*Of the Northern District of California, sitting by designation.

United States Court of Appeals

For the First Circuit

No. 00-1517

CADLE COMPANY,

Plaintiff, Appellant,

v.

JAN RICHARD SCHLICHTMANN,

Defendant, Appellee.

_____________________ 

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. George A. O’Toole, Jr., U.S. District Judge]

__________________________

Before

Torruella, Circuit Judge,

 Campbell, Senior Circuit Judge,

and Schwarzer,* Senior District Judge.

_____________________

Scott L. Machanic, with whom Cunningham, Machanic, Celtin &

Johnson, LLP, appeared on brief, for appellant.

Jan Richard Schlichtmann for appellee.

__________________
2

October 4, 2001

__________________
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Schwarzer, Senior District Judge. This appeal presents

the questions of whether a security interest in the accounts receivable

of a law firm--including an account arising from a contingent fee

agreement--survives the firm’s dissolution and the bankruptcy of one of

its partners and, if it does, whether it attaches to a post-bankruptcy

payment of the fee. We hold that it does and reverse the judgment.

FACTUAL AND PROCEDURAL BACKGROUND

From 1990 to early 1991, the law firm of Schlichtmann,

Conway, Crowley and Hugo (the firm) represented plaintiffs in certain

environmental litigation in the Middlesex Superior Court, Coble v. FL

Aerospace Corp., Civil No. 89-76530, (the Groton matter). Among the

firm’s accounts receivable was a contingency fee agreement, the fee to

be paid to the firm at the conclusion of the litigation. The firm had

borrowed funds from the Boston Trade Bank (the Bank) and to secure

those loans, the firm and its partners had signed a series of notes,

guaranties, security agreements and UCC filings. By virtue of these

documents, the Bank held a security interest in the Groton fee

receivable. Before any part of this fee became payable, the Bank

failed and the FDIC sold its assets--including the firm’s notes and the

security agreements--to Cadle Company (Cadle). 

In December 1990, Jan Schlichtmann wrote to the Bank on

behalf of the firm, reporting on the status of the outstanding loan

accounts and on the progress of the Groton settlement. In the letter,
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Schlichtmann stated that “This letter serves as an additional security

interest of the bank in all Groton fees received by this office.”

In June 1991, the Superior Court approved the Groton

settlement agreement, under which $825,000 was deposited into an escrow

account, with distribution subject to the settlement’s approval by the

Massachusetts Department of Environmental Protection. In October 1991,

Schlichtmann filed for bankruptcy under Chapter 7 of the Bankruptcy

Code, causing the firm’s dissolution pursuant to Massachusetts General

Laws ch. 108A § 31 (1922) (“Causes of Dissolution”). In January 1992,

the Bankruptcy Court issued a “Discharge of Debtor” order, releasing

Schlichtmann from all his dischargeable debts.

Following Schlichtmann’s bankruptcy and the firm’s

dissolution in 1991, Schlichtmann continued to work on the Groton

matter until its final resolution in May 1995. In June 1995, $300,000

from the Groton settlement was deposited into Schlichtmann’s escrow

account. Of this amount, he distributed $100,000 to his former

partners and $200,000 to himself ($110,000 of which he shared with

Thomas Kiley, a former co-defendant who was dismissed from this case).

Cadle received no part of the Groton fee settlement. 

Cadle then filed this action against Schlichtmann, his former

partners, and Kiley in June 1995. After considerable skirmishing,

Schlichtmann/Kiley and Cadle filed cross-motions for summary judgment.

On July 14, 1999, the district court denied both motions. The court
1Defendants other than Schlichtmann were dismissed before trial.

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concluded that because Schlichtmann’s post-bankruptcy work on the

Groton matter was not performed on behalf of the dissolved partnership,

he was entitled to a portion of the Groton fee to compensate for the

work he performed in his individual capacity. Whether the two-thirds

portion of the Groton fee retained by Schlichtmann was a proper

division between Schlichtmann and his former partners was to be

resolved at trial.

The case went to trial in November 1999.1 Cadle advanced two

theories: First, that Schlichtmann’s retaining $200,000 of the Groton

fee and distributing $100,000 to his former partners constituted

conversion of funds in which Cadle had a security interest; and,

second, that Cadle was entitled to the entire Groton fee, having

forborne enforcing the notes it held in reliance on Schlichtmann’s

promise to deliver the fee when received. Cadle’s request for a jury

instruction on promissory estoppel was denied. The jury returned a

verdict for defendant.

Cadle appeals on two grounds: First, that because it held

a security interest in the entire Groton fee, the court should have

granted its motion for summary judgment; and, second, that the court

erred in refusing to instruct the jury on promissory estoppel.

Because we conclude that Cadle was entitled to the portion of the

Groton fee retained by Schlichtmann, we do not reach the promissory
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estoppel issue.

The district court had jurisdiction under 28 U.S.C. § 1332,

and this court has jurisdiction under 28 U.S.C. § 1291. 

DISCUSSION

In its order denying Cadle’s motion for summary judgment, the

court acknowledged that the motion “hinges on its contention that the

former law partnership . . . had a right to the entire $300,000 legal

fee derived from the second Groton escrow account.” The Cadle Co. v.

Schlichtmann, Conway, Crowley & Hugo, 1999 WL 527715, at *1 (D. Mass.

1999). The court then reasoned that “[t]he only way it could

potentially lay claim to this amount is if all compensable legal work

required to gain access to the second escrow account had been completed

at the time of the law firm’s dissolution in October 1991.” Id. The

court observed that the settlement agreement required additional work

by plaintiffs’ lawyers post-bankruptcy, Schlichtmann performed that

work, and he performed it in his individual capacity, rather than on

behalf of the firm. He was, therefore, entitled to compensation. See

id. The court concluded that “Cadle’s security interest only extends

to that portion of the Groton fee, if any, that belongs to the

dissolved partnership.” Id.

The fundamental error in this analysis is that it ignores the

source of Schlichtmann’s entitlement to the Groton fee. The fee to

which Schlichtmann laid claim came out of the distribution from the
2In this letter, Schlichtmann represented to the Bank that

$800,000 was then being held in escrow by the Bank to secure the

first part of the settlement, out of which $200,000 in fees

would be paid to the firm, and that release of the funds was

awaiting settlement of the co-defendant's share representing an

additional $825,000, out of which the firm expected a second

payment of $206,000. Schlichtmann went on to state:

I want to assure you of the Bank's security

in these anticipated fees in the Groton

case. First, you should know that the case

has been reported to the court by the

parties as being settled. The court has

ordered the pa4ties to appear before it as

soon as practical in January so that it may

approve of the distribution of the funds.

Out of the first payment we will pay off the

$45,000 note. This letter serves as an

additional security interest of the bank in

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Groton settlement and became payable by reason--and only by reason--of

the fee agreement between the (now dissolved) firm and the Groton

plaintiffs. The Distribution of Settlement Proceeds form clearly shows

an allocation of 32.24% attorneys’ fees (plus 4.02% for litigation

consultation). It is unquestioned that this amount became payable by

reason of the fee agreement between the firm and the plaintiffs. Thus,

when Schlichtmann began to work for the plaintiffs after the

dissolution, he simply took over the firm’s work and carried out what

the firm had agreed to do, for which it was to be compensated. 

That the firm no longer existed is immaterial to Cadle’s

claim. It had a security interest in the entire Groton fee; as

Schlichtmann wrote in December 1990, “I want to assure you of the

bank’s security in these anticipated fees in the Groton case.”2 And
all Groton fees received by this office. We

also anticipate making arrangements with the

bank for an appropriate schedule to pay down

the credit line.

The letter makes clear that the parties intended an assignment

of a security interest in sums in escrow, not in future fees.

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that Schlichtmann may have taken over the Groton engagement and

completed the work cannot operate to wipe out Cadle’s acknowledged

security interest in the fee from that work without the secured party’s

written consent; indeed, the security agreement specifically bars

disposal of any collateral without the secured party’s prior written

consent.

Schlichtmann concedes that Cadle holds a security interest

in the firm’s accounts receivable which encompasses any Groton fee

received by the firm. However, he contends that after the firm

dissolved, the firm terminated its representation of the Groton

clients, and thus left Cadle with a security interest in only the fees

related to the work the firm performed on the matter prior to its

dissolution. Agreeing with the district court, Schlichtmann

characterizes his post-dissolution efforts on the Groton case as work

performed in his individual capacity, not on behalf of the firm. 

However, that the post-dissolution work on the Groton matter

was performed by Schlichtmann does not alter Cadle’s rights as a

secured creditor. Partners cannot eliminate a security interest in the

partnership’s anticipated fees by transferring (without the creditor’s
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written consent) the client files, whether by dissolution of the

partnership or otherwise. In PNC Bank, Delaware v. Berg, 1997 WL

527978 (Del. Super. Ct. 1997), the court held that a bank could assert

its security interest under Article 9 of the Uniform Commercial Code in

contingent fee agreements that had been transferred before having

matured. There, Tighe, Cottrell, and Logan--partners in a firm called

Berg, Tighe, Cottrell & Logan--withdrew from the firm and opened a new

firm called Tighe, Cottrell & Logan (“Tighe”). The partners in the new

firm took with them many client files, including the active files on

which Tighe, Cottrell, and Logan had themselves been working. See id.

at 2. PNC Bank claimed a continuing security interest in the

contingent fee files. In its defense, Tighe argued that the security

interest was lost as a result of the agreement between Berg and Tighe

in which Berg surrendered any interest in the client files in return

for Tighe’s relinquishing its interest in the Berg firm. See id. at

10. The court rejected the argument, holding that unless PNC Bank

authorized this transfer, it retained the right under Uniform

Commercial Code § 9-306 to follow the collateral, the contingent fee

files. See id. The court went on to reject the argument that Tighe

had invested eighteen months of effort and additional expense on the

assumption that the total of any contingent fee recoveries would be

theirs, concluding that this “has absolutely nothing to offer on the

issue of whether PNC Bank has a security interest.” Id. at 11. In
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denying Tighe’s motion for reargument, the court said that accepting

Tighe’s contention 

would emasculate the protection which § 9-306(2)

affords secured creditors. Any debtor would be

able to destroy an existing Article Nine security

interest simply by transferring both the right to

payment and the performance due under the

contract to an assignee. Section 9-104(f) simply

does not countenance wiping out already-existing

security interests.

PNC Bank, Del. v. Berg, 1997 WL 817869 *2 n.1 (Del. Super. Ct. 1997).

The instant case is analogous. The firm dissolved and

Schlichtmann agreed with his former partners to take over the Groton

matter in exchange for one-third of any recovered attorney’s fee.

Schlichtmann’s departure from the firm and his assumption of

responsibility for the Groton matter does not wipe out Cadle’s right to

follow the collateral--the fee in the Groton case. We agree with the

court in PNC Bank, Delaware that to hold otherwise would allow “[a]ny

debtor . . . to destroy an existing Article Nine security interest

simply by transferring both the right to payment and the performance

due under the contract to an assignee.” PNC Bank, Del., 1997 WL 817869

at *2 n.1. Thus, Schlichtmann’s claim to have performed work on the

Groton matter in his individual capacity after the firm dissolved

cannot defeat Cadle’s rights as a creditor with a security interest in

the Groton fee. 

Schlichtmann would distinguish PNC Bank, Delaware because
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it did not deal with the impact of bankruptcy on the entitlement of a

discharged debtor to his post-bankruptcy earnings. Such a discharge

extinguishes only in personam claims and generally has no effect on in

rem claims against property. See Doral Mortgage Corp. v. Echevarria,

212 B.R. 185 (B.A.P. 1st Cir. 1997). The June 7, 1991, settlement

agreement established the distribution of the settlement proceeds in

the Groton matter and determined the amount of the fee due to the firm

under the contingency agreement. This took place before Schlichtmann

filed for bankruptcy. Cadle’s security interest attached to this

amount and it has an in rem claim to it. While Schlichtmann’s postbankruptcy work on the Groton matter no doubt contributed to the

consummation of the settlement, the amount of the fee owed to the firm

and therefore to Cadle was established outside of Schlichtmann’s

bankruptcy. Cadle’s security interest in this property was not

affected by Schlichtmann’s bankruptcy. 

Schlichtmann attempts to characterize his claim to the fee

as post-petition earnings, personal property acquired after his debts

were discharged. This argument is foreclosed by § 552 of the

Bankruptcy Code, which concerns the effect of pre-petition security

interests on post-petition earnings. See 11 U.S.C. § 552. “Its

purpose is to prevent a creditor’s pre-petition security interest in

’after-acquired property’ . . . from attaching to property acquired by

the estate or debtor-in-possession after the filing of a bankruptcy
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petition.’” See N.H. Bus. Dev. Corp. v. Cross Baking Co., 818 F.2d

1027, 1029 (1st Cir. 1987). Under 11 U.S.C. § 552(a), “[P]roperty

acquired . . . by the debtor after the commencement of the case is not

subject to any lien resulting from a security agreement entered into by

the debtor before the commencement of the case.” Section 552(b)(1),

however, carves out an exception to this rule:

[I]f the debtor and an entity entered into a

security agreement before the commencement of the

case and if the security interest created by such

security agreement extends to property of the

debtor acquired before the commencement of the

case and to proceeds, product, offspring, or

profits of such property, then such security

interest extends to such proceeds, product,

offspring, or profits acquired by the estate

after the commencement of the case to the extent

provided by such security agreement and by

applicable nonbankruptcy law, except to any

extent that the court, after notice and a hearing

and based on the equities of the case, orders

otherwise.

11 U.S.C. § 552(b)(1) (emphasis added).

Section 552(b)(1) applies because Cadle’s security interest

in the firm’s accounts receivable extends to proceeds from the Groton

matter including the contingency fee at issue. Schlichtmann’s December

27, 1990, letter to Boston Trade Bank compels that conclusion: “I want

to assure you of the bank’s security in these anticipated fees in the

Groton case. . . . This letter serves as an additional security

interest of the bank in all Groton fees received by this office.”

Because the security agreement covered the firm’s accounts receivable--
3Under both Uniform Commercial Code § 9-306(1) and Massachusetts

General Laws ch. 106 § 9-306(1): “‘proceeds’ includes whatever is

received upon the sale, exchange, collection or other disposition of

collateral or proceeds.” See In re Mintz, 192 B.R. 313, 318-19 (Bankr.

D. Mass. 1996).

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property acquired before the bankruptcy proceedings--and the resulting

security interest attached to the proceeds known as the Groton fee,

this security interest attached to the Groton fee received by

Schlichtmann post-bankruptcy.3

An analogous situation was before the court in United

Virginia Bank v. Slab Fork Coal Co., 784 F.2d 1188 (4th Cir. 1986).

Slab Fork, a coal company, entered into a contract with Armco, Inc. to

sell Armco coal it had mined. See United Va. Bank, 784 F.2d at 1189.

Before Slab Fork filed for bankruptcy, United Virginia Bank acquired a

security interest in Slab Fork’s contract and its proceeds. See id.

After Slab Fork shut down its mining operation and declared bankruptcy,

it made arrangements for another company to mine and supply coal to

Armco. See id. Armco continued to pay Slab Fork for the coal. See

id. Slab Fork argued that the cash it generated after it filed for

bankruptcy was not covered by the bank’s security interest. See id.

The court disagreed, holding that under 11 U.S.C. § 552(b), cash

proceeds generated under a pre-petition contract received post-petition

are subject to a pre-petition security interest in the contract and its

proceeds. See id. “It is true,” the court observed, “that coal had to
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be supplied to Armco by or for Slab Fork before any right to payment

arose, but that is true for all the payments under the contract,

whether generated pre-petition or post-petition.” Id. at 1190. The

court concluded that “No change in the right to payment under the Armco

contract was brought about by the filing of a bankruptcy petition,

where the underlying asset and all proceeds therefrom were subject to

a valid pre-petition security interest.” Id.

Similarly, Cadle held a security interest in the firm’s

contingency fee agreement relating to the Groton matter and the

proceeds from that agreement. That Schlichtmann performed much of the

work after the firm’s dissolution and his bankruptcy and before the

right to payment arose does not alter the fact that Cadle held a

security interest in that payment. We reject Schlichtmann’s argument

that the post-petition Groton fees were after-acquired personal

property, free of Cadle’s security interest.

The court recognizes that ordinarily post-petition earnings

belong to the petitioner who has sought bankruptcy protection and not

to the estate. See 11 U.S.C. § 541(a)(6). However, in this

instance, the firm, through Schlichtmann, gave the bank an unqualified

security interest in a specific fund ( i.e., the attorneys' fee share of

the settlement), half of which had already been paid into an escrow

account and the other half of which was paid into such an account well

before Schlichtmann declared bankruptcy. Nothing in the commitment by
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Schlichtmann suggested, so far as the bank was concerned, that the fees

or the security interest were contingent on the performance of

substantial further legal services from the firm or from Schlichtmann.

There is no reason why schlichtmann should be able to back away from

his own commitment.

Because we find that Cadle had a security interest in the

entire Groton fee, we hold that it was entitled to judgment as a matter

of law. We need not, therefore, reach the promissory estoppel issue.

It appears, however, that Cadle did not give notice of its

claim to the fee distribution until after Schlichtmann had received the

$300,000 and paid $100,000 to the other members of the former firm and

(perhaps) shared a portion of it with Kiley. Thus, Schlichtmann is not

liable for conversion of the $100,000 he distributed to the firm or of

the amount he gave to Kiley before receiving notice from Cadle. Under

Massachusetts law, the tort of conversion requires the plaintiff to

prove that the defendant intentionally or wrongfully exercised control,

ownership or dominion over personal property to which he had no right

of possession at the time of the alleged conversion. See Abington

Nat’l Bank v. Ashwood Homes, Inc., 19 Mass. App. Ct. 503, 507 (1985).

Cadle makes no claim that it made a specific demand on Schlichtmann for

the $100,000 portion of the fee before Schlichtmann sent it to his

former partners or for the amount he gave to Kiley, or that

Schlichtmann otherwise wrongfully exercised control, ownership or
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dominion over those amounts, or prevented Cadle from recovering them.

Because Cadle’s claim is based on a conversion theory, the evidence

falls short of permitting recovery of these amounts from Schlichtmann;

we express no opinion, however, with respect to any potential liability

of the former partners or Kiley. Cadle is therefore entitled to

judgment against Schlichtmann in the amount he retained after the

payments to his former partners and Kiley before having received notice

of Cadle’s claim. Because the present record does not enable us to

determine this amount, we remand to the district court to make that

determination and to enter judgment for Cadle in the appropriate

amount.

CONCLUSION

The judgment is reversed and the matter is remanded to the

district court for further proceedings consistent with this opinion.

SO ORDERED.