Opinion
106391/10.
Decided November 23, 2010.
Petitioner Emery Celli Brinkerhoff Abady LLP ("ECBA") moves, by order to show cause, pursuant to Judiciary Law § 475, for an order determining and fixing a charging lien against the proceeds of settlements negotiated by ECBA on behalf of its former client, respondent Michael Rose ("Rose"). Respondent opposes the petition and cross moves to (1) consolidate this proceeding with a motion for summary judgment in lieu of complaint based on an account stated (Index No. 103871/10) (hereinafter "the related action"), and (2) to deny ECBA's request for summary judgment in lieu of complaint or, alternatively, to supplement its opposition to the motion for summary judgment in lieu of complaint and to correct the attorneys' affirmation submitted by Rose in opposition to the motion.
Background
In February 2005, Rose retained ECBA, a Manhattan law firm specializing in litigation, to represent him and his company, Broadside Realty Corporation ("Broadside") in connection with various disputes concerning his company, its shareholders, its assets and related matters. Rose signed a retainer agreement setting forth ECBA's hourly rates and billing procedures, including a provision that Rose would be sent a monthly invoice to be paid 30 days from the date of the bill, and that interest would be charged on any unpaid balance not paid in full within 60 days.
In connection with the retainer agreement, Rose agreed to provide ECBA with a refundable initial retainer of $50,000
According to ECBA, Rose stopped paying his bills regularly in 2006, and by December 9, 2009, he owed a balance of $439,439.03, consisting of 438,796.41 in legal fees and $642.62 in disbursements. ECBA separately moved in the related action for summary judgment in lieu of complaint seeking $438,796 in legal fees based on a theory of an account stated. In a separate decision and order, the court denied this motion on the ground that summary judgment in lieu of complaint cannot be granted on the basis of an implied account stated.
At issue on this petition is whether ECBA is entitled to a charging lien based on a settlement which increased Rose's ownership in Broadside and resulted in Rose receiving certain items of personal property. The settlement resolved, inter alia, three actions related to disputes among the shareholders of Broadside regarding their ownership rights in Broadside and Broadside's management, that arose after the death of Rose's father, Stanley Rose, in 1994. The parties to these actions included Rose, and Rose's half-sisters Georgia Stamoulis (a/k/a Georgia Rose) ("Georgia"), and Helen Rose ("Helen") and Helen's son, Aris Taflambas ("Aris").
The first action was a derivative shareholder action filed by Rose in the Supreme Court, Queens County against Georgia in March 2002 (Index No. 5686/02), alleging that Georgia was mismanaging properties owned by Broadside and misappropriating assets to her own use. At the time, Rose was not yet represented by ECBA. In March 2003, Helen and Aris brought a derivative shareholder action against Rose and Georgia in the Supreme Court, Queen County, (Index No. 6885/03), alleging that both were mismanaging properties owned by Broadside and misappropriating the Broadside's assets to their own use. After ECBA was retained by Rose in 2005, it appeared on his behalf in both of these actions, which were consolidated in May 2003.
In addition, in August 2007, Rose, represented by ECBA, filed a declaratory judgment action in the Supreme Court, New York County, Index No. 602887/07 ("the 2007 action"), in order to determine the amount of shares of Broadside stock Stanley Rose owned at the time of his death. ECBA also represented Rose in a fee dispute with his former attorneys.
In 2008, Rose, Georgia, Helen and Aris reached a settlement agreement. A consent order and agreement for settlement of the actions was entered into in the Supreme Court, Queens County on April 10, 2008 ("the April Settlement"). Under the terms of the April Settlement, Helen, Aris, and Georgia agreed to "relinquish all rights and/or claims to any and all stock of Broadside," turn over all Broadside corporate information to Rose, and to confirm that Rose is the sole shareholder of Broadside. Georgia also agreed to transfer to Rose several items of personal property including two wine refrigerators, forty bottles of wine, a painting of fruits by Geralis, and engraving of a volcano on the island of Thera, a snow thrower, a tool box, and antique American Flyer train set, and a variety of personal photographs and sentimental items.
The April Settlement required Broadside and/or Rose, as Broadside's sole shareholder, to make a series of payments to Georgia, Helen and Aris, to be financed by loans to Broadside and the sale of Broadside's assets. Specifically, under the April Settlement, Rose and Broadside were jointly and severally responsible for (I) paying Georgia $5.5 million, including $100,000 upon execution of the agreement, and $5.4 million by December 31, 2008, and (ii) paying Aris and Helen $6.5 million, consisting of $100,000 upon execution of the agreement and $6.4 million by December 31, 2008.
In addition to resolving the three actions regarding the ownership and management of Broadside, the April Settlement also resulted in the dismissal of certain lawsuits in Greece brought by Georgia and Helen against Rose concerning the inheritance of property in Greece from their mother.
On December 31, 2008, Rose, on behalf of himself and Broadside, entered into a further stipulation and agreement with Georgia ("the December 2008 Agreement"), which amended the April Settlement to clarify, inter alia, that Rose had full discretion to operate Broadside as he saw fit. Broadside also to set aside funds to be paid to Georgia. On July 2, 2009, Rose, on behalf of himself and Broadside, entered into an agreement with Georgia ("the July 2009 Agreement") which, inter alia, reduced the amount Broadside was to pay Georgia. Rose and Broadside were represented by ECBA in connection with the negotiations of both agreements.
The December 2008 Agreement and the July 2009 Agreement are not part of the record and the description of the agreements is based solely on the allegations in the petition.
ECBA now petitions for a determination and enforcement of a charging lien against the proceeds of the April 2008 Settlement and, in particular, Rose's increased ownership interest in the Broadside and the items of personal property obtained as a result of the settlement.
Rose opposes the petition, asserting, inter alia, that he paid all fees arising out of the litigation which resulted in the settlement, and that, in any event, there was no favorable result or proceeds on which the lien could attach since he did not receive any additional stock and had to pay the other shareholders of Broadside to give up their interest in the company so that he could be the sole shareholder. Rose also argues that legal fees for which ECBA asserts its right to a lien were incurred after the April Settlement, and therefore do not arise out of their services for which the alleged proceeds were obtained. According to Rose, these fees include approximately $90,000 for legal work after the discontinuation of the actions, and another approximately $349,000 to resolve a separate dispute regarding the amount of transfer tax due on the settlement. Rose alleges that much of this work was necessitated by the negligent failure of ECBA to take into account tax consequences of the April Settlement, which he alleges amounts to legal malpractice .
In reply, ECBA asserts that the opposition misrepresents the facts, and that ECBA consistently advised Rose to obtain independent tax counsel to review the April Settlement and that eventually, with Rose's permission, ECBA arranged to have tax counsel provide Rose with tax advice. ECBA also argues that the accusation of legal malpractice is unsupported by evidence and that in any event, the tax advice relates to matters occurring after the settlement and therefore the charging lien should attach. ECBA alternatively argues that if a charging lien is not imposed that Rose should be enjoined from transferring any property that may be subject to the lien.
Discussion
Judiciary Law § 475 provides that "[f]rom the commencement of an action . . . the attorney who appears in an action has a lien upon his [or her] client's cause of action, claim or counterclaim, which attaches to a verdict, report, determination, decision, judgment or final order in the client's favor and the proceeds thereof in whatever hands they may come." It further provides that "the lien cannot be affected by any settlement between the parties before or after judgment, final order or determination."
"A charging lien is a security interest in a favorable result of litigation . . . giving the attorney equitable ownership interest in the client's cause of action and ensuring the attorney can collect a fee from the fund he has created for that purpose on behalf of the client." Chadbourne Parke, LLP v. AB Recur Finans, 18 AD3d 222, 223 (1st Dept 2005) (citations omitted). Furthermore, although "a charging lien extends to settlement proceeds . . . it is only enforceable against the fund created by that action." Id. (citation omitted). Thus, "where the attorney's services do not create any proceeds but consist solely of defending title or interest already held by the client, there is no lien on the title or interest." Theroux v. Theroux, 145 AD2d 625 (2d Dept 1989), citing, Desmond v. Socha, 38 AD2d 22, 24 (3d Dept 1971), aff'd, 31 NY2d 687 (1972). In addition, the charging lien only extends to fees arising out of the attorney's services in a specific action or proceeding in which they were incurred and does not include fees due to an attorney for other matters. See In the Matter of Rosenblum, 121 AD2d 546 (2d Dept 1986); 7 NYJur2d Attorneys at Law § 295.
The preliminary question raised is whether the April Settlement created proceeds to which a charging lien could attach. Even assuming arguendo that Rose did not obtain any additional stock in Broadside as a result of the April Settlement, he nonetheless attained 100% ownership in Broadside. Moreover, although the settlement required Broadside and Rose to buy out the other shareholders, it cannot be said that the settlement did not result in proceeds of litigation in his favor, particularly as the settlement resolved the issues regarding the conflicting rights of the shareholders and made him the sole owner of Broadside. See e.g. Tunick v. Shaw, 45 AD3d 145 (1st Dept 2007), lv dismissed, 10 NY3d 930 (2008) (holding that photographic images constitute proceeds of litigation to which attorneys' charging liens could attached even though images existed prior to litigation where attorneys' efforts culminated in settlement resolving conflicting rights to possession and commercial exploitation of the images); compare Theroux v. Theroux, 145 AD2d 625 (holding that attorney's services did not create any proceed on which charging lien could attach where equitable distribution settlement merely permitted plaintiff to maintain a one-half interest in the condominium that she held as a tenant by the entirety).
That being said, however, it cannot be established on this record the extent to which the unpaid legal fees at issue in this proceeding arose out of ECBA's services in connection with the litigation that was settled. Notably, the billing records indicate that ECBA is seeking to recover for charges unrelated to the litigation, including a fee dispute with Rose's former attorneys. In addition, it is unclear from the record whether the tax issues arising after the April Settlement sufficiently relate the litigation such that a lien would attach to the proceeds of the settlement.
Next, Rose's allegations of legal malpractice related to the tax consequences of the April Settlement preclude the enforcement of any charging lien at this juncture since it cannot be said as a matter of law that the allegations are without merit, and an order fixing a charging lien bars any claim for legal malpractice. Wallach v. Unger Stutman, LLP, 48 AD3d 360 (1st Dept 2008). Furthermore, contrary to ECBA's argument, the alleged malpractice did not occur after the Settlement Agreement, such that the allegations are irrelevant to the attachment of the charging lien to the settlement proceeds. In particular, although it appears that the issues regarding the tax arose subsequent to the settlement, the alleged malpractice appears to relate to the tax implications of the structuring of the April Settlement Agreement.
In addition, Margarbe v. Rusciano, 55 AD3d 689 (2d Dept 2008), on which ECBA relies, is not dispositive here. In Margarbe, the Appellate Division, Second Department held that a violation of the Code of Professional Responsibility did not preclude a firm from fixing a charging lien on the proceeds of a settlement obtained for its clients where the firm "properly exercised its fiduciary duty" to the clients up until the date of the alleged violation and the firm was seeking no fees for work performed after that date. Notably, a hearing was held to determine whether a charging lien was appropriate in that case. Here, it cannot be determined on this record whether any alleged misconduct by ECBA relating to tax advice given in connection with the April Settlement Agreement should preclude the fixing of a lien. Moreover, there is no dispute that tax issues arose following the April Settlement Agreement, and the billing records reflect this fact.
In addition, at this juncture, the record is not sufficiently developed to warrant an order enjoining Rose from disposing of any property that may be subject to the lien until there is a final judgment. That being said, however, when, as here, a charging lien is asserted an attorney is entitled to a prompt hearing to determine whether the attorney is entitled to enforce a charging lien, here whether there is a defense to such a lien based on allegations of legal malpractice or other misconduct by the attorney, and, if so, the amount of the lien. See Katsaros v. Katsaros, 152 AD2d 539 (2d Dept 1989); Linney Crocco v. Wolfe, 243 AD2d 348 (1st Dept 1997). Accordingly, the petition is granted only to the extent of referring these issues to a Judicial Hearing Officer ("JHO") or Special Referee for a hearing and recommendations.
In light of the above ordered hearing, Rose's cross motion to consolidate this special proceeding with the related plenary action is denied, and the balance of the cross motion is moot as the motion for summary judgment in lieu of complaint has been denied.
Conclusion
In view of the above, it is
ORDERED that the petition for an order determining and enforcing a charging lien pursuant to Judiciary Law § 475 is granted only to the extent of referring the matter to a JHO and/or Special Referee to hear and report as to (1) whether the enforcement of the lien is barred by any alleged legal malpractice by ECBA in connection with the tax issues involved in the April Settlement and, if not, (2) the extent to which the unpaid legal fees at issue in this proceeding arose out of ECBA's services in connection with the litigation that was settled by the April Settlement; and it is further
ORDERED that the powers of the JHO/Special Referee shall not be limited further than as set forth in the CPLR; and it is further
ORDERED that this matter is hereby referred to the Special Referee Clerk (Room 119M, 646-386-3028 or spref@court.state.ny.us) for placement at the earliest possible date on calendar of the Special Referee Part (which are posted on the website of this court at www.nycourts.gov/supctmanh at the References link under Courthouse procedures), shall assign this matter to an available Special Referee to hear and report as specified above; and it is further
ORDERED that counsel for ECBA shall, within 15 days of this decision and order submit to the Special Referee Clerk by fax (212-401-9186) or email an Information Sheet (which can be accessed at the References link of the Court website) containing all the information called for therein and that, as soon as practical thereafter, the Special Referee Clerk shall advise counsel of the date fixed for the appearance on the matter upon the calendar of the Special Referee Part; and it is further
ORDERED that the parties shall appear at the hearing, including with all witnesses and evidence they seek to present, and shall be ready to proceed on the date fixed by the Special Referee Clerk subject only to any adjournment that may be authorized by the Special Referee Part in accordance with the rules of that Part; and it is further
ORDERED that the hearing shall be conducted in the same manner as a trial before a Justice without a jury (CPLR 4320(a)) (the proceeding will be recorded by a court reporter, the rules of evidence apply, etc) and, except as otherwise directed by the assigned JHO/Special Referee for good cause shown, the trial of the issues specified above shall proceed from day to day until completed; and it is further
ORDERED that the motion to confirm or reject the Report of the JHO/Special Referee shall be made within the time specified in CPLR 4403 and Section 202.44 of the Uniform Rules for the Trial Courts; th; and it is further
ORDERED that the cross motion is denied.