A law firm sought relief from the automatic stay so that it could release funds held in its IOLTA account to pay itself fees owed by the debtor. The chapter 7 trustee and a title company creditor objected. The key issue was whether the firm had an attorney’s lien on the funds in its client trust account.
In 2009 the law firm entered into a written contingency fee agreement to represent the debtor with respect to certain claims for a fixed fee of one third of the recovery plus expenses. Eventually the debtor received $312,500 pursuant to a partial settlement.
Before the funds could be distributed a judgment creditor of the debtor demanded that the money be paid to it. The law firm declined, advising that the settlement proceeds were subject to its attorney’s lien, which was senior to the creditor’s claim. Eventually the parties agreed that the firm would hold the settlement proceeds in escrow until the issues were resolved. The firm then placed the funds in its IOLTA account.
In July 2012, the firm released ~$131,600 to itself to pay its one third contingency fee plus expenses (with no objection from the judgment creditor). In May 2017 a title company creditor obtained an injunction against the debtor preventing her from transferring or otherwise disposing of her rights to funds from designated litigation (including the funds held in the IOLTA account) to anyone other than the title company.
At some point along the way the law firm performed additional legal services for the debtor, charging an hourly rate. The debtor never paid the resulting $125,000 bill, but did not dispute it. At the time the debtor filed bankruptcy in May 2018, the remaining settlement proceeds of ~$180,900 remained in the law firm’s trust account.
The firm moved for relief from the automatic stay to permit it to release settlement funds from its IOLTA account sufficient to pay the outstanding $125,000 bill. It claimed that it had an attorney’s possessory or retaining lien over the funds to secure payment of legal fees. The chapter 7 trustee and the title company creditor objected, arguing that the only lien available to the law firm was a lien to secure its one third contingency. However, that it already been paid in full. So, the firm was just a general unsecured creditor when it came to its hourly fees.
The court started with an overview of attorney’s liens. There are two types of liens: (1) general, possessory or retaining liens, and (2) charging or special liens. A general lien secures the entire balance owed to an attorney, but is dependent on having possession of the funds. In contrast, a charging lien binds a judgment recovered through the attorney’s efforts.
A charging lien is not dependent on possession, but is designed to protect attorneys against “the knavery of their clients, by disabling clients from receiving the fruits of recoveries without paying for the valuable services by which the recoveries were obtained.” Thus, a charging lien is limited to the value of services provided in connection with the applicable action.
Turning to Massachusetts as the applicable state law, charging liens were expressly authorized by statute. Thus, the law firm had a lien on the settlement proceeds that entitled it to drawdown funds to pay the related contingent fee and expenses. On the other hand, the status of a possessory or retaining lien was not clear. Although some states have statutes recognizing this type of lien, Massachusetts did not, and the courts never ruled directly on the matter.
However, the bankruptcy court concluded that it could sidestep the issue. “As tempting as it would be to read the tea leaves brewed from all these precedents [raised by the parties and discussed by the court] to predict how the [state supreme court] would rule” on possessory liens, that was not necessary in this case. Looking to state law precedent, even if an attorney receives funds from a client in the course of their professional relationship, if the funds are being held in escrow by the attorney as a neutral depository, allowing the attorney to assert a lien would be inconsistent with the fiduciary duty assumed when agreeing to act as a fiduciary.
Thus, regardless of whether Massachusetts would recognize a possessory or retaining lien as a general matter, the law firm did not have such a lien on the funds it held in its client trust account as an escrow agent. Accordingly, the court denied the request for relief from the stay.
A lien can provide attorneys very significant leverage in collecting their fees. But all parties should keep in mind that the rules on what is allowed can be very state specific. The opinion included an ALR citation that might provide a useful starting point: L.S. Tellier, Rights and Remedies of Client as Regards Papers and Documents on Which Attorney Has Retaining Lien, 3 A.L.R.2d 148 § 1 (1949 & Supp. 2019). In addition, an attorney should consider whether it is subject to any professional responsibility rules that impose restrictions on asserting liens.
Vicki R Harding, Esq.