Judge Maurice A. Leiter, Case 21STCV28185 2023-05-03 Tentative Ruling

If the parties wish to submit on the tentative, please email the courtroom at¿SMCdept54@lacourt.org¿with notice to opposing counsel (or self-represented party) before 8:00 am on the day of the hearing.

On February 24, 2022, Plaintiff Martina Silas filed the operative first amended complaint against Defendants The Fox Law Corporation, Inc., Steven Robert Fox and Barry Roger Wegman, asserting causes of action for fraudulent transfer, fraud, conversion, and money had and received. Plaintiff alleges she obtained a judgment and assignment order against third-party James Arden for approximately $300,000.00 in 2011. At some point, Arden filed for bankruptcy. Plaintiff alleges that Arden paid Defendants, his purported attorneys in the bankruptcy proceedings, with money that belonged to Plaintiff under the assignment order.

“In granting or denying a motion for summary judgment or summary adjudication, the court need rule only on those objections to evidence that it deems material to its disposition of the motion.” (CCP § 437c(q).) Plaintiff’s objection no. 8 to Fox declaration is SUSTAINED.

“A party may move for summary adjudication as to one or more causes of action within an action, one or more affirmative defenses, one or more claims for damages, or one or more issues of duty, if the party contends that the cause of action has no merit, that there is no affirmative defense to the cause of action, that there is no merit to an affirmative defense as to any cause of action, that there is no merit to a claim for damages, as specified in Section 3294 of the Civil Code, or that one or more defendants either owed or did not owe a duty to the plaintiff or plaintiffs. A motion for summary adjudication shall be granted only if it completely disposes of a cause of action, an affirmative defense, a claim for damages, or an issue of duty.” (CCP § 437c(f)(1).)

Plaintiff moves for summary adjudication of two issues of duty and of Defendants’ sixth, seventh and ninth affirmative defenses.

Plaintiff asserts that Defendants had legal and fiduciary duties to: (1) disclose to the bankruptcy court all fees/funds received from Debtor Arden as compensation for services performed relating to the bankruptcy proceedings; and (2) recognize and comply with Plaintiff’s priority right to payment as a secured creditor, over Defendants’ alleged claim to a right to payment as an unsecured creditor, and to turn those funds over to Plaintiff. Plaintiff also asserts these duties dispose of Defendants’ affirmative defenses of lack of fiduciary duty, no duty to disclose, and non-existence of property.

Plaintiff asserts Defendants had a “duty to disclose” the receipt of funds from Arden under 11 U.S.C. § 329(a) and Rule of Professional Conduct 1.15(d)(1).

11 U.S.C. § 329(a) provides, “Any attorney representing a debtor in a case under this title, or in connection with such a case, whether or not such attorney applies for compensation under this title, shall file with the court a statement of the compensation paid or agreed to be paid, if such payment or agreement was made after one year before the date of the filing of the petition, for services rendered or to be rendered in contemplation of or in connection with the case by such attorney, and the source of such compensation.”

Plaintiff presents evidence showing Defendants only disclosed $3,000.00 in fees to the bankruptcy court. (UMF ¶¶ 47-48.) Plaintiff also presents evidence showing Arden paid Defendants at least $106,958.03 from 2013 to 2019 and during that time, Defendants represented Arden in the bankruptcy adversary proceeding brought by Plaintiff. (UMF ¶¶ 52-53; 37-42.) Under 11 U.S.C. § 329(a), Defendant was required to disclose these funds to the bankruptcy court to the extent they were incurred in connection with the bankruptcy proceedings.

Defendants do not dispute these facts. Defendants instead argue Plaintiff cannot enforce in state court the duty to disclose fees. Defendants assert that federal bankruptcy courts have exclusive jurisdiction over attorney’s fees incurred in bankruptcy proceedings. This does not defeat Plaintiff’s arguments. The question before the Court is whether Defendants had a duty to disclose Arden’s payment of attorney’s fees to the bankruptcy court. Plaintiff has established that Defendants did have such a duty.

Rule of Professional Conduct 1.15(d)(1) provides, “A lawyer shall . . . promptly notify a client or other person of the receipt of funds . . . in which the lawyer knows or reasonably should know the client or other person has an interest.”

Plaintiff asserts Defendants had a duty to disclose to Plaintiff the funds they received from Arden because they knew or should have known Plaintiff had a superior interest in them under Plaintiff’s assignment order. The assignment order assigned Plaintiff the right to Arden’s rights to (1) “receive payment for services and costs from any client or third party, regardless of whether the matter is litigated or a transactional matter;” (2) “collect payment or cost reimbursements from a client or any party on any current or future litigated case in any court in any state;” (3) “collect property or money from any client or third party whether the right arises from providing legal services or in some other occupation;” and (4) “collect rents, commissions, royalties, patent or copyright fees or funds based on an insurance policy loan value.”

Plaintiff asserts that Defendants represented they did not have to disclose these fees to Plaintiff because they were paid from Arden’s inherited funds. Plaintiff presents evidence showing Arden did not pay Defendants with inherited funds, and instead used the funds to buy a house and car. (UMF ¶ 75.) Plaintiff also presents evidence showing Arden earned $248,520.00 in income after the assignment order was issued in 2013. (UMF ¶¶ 72-74.) This is sufficient to establish Defendants were paid with Arden’s income, rather than inheritance.[1]

Defendants again do not dispute these facts. Defendants rely on the declaration of Defendant Steven R. Fox, who states, “Arden received notice of his impending large inheritance in 2017, he informed me of this pending event and that I would be paid from the inheritance funds.” (Decl. Fox ¶ 17.) This statement is hearsay and cannot be used to establish Defendants were actually paid with inheritance funds.

Defendants also assert that the professional rules do not create a private right of action for violation of Rule 1.15. As with the bankruptcy disclosures, the Court is merely making a finding as to whether Defendants had a duty to disclose the funds to Plaintiff under the Professional Rules. Plaintiff has established Defendants had that duty.

Plaintiff asserts Defendants have a duty to disgorge the funds to Plaintiff. It is unclear, however, from where this duty arises. Plaintiff asserts that her assignment has priority over Defendants’ entitlement to payment of attorney’s fees and that the remedy for failure to disclose attorney’s fees in a bankruptcy proceeding is disgorgement. Plaintiff, however, does not cite authority showing Defendants have a “duty to disgorge” these funds to Plaintiff. Under the bankruptcy rules, the fees likely would be disgorged to the estate or the court. Plaintiff does not present authority showing disgorgement of attorney’s fees to a third-party creditor.

That Plaintiff has a superior right to payment and Defendant failed to honor this right, may give rise to liability under Plaintiff’s causes of action. But this does not create a “duty of disgorgement.” Plaintiff does not discuss or analyze fiduciary or legal duties an attorney may have to third parties to disgorge fees.

[1] Plaintiff asserts she is entitled to the money paid to Defendants regardless of whether it was paid from income or inheritance. As Plaintiff has shown that the money was paid from Arden’s income, the Court need not address whether the assignment order also provides Plaintiff with the rights to Arden’s inheritance dollars.