Appellant, Decker, Vonau, Sybert, & Lackey, Co., L.P.A. (“Decker”), provided prepetition legal services to the Debtor, Simms Construction Services Co., Inc. (“Simms Construction”). Decker received payment for those services from the proceeds of an arbitration award during the ninety days preceding Simms Construction’s bankruptcy filing. Harold A. Corzin, plaintiff-appellee, sued Decker asserting that an avoidable preferential transfer occurred. Ruling on cross motions for summary judgment, the bankruptcy court concluded that Decker’s asserted attorney’s charging lien against the arbitration award proceeds was not valid under Ohio law, and that the payment therefore constituted a preferential transfer under § 547(b) of the Bankruptcy Code. 1 For the reasons that follow, the Panel reverses the judgment of the bankruptcy court and remands the adversary proceeding for entry of judgment in favor of Decker.
I. ISSUES
The general issue raised by this appeal is whether the payment of attorney’s fees to Decker constitutes an avoidable preference under § 547(b). In resolving this issue, it must be determined whether Decker held a valid attorney’s charging lien against the arbitration award from which the fees were paid and, if so, whether such lien was enforceable under Ohio law. 2
If the Trustee is found to have proved all requisite elements to avoid the transfer under § 547(b), an additional issue regarding the applicability of the “ordinary course of business” defense, § 547(c)(2), arises. Because Ohio law mandates the conclusion that Decker held a valid, enforceable attorney’s lien, the Panel need not consider the “ordinary course” issue.
II. JURISDICTION AND STANDARD OF REVIEW
We have jurisdiction to decide this appeal. The United States District Court for the Northern District of Ohio has authorized appeals to the BAP, and a “final order” of the bankruptcy court may be appealed as of right under 28 U.S.C. § 158(a)(1). The judgment of the bankruptcy court holding that the payment by Simms Construction to Decker constituted an avoidable preferential transfer under § 547(b) is a final order.
Marlow v. Rollins Cotton Co. (In re Julien Co.),
The bankruptcy court’s conclusions of law, including those relating to the validity of an alleged attorney’s lien under state law, are subject to de novo review.
See Salve Regina College v. Russell,
III. FACTS
The facts' ar,e uncontested by the parties. Simms Construction filed its petition for relief under chapter 7 of the Bankruptcy Code on March 7, 1997. Harold A. Corzin (“Trustee”) was appointed as the chapter 7 trustee.
On or about March 16, 1995, Simms Construction retained Decker to prosecute a construction claim it held against Carter Steel and Fabricating Co., Inc. (“Carter Steel”). The claim arose during construction of the Student Recreation Center of the Ohio University in Athens, Ohio. The terms of Decker’s retention agreement provided that Decker would be paid on an hourly basis and that all invoices from Decker to Simms Construction would become due and payable upon receipt. These terms were set forth in a letter from Decker to Simms Construction dated March 14,1995.
On September 11, 1996, attorney Mark Decker (“Attorney Decker”) met with Jerry L. Simms, III, (“Simms”), the president and sole shareholder of Simms Construction, to discuss the progress of the pending arbitration proceedings against Carter Steel. According to an affidavit submitted by Simms in support of Decker’s motion for summary judgment, at this meeting it was agreed that
[AJttorney Decker would prepare for and complete the arbitration knowing that Simms Construction Services, Inc., would be unable to pay for the firm’s services as previously agreed, on the condition that the law firm would have first claim to and be paid from any proceeds or award that resulted from the arbitration.... The discussion was concluded with a handshake....
A separate affidavit submitted to the bankruptcy court by Attorney Decker is consistent with Simms’ recollection of their conversation.
On September 19, 1996, Simms was present during a telephone conference between Attorney Decker and Jack Stewart (“Stewart”), the attorney for Carter Steel. Attorney Decker’s affidavit states that, during that phone conference, he informed Stewart that “substantial time and resources had been invested into the preparation for the arbitration hearing and that the firm [Decker] would be paid out of the proceeds from the arbitration award.” As Attorney Decker put it, his law firm was now “working for its money.” According to his affidavit, Simms also recalls this portion of Attorney Decker’s conversation with Stewart.
On November 22, 1996, an arbitration award in the amount of $120,100 was entered against Carter Steel in favor of Simms Construction. The award was conditioned upon Simms Construction securing the removal and release of certain mechanic’s liens aggregating $133,496. The full amount of the arbitration award was held in a trust account with Luper Sheriff and Neidanthal (“Luper Sheriff’), the attorneys for Carter Steel, pending Simms Construction resolving all of the mechanic’s lien issues.
Upon receiving notification of the arbitration award, Attorney Decker contacted Stewart and again asserted Decker’s charging lien against the arbitration award proceeds. This conversation occurred in “late November, 1996.”
Following the arbitration award, Decker continued to negotiate with the mechanic’s lien claimants and ultimately obtained releases of "the mechanic’s liens to Carter Steel’s satisfaction. On January 23, 1997, Luper Sheriff issued checks from the arbitration award proceeds to three mechanic’s
As noted previously, Simms Construction filed for chapter 7 relief on March 7, 1997. On April 28, 1999, the Trustee filed an adversary proceeding against Decker seeking to recover the $45,632.68 payment it received from the arbitration proceeds as a preferential transfer. Decker filed an answer on May 19, 1999, alleging that it held an equitable attorney’s lien against the arbitration proceeds and that payment in satisfaction of its lien was not a preferential transfer under § 547(b).
On November 9, 2000, in a ruling on cross motions for summary judgment relating solely to the existence of Decker’s asserted lien, the bankruptcy court concluded that Decker held no valid attorney’s charging lien under applicable Ohio law. The bankruptcy court found that the affidavits submitted by Simms and Attorney Decker established the existence of an oral agreement allowing Decker’s fees to be paid out of the arbitration award proceeds. The bankruptcy court held, however, that an oral agreement is “not sufficient under Ohio law to create a valid attorney lien.” In reaching this conclusion, the bankruptcy court relied upon an unpublished Ohio Court of Appeals decision,
Rust v. Harris-Gordon,
No. L-97-1415,
Decker filed a motion for reconsideration of the bankruptcy court’s decision and the motion was denied by order of the bankruptcy court on December 28, 2000. This Bankruptcy Appellate Panel also denied Decker’s Motion for Leave to Appeal by entry of an order on April 6, 2001.
The remaining issues pertaining to the alleged preferential transfer and Decker’s “ordinary course of business” defense, § 547(c)(2), were tried before the bankruptcy court on April 4, 2003. On September 2, 2003, the bankruptcy court issued an opinion finding that the payment to Decker was not “ordinary in relation to other business dealings between” Decker and Simms Construction under § 547(c)(2)(B). As Decker had not proven a valid affirmative defense to the Trustee’s right to recover, the bankruptcy court held that the Trustee could avoid the payment to Decker as a preferential transfer. This timely appeal followed.
TV. DISCUSSION
Section 547(b) allows the trustee to recover certain payments made by a debtor to creditors during the ninety days preceding the debtor’s bankruptcy filing. Specifically, § 547(b) allows the trustee to:
avoid any transfer of an interest of the debtor in property—
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made—
(A) on or within 90 days before the date of the filing of the petition; or
(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and
(5) that enables such creditor to receive more than such creditor would receive if—
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title.
To avoid a particular transfer, the trustee must prove each of the statutory elements by a preponderance of the evidence. 11 U.S.C. § 547(g);
ABB Vecto Gray, Inc. v. First Nat’l Bank (In re Robinson Bros. Drilling, Inc.),
In the present adversary proceeding, the Trustee’s ability to satisfy the statutory elements, particularly subsection (b)(5), turns on whether Decker held a valid, enforceable attorney’s charging lien against the arbitration award proceeds. If Decker’s alleged charging lien is valid and enforceable under Ohio law, the payment to Decker in satisfaction of its lien did not cause Decker to receive more than it otherwise would have been entitled to receive as a result of the liquidation of Simms Construction’s bankruptcy estate.
A. Creation of an Attorney’s Charging Lien.
Generally, an attorney’s charging lien “allow[s] a lawyer who has represented a successful claimant to retain out of the proceeds of the suit an amount sufficient to pay the lawyer’s claimed fee and disbursements.” 3 Restatement (Third) of the Law Governing Lawyers § 43 cmt. d (2000). The attorney’s charging lien plays an important role in attorney/client relationships:
Especially when the client has no other assets and the lawyer is receiving a contingent fee, the charging lien gives the lawyer important assurance that the fee and disbursements will actually be paid. It thus makes it easier for people to secure competent representation when they have small means and meritorious claims.
Id.
The preliminary question of whether Decker held a valid attorney’s lien against the arbitration award proceeds is governed by Ohio law.
Butner v. United States,
The Ohio Supreme Court has recognized and discussed attorneys’ charging liens on three notable occasions. As early as 1880, the Supreme Court acknowledged that an attorney might sustain a lien upon a fund being held by a state court receiver “by reason of the services rendered in securing it, [such] that a court of equity ... would be fully warranted in directing a reasonable compensation to be paid out of it.”
Olds v. Tucker,
This premise was further developed in
Diehl v. Friester,
an attorney may have a claim upon the fruits of a judgment or decree which he has assisted in obtaining, or upon a sum of money which he has collected, and under some circumstances courts will aid him in securing or maintaining such claim. Thus he will be protected in retaining his fee out of money which he has collected for his client.
Id.
The Ohio Supreme Court again addressed the issue of attorney’s liens in
Cohen v. Goldberger,
would put aside entirely the question of [the attorneys’] interest in, or lien upon, the fund produced by their skill and labor, and would result in taking from them that which had thus been procured ... probably leaving without remuneration of any sort the attorneys but for whose efforts, presumably, the fund would not have been procured or made available for the payment of the creditors either of the firm or the individuals composing it. The mere statement of that proposition discloses its inequity.
Id. at 657-58.
These cases implicitly suggest that some degree of proof of an agreement between the attorney and client is required to establish the existence of a valid attorney’s lien under Ohio law. The Supreme Court has not, however, clearly articulated the
level of proof
required to establish the existence of a valid attorney’s lien. As recognized by the Restatement of the Law
As noted, the existence of an agreement creating a valid attorney’s lien was not directly addressed in
Diehl
or
Cohen.
To the contrary, in
Diehl,
the Supreme Court declined to speculate about the evidence that was provided to the trial court prior to the entry of its order enforcing the attorney’s lien.
Diehl,
The Ohio Court of Appeals has also addressed the issue of attorney’s charging liens. In analyzing the proof required to establish the existence of such liens, the lower appellate court decisions have generally imposed a more stringent standard than that suggested by the Ohio Supreme Court language.
See, e.g., Mancino v. City of Lakewood,
For instance, in
Minor Child of Zentack v. Strong,
Similarly, in
Rust v. Harris-Gordon,
No. L-97-1415,
In denying Decker’s claim to an attorney’s charging lien on the arbitration award proceeds, the bankruptcy court cited the Rtist decision for the proposition that the agreement creating the lien must be in writing. A comprehensive review of case law on the issue reveals, however, that the relevant language in Rust is, at best, an inexact statement of the applicable Ohio law. The Ohio Supreme Court, in dicta, has suggested that an agreement with the client is not a prerequisite to the creation of an attorney’s charging lien. More recently, the Ohio Court of Appeals has required proof of the attorney’s entitlement to a charging lien but has stated, in Zentack, that an affidavit from the client is sufficient. Under either of these standards of proof, the Simms affidavit adequately establishes Decker’s attorney’s lien on the arbitration award proceeds. Because the bankruptcy court relied on a more stringent standard for establishing a valid attorney’s lien than is required under Ohio law, the bankruptcy court’s decision must be reversed.
B. Enforcement of Attorney’s Charging Lien.
Ohio law provides that an attorney may enforce a charging lien either by taking possession of the funds to which the lien has attached or by giving notice of the asserted lien to the judgment debtor. As stated by the Ohio Supreme Court in Diehl:
Although an attorney may contribute his skill and services in obtaining a judgment for his client, he has, in this state, no lien on such judgment for his fees, where there is no agreement for such lien known to the judgment debtor .... But, on the other hand, an attorney may have a claim upon the fruits of a judgment or decree which he has assisted in obtaining, or upon a sum of money which he has collected, and under some circumstances courts will aid him in securing or maintaining such claim.
Diehl,
The affidavits of Simms and Attorney Decker establish without contradiction that Attorney Decker first informed counsel for Carter Steel of Decker’s intent to assert a charging lien against the arbitration award proceeds during a telephone conversation on September 19, 1996. After the arbitration award was entered on November 22, 1996, Attorney Decker again informed counsel for Carter Steel of his attorney’s lien against the award proceeds. Accordingly, Decker notified Carter Steel, and its attorneys, Luper Sheriff, of its lien by the end of November, 1996, at the latest.
The Trustee argues that Decker’s charging lien is not enforceable in bankruptcy cases because it is a state law equitable remedy, similar to the constructive trust addressed by the Sixth Circuit Court of Appeals in
XL/Datacomp, Inc. v. Wilson (In re Omegas Group, Inc.),
Omegas
should not be read to invariably preclude the enforcement of constructive trusts or, for that matter, equitable liens or other types of equitable relief.
See Poss v. Morris (In re Morris),
C. Payment in Satisfaction of a Valid Attorney’s Lien Is Not a Preferential Transfer.
The existence of a valid, enforceable attorney’s lien in Decker’s favor mandates the conclusion that the $45,632.68 payment to Decker was not a preferential transfer. Although the payment was made during the 90-day period preceding Simms Construction’s bankruptcy filing, it was made in satisfaction of Decker’s charging lien against the arbitration award proceeds. It is well established that “[p]ayments to a creditor who is fully secured are not preferential since the creditor would receive payment up to the full value of his collateral in a chapter 7 liquidation.”
Ray v. City Bank & Trust Co. (In re C-L Cartage Co., Inc.),
D. Ordinary Course of Business Defense.
As discussed above, the existence of Decker’s valid, enforceable attorney’s
Y. CONCLUSION
The bankruptcy court misapplied Ohio law in holding that Decker had failed to establish that it held a valid, enforceable attorney’s charging lien against the arbitration award proceeds. As a result of Decker’s charging lien, the $45,632.68 payment it received from the award proceeds during the preference period did not cause it to receive more than it would have otherwise been entitled to receive in the liquidation of the Simms Construction estate. Accordingly, the bankruptcy court’s decision is reversed and remanded for entry of a judgment in favor of Defendant on its cross-motion for summary judgment.
Notes
. The Bankruptcy Code is contained in 11 U.S.C. §§ 101-1330. Unless stated to the contrary, all future statutory references are to the Bankruptcy Code, e.g., "§_”
. The Trustee's complaint was filed under § 547(b) and does not attempt to invoke his “strong-arm power” to avoid the attorney's lien under § 544. Therefore, the priority of the asserted attorney's lien vis-á-vis the claims of other creditors is not an issue in this appeal.
. An attorney’s charging lien differs from a retaining lien in that the latter entitles the lawyer “to retain the client’s property in the lawyer's possession in order to secure payment of the lawyer's fees and disbursements.” Restatement (Third) of the Law Governing Lawyers § 43 (2000).