Court Opinion

ID: 2995243
Source: CourtListenerOpinion
Date Created: 2015-09-24 19:19:13.972852+00
Date Added: 2024-06-11T11:45:24.610212
License: Public Domain

In the
United States Court of Appeals
For the Seventh Circuit

No. 00-2902

In re:   Dennis E. Carlson,

Debtor-Appellant.

Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 99 C 6021--Marvin E. Aspen, Chief Judge.

Argued March 27, 2001--Decided August 31, 2001

  Before Bauer, Posner, and Manion, Circuit
Judges.

  Posner, Circuit Judge. The debtor in
this bankruptcy case appeals from the
denial of a discharge of his debts, the
usual relief sought by the debtor in a
bankruptcy proceeding. The grounds for
the denial were various and abundant,
resulting in suspension of the debtor (a
personal-injury lawyer) from the practice
of law--he was lucky to escape criminal
prosecution for bankruptcy fraud. The
only ground we need discuss is whether he
concealed from the trustee in bankruptcy
and improperly transferred property of
the estate in bankruptcy, in violation of
11 U.S.C. sec. 727(a)(4)(A). Carlson’s
challenges to the jurisdiction of the
bankruptcy court are frivolous--and if
they succeeded would deprive him of the
relief he seeks, which is a discharge by
the bankruptcy court!

  A few months before declaring
bankruptcy, Carlson formed with his
friend and fellow attorney William
Hourigan what they called a "practice
merger agreement" purporting to merge
their two practices and entitle Hourigan
to a share of the fees in cases that
Carlson assigned him to handle. Shortly
after the formation of the agreement, the
defendant in a case that Carlson was
handling for a person named Gonzalez
agreed to settle the case for $58,000, to
which Carlson under his retention
agreement would be entitled to one-third.
A few weeks later, before Carlson
received the check from the defendant for
the $58,000, he declared bankruptcy, and
a few days later the check came--to
Hourigan, who after paying the client’s
share deposited the balance in his own
bank account but in the following months
paid out this balance to Carlson and
Carlson’s designees, in particular
Carlson’s ex-wife. Carlson did not list
the fee from Gonzalez in the schedule of
assets that he filed with the bankruptcy
court. His position was and is that the
expectation of a contingent fee is not
property under the law of Illinois and so
doesn’t have to be listed. He relies on a
case which holds that such an expectation
is not part of the marital estate in
divorce, In re Marriage of Zells, 572
N.E.2d 944, 945 (Ill. 1991); on the
client’s interest in preserving his
lawyer’s incentive to press the client’s
claim with utmost vigor; and on the
"practice merger agreement," under which,
he argues, Hourigan was entitled to the
fee.

  The last argument is the very weakest.
The agreement did not obligate Carlson to
assign any specific cases to Hourigan,
let alone one in which all the work had
been done and all that remained was to
cash a check and disburse two-thirds of
the proceeds to the client. And anyway
the agreement was obviously made in
contemplation of impending bankruptcy and
was a transparent effort to conceal
assets from the bankruptcy court. It was,
therefore--to the extent if any that it
actually purported to transfer any of
Carlson’s already earned fees to
Hourigan--a transfer made without
consideration and with intent to defraud
Carlson’s creditors, and thus a
fraudulent conveyance and indeed one
involving both constructive and actual
fraud. 11 U.S.C. sec.sec. 548(a)(1),
(a)(2); McClellan v. Cantrell, 217 F.3d
890, 894- 95 (7th Cir. 2000); In re FBN
Food Services, Inc., 82 F.3d 1387, 1395
(7th Cir. 1996); Capitol Indemnity Corp.
v. Keller, 717 F.2d 324, 327 (7th Cir.
1983); Rubin v. Manufacturers Hanover
Trust Co., 661 F.2d 979, 989 (2d Cir.
1981).

  A more substantial question is whether
a merely potential contingent fee is
property. The Bankruptcy Code requires
the debtor to list as assets of the
estate in bankruptcy "all legal or
equitable interests of the debtor in
property as of the commencement of the
case." 11 U.S.C. sec. 541(a). The term
"legal or equitable interests . . . in
property" has been broadly interpreted to
include any legally enforceable right,
United States v. Whiting Pools, Inc., 462
U.S. 198, 204-05, 209 (1983); Cable v.
Ivy Tech State College, 200 F.3d 467,
472-73 (7th Cir. 1999); In re Jones, 768
F.2d 923, 926 (7th Cir. 1985); In re
Parsons, 262 B.R. 475, 480 (8th Cir.
B.A.P. 2001), except (so far as bears on
this case), as the statute goes on to
state, "earnings from services performed
by an individual debtor after the
commencement" of the bankruptcy
proceeding. 11 U.S.C. sec. 541(a)(6).
That a lawyer has a legally enforceable
interest in a potential contingent fee is
shown by the fact that if the client
terminates his employment before judgment
or settlement (for reasons other than
wrongful conduct by the lawyer) and so
before the lawyer receives any fee, he is
entitled to the fair value of the
services that he performed up to the
termination. Estate of Callahan, 578
N.E.2d 985, 988 (Ill. 1991); Storm &
Associates, Ltd. v. Cuculich, 700 N.E.2d
202, 208 (Ill. App. 1998); Kenseth
v.Commissioner, No. 00-3705, 2001 WL
881479, at *1 (7th Cir. Aug. 7, 2001);
Maksym v. Loesch, 937 F.2d 1237, 1245
(7th Cir. 1991); Skeens v. Miller, 628
A.2d 185, 188 (Md. 1993); Tillman v.
Komar, 181 N.E. 75 (N.Y. 1932). This is
true even if he withdraws rather than
being terminated, provided the withdrawal
is for good cause. Kannewurf v. Johns,
632 N.E.2d 711, 716 (Ill. App. 1994);
Leoris & Cohen, P.C. v. McNiece, 589
N.E.2d 1060, 1064-65 (Ill. App. 1992);
Reed Yates Farms, Inc. v. Yates, 526
N.E.2d 1115, 1124-25 (Ill. App. 1988);
International Materials Corp. v. Sun
Corp., 824 S.W.2d 890, 894 (Mo. 1992). It
follows that the fair value of the
services rendered by a contingent-fee
lawyer up to the date of his bankruptcy
(though not after, by virtue of section
541(a)(6)) is property of his estate in
bankruptcy. In re Jess, 169 F.3d 1204,
1207 (9th Cir. 1999); Turner v. Avery,
947 F.2d 772, 774 (5th Cir. 1991).

  But because the property interests that
bankruptcy enforces are property
interests created by state law, Barnhill
v. Johnson, 503 U.S. 393, 398 (1992);
Butner v. United States, 440 U.S. 48, 55
(1979); In re Krueger, 192 F.3d 733, 737
(7th Cir. 1999), we must consider
whether, as Carlson argues, the decision
of the Supreme Court of Illinois in In re
Marriage of Zells, supra, creates a
different rule for Illinois regarding the
interest in a potential contingent fee.
It does not. The cases we cited in the
preceding paragraph show that in Illinois
as in other states the lawyer whose
employment ends before the litigation is
complete is (with the usual exceptions)
entitled to the fair value of his
services up to the date of termination.
All that Zells holds is that because the
value of the potential contingent fee is
uncertain, it is not to be part of the
marital estate. The court did express
concern that if the potential contingent
fee were property of the marital estate
the lawyer would be in effect splitting
the fee with a nonlawyer, his spouse
(unless the spouse happened to be a
lawyer), which is forbidden. This does
not mean that the potential contingent
fee is not property under Illinois law,
however--an issue not discussed in Zells.
It means only that the Illinois courts
don’t think it should be subjected to the
control or influence of a nonlawyer. That
may be right or wrong (which isn’t our
business), but it does not rule the
status of the potential contingent fee in
bankruptcy. Illinois has not declared
potential contingent fees not to be
property. Nor has it purported to exempt
them from bankruptcy under 11 U.S.C. sec.
522(b). To prevent debilitating
uncertainty regarding creditors’ rights
in bankruptcy, the courts require that
state exemptions from federal bankruptcy
be declared explicitly rather than left
to inference from judicial opinions that
may seem to limit creditors’ rights. In
re Geise, 992 F.2d 651, 659 (7th Cir.
1993).

  A further difference between the cases
is that, in Zells, once the uncertain
contingent fee was earned, it would
"contribute to the annual income figures
relied upon in awarding maintenance and
support." 572 N.E.2d at 945. Creditors of
Carlson will never benefit from fees he
obtains after his discharge from
bankruptcy.

  And because Carlson earned his entire
fee before declaring bankruptcy, there
was no possibility that entitling the
trustee in bankruptcy to the fee would
interfere with Carlson’s representation
of his client. That representation was
over. Suppose it hadn’t been; suppose a
lawyer declares bankruptcy halfway
through a case that he’s handling on a
standard 33.3 percent contingent-fee
basis and the value of his work to date,
as measured by the opportunity cost of
his time is, $10,000. And suppose that if
he completes his work on the case he can
expect a settlement of $60,000, entitling
him to a contingent fee of $20,000 of
which half will go to the trustee. His
incentive to continue working hard on the
case will be less than if his stake were
$20,000. Suppose he discovers he’ll have
to invest not another $10,000 worth of
his time, as he had thought, but $15,000.
With only $10,000 to gain from successful
completion of the case, he has little
incentive to continue with it, though not
none because slacking on a case may
result in professional discipline. In re
Howard, 721 N.E.2d 1126, 1135 (Ill.
1999); In re Arnold, 2000 WL 1838889, at
*15 (Ill. Atty. Registration &
Disciplinary Comm’n Sept. 6, 2000).

  So the client might suffer from a rule
that treats all potential contingent fees
as assets of the estate in bankruptcy,
though whether that would affect the
bankruptcy status of the fees may be
doubted--they would still be nonexempt
property of the estate and bankruptcy
courts have no general equitable power to
deny such property to the creditors. But
this point has no application to
Gonzalez, since, as we mentioned, Carlson
had completed all his work for him before
declaring bankruptcy. And as the only
issue is whether Carlson concealed any
property from the trustee, we need not
consider the other potential contingent
fees he should have listed on his
schedule of assets or how to balance the
interest of the client against the
interest of the lawyers’ creditors.
Carlson was rightly denied a discharge of
his debts.

  But we are not yet done with these two,
Carlson and Hourigan. This case reveals
merely the tip of an iceberg of improper
practices that require the reference of
both of them for possible discipline by
the Illinois bar authorities, as well as
the institution of our own proceedings
against them. Hourigan is not the Good
Samaritan that he represented himself at
the argument of this appeal to be. He was
suspended from the practice of law for
one year (or until he made restitution to
his clients--whichever came later) in
1996 as a result of a long history of
grossly mismanaging and neglecting
clients’ cases and even, it seems,
converting part of a client’s settlement
to his own use. In re Hourigan, 1996 WL
931113 (Ill. Sept. 24, 1996). His
numerous offenses are recounted in In re
Hourigan, 1995 WL 936648 (Ill. Atty.
Registration & Disciplinary Comm’n Apr.
5, 1995), where we read of his "pattern
of making excuses and explanations which
either strain credulity or are
inconsistent and contradictory and which
attempt to make excuses for his
misconduct." Id. at *18. Particularly
choice was his defense to the charge of
converting a part of his client’s
settlement: he said he had disbursed it
to an imposter! If so, as is hard to
believe, he "acted in a most foolish and
grossly negligent manner." Id. at *17.
And who was Hourigan’s counsel at his
disciplinary proceeding? Carlson, of
course. They deserve each other.

  Carlson himself had been suspended for
60 days from the practice of law before
his bankruptcy for neglecting clients’
cases. In re Carlson, 1995 WL 936592
(Ill. Atty. Registration & Disciplinary
Comm’n Nov. 5, 1995), approved 1996 WL
931008 (Ill. Mar. 26, 1996). The ARDC
recommended him for another suspension,
this one for three years, as a result of
his bankruptcy scheming, which the
disciplinary authorities found had
involved fraud and dishonesty, as well as
for his chronic neglect of client
matters. "The inexorable conclusion is
that [Carlson’s] conduct was
intentionally fraudulent and deceptive.
It was designed to prevent the bankruptcy
court from learning about funds that
rightly belonged to the bankruptcy
estate. This is deceptive and dishonest
conduct of the most egregious kind,
particularly so because [Carlson] engaged
in it before a court. These facts also
establish that [his] conduct is
prejudicial to the administration of
justice and brings the legal profession
into disrepute." In re Carlson, 1999 WL
1491489, at *41 (Ill. Atty. Registration
& Disciplinary Comm’n Dec. 27, 1999). He
"intentionally omitted information in
order to conceal assets from creditors,
the trustee and the bankruptcy court.
Furthermore, much of this conduct,
particularly the dishonesty, either
overlapped, or followed closely behind,
[his] three-month suspension [sic-- the
reference is to the 60-day suspension]
from the practice of law." Id. at *45.
And he committed an identical fraud with
respect to fees received from two other
clients: "For many of the reasons stated
previously, the Hearing Panel concludes
that Carlson’s failure to disclose these
funds and the transfer to Lorraine [his
ex-wife] constituted conduct involving
dishonesty, fraud, deceit and
misrepresentation, conduct prejudicial to
the administration of justice, and
conduct that tends to bring the courts
and the legal profession into disrepute."
Id. at *42.

  Carlson and Hourigan have a long history
of ignoring their clients’ cases while at
the same time vigorously and
unrelentingly litigating their own cases,
for example by appealing this present
bankruptcy twice, even though there were
no meritorious grounds of appeal either
time. Cf. In re Riggs, 240 F.3d 668, 670
(7th Cir. 2001), where we remarked that
"although Riggs has ignored most orders
affecting his clients’ rights, he
responded with alacrity to an order
issued on December 28 affecting his own
interests: an order to show cause why he
should not be disbarred."

  We have no interest in punishing these
two for delicts for which they have
already been punished by the
Illinoisdisciplinary authorities. But
their continued pursuit of meritless and
frivolous claims arising from their
conspiracy to commit bankruptcy fraud
represents an exacerbation and
continuation of the offense for which
Carlson has been disciplined. Indeed,
Carlson’s action in seeking discharge
after the state disciplinary authorities
found, by clear and convincing evidence,
that not reporting the contingent fee was
fraudulent and dishonest demonstrates
contempt for the disciplinary and legal
process. Hourigan has never been
disciplined for his role in the
bankruptcy, although as the one who
received the contingent fee without
consideration and then paid it out to
Carlson in many installments he is both
an accomplice and co-conspirator in
Carlson’s acts and it is unclear why he
should get off more lightly.

  Carlson and Hourigan are hereby directed
pursuant to Fed. R. App. P. 46(b)(1)(B)
to show cause within 14 days from the
date of this order why they should not be
disciplined for professional misconduct.
See In re Cook, 49 F.3d 263, 267-68 (7th
Cir. 1995). A copy of this opinion is
being sent to the Illinois Attorney
Registration and Disciplinary Commission
for such action as it may see fit to
take.

Affirmed.