A recent decision by Judge Isicoff is a reminder that both (1) fee agreements in bankruptcy court are governed by state rules of professional responsibility, and (2) attorneys must read those rules carefully when drafting agreements.
In In re Miami Beverly LLC, a creditor of a chapter 11 debtor had been litigating in state court with the debtor before the petition date.[1] After the petition was filed, the creditor’s law firm filed a proof of claim on the creditor’s behalf, as well as a charging lien.
The firm’s contingency-fee agreement with the creditor provided for 50 percent of any recovery in the state court suit. The agreement continued that the firm was entitled to that recovery even if the client terminated the firm and hired new counsel. If new counsel took over, the agreement entitled the firm to a charging lien on 50 percent of any future recovery.
After filing the proof of claim and charging lien, the firm and the creditor terminated their attorney/client relationship, and the creditor assigned his state law claims to another entity. This new entity appeared in the bankruptcy case and moved to strike the charging lien, arguing, among other things, that the contingency fee was excessive and unenforceable.
In striking the charging lien, the U.S. Bankruptcy Court for the Southern District of Florida first noted that charging liens are governed by state law. In Florida, an attorney must establish four elements to maintain a lien, the first of which is the existence of an express or implied attorney-fee agreement between the lawyer and client.[2] To establish this element, the attorney-fee agreement must be enforceable under Florida law as well.[3] Here, the bankruptcy court found that the agreement was unenforceable and void ab initio.
First, the court held that the agreement’s contingency fee was excessive. Under Rule 4-1.5(a) of the Rules Regulating the Florida Bar, “lawyer[s] must not enter into an agreement for . . . [an] excessive fee or cost.”[4] Those rules further provide an acceptable fee schedule, which caps contingency fees at 40 percent of any recovery up to $1 million, unless prior court approval is received.[5] The firm here had failed to get court approval of its fee agreement in violation of these rules, so the agreement was “presumed to be excessive.”[6] And any fee agreement failing to comply with Florida’s ethics rules is deemed unenforceable under Florida law.[7]
Second, the court said that the fee agreement was not only unenforceable, but void ab initio. As noted above, the agreement entitled the firm to its contingency fee even if the client terminated the firm and regardless of when that termination occurred. And if the firm was terminated, the agreement required the client to pay for all attorneys’ fees and expenses incurred as of termination, plus the 50 percent contingency fee of the entire amount awarded. The bankruptcy court found that the latter provision constituted an impermissible double recovery under Florida’s ethics rules. As to the former, “requiring payment of a contingency fee based on full recovery to a prior attorney restricts a client’s ability to retain new counsel.”[8] These provisions were impermissible under Florida’s ethics rules, striking at the “very essence of the fee agreement and render[ing] it unenforceable from its inception.”[9]
Finding that the fee agreement violated applicable rules of professional conduct, the bankruptcy court held that the fee agreement was not only unenforceable, but void ab initio, thereby invalidating the charging lien.
Miami Beverly LLC is an important reminder that bankruptcy courts analyze fee agreements under state law, and bankruptcy attorneys must ensure that their agreements comply with applicable ethics rules.[10] The failure to do so may ultimately render claims for attorney’s fees and expenses barred.
[1] 2019 Bankr. LEXIS 3279, 2019 WL 5291364, Case No. 18-14506.
[2] Id. at *8 (citing Daniel Mones P.A. v. Smith, 486 So. 2d 559, 561 (Fla. 1986)).
[3] In re Miami Beverly LLC, 2019 Bankr. LEXIS 3279, at *8-9.
[4] Id. (quoting Rule 4-1.5(a) Rules Regulating the Fla. Bar).
[5] In re Miami Beverly LLC, 2019 Bankr. LEXIS 3279, at *9 (quoting Rule 4-1.5(f)(4)(B)(i)).
[6] In re Miami Beverly LLC, 2019 Bankr. LEXIS 3279, at *10.
[7] Id. at 9 (citing Chandris S.A. v. Yanakakis, 668 So. 2d 180, 185-86 (Fla. 1995)).
[8] In re Miami Beverly LLC, 2019 Bankr. LEXIS 3279, at *10.
[9] Id. at *13 (citing Rubin v. Guettler, 73 So. 3d 809, 814 (Fla. Ct. App. 2011); The Fla. Bar v. Spann, 682 So. 2d 1070, 1072-1073 (Fla. 1996)).
[10] See, e.g., Havis v. Norman (In re Equator Corp.), 362 B.R. 326, 331 (Bankr. S.D. Tex. 2007) (“Property interests are created and defined by state law. This includes an attorney’s right to compensation pursuant to a contingency fee agreement.”).