I.

We begin with the proposition that because federal common law does not recognize an
attorney’s retaining lien, federal courts are to apply the common law attorney’s retaining lien of the
state in which the court sits. Lucky-Goldstar International, Inc. v. International Manufacturing Sale
Co., Inc., 636 F. Supp. 1059, 1062 (N.D. Ill. 1986). Here, “Illinois common law recognizes an
attomey’s retaining lien to retain papers . . . received from his client in the course of his professional
employment .. . until the parties settle their fee dispute or the client posts adequate security for
payment.” Jd. at 1061 (emphasis added). As Riva concedes (PI. Reply at 1-2 n.1), this Court does
not have jurisdiction to decide the underlying fee dispute, which must be reserved for resolution in
state court. Lucky-Goldstar, 636 F. Supp. at 1063. However, this Court does have jurisdiction to
determine whether, notwithstanding the lien, WMH must produce the withheld documents in this
litigation, without Riva posting security. For the reasons set forth below, we find that WMH need
not do so.

A.

Riva asserts that as a director, Mr. Wolf owed Riva fiduciary duties. Thus, Riva argues,
notwithstanding any retaining lien by WMH, Mr. Wolf “was obligated to return the documents
sought in this motion when Riva initially requested those documents” (Pl. Mem. at 9).

To the extent that Riva is claiming that Mr. Wolf’s capacity as a lawyer for Riva must be
disregarded because he also was one of Riva’s directors, we disagree. Mr. Wolf first served Riva
in his capacity as an attorney, and continued in this primary attorney role even after he was made a
director of Riva. Whether serving in these dual capacities created a conflict for Mr. Wolf is

governed by LR 83.51.7(b) which states, in pertinent part, that “[a] lawyer shall not represent a client


there is a rather straightforward means of accomplishing this result: that is for Riva to provide a bond
or other security, which would allow for the release of the documents.

Relying on Lucky-Goldstar, Riva argues that no security should be required (see generally
Pl. Reply at 6-9). However, we note that in Lucky-Goldstar the court conditioned the production of
documents on the “defendants providing security in place of the retaining lien.” 636 F. Supp. at
1065. In this case, we believe that a review of the factors considered in Lucky-Goldstar likewise
shows that production of documents here should be based on Riva providing security in place of the
retaining lien.

First, we consider the financial situation of Riva. Lucky-Goldstar suggest that an attorney
should forego asserting a retaining lien when the client makes a clear showing that it is financially
unable to pay. 636 F. Supp. at 1064. But here, Riva does not assert an inability to pay, but rather
disputes whether it should have to pay. Indeed, Riva suggests that its ability to pay is a factor that
would make a lien unnecessary (Pl. Reply at 2). In any event, Riva has made no clear showing of
need that would counsel in favor of requiring WMH to forego its lien rights.

Second, we consider the sophistication of the client in dealing with lawyers. Lucky-Goldstar,
636 F. Supp. at 1063. Riva claims that this factor cuts in its favor, since WMH were the lawyers (PI.
Reply at 6, 7). But, as evidenced by their ability to run a corporation, Messrs. Annella and Hahamy
possess the requisite sophistication intended by the Lucky-Goldstar court. Id. at 1064 (mere standing
as business client to firm suffices). Were it otherwise, any client who is not a lawyer could seek to
overcome the retaining lien on the ground that he or she was less sophisticated than the lawyer.

Third, we consider whether the client clearly understood and agreed to pay the amount now

owing. Lucky-Goldstar, 636 F. Supp. at 1063. That, of course, is a matter of dispute here, But the


Financial Fund. v. Salomon Bros., Inc.,790 F. Supp. 1392, 1399 (N.D. Ill. 1992) (consent to a dual
representation may be constructive or implicit). Messrs. Annella and Hahamy affirmatively
requested that their attorney also serve as director. While the Committee Comments to LR 83.51.7
says a lawyer should not ask for consent to waive a conflict situation if there is a material risk that
his or her independence as an attorney would be compromised, we already have found that is not the
case here. According to LR 83.51.7, Riva’s consent — given at the time Mr. Wolf was made director
— amounts to a waiver of any conflict claim now raised by Riva.
B.

Having found no ethical bar to Mr. Wolf’s dual representation of Riva and service as one of
its directors, we consider the capacity in which he obtained the documents now being withheld under
the lien. Riva has offered no argument that Mr. Wolf obtained these documents for use in his limited
role as director. By contrast, it seems evident that Mr. Wolf would obtain these documents in his
role as counsel — a conclusion that is fortified by the fact that Riva’s attorneys now want these same
documents for use in representing Riva in this litigation. As a result, in these circumstances, we do
not believe that Mr. Wolf’s role as a director deprives him of the common law lien that he has
invoked as an attorney. To hold otherwise would lead to the result that an attorney who serves in
a dual director-attorney capacity never would be able to assert a common law lien. Riva has not
cited any Illinois law to support such a sweeping result, and we do not believe such a result is

warranted.


if the representation of that client may be materially limited by the lawyer’s . .. own interests, unless:
(1) the lawyer reasonably believes the representation will not be adversely affected: and (2) the client
consents after disclosure.”

Riva has offered no argument that Mr. Wolf’s position as a director may have “materially
limited” his representation of Riva. Moreover, Mr. Wolf apparently did not believe this role as
director would affect his representation of Riva, and Riva does not argue that Mr. Wolf could not
have reasonably believed that there was no conflict in the dual roles. We are unwilling to endorse
a general rule that would say a lawyer can never represent a client and serve as an officer or director,
as that kind of broad proscription is not required by LR 83.51.7. Rather, the Committee Comments
to LR 83.51.7 explain that a dual role should not be undertaken if there exists a“. . . material risk
that the dual role will compromise the lawyer’s independence of professional judgment.” We see
nothing in the particular circumstances surrounding Mr. Wolf’s representation of Riva that would
have created a material risk that Mr. Wolf’s role as a director would compromise his role as an
attorney representing Riva. Mr. Wolf was assigned a token number of the shares, leaving Messrs.
Hahamy and Annella with control of 99 percent. There is no evidence that Mr. Wolf ever acted in
his director capacity, which leads this Court to believe that Mr. Wolf was intended solely to serve
as a tie-breaker in the event of a deadlock if one occurred. Certainly, there is no evidence that Mr.
Wolf otherwise wielded enough corporate control to affect the direction of Riva, or to use his
position as director to advance his personal interests as a lawyer at the expense of the corporation.

Further, LR 83.51.7 permits a client to waive any conflict by consent. Neither the rule nor
the Committee Comments state that this consent must be expressed in writing. And, from the facts

presented to this Court, client consent in the instant case fairly may be implied. See, e.g, SWS


withdraw from employment until the lawyer has taken reasonable steps to avoid foreseeable
prejudice to the rights of the client, including . . . delivering to the client all papers and property to
which the client is entitled.” However, this rule requires WMH only to deliver those papers and
property to which Riva is “entitled,” and if WMH has a proper common law lien, then Riva is not
entitled to those documents — absent resolution of the fee dispute or the posting of security until the
dispute is resolved. See Lucky-Goldstar, 636 F. Supp. at 1062 (“In the context of an attorney’s
retaining lien, we believe the ‘entitled to’ standard begs the question”). What’s more, the
commentary to LR 83.51.16 expressly states that while a discharged lawyer must take reasonable
steps to assist the client so as to mitigate the consequences of the withdrawal, the lawyer still “may
retain papers as security for a fee only to the extent permitted by law.”

Thus, LR 83.51.16 and its accompanying commentary make clear that the rule does not
override the Illinois common law retaining lien, but instead coexists with it. In this case, Riva offers
no argument that WMH lacks a proper retaining lien at common law. To the extent that the attorney
has a proper retaining lien, LR 83.51.16 does not require an attorney to abandon it. As a result, we
reject Riva’s contention that LR 83.51.16 requires WMH to produce the documents notwithstanding
the common law lien.

However, while the fee dispute is for Riva and WMH to resolve (whether voluntarily or in
another forum), the continued retention of documents by WMH has ramifications for the present
lawsuit. The documents withheld likely include some that are discoverable in this lawsuit. Thus, as
was the case in Lucky-Goldstar, we are left with the “task of deciding how to effectively provide
access to the documents necessary to the underlying action without prejudicing the rights of either

party to a [fee] controversy we have no authority to resolve.” 636 F. Supp. at 1063. We note that


Minute Order Form (06/97)

United States District Court, Northern District of Illinois

serge Magistrate Judge Sidney 1. Schenkier “than Assigned Judge

CASE NUMBER 01 C 1390 DATE 3/6/2002
CASE Riva Technologies, Inc. vs. Zack Electronics, Inc., and Dennis Awad
TITLE

[in the following box (a) indicate the party filing the motion, e.g., plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature
of the motion being presented.}

MOTION:

DOCKET ENTRY:

qd) qg Filed motion of [ use listing in “Motion” box above.]

Q) oO Brief in support of motion due

(3) Oo Answer brief to motion due___. Reply to answer brief due.

(4) a Ruling/Hearingon___—ssetfor__——s at.

(5) u Status hearing set for 3/15/2002 at 9:00 A.M.

(6) Oo Pretrial conference[held/continued to] [set for/re-set for] on set for at
am Oa Trial[set for/re-set for] on_____at

(8) oO [Bench/Jury trial] [Hearing] held/continued to at.

(9) oOo This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]

COFRCP4(m) ClGeneralRule21 CIFRCP41(a)(1) CI FRCP41(a)(2).

(0) i [Other docket entry] ENTER MEMORANDUM OPINION AND ORDER. Plaintiff's motion to
compel the return of its documents [doc. # 27-1] is denied. The Court orders that Riva and Wolf, Moskowitz,
Holland & Matern (“WMH”) establish a method of posting security for the alleged $230,000.00 due and owing
in attorneys’ fees. The Court further directs that WMH immediately assemble the documents being held subject
to the lien, so that they can be produced without delay once the security is posted. At this time, the Court will not
set forth the specific security arrangement that will be necessary, but will leave it to the parties, acting in good
faith, to determine the amount and kind of security that will suffice.

qi) @ [For further detail see order attached to the original minute order.]

No notices required, advised in open court.

No notices required.

number of notices

Notices mailed by judge’s staff.

MAR 07 2002

V | Notified counsel by telephone.

Docketing to mail notices.

Mail AO 450 form.

Copy to judge/magistrate judge.

date mailed notice

courtroom
wy deputy’s
- initials

“Dhteltime received inl

central Clerk’s Office mailing deputy initials



dispute is to require security in the amount of [WMH’s] fee claim, in return for which [WMH] will
be required to produce the documents.” 636 F. Supp. at 1064-65. If the Court followed Riva’s
suggestion and released the documents without payment or security, WMH’s leverage to effectuate
its valid collection method would be destroyed. McDermott, Will & Emery v. Ogle, 01 C 4837, 2001
WL 145696, at *5 (N.D. Ill., Nov. 15, 2001) (client does not have absolute right to immediate
possession of documents if releasing documents would neutralize the effectiveness of attorney’s
valid collection method).?
CONCLUSION

For the foregoing reasons, the Court denies plaintiff's motion to compel the return of its
documents. (doc. # 27-1). So that this ruling does not hinder the progress of the case, the Court
orders that Riva and WMH establish a method of posting security for the alleged $230,000 due and
owing in attorneys’ fees. The Court further directs that WMH immediately assemble the documents
being held subject to the lien, so that they can be produced without delay once the security is posted.
At this time, the Court will not set forth the specific security arrangement that will be necessary, but

will leave it to the parties, acting in good faith, to determine the amount and kind of security that will

Riva raises two other arguments that we address briefly. First, Riva suggests that WMH’s failure to
immediately sue in state court to collect the fees somehow compromises WMH’s lien rights (P]. Reply at 3). Riva offers
no authority for this suggestion, which the Court rejects. Indeed, it strikes the Court that one point of the common law
lien is to give the attorney a means to induce payment short of litigation.

Second, Riva argues that WMH should produce the documents because they “Jack[ ] any intrinsic financial value
anyway” (Pl. Reply at 8). Again, this argument misconceives that purpose of the retaining lien: to secure payment of
fees by allowing the attorney to hold onto something that is of value to the client, even if it has no “intrinsic” value.
Thus, as did the Lucky-Goldstar court, “we do not believe the intrinsic value of the property in any way affects an
attorney’s right to invoke the lien.” 636 F. Supp. at 1064 n.8.

11


parties do not dispute that there was a fee agreement. Messrs. Annella and Hahamy made their own
handwritten corrections to the contract, and then signed it. There also is no dispute that the retention
contract set forth Riva’s agreement to use WMHs services in two respects: for post-closing matters
(villed at a straight hourly rate), and for litigation (billed at an hourly rate up to a $25,000 cap, with
a contingency thereafter). What is disputed here is whether certain time spent is attributable to one
category or the other, and the reasonableness of the time spent. As to the latter point, that kind of
dispute is not uncommon, and a purpose of a retaining lien is to provide the attorney with leverage
in the case of such a dispute. As to the former dispute (to the extent it still matters, in light of the
fact that any suit to collect fees by WMH now will be based on quantum meruit), that is something
that will be sorted out if the matter is litigated. It does not weigh in favor of requiring WMH to
abandon the lien.

Fourth, this Court must consider whether continuation of the retaining lien would prejudice
the important rights or interests of the client. Lucky-Goldstar, 636 F. Supp. at 1063. But the kind
of prejudice discussed in Lucky-Goldstar (comprising the ability to defend a criminal matter or to
defend a similarly important personal liberty, are not present here). And, any prejudice to the pursuit
of this action can be eliminated by the posting of a bond.

Fifth, we consider “whether there are less stringent means by which the matter can be
resolved or by which the amount owing can be secured.” Lucky-Goldstar, 636 F. Supp. at 1063.
Riva Suggests that posting security would be an imposition (P1.’s Reply at 3 n.2 and 8), but fails to
establish that it lacks resources to do so. The Court here firmly believes, as did the court in Lucky-
Goldstar and other controlling Ilinois cases, that “. . . the proper way to make the documents

available in this litigation without unnecessarily impinging upon the rights of the parties to the fee

10


I.

Riva’s second argument offered to overcome WMH’s retaining lien is based on LR
83.51.16(d), which states in pertinent part that a lawyer, upon the conclusion of his services, is to
deliver to the client “all papers and property to which the client is entitled.” Riva claims that this
ethical rule conflicts with — and supersedes — the Illinois common law rule that “if an attorney is
properly asserting the retaining lien, then the client is not entitled to the property,” Lucky-Goldstar,
636 F. Supp. at 1062, on the theory that “the mere existence of a legal right does not entitle a lawyer
to stand on that right if ethical considerations require that he forego it.” Jd. at 1063.

At the threshold, we reject WMH’s contention that LR 83.51.16 does not apply at all here,
because WMH did not voluntarily withdraw from its representation of Riva but instead was fired
(WMH Mem. at 13). The text of the rule specifically states that it applies to withdrawals that occur
when “the lawyer is discharged by the client.” LR 83.51.16(a)(4). In addition, the Committee
Comments specifically address the situation of discharge. The comments note that a client “has a
right to discharge a lawyer at any time, with or without cause, subject to liability for payment for the
lawyer’s services.” In addition, the comments specifically address the duty of the lawyer to take “all
reasonable steps to mitigate the consequences to the client” of a termination of representation,
“fe]ven if the lawyer has been unfairly discharged.” WMH offers no explanation of why
LR 83.51.16 does not apply in light of the plain language of the rule and the accompanying
comments, and we can find none.

That said, the Court also does not believe that Riva is correct in asserting so stark a contrast
between the attorney’s rights under an Illinois common law lien and the attorney’s obligations under

LR83.51.16. Riva focuses on the requirement under LR 83.51.16(d) that a lawyer “shall not


performance, vel non, of certain post-closing obligations under the asset purchase agreement (PI.
Mem. at 2; WMH Mem. at 3). Riva again turned to WMH for legal assistance, which led to the
filing of the underlying litigation (P1. Mem. at 2). WMH accepted the employment and started
preparing for litigation without having memorialized a fee agreement (P1. Mem. at 4, WMH Mem.
at 7). The fee arrangement regarding this representation remained oral for five (5) months (from just
before February 27, 2001, when the suit was filed, to July 17, 2001, the date the retention letter was
signed) (PI. Reply at 6).

During the course of the litigation, a dispute arose between WMH and Riva regarding
WMH’s attorney’s fees (P1. Mem. at 5; WMH Mem. at 5). Riva terminated WMH on August 31,
2001 as its counsel and retained new counsel to proceed in the litigation (Pl. Mem. at 6, Ex. A). On
September 4, 2001, Mr. Wolf resigned as director (WMH Mem. at 10).

Riva’s new counsel now seeks to have certain of Riva’s non-work product documents from
WMH to continue litigating the suit against Zack (P1. Mem. at 2). WMH has asserted acommon-law
attorney’s retaining lien to induce the payment allegedly owned to it by Riva (WMH Ex. F), which
allegedly is some $231, 000.00 (PI. Mem. at 6).' Riva claims that it should not be required to pay
this money, asserting most of these fees were: (1) attributable to the litigation rather than “post-
closing” matters, and that fees for the litigation were subject to a $25,000.00 cap before the
arrangement converted into a contingency agreement (PI. Reply at 7), and (2) the fees claimed are

excessive (Pl. Mem. at 5-6).

‘We note that WMH originally asserted an Illinois statutory lien as well as an Illinois common law lien. Under
the Illinois Attorney’s Lien Act, 770 ILCS 5/1, a statutory lien is a non-possessory lien that “attaches only to the proceeds
recovered by the attorney through his professional services.” Upgrade Corp. v. Michigan Carton Co., 410 N.E.2d 159,
161 (1" Dist. 1980). Thus, it would appear that the statutory lien would not apply here, as the property here is not
proceeds but instead physical property (Riva’s papers). In any event, WMH has withdrawn its assertion of a statutory
basis for the lien (see WMH Mem. at 10-11 and Ex. E), and thus we need not address that issue.

3


For the reasons set forth below, the Court finds that Riva’s arguments are insufficient to
trump WMH’s common law retaining lien. Accordingly, Riva’s motion is denied, and WMH will
not be required to produce the documents until Riva either (1) resolves the fee dispute with WMH,
or (2) posts security in lieu of the documents.

I.

We begin by relating the relevant factual background. While the exact date is not clear,
sometime in the fall of 2000, WMH was initially retained by Charles Annella (“Annella”) and Yohay
Hahamy (“Hahamy”), now Riva’s principals, to assist them in forming Riva (P1. Mem. at 2, 9; WMH
Mem. at 9). Steven B. Wolf, a partner at WMH, was instrumental in formation of the attorney-client
relationship between Mr. Annella, Mr. Hahamy and WMH (Pl. Mem. at 2). At the time,
Messrs. Annella and Hahamy were Riva’s only shareholders and directors and each owned 50
percent of the 200 shares of issued and outstanding common stock of Riva (WMH Mem. at 9).
Messrs. Annella and Hahamy then each issued to Mr. Wolf one share of Riva stock, and elected him
as a third director to act as a tie-breaker in the event of a deadlock between Messrs. Annella and
Hahamy (WMH Mem. at 9). Mr. Wolf prepared the documents to transfer one share each from
Messrs. Annella and Hahamy to himself, and he further amended the Bylaws of Riva to provide for
three directors (WMH Mem. at 9).

After forming Riva, WMH, primarily through Mr. Wolf, represented Riva in connection with
the negotiation of the underlying asset purchase agreement between Riva and defendant Zack
Electronics, Inc. (“Zack”) (PI. Mem. at 2; WMH Mem. at 3). An asset purchase agreement was
signed on December 29, 2000 and the acquisition closed on January 23, 2001 (Pl. Mem. at 3; WMH

Mem. at 3). Within days of closing, Riva and Zack became embroiled in disputes concerning the


IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION
RIVA TECHNOLOGIES, INC., an Illinois )
corporation d/b/a “Joseph Electronics,” )
)
Plaintiff, )
) No. 01 C 1390
vs. )
) Magistrate Judge Schenkier
ZACK ELECTRONICS, INC., a California )
corporation, ard DENNIS AWAD, )
) rere
) gt

Defendants.

MEMORANDUM OPINION AND ORDER

Plaintiff, Riva Technologies, Inc., has moved to compel the return of documents held by its
former counsel, Wolf, Moskowitz, Holland & Matern (“WMH”) (doc. #27). Riva claitns that
discovery in the underlying case will be impeded if WMH is permitted to retain the documents.
WMH, however, has asserted a common law attorney’s retaining lien, and offers to return the
documents to plaintiff only after plaintiff has paid or posted adequate security for the disputed
attorney’s fees that Rive allegedly owes to WMH. In support of its motion to compel, Riva raises
two main arguments to circumvent WMH’s common law retaining lien: (1) Riva claims that
although the documents were given to WMH for the purpose of litigation, WMH partner Steven
Wolf’s tenure as a director of Riva during the attorney-client relationship confers upon Wolf (and
thus WMB) the duty to return the corporate documents; and (2) Riva claims that under the Northern
District’s Rule of Professional Conduct, Local Rule (“LR”) 83.51.16(d), WMH is ethically obliged

to return the documents to plaintiff so as to avoid causing prejudice to Riva in this litigation.


suffice. The matter is set for a status conference on March 15, 2002 at 9:00 a.m. for Riva and WMH

to report as to the agreed-upon security.

ENTER:

Ou, 1 AGL

SIDNEY I. SCHENKIER ~
United States GENKIER Judge

Dated: March 6, 2002

12