A debtor’s lawyer who agrees to payment only from a third party cannot assert a charging lien on the files in the event of nonpayment by the nondebtor, according to Bankruptcy Judge Michael E. Wiles of Manhattan.
With bankruptcy court approval, the debtor hired a firm as special counsel to litigate with the landlord. The retention order and associated papers provided that the firm would be paid only by the debtor’s owner and that the debtor would have no liability for the lawyers’ fees.
After a settlement fell through, the firm sought leave to withdraw for nonpayment by the owner and to ratify the firm’s assertion of a common law charging lien on the files. The firm argued that it had the right to withhold the files from the debtor and its other counsel until the fees were paid.
Judge Wiles ruled against the firm in his July 21 opinion based on an earlier bench opinion delivered in court. He refused to allow the firm to withdraw, required the firm to continue working, and instructed the firm to make its files available to the debtor’s other counsel.
Judge Wiles interpreted a charging lien to mean “that an attorney may retain the products of his or her work until the client has satisfied the client’s own payment obligations.”
In the case before him, Judge Wiles said, “the client has no payment obligations.” The retention papers didn’t have “any hint” that the debtor’s access to files would be conditioned upon payment by the owner.
He said that the firm, in substance, “wants to assert a lien on the debtor’s files in order to secure an obligation owed by another party.”
Precluding the firm from asserting a charging lien, Judge Wiles relied on decisions by state courts in New York holding that a firm cannot withhold files from a client when an insurance company, which is obligated to defend, has failed to pay.
Judge Wiles not only barred assertion of the lien, he said the firm must continue “to work diligently.” He directed the firm to continue as counsel for the debtor until a “complete and unrestrained turnover of all files.”
Judge Wiles would allow the firm to withdraw if the motion to be relieved as counsel was “accompanied by an explicit and unconditional agreement [by the firm] that all of its files will be immediately turned over, with no exceptions.”
The firm evidently could have asserted a charging lien if the terms of engagement made the debtor secondarily liable for fees or if the ability to assert a lien had been permitted by the retention agreement.