In Re Ernst
This is an appeal from the Order granting Debtors’ motion for summary judg
The Appellant is an attorney. The Bankruptcy Court held that a provision in the retainer agreement between the Appellant and the Appellees that allowed the Appellant to recover the costs of collecting his fees from the Apрellees was unenforceable under New York law. The central issues on this appeal are, first, whether the Bankruptcy Court erred in finding that the non-reciprocal collection fee clause in the Appellant’s retainer agreement was per se unenforceable pursuant to the decision of the New York Statе Supreme Court Appellate Division, First Department, in
Ween v. Dow,
The Court has reviewed the Bankruptcy Court’s deсision granting the Debtors’ motion for summary judgment and the arguments of the parties to this appeal. For the reasons explained below, the Order is affirmed.
I.
This appeal arises from a conflict that reaches back several years and embodies a complicated procedural history. From January through July 1998, the Appellаnt Carey represented debtor Rudolf J.O. Ernst in an extradition matter in the Southern District of New York. In connection with the representation, the Debtors entered into a retainer agreement (the “Retainer Agreement”) with Carey that contained a provision that allowed Carey to recover the costs of collecting his fee. (See Aрpellant’s Appendix dated July 9, 2007 (“Appellant’s Appx.”), Ex. 1.) The provision was non-reciprocal because it did not provide that the client could recover the costs of resisting an unmeritorious claim for fees.
In August 1998, Carey sued in the New York State Supreme Court for his fees from representing Rudolf J.O. Ernst, and by order dated March 19, 2004, Justice DeGrasse granted Carey’s motion for summary judgment in the amount of $72,274.14 for account stated. Carey and Assocs. v. Ernst, No. 60400/98 (N.Y. Sup. Ct. filed Mar. 26, 2004) (the “State Court Decision”). The court also determined that Carey was entitled to the costs of collection, pursuant to the Retainer Agreement. Id. The decision left open the amount of costs, which was to be determined at a hearing which was to be scheduled: “Plaintiffs claim for collection costs recoverable under the agreement is severed for an assessment of damages which shall be conducted on the scheduled trial date.” Id.
On April 5, 2004, shortly after the State Court Decision was filed, and before the hearing to determine the amount of costs was hеld, the Debtors filed a Chapter 13 Bankruptcy proceeding. On July 27, 2004, Carey filed a claim in the bankruptcy proceeding for $335,319.20, including the unpaid fees in the extradition proceeding for $72,274.14, disbursements of $15,951.77, and $195,893.50 for the collection fees that would be presented to the Bankruptcy Court for a determination of reasonable
On February 22, 2005, Bankruptcy Judge Blackshear found that Carey was entitlеd to his claim for $72,000 but reduced the amount of interest from 12% as provided in the Retainer Agreement to 9%. In re Ernst, No. 04-12291 (Bankr.S.D.N.Y. Feb. 22, 2005); (Appellant’s Appx., Ex. 3.). Judge Blackshear noted that while the claim for collection fees was rooted in state law, the Bankruptcy Court had to determine it to be “reasonable” under section 502(b). Without holding a hearing, Judge Blаckshear disallowed Carey’s claim for collection fees in its entirety on the grounds that there was insufficient evidence of the reasonableness of the costs.
On appeal to this Court, Judge Patterson affirmed the reduction of the interest rate to 9% but reversed the Bankruptcy Court’s denial of a hearing on Carey’s claim for сollection fees, on the grounds that Judge Blackshear had indicated that there would be an evidentiary hearing at which the attorney could prove the reasonableness of the costs but then failed to hold the hearing. (Appellant’s Appx., Ex. 4.)
The ease returned to Bankruptcy Judge Peck. Before a hearing to determine costs and fees was held, the Appellate Division issued a decision in another case holding that it was an unconscionable provision in a retainer agreement to provide for a nonreciprocal provision allowing an attorney to recover the costs of collection but not permitting the client to recover the costs of resisting a suit for the collection of fees.
Ween v. Dow,
The Appellant argues that the Bankruptcy Cоurt erred in concluding that the collection fees clause was unenforceable, that the court improperly applied Ween under section 502(b)(1) and that the Bankruptcy Court erred in finding that res judicata did not bar the Debtors’ motion for summary judgment.
The Court reviews the Bankruptcy Court’s conclusions of law de novo and its findings of fact for clear error.
In re Vebeliunas,
II.
The Appellant initially argues that the Bankruptcy Court erred in interpreting Ween v. Dow as a per se bar on nonreciprocal collection fee allowances in attorney retainer agreements. According to the Appellant, Ween v. Dow and the cases relied upon by Ween each relied not only on non-reciprocal provisions in the retainer agrеement, but on findings of attorney misconduct.
We find that the very nature of the provision, which permits the recovery of attorneys’ fees by the attorney should he prevail in a collection action, without a reciprocal allowance for attorneys’ fees should the client prevail, to be fundamentally unfаir and unreasonable. Aside from its lack of mutuality, the clause, even if not so designed, has the distinct potential for silencing a client’s complaint about fees for fear of retaliation for the nonpayment of even unreasonable fees. That being so, such a provision is not entitled to judicial sanction and is, therefore, unenforceable.
Ween,
Ween
is controlling law. If the Appellant was granted relief from the automatic stay and was allowed to pursue the decision of the New York State Court allowing an award of collection costs but not determining the amount, any subsequent New York State Court decision would not enforce an award of such costs. As the Bankruptcy Court properly noted, although the
Ween
decision would not automatically constitute grounds for vacating the State Court Decision if Carey were to pursue his claim in state court, the state court would look to three factors to determine whether to apply the
Ween
decision: “(1) the purpose to be served by the new rule, (2) the extent of reliance on the old rule, and (3) the effect on the administration of justice of retroactive application.”
People v. Favor,
Therefore, the Bankruptcy Court properly interpreted Ween as a per se bar on nonreciprocal fee provisions such as the one included in the Appellant’s contract with the Debtors.
III.
The Appellant also argues that the Bankruptcy Court misconstrued its directive under section 502(b)(1). Section 502(b)(1) instructs the Bankruptcy Court to determine the amount of a disputed claim “as of the date of the filing of the petition” and to allow the claim in such amount, “except to the extent that such ... claim is unenforceable against the
The Bankruptcy Court was correct that it was required to determine the validity of the claim at the time that it was making its decision to determine whеther the claim was enforceable under “applicable law.” The Appellant’s efforts to establish otherwise are unpersuasive. As the United States Supreme Court recently reiterated, claims under section 502(b)(1) are governed by state law, under which property interests are defined and created.
Travelers Cas. & Sur. Co. of America v. Pac. Gas & Elec. Co.,
— U.S. -, -,
IV.
Finally, the Appellant challenges the Bankruptcy Court’s determination that the disallowance of the claim was not barred by res judicata. The Bankruptcy Court noted that the sentence in the Supreme Court decision addressing collection fees was ambiguous and that the Supreme Court did not explicitly find liability or enter a judgment against Ernst for collection fees. Nevertheless, the Bankruptcy Court аssumed for purposes of its decision that Justice DeGrasse actually made a finding that the Debtors’ were liable for collection fees. Even so, the Bankruptcy Court determined that a finding of liability by the state court established at most only a right to payment in an unliquidated amount and did not limit the Bankruptcy Court’s power to determine the allowed amount of the collection fee. “Because the bankruptcy court is the only forum that is competent to determine whether Carey’s claim is allowable, the doctrine of res judicata does not apply.”
In re Ernst,
The Court of Appeals for the Second Circuit has made clear that bankruptcy courts are bound to give preclusive effect to state-court judgments whenever the courts of the state from which the judgments emerged would do so, absent a finding that the judgment was attained through fraud or collusion. For example, in
Kelleran v. Andrijevic,
However, the Appellant cannot establish that the one sentence in the state court opinion relating to costs was a final judgment for the purposes of res judicata. Under the New York doctrine of res judi-cata, a prior judgment on the merits is conclusive in any subsequent action involving the same cause of action not only as to the issues actually litigated in the prior proceeding but those which could have been.
See Maharaj v. Bankamerica Corp.,
The doctrine of res judicata therefore did not require the Bankruptcy Court to afford preclusive effect to any state court order on the collection fees. At the time of the bankruptcy proceeding, no such claim was reduced to a state court judgment.
Cf. In re Drexel Burnham, Lambert Group Inc.,
Moreover, there could be no preclusive effect with respect to the determination of damages.
See Kelleran,
CONCLUSION
For the reasons stated above, the Order entered by the Bankruptcy Court on April 27, 2007 is affirmed. The Clerk of the
SO ORDERED.