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Parties Involved:
Howard Bittman
Appellee
Electronic Metal Products, Inc.
Appellant

Document Text:

PUBLISH 

FILED 

United States Court of Appeals 

Tenth Ci:-cu!t 

UNITED STATES COURT OF APPEALS C1Cil91990 

ROBERT L. HOECKER 

Clerk 

TENTH CIRCUIT 

In re: ELECTRONIC METAL PRODUCTS, 

INC., a/k/a Advanced Machining Co., 

Debtor, 

ELECTRONIC METAL PRODUCTS, INC., 

a/k/a Advanced Machining Co., 

Plaintiff-Appellant, 

v. 

HOWARD BITTMAN, 

Defendant-Appellee. 

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No. 89-1354 

APPEAL FROM THE UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF COLORADO 

(D.C. No. 88-M-1377)) 

Submitted on the briefs: 

Ronald G. Rossi, Paul T. Maricle, Ceri A.F. Churchill of Rossi & 

Judd, P.C., Denver, Colorado, for Plaintiff-Appellant. 

Howard Bittman, pro se. 

Before TACHA, EBEL, Circuit Judges, and JOHNSON,** District Judge. 

**Honorable Alan B. Johnson, District 

District Court for the District of 

designation. 

Judge, 

Wyoming, 

United States 

sitting by 

Appellate Case: 89-1354 Document: 01019311208 Date Filed: 10/19/1990 Page: 1 
PER CURIAM. 

The issue on appeal in this case is whether an attorney's 

agreement to continue working on a litigation matter in exchange 

for periodic payments against antecedent bills owing by the client 

constitutes "new value" and is thus excepted from avoidance of the 

payments as a preference in the client's subsequent bankruptcy. 

The bankruptcy court ordered summary judgment in favor of 

Electronic Metal Products, Inc. (EMP) I the client and 

debtor-in-possession, against Howard Bittman, the attorney, for 

the recovery of two payments totalling $5,100 paid to Bittman 

during the ninety-day prefiling preference period. The district 

court reversed, holding that the payments did constitute new value 

because the estate realized a direct net financial benefit from 

Bittman's continued representation and because the payments of 

$5,100 released Bittman's attorney's charging lien on the 

settlement proceeds as to $5,100 of such lien. 

Debtor-in-possession EMP appealed, 1 and we reverse. 

The underlying facts of this case are stipulated. See R. 

Vol. I, tab 11. 

1 In response to the parties' Stipulated Motion for Submission 

on the Briefs and Waiver of Oral Argument, the court has examined 

the briefs and appellate record, and has determined that oral 

argument would not materially assist the determination of this 

appeal. See Fed. R. App. P. 34(a); lOth Cir. R. 34.1.9. The case 

is therefore ordered submitted without oral argument. 

2 

Appellate Case: 89-1354 Document: 01019311208 Date Filed: 10/19/1990 Page: 2 
In 1985, Bittman, an attorney, was retained by 

Electronic Metal Products (EMP), the debtor, to bring a 

suit for damages against Fluor Engineers, Inc. Bittman 

filed the action, conducted discovery and pre-trial 

proceedings. On December 19, 1986, Bittman sent EMP a 

letter requesting payment of past due fees and expenses. 

The president of EMP called Bittman and asked what he 

would require to continue working on the case. Bittman 

said that he would seek to withdraw from the Fluor case 

and other pending litigation unless EMP paid him at 

least $2,000 per month on the past due bill. Between 

February 10, 1987 and May 6, 1987, Bittman received 

$5,100, representing payments on bills from June, August 

and September, 1986. EMP filed a petition under Chapter 

11 on May 6, 1987. On August 29, 1987, the bankruptcy 

judge entered an order approving Bittman's continued 

employment pursuant to a written fee agreement with EMP 

as debtor-in-possession. Bittman continued working on 

the case. On October 6, 1987, the Fluor litigation 

settled by Fluor's payment of $42,000 to EMP. Bittman's 

compensation for work performed after the $5,100 payment 

is not at issue. 

Electric Metal Products, Inc. v. Bittman (In re Electronic Metal 

Products, Inc.), No. 88-M-1377, Memorandum Opinion and Order at 

1-2 (D. Colo. November 7, 1989)(hereafter "District Court Opinion 

and Order"). It was further stipulated by the parties that 

[1] The Transfers were to a creditor, Howard 

Bittman. 

[2] The Transfers were made while the Debtor was 

insolvent. 

[3] The Transfers were made on or within 90 days 

before the date of the filing of [EMF's] Petition in 

Bankruptcy . . . . 

[4] If this Court finds that the Transfers were not 

contemporaneous exchanges of value, that Bittman did not 

give new value for those Transfers, and that Bittman did 

not have a perfected attorneys' lien in the Transfers, 

then the parties stipulate that the Transfer enabled the 

creditor, Bittman, to receive more than Bittman would 

receive if the case were a case under Chapter 7 of this 

Title. 

[5] Neither Transfer was made in the ordinary 

course of business or financial affairs of the Debtor or 

the Transferee. 

3 

Appellate Case: 89-1354 Document: 01019311208 Date Filed: 10/19/1990 Page: 3 
R. Vol. I, tab 11 at 3. These stipulations satisfy the elements 

for preferential transfer under 11 u.s.c. § 547(b)(1988), 2 

contingent on whether the transfers were contemporaneous exchanges 

of value, whether Bittman gave new value for the transfers, and 

whether Bittman had a perfected attorney's lien on the transfers. 

These are questions of law which we review de novo. Davidovich v. 

Welton (In re Davidovich), 901 F.2d 1533, 1536 (lOth Cir. 1990). 

"The validity and extent of an attorney's lien in bankruptcy 

is determined by state law." In re Life Imaging Corp., 31 Bankr. 

2 11 U.S.C. § 547(b) provides: 

Except as provided in subsection (c) of this 

section, the trustee may avoid any transfer of an 

interest of the debtor in property - (1) to or for the benefit of a creditor; 

(2) for or on account of an antecedent debt owed by 

the debtor before such transfer was made; 

(3) made while the debtor was insolvent; 

( 4) made - (A) on or within 90 days before the date of 

the filing of the petition; or 

(B) between ninety days and one year before 

the date of the filing of the petition, if such creditor 

at the time of such transfer was an insider; and 

(5) that enables such creditor to receive more than 

such creditor would receive if - (A) the case were a case under chapter 7 of 

this title; 

(B) 

(C) 

debt to the 

title. 

the transfer had not been made; and 

such creditor received payment of such 

extent provided by the provisions of this 

11 U.S.C. § 547(a)(2) defines new value: 

"new value" means money or money's worth in goods, 

services, or new credit, or release by a transferee of 

property previously transferred to such transferee in a 

transaction that is neither void nor voidable by the 

debtor or the trustee under any applicable law, 

including proceeds of such property, but does not 

include an obligation substituted for an existing 

obligation. 

4 

Appellate Case: 89-1354 Document: 01019311208 Date Filed: 10/19/1990 Page: 4 
101, 102 (Bankr. D. Colo. 1983). In Colorado, attorney's liens 

are governed by Colo. Rev. Stat. § 12-5-119 (1985 Repl. Vol. & 

Cum. Supp. 1989). 3 

3 

Colorado law distinguishes between retaining liens 

and charging liens. See Collins v. Thuringer, [92 Colo. 

433,] 21 P.2d 709, 710 (Colo. 1933); Donaldson [,Hoffman 

& Goldstein] v. Gaudio [(In re Forrest A. Heath Co.)], 

260 F.2d 333, 335-36 (lOth Cir. 1958). A retaining lien 

permits the attorney to retain possession of personal 

property of the client, such as a deposit or files, 

until fees are paid. A charging lien permits the 

attorney to satisfy his fee claim out of the subject 

matter of the litigation. 

Even without filing notice, Bittman had a charging 

lien on the chose in action that produced the 

settlement, because as between attorney and client, the 

lien arises by operation of law. See Dankwardt v. 

Kermode, [68 Colo. 225,] 187 P. 519, 520 (Colo. 1920); 

Dolan v. Flett, [41 Colo. App. 40,] 582 P.2d 694, 696 

(Colo. App. 1978); Ranes v. Molen [(In re Ranes)J, 31 

Bankr. 70, 72 (Bankr. D. Colo. 1983). However, because 

Bittman did not file a notice of lien, it was not 

perfected against third parties [see In re Ranes, 31 

Bankr. at 72; Dolan, 582 P.2d at 696,] and was therefore 

Colo. Rev. Stat. Ann. § 12-5-119 provides: 

All attorneys- and counselors-at-law shall have a 

lien on any money, property, choses in action, or claims 

and demands in their hands, on any judgment they may 

have obtained or assisted in obtaining, in whole or in 

part, and on any and all claims and demands in suit for 

any fees or balance of fees due or to become due from 

any client. In the case of demands in suit and in the 

case of judgments obtained in whole or in part by any 

attorney, such attorney may file, with the clerk of the 

court wherein such cause is pending, notice of his claim 

as lienor, setting forth specifically the agreement of 

compensation between such attorney and his client, which 

notice, duly entered of record, shall be notice to all 

persons and to all parties, including the judgment 

creditor, to all persons in the case against whom a 

demand exists, and to all persons claiming by, through, 

or under any person having a demand in suit or having 

obtained a judgment that the attorney whose appearance 

is thus entered has a first lien on such demand in suit 

or on such judgment for the amount of his 

fees .... Such lien may be enforced by the proper 

civil action. 

5 

Appellate Case: 89-1354 Document: 01019311208 Date Filed: 10/19/1990 Page: 5 
invalid against a trustee in bankruptcy as of the date 

of the bankruptcy filing under 11 U.S.C. § 545. 

District Court Opinion and Order at 2-3. We agree with the 

district court to this point in its analysis. 

In addition, the district court was correct that the trustee, 

or in this case the debtor-in-possession, 4 had the power to avoid 

the $5,100 payments as preferences. This provision was intended 

as protection of the debtor, the trustee, and other creditors 

from those creditors aware of the unstable financial condition of 

the debtor immediately prior to its bankruptcy filing who 

"dismember the debtor during his slide into bankruptcy," H.R. Rep. 

No. 595, 95th Cong., 2d Sess., 177, reprinted in 1978 U.S. Code 

Cong. & Admin. News 5963, 6138 (hereafter "House Report"), 

draining the debtor of resources which could be used for its 

restructuring or for equitable distribution among all the debtor's 

creditors. Id. 

However, Congress also recognized that certain otherwise 

avoidable preferential payments actually ultimately benefited the 

debtor's estate and hence the other creditors, and it excepted 

these situations from the trustee's avoidance power. 5 In the case 

4 The debtor-in-possession has the power of 

trustee in aspects relevant to our discussion here. 

§ 1107(a). 

a Chapter 11 

See 11 u.s.c. 

5 11 u.s.c. § 547(c) provides: 

The trustee may not avoid under this section a 

transfer -

(1) to the extent that such transfer was 

(A) intended by the debtor and the creditor to 

or for whose benefit such transfer was made to be a 

contemporaneous exchange for new value given to the 

debtor; and 

(continued on next page) 

6 

Appellate Case: 89-1354 Document: 01019311208 Date Filed: 10/19/1990 Page: 6 
before us, Bittman claims that his agreement to continue working 

on the case in consideration for the preferential payments 

constituted new value to the debtor and is thus not subject to the 

trustee's avoidance power. 

The district court agreed with Bittman. It found that EMF's 

payments to Bittman during the preference period constituted new 

value because they resulted in a gain of $42,000 to the estate and 

because Bittman "released" $5,100 of his charging lien as against 

EMP upon receipt of the payments. District Court Opinion and 

Order at 4. We agree with the district court that the Fluor 

litigation resulted in a net direct financial gain to the estate, 

and we agree that Bittman's charging lien as against his client 

EMP was released upon acceptance of the preferential payments. 

However, as set forth below, we disagree that these two factors 

satisfy the tests for new value under prior holdings of this and 

other circuits. 

As a preliminary matter, Bittman claims that his promise to 

continue to represent EMP if it made periodic payments to decrease 

its antecedent debt was consideration sufficient to constitute new 

(continued from previous page) 

(B) in fact a substantially contemporaneous 

exchange; 

(4) to or for the benefit of a creditor, to the 

extent that, after such transfer, such creditor gave new 

value to or for the benefit of the debtor -

(A) not secured by an otherwise unavoidable 

security interest; and 

(B) on account of which new value the debtor 

did not make an otherwise unavoidable transfer to or for 

the benefit of such creditor. 

7 

Appellate Case: 89-1354 Document: 01019311208 Date Filed: 10/19/1990 Page: 7 
value. However, this circuit has held otherwise. 11 [T]he fact 

that [the creditor] may have promised to continue to do business 

with [the debtor] if it paid its bills is not new credit or new 

value to the estate. 11 Lowrey v. U. P. G. , Inc. (In re Robinson 

Bros. Drilling, Inc.), 877 F.2d 32, 34 (lOth Cir. 1989). We are 

prompted to extend this holding to legal representation for three 

reasons. First, were we to hold otherwise, nearly any 

preferential transfer for or on account of an antecedent debt in 

the circumstance of an ongoing attorney-client relationship would 

be insulated from recovery as a preference under 

section 547(c)(l). See id. Second, "the Bankruptcy Code's 

definition of the term 'new value' implies that the creditor must 

prove the specific valuation in 'money or money's worth in goods, 

services, or new credit.'" Id. (citing Jet Florida, Inc. v. 

American Airlines, Inc. (In re Jet Florida Sys., Inc.), 861 F.2d 

1555, [1559] (11th Cir. 1988); 11 u.s.c. § 547(a)(2)). There is 

no evidence, nor can we hypothecate circumstances in an 

attorney-client relationship under which there could be evidence, 

that the $42,000 settlement which enriched the estate was directly 

attributable to Bittman's promise to continue to work on the Fluor 

file from December 1986 until May 1987. And third, continuation 

of Bittman's legal representation on the Fluor matter may have 

been more efficient than securing other counsel, but in this 

respect, legal representation is indistinguishable from the 

efficiency of continuation of the types of business relationships 

explicitly covered by the In re Robinson Drilling decision. 

8 

Appellate Case: 89-1354 Document: 01019311208 Date Filed: 10/19/1990 Page: 8 
In addition, Bittman claims that the new value requirement 

was satisfied because, with his acceptance of the payments during 

the preference period, his attorney's charging lien was decreased 

in like amount, thus constituting a release of security. However, 

Bittman's release of the charging lien during the preference 

period was a release only as to his client. It was not a release 

as to third parties, cf. In re Ranes, 31 Bankr. at 72 (charging 

lien which is automatic as between attorney and client becomes 

enforceable against third parties if notice of the lien is filed 

with the court); Dolan, 582 P.2d at 696 (same), including EMP's 

other creditors and the trustee or debtor-in-possession. After 

EMP filed its petition in bankruptcy, the perspective of the court 

must necessarily change from analysis of the preferential 

payments' effect on Bittman's security interest in the settlement 

proceeds as to his client, now debtor-in-possession EMP, to the 

effect of the payments on the estate and on EMP's other creditors. 

See 11 u.s.c. 545; 6 House Report at 6138. 

6 11 u.s.c. § 545 provides in pertinent part: 

The trustee may avoid the fixing of a statutory 

lien on property of the debtor to the extent that such 

lien -

(1) first becomes effective against the debtor-

(A) when a case under this title concerning 

the debtor is commenced; 

(2) is not perfected or enforceable at the time of 

the commencement of the case against a bona fide 

purchaser that purchases such property at the time of 

the commencement of the case, whether or not such a 

purchaser exists. 

9 

Appellate Case: 89-1354 Document: 01019311208 Date Filed: 10/19/1990 Page: 9 
Finally, Bittman claims that since the estate was enriched by 

$42,000 at the time of the Fluor settlement, even if the transfers 

were preferences, they should not be avoided since they resulted 

in a net increase to the estate. However, this argument is merely 

a request that we utilize the old judicially-created "net result 

rule" under the 1898 Bankruptcy Act, which has been discredited 

under the 1978 Bankruptcy Code. McClendon v. Cal-Wood Door (In re 

Wadsworth Bldg. Components, Inc.), 711 F.2d 122, 123-24 (9th Cir. 

1983)(legislative history of the 1978 Bankruptcy Code does not 

support application of the "net recovery rule" analysis to the 

1978 Code). We agree with the holding in McClendon. The orderly, 

equitable, and predictable liquidation or reorganization of the 

debtor's estate anticipated by the 1978 Code would be undermined 

by this post-hoc analysis of the financial benefits of 

preferential payments to creditors. 

The district court's conclusion that EMF's payments to 

Bittman during the preference period were exceptions to avoidance 

because they were consideration for new value was erroneous and 

must be REVERSED. The bankruptcy court's order of Aug. 11, 1988, 

granting summary judgment to EMP as debtor-in-possession on its 

complaint seeking avoidance of the $5,100 preference payment 

described herein is REINSTATED. 

10 

Appellate Case: 89-1354 Document: 01019311208 Date Filed: 10/19/1990 Page: 10