The U.S. Court of Appeals for the First Circuit recently upheld the denial of a motion to enforce an attorney’s lien filed by borrower’s counsel pursuant to Mass. Gen. Law. ch. 221, §50 in an underlying mortgage dispute, where a third-party short sale was negotiated without the borrower’s counsel’s assistance.
In so ruling, the Court held that the borrower’s counsel was not entitled to enforce its attorney’s lien against the short sale’s proceeds, where the sale was agreed upon outside the context of the litigation, and the borrower’s counsel did not “successfully secure” the value realized by the borrower in selling her home.
A copy of the opinion is available at: http://media.ca1.uscourts.gov/pdf.opinions/13-1476P-01A.pdf
In June 2011, the lender commenced this action in the U.S. District Court for the District of Massachusetts against the borrower to collect on a $2.5 million loan secured by property on Nantucket. In May 2012, the borrower retained counsel and agreed to a fee arrangement that would provide either a contingent fee as a percentage of proceeds from her counterclaim against the lender, if any, or a flat fee of $25,000 ($15,000 paid up front).
Counsel for the borrower entered his appearance and filed an amended counterclaim against the bank, which moved to dismiss the counterclaim. Shortly after his appearance, the borrower’s counsel briefly left the state, and was partially granted a stay of proceedings; however, the court held that the non-judicial foreclosure of the borrower’s property would proceed regardless of counsel’s availability.
The borrower hired additional counsel who entered a limited appearance for the purpose of filing an emergency motion to enjoin the foreclosure sale. The emergency motion was denied and again defeated in a subsequent interlocutory appeal, and the district court ordered the parties to mediation.
In June 2012, the borrower notified her counsel that she received a third-party offer to purchase the property, and the lender was offering to forgive the loan and settle the case pursuant to the short sale agreement. After the borrower refused to pay the additional $10,000 allegedly owed to her counsel pursuant to the flat fee arrangement, borrower’s counsel filed a notice of attorney’s lien in accordance with MA Gen. Law. ch. 221, §50 (“Section 50”).
Three days later, as a result of the court-ordered mediation (and allegedly unbeknownst to borrower’s counsel), the borrower and lender reached settlement pursuant to a stipulation that the lender would receive $1.9 million of the $2.24 million short sale, and the remaining proceeds would be left to the borrower. Once the borrower settled her debts to her additional counsel and in order to transfer clear title to the property, over $175,000 in proceeds remained.
After the stipulation of dismissal was submitted to the trial court through her additional counsel, the borrower’s counsel moved to enforce the attorney’s lien against all parties, seeking almost $100,000, in accordance with the contingency fee provision.
The trial court denied the motion to enforce the lien, holding: (1) that the settlement reached in this case did not constitute a “judgment, decree or other order in the borrower’s favor within the meaning of Mass. Gen. Law. ch. 221, §50 (“Section 50”); (2) that the borrower received no “proceeds” upon which a lien could attach, and; (3) that the fees requested were not shown to be reasonable. After the district court denied borrower’s counsel’s subsequent motion for reconsideration, this appeal followed in order to review the district court’s determination that the attorney’s lien was not enforceable under Section 50.
Section 50 provides, in pertinent part, that “[f]rom the authorized commencement of an action, counterclaim or other proceeding in any court, or appearance in any proceeding before any state or federal department, board or commission, the attorney who appears for a client in such proceeding shall have a lien for his reasonable fees and expenses upon his client's cause of action, counterclaim or claim, upon the judgment, decree or other order in his client's favor entered or made in such proceeding, and upon the proceeds derived therefrom.”
Considering the issue of “judgment” under Section 50, the First Circuit observed that MA courts have consistently held that “for purposes of [Mass. Gen. Laws ch. 221, § 50], a ‘judgment’ includes a stipulation of dismissal.” Ne. Avionics, Inc. v. City of Westfield, 63 Mass. App. Ct. 509, 827 N.E.2d 721, 725 (Mass.App.Ct.2005). Accordingly, borrower’s counsel was correct in his assertion that the stipulation of dismissal could have provided the basis for its attorney’s lien.
However, for the attorney’s lien to attach, there must be ““proceeds derived’ from a ‘cause of action’ as a result of a settlement.” Ropes & Gray LLP v. Jalbert, 454 Mass. 418, 910 N.E.2d 339 n. 12 (Mass.2009). Here, the proceeds were not derived from the counterclaim against the borrower, which was dismissed as part of the settlement, but rather from a third party in the short sale transaction effectuated outside the context of the litigation.
The Court next addressed borrower’s counsel’s claim that the borrower experienced a “windfall” as a result of the sale price exceeding the amount paid to the lender. Borrower’s counsel likened the sale of the home to the sale of patents and patent applications which the Supreme Judicial Court of Massachusetts found to generate attachable “proceeds” in Ropes & Gray, 910 N.E. 2d at 338.
The First District rejected this argument due to the borrower’s counsel’s admittedly nonexistent involvement in the short sale or settlement process, that did not “successfully secure” the value realized by the borrower in selling her home.
Accordingly, the First Circuit affirmed the denial of borrower’s counsel’s motion to enforce the attorney’s lien.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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