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Law firm can't take possessory lien over client funds.

Byline: Eric T. Berkman

A law firm could not take an attorney's possessory lien over client funds it held in escrow while competing claims to the funds awaited resolution, a U.S. Bankruptcy Court judge has decided.

The Boston firm, Lawson & Weitzen, secured a $300,000 settlement for onetime client Jessica Venincasa in 2012. L&W took its contingency fee and escrowed the rest of the money in an IOLTA account while other litigation involving Venincasa was pending and other creditors claimed a right to the remainder of the funds.

When Venincasa filed for bankruptcy in 2018, the firm moved for relief from the automatic stay, asserting a possessory or retaining lien over the funds, from which it sought to pay itself for additional hourly work performed on Venincasa's behalf.

But a judgment creditor, Stewart Title Guaranty Co., opposed the motion, arguing that L&W's only available lien was for its contingency fee and expenses, which had already been paid in full. As to the rest of the funds, Stewart argued, the firm was a general unsecured creditor with no priority over other unsecured creditors.

Judge Melvin S. Hoffman agreed.

"L&W's attempt to assert a possessory lien over the settlement funds it held in escrow implicates concerns over allowing an attorney who has acted as an escrow agent to assert a possessory lien on the escrowed property as security for professional services rendered," Hoffman said. "The [Supreme Judicial Court] in [its 1970 Torphy v. Reder decision] expressed concerns that recognizing a possessory lien under such circumstances would 'discourage similar arrangements in the future' and 'be inconsistent with the fiduciary duty voluntarily assumed by the attorney.'"

The nine-page decision is In re: Venincasa, Jessica, Lawyers Weekly No. 04-015-19. The full text of the ruling can be found here.

Bad timing?

J. Mark Dickison of Lawson & Weitzen represented the firm in the matter. Dickison said he was disappointed with the outcome but that the decision was probably decided correctly.

"The helpful thing for the bar is that it's another well-reasoned decision acknowledging that a possessory lien, under the proper factual scenario, is available for attorneys to use in collecting amounts owed," he said. "The one unfortunate fact in this case was that our firm held the funds under an escrow arrangement, and, therefore, our possessory lien has to give way to that."

Stewart Title's attorney, Jonathan M. Hixon of Boston, could not be reached for comment prior to deadline.

However, Ronald W. Dunbar Jr. of Boston said he thought L&W could have asserted a possessory lien on the settlement funds had the timing been different.

The problem was that another judgment creditor, Developers Surety and Indemnity Co., learned about the settlement and demanded that the firm pay it from the settlement proceeds. It was at that point that the firm opted to put the funds in escrow until the matter could be resolved.

"If L&W would have received the settlement funds prior to Developers asserting a claim to those funds, then L&W could successfully, I believe, under existing Massachusetts case law assert a possessory or retaining lien on the settlement funds to satisfy its unpaid hourly bill," Dunbar said.

Jonathan M. Horne, a Boston lawyer who represents creditors in bankruptcy litigation, was not so sure. While noting that the judge narrowly held that L&W could not assert a retaining or possessory lien in funds for which it was the escrow agent, the judge also seemed to call into question whether Massachusetts law recognizes an attorney's retaining or possessory lien at all, Horne said.

"This likely comes as a surprise to many Massachusetts attorneys, but as Judge Hoffman's succinct survey of the law shows, authority on the issue is decidedly unclear," Horne said.

Given such uncertainty, Horne advised that attorneys not rely heavily on the ability to enforce a possessory lien, particularly when a client is in financial trouble and could end up in bankruptcy.

Winchester bankruptcy attorney Nina M. Parker said the ruling should not alarm those who represent debtors in bankruptcy cases and are paid sums in contemplation of legal services being rendered, which they then deposit in IOLTA accounts pending those legal services and if required court approval of applications for compensation.

"In this instance, the funds in question were not earmarked as attorneys' fees for services to be rendered; rather, they were being held in the IOLTA account by L&W pending a determination as to who had rights to payment of those funds," Parker said.

In light of the facts and the clear delineation of the sums in controversy, Parker said she thought attorneys holding sums as retainers in an IOLTA account could "rest comfortably" that their payment would not be at risk in light of Venincasa.

Escrowed funds

Venincasa and L&W entered a written contingency fee agreement in October 2009 under which the firm would represent her in a business dispute with family members.

L&W secured a $312,500 settlement on her behalf in 2012. But before payment of the proceeds, Developers Surety, a judgment creditor, heard about the deal and demanded payment from the funds.

The firm told Developers Surety that the funds were subject to its attorney's lien, which was superior to Developers Surety's claim, but ultimately agreed that when the money came in, it would hold the funds in escrow until the issue could be resolved.

L&W subsequently escrowed the money in its IOLTA account but released to itself $131,000 for its contingent fee.

However, L&W had also performed hourly legal services for Venincasa and had not been paid. After Venincasa filed for bankruptcy in 2018, the firm sought relief from the automatic stay under 362(d) of the U.S. Bankruptcy Code, asserting an attorney's possessory or retaining lien over the escrow funds to secure payment of those additional fees.

Stewart Title opposed L&W's motion, arguing that having taken its contingency fee, L&W was now a general unsecured creditor that had to wait in line along with other unsecured creditors.

Lack of lien

Addressing the firm's motion, Hoffman pointed out that Massachusetts law expressly authorizes an attorney's charging lien and noted that L&W enforced that lien by taking its contingency fee from the settlement proceeds.

On the other hand, he said, the commonwealth's law on possessory or retaining liens was "far less clear."

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"As tempting as it would be to read the tea leaves brewed from all these precedents to predict how the SJC would rule on the availability in Massachusetts of an attorney's possessory lien, the facts here neither necessitate nor justify my doing so."

Judge Melvin S. Hoffman

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While several other states have statutes recognizing such liens for attorneys, Massachusetts does not, Hoffman noted. Nor has any Massachusetts court ruled directly on whether an attorney may assert a possessory lien on a client's property, he said.

Instead, Hoffman said, the SJC had sidestepped a direct ruling on the issue by finding lack of such a lien under the facts of the particular cases that had come before it.

Meanwhile, Hoffman said he was not prepared to adopt L&W's argument that a 1947 SJC decision, Webber v. Napolitano, in which the court found that an attorney had not acted unreasonably or maliciously in retaining a lodging house license he secured for a client, suggested that an attorney could claim a possessory lien in Massachusetts.

Similarly, the bankruptcy judge was unwilling to state that such a right exists in Massachusetts based on federal District Court decisions issued in 1898 and 1927.

"As tempting as it would be to read the tea leaves brewed from all these precedents to predict how the SJC would rule on the availability in Massachusetts of an attorney's possessory lien, the facts here neither necessitate nor justify my doing so," Hoffman said.

In so ruling, Hoffman likened the case to Torphy, in which the SJC refused to recognize an attorney's possessory lien to a client's stock certificates and bank books that it held in escrow while a dispute was pending over who had the right to those assets.

"The Court focused on the fact that the stock certificates and bank books, though received by the attorney from his client 'in the course of their professional relationship,' were to be held not by the attorney alone but 'for a special purpose which was inconsistent with the petitioner's claim of lien: a neutral depository to which neither counsel had exclusive access pending further order of the court,'" Hoffman said.

Accordingly, while suggesting that the availability of an attorney's possessory or retaining lien remained an open question in Massachusetts, Hoffman concluded that L&W had no such lien and thus its motion for stay relief should be denied.

In re: Venincasa, Jessica

THE ISSUE:Could a law firm assert an attorney's possessory lien over client funds it held in trust while competing claims to the funds awaited resolution?

DECISION:No (U.S. Bankruptcy Court)

LAWYERS:J. Mark Dickison of Lawson & Weitzen, Boston (law firm creditor)

Jonathan M. Hixon of Hackett Feinberg, Boston (judgment creditor)

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Author:Berkman, Eric T.
Publication:Massachusetts Lawyers Weekly
Date:May 1, 2019
Words:1526
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