on May 25, 2016, and the Trustee was appointed. 25 On May 16, 2019, the Trustee sought Court approval of a settlement with the Debtors in 26 their individual capacities and as trustees of various of their trusts. (Dkt. 568). Munger Chadwick 27
28 1 No objection has been raised as to the amount asserted in Munger Chadwick’s proof of claim. The 1 objected to the proposed settlement on the basis that it was not reasonable. (Dkt. 571). During a 2 hearing on the proposed settlement, counsel for Munger Chadwick raised the unresolved 3 charging lien issue. Ultimately, all objections to the settlement were resolved and the parties 4 agreed that Munger Chadwick would file an application asserting a charging lien on or before 5 October 4, 2019. (Dkt. 582). 6 Munger Chadwick timely filed the Application, in which it asks the Court to release 7 $10,000, representing the settlement proceeds generated by the Sierra Settlement, in accordance 8 with the Fee Agreement, which Munger Chadwick argues provides for a charging lien in its favor 9 on any Compensation obtained, defined in the Fee Agreement as “all reparations, compensation, 10 benefits and civil damages lawfully due Client.” Munger Chadwick has not argued that it is 11 entitled to a lien under any alternative theories. 12 The Trustee has objected to the Application on the basis that: (1) it is procedurally 13 defective in that it attempts to circumvent the requirements set forth in Federal Rule of 14 Bankruptcy Procedure 7001, which require that an adversary be commenced to determine the 15 validity, priority, and/or extent of a lien; and (2) the plain language of the Fee Agreement 16 provides for a charging lien only if litigation proceeds exceed the outstanding balance owed to 17 Munger Chadwick, which condition has not been satisfied. 18 III. Legal Analysis & Conclusions of Law 19 A. Procedure 20 Although Federal Rule of Bankruptcy Procedure 7001(2) provides that proceedings to 21 determine the validity, priority, and/or extent of a lien are to be brought as adversary proceedings, 22 in this case the parties agreed to the procedure followed in this case, specifically the filing of an 23 application. Furthermore, no party will be prejudiced if this proceeding is resolved in the context 24 of the administrative case given that parties in interest have been given notice of these 25 proceedings, there are no disputed issues of fact, and this matter has been fully briefed. 26 B. Entitlement to Charging Lien 27 The Fee Agreement provides in relevant part:
28 In the event you receive Compensation [defined as “all reparations, 1 representation, you agree to bring your account current and 2 expressly grant the Firm a “charging lien” in said Compensation for the full undisputed outstanding balance. 3 (Dkt. 578, Ex. 2 at p.5, ¶ 5). 4 Munger Chadwick argues that the opening conditional phrase “[i]n the event you receive 5 Compensation in excess of the outstanding balance as a result of the Firm’s representation” 6 modifies only “you agree to bring your account current” and not “and expressly grant the Firm a 7 ‘charging lien’ in said Compensation for the full undisputed outstanding balance.” It is the 8 Trustee’s position that the conditional phrase applies to both clauses that follow. 9 “In the event,” which is an equivalent of “if,” introduces a conditional clause. See Bryan 10 A. Garner, Garner’s Modern American Usage 355 (4th ed. 2016). A conditional clause “is a 11 clause that ‘state[s] a condition or action necessary for the truth or occurrence of the main 12 statement of a sentence.’” United States v. Flores, 664 F. App’x 395, 399 (5th Cir. 2016) (quoting 13 Porter G. Perrin, Writer’s Guide and Index to English 500 (rev. ed. 1950)). The dependent clause 14 that expresses the condition is the protasis, and the main statement in which the consequence is 15 expressed is the apodosis. Garner’s Modern American Usage at 990. The apodosis is only 16 triggered if the protasis is satisfied. See Mercer v. Duke Univ., 190 F.3d 643, 646-47 (4th Cir. 17 1999). 18 In this case, “[i]n the event you receive Compensation in excess of the outstanding balance 19 as a result of the Firm’s representation” is the protasis and “you agree to bring your account 20 current and expressly grant the Firm a ‘charging lien’ in said Compensation for the full 21 undisputed outstanding balance” is the apodosis. The two clauses that make up the apodosis are 22 joined by the conjunction “and,” which is used to join clauses that are of equal stature. See Bryan 23 A. Garner, The Redbook: A Manual on Legal Style § 10.47 (3rd ed. 2013). There is nothing in 24 the syntax or substance of the sentence that would limit the applicability of the opening 25 conditional phrase to only the first phrase that follows. 26 Therefore, because it is undisputed that neither the Debtors nor the estate received 27 Compensation in excess of the outstanding balance owed to Munger Chadwick the provision 28 1 regarding a charging lien was never triggered. 2 At best, the charging lien provision is ambiguous, and the general rule that ambiguities in 3 contracts must be construed against the drafter applies with additional force when the contract 4 has been drafted by an attorney. In re Miller, 253 B.R. 455, 459 (Bankr. N.D. Cal. 5 2000), aff’d, 284 B.R. 121 (N.D. Cal. 2002), aff’d sub nom. Miller v. United States, 363 F.3d 999 6 (9th Cir. 2004); see also Erdman v. Cochise Cty., Ariz., 926 F.2d 877, 880 (9th Cir. 1991); United 7 California Bank v. Prudential Ins. Co. of Am., 140 Ariz. 238, 258, 681 P.2d 390, 410 (Ariz. Ct. 8 App. 1983). In this case, the Court will strictly construe the provision at issue against the drafter, 9 Munger Chadwick. 10 Moreover, even if the Court were to accept Munger Chadwick’s reading of the charging 11 lien provision in the Fee Agreement, Munger Chadwick has not established or cited this Court to 12 any authority that would support the proposition that Munger Chadwick’s asserted charging lien 13 was validly perfected and would attach to the post-petition proceeds at issue. 14 IV. Conclusion 15 Based upon the foregoing and the totality of the circumstances, it is the determination of 16 the Court that Munger Chadwick does not have, and is not entitled to assert, a charging lien 17 against the subject proceeds. 18 Wherefore, for good cause appearing; 19 IT IS HEREBY ORDERED that the Application is denied. 20 DATED AND SIGNED ABOVE. 21 22 23 24 25 26 27 28