In re Baum

639 B.R. 721

IN RE: Lynn Beth BAUM, Debtor.

Case No. 22-40755

United States Bankruptcy Court, E.D. Michigan, Southern Division.

Signed May 6, 2022

David Findling, The Findling Law Firm, PLC, Royal Oak, Michigan, Attorney for Debtor.

Joseph K. Grekin, Leon N. Mayer, Michael E. Baum, Schafer and Weiner, PLLC, Attorneys for Howard Baum.

Jerome D. Frank, Tami R. Salzbrenner, Frank & Frank, PLLC, Farmington Hills, Michigan, Attorneys for Alliance Equities, LLC.

Marilyn R. Somers-Kantzer, Detroit, Michigan, Attorney for Tammy L. Terry, Chapter 13 Trustee.

OPINION AND ORDER GRANTING MOTION TO DISQUALIFY DEBTOR'S COUNSEL

Thomas J. Tucker, United States Bankruptcy Judge

A. Introduction

In this Chapter 13 case, the Debtor's attorney is also a pre-petition creditor, holding a claim for attorney fees that is potentially very large, but that is entirely unliquidated and in part contingent. The fees were incurred in representing the Debtor in several years of state court litigation that is not yet completed. The question now before the Court is whether the Debtor's attorney has a disqualifying conflict of interest, such that he may not represent the Debtor in this bankruptcy case. The Court answers this question "yes," and therefore will disqualify the Debtor's attorney.

B. Procedural background

This case is before the Court on the motion filed by a creditor, Howard Baum, entitled "Howard Baum's Motion to Disqualify David Findling As Attorney For The Debtor" (Docket # 73, the "Motion"). The Debtor and her attorney objected to the Motion. A party in interest, Alliance Equities, LLC, filed a paper concurring in the Motion.

The Court held a telephonic hearing on the Motion on April 21, 2022. After the hearing, on April 21, 2022, the Court entered an order allowing the Debtor to file certain specified documents, no later than April 27, 2022.¹ The Debtor did file such documents, on April 27, 2022, and then the Debtor filed corrected versions of such documents on April 29, 2022. Howard Baum filed a supplemental brief on April 29, 2022.²

The Court has considered all of the documents that have been filed relating to the Motion, and has considered all of the written and oral arguments of the parties. The Motion is now ready for decision.

The Motion seeks an order disqualifying the Debtor's attorney, David Findling ("Findling"), and Findling's law firm, from representing the Debtor in this Chapter 13 bankruptcy case. Howard Baum argues that Findling and his law firm have a conflict of interest, arising out of their status as pre-petition creditors of the Debtor, and that Mich. Rules Prof. Conduct r.1.7 precludes them from representing the Debtor in this Chapter 13 bankruptcy case.

The Court agrees, and will grant the Motion, for the reasons stated below.

C. Discussion

Certain statements made by Findling at the April 21, 2022 hearing, and certain documents filed by Findling after the hearing, have addressed some of the arguments made by the movant, Howard Baum, in support of the Motion. These include the amended Rule 2016(b) Statement filed by the Debtor on April 22, 2022,³ and the amended Chapter 13 plan filed by the Debtor on April 27, 2022, and its corrected version filed on April 28, 2022.⁴ But Findling, and his law firm, The Findling Law Firm, P.L.C. (the "Findling firm") still have a conflict of interest in representing the Debtor in this Chapter 13 bankruptcy case.

1. The pre-petition claims of Findling and the Findling firm

a. Findling's work for the Debtor in extensive pre-petition state court litigation

The conflict arises from the fact that Findling and the Findling firm are pre-petition creditors of the Debtor. For several years before the Debtor filed this bankruptcy case on February 2, 2022, Findling and the Findling firm represented the Debtor in several complex, related pieces of state court litigation.

All that litigation arose initially from the Debtor's claim that in February 2012, the Debtor told her then-husband, David Baum, and his brother, Howard Baum, that she intended to file for divorce. Shortly after that, the Debtor alleged, David Baum made fraudulent transfers of all of the parties’ marital property to companies owned and operated by Howard Baum. The Debtor sought to remedy that. For example, the Debtor filed a fraudulent transfer action against Fraser Equities, LLC ("Fraser"), a company owned and operated by Howard Baum, to recover some of the fraudulent transfers. That action was filed in 2015 in the Oakland County, Michigan Circuit Court, Case No. 2015-149725-CZ (the "Fraser Action"). After a jury trial, the Debtor obtained a judgment against Fraser on September 30, 2019, for $862,278.71.

Findling and the Findling firm represented the Debtor in the Fraser Action, and in other related fraudulent transfer action and collection-related actions, all filed in the state court. The extensive state court litigation continues, and Findling and the Findling firm continue to represent the Debtor in all that litigation.

b. Findling's two pre-petition fee agreements with the Debtor

Before the Debtor filed this bankruptcy case, she and the Findling firm had entered into two retainer agreements. The first of these was a contingent fee agreement dated January 13, 2015 (the "Contingent Fee Agreement"), under which the Findling firm agreed to represent the Debtor in the following matter:

... in the recovery of funds transferred to a third party or parties prior to [the Debtor's] divorce at issue in Lynn Beth Baum v. David Mark Baum, Case Number 2012-795996-DM, and Howard Baum v Lynn and David Baum, Case Number 2012-128166-CK.⁵

The fee for this representation was to be "33% of the total amount recovered."

The second retainer and fee agreement was an hourly-rate agreement, dated October 29, 2019 (the "Hourly Rate Agreement"). This second agreement supplemented, but did not replace, the Contingent Fee Agreement. The work covered by the Hourly Rate Agreement was described on the first page of the agreement, as follows:

Client is presently represented by Attorney pursuant to a Contingent Fee Agreement dated January 13, 2015 with regard to the recovery of funds transferred to a third party or third parties prior to her divorce in Lynn Baum v David Baum, et. al, Case No 2015-149725-CZ (the "Action"). A final judgment in the Action was entered by the Circuit Court on October 29, 2019.

Client seeks to retain Attorney to represent her in separate related claims for criminal contempt and Proceedings Supplemental to Judgment in the Action (the "Matters"). Client agrees to retain Attorney on an hourly basis with respect to all of the Matters.⁶

It is undisputed that to date, Findling and the Findling firm have not yet recovered any money for the Debtor, so there is not yet any fee owing to Findling and the Findling firm under the Contingent Fee Agreement. So in this bankruptcy case, Findling and the Findling firm have a contingent and unliquidated claim against the Debtor for a fee under the Contingent Fee Agreement.

With respect to fees under the Hourly Rate Agreement, Findling stated during the April 21, 2022 hearing that he and his firm have never actually billed the Debtor for any fees, nor has the Debtor ever paid any fees, even though Findling has done years of work in the state court litigation matters covered by the Hourly Rate Agreement. At the hearing, Findling stated that he did not know how much the Debtor owes under the Hourly Rate Agreement. And he asknowledged that there is overlap between the work described and covered by the Contingent Fee Agreement, on the one hand, and the work described and covered by the Hourly Rate Agreement. So in this bankruptcy case, Findling and the Findling firm have an unliquidated claim for fees against the Debtor under the Hourly Rate Agreement, the amount of which is unknown by both Findling and the Debtor.

With respect to the claims for fees owing to Findling and the Findling firm under the above two pre-petition fee agreements, Findling claims to have an attorney's lien, based on Michigan common law, against any funds recovered for the Debtor. Based on that lien, Findling and his firm claim to be secured creditors of the Debtor.

c. Findling's proof of claim filed in this bankruptcy case

The claims against the Debtor of Findling and the Findling firm to fees, based on the Contingent Fee Agreement and the Hourly Rate Agreement, arose pre-petition, and are pre-petition claims. Findling does not dispute this. And on April 13, 2022, Findling and the Findling firm filed a joint proof of claim in this case (Claim No. 7-1), in the amount of $862,729.00. The claim is explicitly based on the two pre-petition fee agreements, and states that the claim is entirely secured, based on an "[a]ttorney's common law charging lien on [the] Debtor's litigation recovery."

Findling and the Debtor originally agreed that Findling's fee for representing the Debtor in this Chapter 13 bankruptcy case would be a flat fee of $4,000.00.⁷ But as Findling stated during the April 21, 2022 hearing, Findling is now waiving any claim for such fees. This is confirmed by the amended Rule 2016(b) Statement filed on April 22, 2022.⁸

d. The Debtor's post-hearing, amended Chapter 13 plan

During the April 21, 2022 hearing, Findling stated that the Debtor and he had agreed, just that morning, for the Debtor to file an amended Chapter 13 plan, in which the pre-petition fee claims of Findling and his firm would be subordinated to the claims of all other creditors, such that no fees would be paid to Findling or the Findling firm unless and until all other allowed claims in the case were paid in full.

The amended plan filed by the Debtor after the hearing states that "[t]he secured claim of The Findling Law Firm, PLC is subordinated. It will be paid outside the plan directly by the Debtor."⁹

This language may be an attempt to embody the subordination described by Findling during the April 21 hearing. But the language is less than clear about that.

It...