David N. Chandler, P.C. v. Deborah McIntosh
697 F. App'x 569
| 9th Cir. | 2017Background
- Debtor McIntosh owed $450,000 in fees to law firm CMITH, $230,000 of which was secured by a deed of trust on her house.
- McIntosh retained Chandler to file Chapter 13 and brought an adversary proceeding arguing CMITH’s deed of trust was invalid under California Rule of Professional Conduct 3-300; CMITH reconveyed the deed and released its lien.
- The house was sold; $57,712 remained in escrow under the bankruptcy court. Debtor’s confirmed Chapter 13 plan provided for certain payments from escrow and for Debtor to receive remaining proceeds under the homestead exemption.
- Debtor later obtained new counsel and moved to dismiss the bankruptcy and release escrow funds per the confirmed plan; Chandler moved to have the escrow paid to the Chapter 13 Trustee and sought fees, arguing the CMITH lien had been preserved for the estate under 11 U.S.C. § 551 via avoidance under § 544(b)(1).
- The bankruptcy court found Chandler breached his duty of loyalty by taking a position adverse to his former client (switching to argue § 551 preservation after having litigated under Rule 3-300), denied his fee application, ordered disgorgement, dismissed the case, and directed distribution of escrow per the plan.
- The BAP affirmed; the Ninth Circuit reviewed de novo and affirmed the BAP’s judgment.
Issues
| Issue | Chandler's Argument | McIntosh's Argument | Held |
|---|---|---|---|
| Did Chandler breach duty of loyalty by later arguing CMITH’s lien was preserved for the estate? | Chandler contended the lien was preserved under § 551 (via § 544 avoidance), entitling the Trustee to proceeds. | Chandler’s change of position injured Debtor; he had earlier litigated under Rule 3-300 and secured reconveyance for Debtor. | Court held Chandler breached his duty of loyalty; finding not clearly erroneous. |
| Should the escrowed sale proceeds be paid to the Chapter 13 Trustee? | Chandler sought distribution to the Trustee so unsecured creditors could be paid. | Debtor (and plan) required payment to CalHFA and remainder to Debtor under homestead exemption. | Court denied Chandler’s motion; funds distributed per confirmed plan and homestead exemption. |
| Is dismissal of the Chapter 13 case and denial of Chandler’s fees appropriate? | Chandler sought fees and payment from estate. | Debtor sought dismissal and denial/disgorgement of Chandler’s fees for breaching loyalty. | Court affirmed dismissal, denied fees, and affirmed disgorgement (Chandler abandoned challenge to disgorgement on appeal). |
| Standard of review for these determinations | N/A | N/A | Bankruptcy court’s factual findings reviewed for clear error; dismissal and fee awards reviewed for abuse of discretion; BAP decision reviewed de novo — affirmed. |
Key Cases Cited
- Boyajian v. New Falls Corp., 564 F.3d 1088 (9th Cir.) (standard for BAP review and related procedural guidance)
- Continental Ins. Co. v. Thorpe Insulation Co., 671 F.3d 1011 (9th Cir.) (clear-error standard for bankruptcy factual findings)
- In re Leavitt, 171 F.3d 1219 (9th Cir.) (clear-error review of bankruptcy factual findings)
- Rodriguez v. Disner, 688 F.3d 645 (9th Cir.) (abuse-of-discretion review for attorney’s fees decisions)
- In re Ellsworth, 455 B.R. 904 (9th Cir. BAP) (abuse-of-discretion standard for dismissal of Chapter 13 cases)
- People ex rel. Deukmejian v. Brown, 624 P.2d 1206 (Cal. 1981) (duty of loyalty to former clients survives termination of representation)
- Oasis W. Realty, LLC v. Goldman, 250 P.3d 1115 (Cal. 2011) (former-client loyalty principle reaffirmed)