'Coudert Brothers': Court Limits Attorney's Retaining Lien

The 'Coudert Brothers' Decision

Almaty Metro-Municipal Corp. (Kazakhstan), Almaty Metro-Municipal Corp. (United States), and Intercontinental Commerce Corp. (collectively, the 'Almaty Parties') were former clients of Coudert that shared a common owner.

The Almaty Parties retained Coudert in 2004 to provide legal services in connection with the financing and construction of a monorail project in Almaty, the largest city in Kazakhstan. Coudert prepared a retention agreement, which was governed by the law of the District of Columbia (DC). However, the Almaty Parties never signed the agreement. Coudert rendered services to the Almaty Parties primarily out of its Almaty office, with additional services provided out of its Washington, DC, office.

The Almaty Parties kept certain of their corporate books, documents, and seals in the custody of a Coudert partner in the Almaty office. During the representation, progress on the monorail project came to a halt. At that juncture, the Almaty Parties decided to leave their property in the possession of Coudert, with the expectation that they could retrieve their property whenever the need arose.

On Aug. 16, 2005, the Coudert partnership elected to dissolve and sought bankruptcy protection under Chapter 11 of the Bankruptcy Code. As part of Coudert's effort to increase its bankruptcy estate, it commenced an adversary proceeding against the Almaty Parties to recover $1.2 million in unpaid fees (the 'Adversary Proceeding'). Coudert also generally reserved its right in its Chapter 11 case to retain the file of any of its former clients until it recovered any unpaid fees from them.

Recently, after a long hiatus, the Almaty monorail project began to move forward. As a result, the Almaty Parties had a renewed need to affix their corporate seals to transactional documents and enter significant notations into their original corporate books, and argued that without these items they were legally unable to continue to work on the monorail project. In order to repossess their corporate property, the Almaty Parties filed a motion in the bankruptcy court under ” 105(a) and 554(b) of the Bankruptcy Code, to compel Coudert to abandon and turn over the property to the Almaty Parties.

Relying upon the choice-of-law provision in the unsigned retention agreement, the Almaty Parties sought to apply DC law in support of their argument that Coudert must return the corporate books and seals. Significantly, Coudert did not dispute this choice of law, and, as discussed below, applying New York's law rather than DC's could have changed the outcome. Coudert objected to the motion on the ground that its common law retaining lien on the Almaty Parties' property precluded turnover of the property.

The bankruptcy court applied the District of Columbia Rules of Professional Conduct (the D.C. Bar Rules) to the dispute. The bankruptcy court's legal analysis began by noting that in 1991, the D.C. Bar Rules modified the common law retaining lien that Coudert sought to assert. The D.C. Bar Rules narrowed the scope of the property to which a retaining lien may attach. Specifically, D.C. Bar Rule 1.8(i) provides that a retaining lien may only attach to an attorney's work product for which the client did not pay.See D.C. R. Prof. Conduct 1.8(i). Furthermore, D.C. Bar Rule 1.8(i) eliminates this narrow lien 'when withholding the lawyer's work product would present a significant risk to the client of irreparable harm. Id. The comments to D.C. Bar Rule 1.8(i) include as examples of irreparable harm '[t]he realistic possibility that a client might irretrievably lose a significant right or become subject to a significant liability because of the withholding of the work product.' Id., cmt. 19.However, D.C. Bar Rule 1.8(i) notably does not impair the ability of a client to voluntarily enter into a contract pursuant to which the client grants to its attorney a lien on its property as security for the payment of legal fees. See Wolf v. Sherman, 682 A2d 194, 198 (D.C. 1996).

After a brief discussion of D.C. cases interpreting the scope of an attorney's retaining lien consistent with Rule 1.8(a), the bankruptcy court granted the Almaty Parties' motion and compelled Coudert to turn over to the Almaty Parties their corporate books and seals.

Commentary

There a number of strategic issues raised by the Coudert Brothers decision. First, one must question Coudert's decision to object to the Almaty Parties' motion. It appeared that Coudert sought to retain the Almaty Parties' property as a coercive tool for its Adversary Proceeding to recover its unpaid fees from the Almaty Parties. However, Coudert's immediate turnover of the Almaty Parties' property could have permitted the Almaty Parties to begin working on the monorail project sooner, which may have had the effect of enabling the Almaty Parties to generate revenue more quickly with which to satisfy Coudert's claim in the Adversary Proceeding.

Second, once Coudert decided to assert its retaining lien in the course of objecting to the Almaty Parties' motion, the determination of which state's law applied became important. Coudert could have argued that the law of a jurisdiction other than D.C. applied, especially in light of the parties' failure to execute a retention agreement. For example, Coudert may have obtained the benefit of New York's more permissive retaining lien by arguing that New York had a greater interest in the dispute because it was the location of Coudert's principal assets. Although there were countervailing interests in favor of applying DC law, a choice-of-law argument may have had a distinct chance of swinging the dispute in Coudert's favor.

Third, Coudert could have negotiated with the Almaty Parties to return their corporate books and seals in exchange for a consensual replacement lien on the proceeds that the Almaty Parties reap from the monorail project. This stratagem would have proved doubly valuable because, not only would Coudert's assets have been preserved by a swift settlement of the Almaty Parties' motion, Coudert would have assured itself of a means of liquidating a judgment in its Adversary Proceeding against the Almaty Parties to collect the $1.2 million in unpaid fees. Moreover, a vigorous pursuit of this strategy could have resolved the Adversary Proceeding as well as the Almaty Parties' motion.

Conclusion

The decision in Coudert Brothers may be surprising to New York practitioners who are used to the less-restrictive retaining lien under New York law. In the bankruptcy context, however, the decision represents a pragmatic solution because it potentially expands the debtor-law firm's bankruptcy estate by enabling a client to generate more revenue with which to satisfy claims asserted by the debtor-law firm, while at the same time balancing the client's claim to these specific items of property – items that, to the debtor-law firm, have no value except to coerce payment. The decision also serves as a reminder of the long-standing federal principle that courts must determine property rights in bankruptcy cases by applying state law, and differences among states' laws can result in differences in outcome. See Butner v. United States, 440 U.S. 48, 54, 57 (1979).

John J. Rapisardi is a partner in the financial restructuring department of Cadwalader, Wickersham & Taft. Christopher R. Mirick, a special counsel in the firm, and Michael J. Cohen, an associate in the firm, assisted in the preparation of this article, which first ran in the New York Law Journal, a sister publication of this newsletter.

The U.S. Bankruptcy Court for the Southern District of New York recently issued a decision in In re Coudert Brothers LLP, No. 06-12226 (RDD), 2007 Bankr. LEXIS 4003 (Bankr. S.D.N.Y. Nov. 21, 2007) concerning the treatment of an attorney's retaining lien in the bankruptcy of a law firm. The decision does not alter the analysis that would obtain under applicable state law, and serves as an important reminder to attorneys that their liens to secure payment of amounts owed by clients and former clients depend on state law and are not enhanced in the bankruptcy setting.

Attorneys' Liens Under NY Law

New York attorneys have at their disposal two types of liens that they can assert to secure the payment of fees from their clients. First, under New York common law, an attorney may obtain a retaining lien on a client's files, papers, and property in the attorney's possession. See In re Heinsheimer, 214 N.Y. 361, 364 (1915); Goldstein, Goldman, Kessler & Underberg v. 4000 E. River Road Assocs., 64 AD2d 484, 487 (4th Dept. 1978). Absent exigent circumstances, a lawyer may withhold turning over a client's files to a successor attorney until a court determines the amount of the lien and whether turnover of the files should be conditioned on payment or the posting of security. See Renner v. Chase Manhattan Bank, No. 98-926 (CSH), 2000 U.S. Dist. LEXIS 16150, at *2-3 (S.D.N.Y. Nov. 8, 2000)
Second, Judiciary Law ' 475 provides the basis upon which New York attorneys may assert a charging lien against the proceeds resulting from the attorney's assertion of an affirmative claim on the client's behalf. See N.Y.Jud.L. ' 475 (2007).The rationale behind the charging lien provided by Judiciary Law ' 475 is that an attorney is entitled to a lien against a fund created through the attorney's own efforts. See Greenberg v. State, 128 AD2d 939, 940 (3d Dept. 1987).The charging lien may also attach to a fund created to settle a client's claim. See Schneider, Kleinick, Weitz, Damashek & Shoot v. City of New York , 302 AD2d 183, 187 (1st Dept. 2002).This lien is only applicable in a litigation representation, but is not available to an attorney who is solely providing a legal defense to a client absent the assertion of a counterclaim. See Rosenman & Colin v. Richard , 850 F.2d 57, 61 (2d Cir. 1988).

The 'Coudert Brothers' Decision

Almaty Metro-Municipal Corp. (Kazakhstan), Almaty Metro-Municipal Corp. (United States), and Intercontinental Commerce Corp. (collectively, the 'Almaty Parties') were former clients of Coudert that shared a common owner.

The Almaty Parties retained Coudert in 2004 to provide legal services in connection with the financing and construction of a monorail project in Almaty, the largest city in Kazakhstan. Coudert prepared a retention agreement, which was governed by the law of the District of Columbia (DC). However, the Almaty Parties never signed the agreement. Coudert rendered services to the Almaty Parties primarily out of its Almaty office, with additional services provided out of its Washington, DC, office.

The Almaty Parties kept certain of their corporate books, documents, and seals in the custody of a Coudert partner in the Almaty office. During the representation, progress on the monorail project came to a halt. At that juncture, the Almaty Parties decided to leave their property in the possession of Coudert, with the expectation that they could retrieve their property whenever the need arose.

On Aug. 16, 2005, the Coudert partnership elected to dissolve and sought bankruptcy protection under Chapter 11 of the Bankruptcy Code. As part of Coudert's effort to increase its bankruptcy estate, it commenced an adversary proceeding against the Almaty Parties to recover $1.2 million in unpaid fees (the 'Adversary Proceeding'). Coudert also generally reserved its right in its Chapter 11 case to retain the file of any of its former clients until it recovered any unpaid fees from them.

Recently, after a long hiatus, the Almaty monorail project began to move forward. As a result, the Almaty Parties had a renewed need to affix their corporate seals to transactional documents and enter significant notations into their original corporate books, and argued that without these items they were legally unable to continue to work on the monorail project. In order to repossess their corporate property, the Almaty Parties filed a motion in the bankruptcy court under ” 105(a) and 554(b) of the Bankruptcy Code, to compel Coudert to abandon and turn over the property to the Almaty Parties.

Relying upon the choice-of-law provision in the unsigned retention agreement, the Almaty Parties sought to apply DC law in support of their argument that Coudert must return the corporate books and seals. Significantly, Coudert did not dispute this choice of law, and, as discussed below, applying New York's law rather than DC's could have changed the outcome. Coudert objected to the motion on the ground that its common law retaining lien on the Almaty Parties' property precluded turnover of the property.

The bankruptcy court applied the District of Columbia Rules of Professional Conduct (the D.C. Bar Rules) to the dispute. The bankruptcy court's legal analysis began by noting that in 1991, the D.C. Bar Rules modified the common law retaining lien that Coudert sought to assert. The D.C. Bar Rules narrowed the scope of the property to which a retaining lien may attach. Specifically, D.C. Bar Rule 1.8(i) provides that a retaining lien may only attach to an attorney's work product for which the client did not pay.See D.C. R. Prof. Conduct 1.8(i). Furthermore, D.C. Bar Rule 1.8(i) eliminates this narrow lien 'when withholding the lawyer's work product would present a significant risk to the client of irreparable harm. Id. The comments to D.C. Bar Rule 1.8(i) include as examples of irreparable harm '[t]he realistic possibility that a client might irretrievably lose a significant right or become subject to a significant liability because of the withholding of the work product.' Id., cmt. 19.However, D.C. Bar Rule 1.8(i) notably does not impair the ability of a client to voluntarily enter into a contract pursuant to which the client grants to its attorney a lien on its property as security for the payment of legal fees. See Wolf v. Sherman , 682 A2d 194, 198 (D.C. 1996).

After a brief discussion of D.C. cases interpreting the scope of an attorney's retaining lien consistent with Rule 1.8(a), the bankruptcy court granted the Almaty Parties' motion and compelled Coudert to turn over to the Almaty Parties their corporate books and seals.

Commentary

There a number of strategic issues raised by the Coudert Brothers decision. First, one must question Coudert's decision to object to the Almaty Parties' motion. It appeared that Coudert sought to retain the Almaty Parties' property as a coercive tool for its Adversary Proceeding to recover its unpaid fees from the Almaty Parties. However, Coudert's immediate turnover of the Almaty Parties' property could have permitted the Almaty Parties to begin working on the monorail project sooner, which may have had the effect of enabling the Almaty Parties to generate revenue more quickly with which to satisfy Coudert's claim in the Adversary Proceeding.

Second, once Coudert decided to assert its retaining lien in the course of objecting to the Almaty Parties' motion, the determination of which state's law applied became important. Coudert could have argued that the law of a jurisdiction other than D.C. applied, especially in light of the parties' failure to execute a retention agreement. For example, Coudert may have obtained the benefit of New York's more permissive retaining lien by arguing that New York had a greater interest in the dispute because it was the location of Coudert's principal assets. Although there were countervailing interests in favor of applying DC law, a choice-of-law argument may have had a distinct chance of swinging the dispute in Coudert's favor.

Third, Coudert could have negotiated with the Almaty Parties to return their corporate books and seals in exchange for a consensual replacement lien on the proceeds that the Almaty Parties reap from the monorail project. This stratagem would have proved doubly valuable because, not only would Coudert's assets have been preserved by a swift settlement of the Almaty Parties' motion, Coudert would have assured itself of a means of liquidating a judgment in its Adversary Proceeding against the Almaty Parties to collect the $1.2 million in unpaid fees. Moreover, a vigorous pursuit of this strategy could have resolved the Adversary Proceeding as well as the Almaty Parties' motion.

Conclusion

The decision in Coudert Brothers may be surprising to New York practitioners who are used to the less-restrictive retaining lien under New York law. In the bankruptcy context, however, the decision represents a pragmatic solution because it potentially expands the debtor-law firm's bankruptcy estate by enabling a client to generate more revenue with which to satisfy claims asserted by the debtor-law firm, while at the same time balancing the client's claim to these specific items of property – items that, to the debtor-law firm, have no value except to coerce payment. The decision also serves as a reminder of the long-standing federal principle that courts must determine property rights in bankruptcy cases by applying state law, and differences among states' laws can result in differences in outcome. See Butner v. United States , 440 U.S. 48, 54, 57 (1979).

John J. Rapisardi is a partner in the financial restructuring department of Cadwalader, Wickersham & Taft. Christopher R. Mirick, a special counsel in the firm, and Michael J. Cohen, an associate in the firm, assisted in the preparation of this article, which first ran in the New York Law Journal, a sister publication of this newsletter.