Carlson v. BrandtCarlson v. Brandt
MEMORANDUM OPINION AND ORDER
Defendant-Appellant Dennis Carlson (the debtor) voluntarily filed a petition for bankruptcy relief under Chapter 11 on April 16, 1996. Two months later, he converted his bankruptcy petition to one for relief under Chapter 7, at which point plaintiff-appellee William Brandt, Jr. was appointed to serve as the Trustee in the case. Brandt filed a three-count adversary complaint against Carlson in the bankruptcy court, arguing that the debtor should be denied a discharge because he:
Background
First we briefly address Carlson’s jurisdictional challenge. As far as this Court is concerned, trustee Brandt submitted a proper motion to vacate the 12/28/99 judgment in favor of debtor Carlson. We granted that motion and set a briefing schedule on the appeal before us now. Even though Brandt technically brought his motion to vacate under Federal Rule of Civil Procedure 60(b) instead of Federal Rule of Bankruptcy Procedure 8015, the U.S. Trustee’s brief in support of Brandt’s motion cleared up the confusion and Brandt filed his motion within the ten-day time period proscribed by Rule 8015, so we decided to treat it as such. And this Court is confident that it has the discretion, within a reasonable period of time, to correct or vacate judgments mistakenly made, which is precisely what happened when we granted judgment for Carlson in open court in Brandt’s absence. We conclude that jurisdiction over this appeal is proper, and proceed now to the merits.
In a bankruptcy appeal, we examine findings of fact for clear error, accepting the bankruptcy court’s version of the facts unless, “ ‘although there is evidence to support [the findings, we are] left with the definite and firm conviction that a mistake has been committed.’ ”
In the Matter of Sheridan,
After reviewing the common law record as well as the bankruptcy trial transcripts, we find Judge Schmetterer’s factual conclusions to be reasonable*in light of the evidence presented, so we will not second-guess them. Those findings are laid out in detail in the bankruptcy court’s memorandum opinion and order,
see Carlson,
Debtor Carlson is an Illinois attorney who, prior to filing for bankruptcy, primarily represented personal injury plaintiffs on a contingency fee basis. On December 27, 1995, three and a half months before Carlson filed his bankruptcy petition, he and William Hourigan — a friend and colleague of Carlson’s who represents Carlson in this appeal — executed what they call a “Practice Merger Agreement” (PMA).
1
The agreement purported to merge the practices of Carlson and Hourigan (after a certain date they were to share an office), apparently so that Hourigan could help Carlson manage his caseload. The PMA did not explain how each attorney’s pending cases would be treated or clarify whether all of each attorney’s cases would
Although Carlson and Hourigan eventually testified that they never expected the PMA to cover all of Carlson’s cases, the parties did not create any list indicating which of Carlson’s pending cases would be included under the PMA until the bankruptcy court ordered Carlson to do so in September 1996. At trial, Hourigan testified that only complex cases were intended to be included, while Carlson testified that only contingency fee cases were intended to be included, and the PMA is silent on the matter. The PMA lacks any contractual language of assignment, yet both Carlson and Hourigan testified at trial that they intended for Carlson’s cases and fees to belong to Hourigan as of the PMA’s effective date. Though the agreement did not so specify, Carlson testified that he understood it to create a contractual obligation to hand over all of his fees to Houri-gan, but that he did not consider it to constitute an “assignment” of his cases or fees. None of Carlson’s clients consented in writing to a division or sharing of legal fees between Carlson and Hourigan; indeed it appears that his clients were not even notified of the merger.
The agreement set up a complicated schedule regarding “compensation” for Carlson. We will not provide all of the details here, but notably, under the payment scheme, any fees from cases in progress that were resolved during January or February 1996 would belong only to Carlson “regardless of when the check arrives,” and beginning in March, Carlson would be paid $5,000 a month so long as he had generated $8,000 in fees in advance. If Carlson were to generate and collect more than $8,000 in fees for three months in a row and it appeared that he would generate over $100,000 of fees for the year, “then he [would] receive 30% of the excess fees based upon the estimation in the fourth month and each month thereafter, to be adjusted on a monthly basis.” Hour-igan was to cover all case expenses incurred after the effective date of the PMA, but “any uncollected case related expense incurred by [Carlson] on cases which he had in his office prior to the merger will remain his liability.” There was no mention of how cases would be “assigned” to Carlson, leaving open the question whether he would only work on the cases of his own clients.
Several years earlier, in 1991, Carlson filed a personal injury lawsuit in the Circuit Court of Cook County on behalf of his client Carmen Gonzalez, individually and as mother and guardian of Anthony Gonzalez, a minor. Carlson’s fee agreement with Gonzalez provided that Carlson would be entitled to receive one-third of any amount recovered on Gonzalez’s behalf, plus reimbursement for expenses. In January or February 1996, shortly after the signing of the PMA but before Carlson filed for bankruptcy, the Gonzalez defendant agreed to pay Gonzalez $58,000 to settle the matter. On March 1,1996, Carlson filed a “Petition to Confirm Settlement of Minor’s Claim or Reinstate” in the Law Division of the Circuit Court of Cook
On April 16, 1996, when Carlson filed his Chapter 11 petition, the Gonzalez settlement proceeds had not yet been disbursed. Within a few days of Carlson’s bankruptcy filing, Hourigan got the $58,000 check and, after paying the client’s share, deposited the remainder in a bank account in his own name. Over the next few months, Houri-gan paid Carlson the equivalent of almost all of Carlson’s fees and expenses for the Gonzalez case, and followed Carlson’s directions to give certain amounts to Carlson’s ex-wife Loraine. 2 Hourigan also paid himself $1500 as compensation for the probate work he did, although the reasonable value of that work was only $500 plus $85 that he advanced in expenses. Hourigan ended up giving some of the $1500 back to Carlson, as the total amount that he paid out to Dennis and Loraine (through August 1996, well after the case had been converted to one under Chapter 7 of the bankruptcy code) exceeded the amount originally deposited from the Gonzalez settlement proceeds.
Judge Schmetterer found that Carlson and Hourigan continuously ignored the provisions of the PMA following its execution on December 27, 1995. For example, although the PMA did not expressly exclude any of Carlson’s cases, between January 1, 1996 and March 81, 1996, Carlson directly received more than $16,000 in fee payments that he did not pay to Hourigan nor deposit into a joint account. He kept some of that money for his own needs and gave some to his former wife Loraine. In fact, the only fees that Carlson and Houri-gan treated as included under the PMA were those for Carlson’s pre-bankruptcy work on the Gonzalez case that were received one or two days after Carlson filed for bankruptcy. Carlson did not disclose the Gonzalez fees due in his bankruptcy statements and schedules (nor did he include Gonzalez on the list of cases intended to be covered by the PMA that he prepared in response to the bankruptcy court’s order); it was only after the Trustee’s work uncovered the payments that Carlson asserted the view that the fees and expenses for the Gonzalez case belonged to Hourigan, not to the bankruptcy estate.
Discussion
We now turn to the bankruptcy court’s conclusions of law. Carlson first argues that Judge Schmetterer incorrectly applied Illinois law in determining that Carlson’s interest in contingent attorney’s fees from the Gonzalez case constitutes an asset of his bankruptcy estate and thus had to be turned over to the trustee. Carlson relies on an Illinois Supreme Court holding that an attorney’s potential contingent fees. do not constitute part of the marital estate subject to valuation and division between divorcing parties.
In re Marriage of Zells,
This case is distinguishable from
Zells
in a number of ways. First, this is not a divorce case, and we are not dividing marital assets. Second, the fee disputed in this case is not speculative as was the fee in
Zells.
Carlson filed his bankruptcy petition on April 16,1996. The parties to the Gonzalez case agreed to settle for the exact amount of $58,000 as early as January or February 1996, and Carlson’s fee agreement provided that he would be entitled to receive one-third of any amount recovered plus reimbursement for expenses. The Circuit Court of Cook County approved and confirmed the $58,000 settlement amount on March 27, 1996. Although the check for the proceeds had not been disbursed by the time Carlson filed for bankruptcy, all of the work that Carlson did on the case — and even the probate court approval obtained by Hourigan once Carlson’s license to practice law was suspended on March 26 — was done pre-petition. A check for $58,000 was delivered to Hourigan just a day or two after Carlson filed for bankruptcy. Because. Carlson’s interest more closely resembled an “account receivable” than a still-speculative contingency fee, including it in his bankruptcy estate was proper.
See In re Marriage of Tietz,
Furthermore, the Bankruptcy Code specifies that the estate encompasses “all legal and equitable interests in property held by the debtor at the time of filing,”
see
11 U.S.C. § 541(a), and this includes all “[pjroceeds, product, offspring, rents, or profits of or from property of the estate, except such as are earnings from services performed by an individual debtor
after
the commencement of the case.”
Id.
at § 541(a)(6) (emphasis added). A number of courts have held that under this definition, contingency fees owed to a debtor-attorney at the time of the bankruptcy filing for legal services performed
before
the petition was filed are a part of the debtor’s estate.
See, e.g., Turner v. Avery,
Carlson maintains that the Gonzalez fees and reimbursed expenses were not part of the bankruptcy estate because he was bound to turn them over to Hourigan pursuant to the Practice Merger Agreement, but we conclude, as did the bankruptcy court, that the PMA is unenforceable. Without even reaching the question whether the PMA gave Carlson ample consideration in exchange for Carlson’s assignment to Hourigan of his rights to legal fees in certain cases (one of Judge Schmetterer’s grounds for rejecting it), we find the agreement void because it violates Rule 1.5 of the Illinois Rules of Professional Conduct (IRPC). Under Rule 1.5(f):
a lawyer shall not divide a fee for legal services with another lawyer who is not in the same firm, unless the client consents to employment of the other lawyer by signing a writing which discloses: (1) that a division of fees will be made; (2) the basis upon which the division will be made, including the economic benefit to be received by the other lawyer as a result of the division; and (3) the responsibility to be assumed by the other lawyer for performance of the legal services in question.
Rule 1.5 reflects the state’s concern that clients be guaranteed the right to representation of their own choosing, “the most recent expression of the long-standing policy of this state” prioritizing clients’ rights over lawyers’ remedies.
See Albert Brooks Friedman, Ltd. v. Malevitis,
Carlson and Hourigan contend that the PMA does not violate Rule 1.5(f) of the IRPC because the rule only prohibits fee-splitting among lawyers who are not in the same law firm, while the effect of the PMA was to create one firm of which both Carlson and Hourigan were a part.
We turn now to the counts brought against Carlson by the trustee. The bankruptcy court denied Carlson a discharge based on its finding that Carlson violated § 727(a)(2) of the Bankruptcy Code, under which a discharge should be denied if
the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed
(A) property of the debtor, within one year before the date of the filing of the petition; or
(B) property of the estate, after the date of the fifing of the petition.
11 U.S.C. § 727(a)(2). The court’s findings support the conclusion that Carlson transferred or concealed property of the bankruptcy estate both within one year before the filing of his petition and after the petition was filed. The Seventh Circuit has explained that “[a] concealment ... need not be literally concealed. The transfer of title with attendant circumstances indicating that the bankrupt continues to use the property as his own is sufficient to constitute a concealment.”
In the Matter of Kauffman,
The final prong of the § 727(a)(2) inquiry — the question whether Carlson had the requisite intent to hinder, delay, or defraud the trustee during the course of this conduct — is one of fact.
See Yonikus,
The court also found the denial of Carlson’s discharge to be warranted under paragraphs (a)(3) and (a)(4) of 11 U.S.C. § 727. Under § 727(a)(3), a discharge may be denied if
the debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor’s financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances of the case.
Section 727(a)(4) calls for the denial of a discharge to the debtor who “knowingly and fraudulently, in or in connection with the case made a false - oath or account,” which may be a false statement or omission in the debtor’s schedules or a false statement by the debtor at an, examination during the course of the bankruptcy proceedings.
See, e.g., Yonikus,
Conclusion
For the foregoing reasons, we affirm the decision of the bankruptcy court denying Dennis E. Carlson a discharge from debts. 7 It is so ordered.
Notes
. The full text of the PMA can be found in the bankruptcy court’s opinion,
In re Carlson,
. Carlson testified at trial that these payments to Loraine were for back child support and maintenance, but he did not list any debt to Loraine in his schedule of debts and he did not disclose several pre-petition transfers to her in his statement of financial affairs.
. Carlson's assertion that allowing the trustee to include the Gonzalez fees in the bankruptcy estate would require Carlson to engage in illegal fee-splitting with a non-attorney is misguided. Carlson is not being asked to share his fees with trustee Brandt in his individual capacity; even though Brandt does stand to receive a small percentage of the total estate assets as compensation for his services, the trustee has the official job of identifying and valuing the assets of the debtor’s estate in order to satisfy creditors' claims, and it is in this capacity that Brandt seeks access to the fees. Were we to credit Carlson's argument, all attorneys who file for bankruptcy would be able to exclude from their bankruptcy estates any fees owed for pre-petition work they did, which could not have been the intent of the Bankruptcy Code given the language of 11 U.S.C. § 541(a)(6).
. Contrary to Carlson’s contention, Illinois law does not limit quantum meruit awards to cases where an attorney hired by a contingent fee contract is
discharged
by his or her client; rather, such valuation of legal services rendered can be made even in cases of attorney withdrawal, so long as the withdrawal is for good cause.
See Kannewurf v. Johns,
. Hourigan testified more specifically that he would not feel responsible if Carlson were to practice law negligently (although he thought the law would hold him responsible anyway), and that he did not withhold any taxes or take any other deductions when he paid Carlson. Tr. at 28-29.
. Carlson received $4,295 of the fees after converting his case under Chapter 7.
. We find reprehensible Carlson’s argument that "he is being hung out to dry” and denied a discharge simply because he is an attorney who was pro se and made errors before the bankruptcy court. Equally offensive is his suggestion that he was denied due process and fundamental fairness because Judge Schmetterer — who was absent from the bench for a long period post-trial due to his wife’s unfortunate illness — issued the opinion eleven months after the trial "with only his notes to rely on” and thus must have forgotten his earlier rulings regarding the precise nature and scope of the claims.