Court Opinion

ID: 4206112
Source: CourtListenerOpinion
Date Created: 2017-09-25 20:01:07.092424+00
Date Added: 2024-06-11T13:59:21.503060
License: Public Domain

NOT FOR PUBLICATION                      FILED
                        UNITED STATES COURT OF APPEALS                    SEP 25 2017
                                                                      MOLLY C. DWYER, CLERK
                                                                        U.S. COURT OF APPEALS
                                 FOR THE NINTH CIRCUIT

In re: DEBORAH MYNETTE                            No.   15-60076
MCINTOSH,
                                                  BAP No. 15-1029
                   Debtor,

------------------------------                    MEMORANDUM*

DAVID N. CHANDLER, P.C.,

                   Appellant,

  v.

DEBORAH MYNETTE MCINTOSH;
CALHFA MORTGAGE ASSISTANCE
PROGRAM,

                   Appellees.

                            Appeal from the Ninth Circuit
                              Bankruptcy Appellate Panel
                 Dunn, Jury, and Taylor, Bankruptcy Judges, Presiding

                            Argued and Submitted July 11, 2017
                                San Francisco, California

Before: BEA and N.R. SMITH, Circuit Judges, and LYNN,** Chief District Judge.

       *
             This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
       **
             The Honorable Barbara M. G. Lynn, Chief United States District
Judge for the Northern District of Texas, sitting by designation.
      David N. Chandler, P.C. (“Chandler”) appeals from the Bankruptcy

Appellate Panel’s (“BAP”) judgment which affirmed the bankruptcy court’s orders

that dismissed Debtor Deborah Mynette McIntosh’s Chapter 13 bankruptcy case,

denied Chandler’s motion for an order directing the distribution of sales proceeds

of Debtor’s residence to the Chapter 13 Trustee, denied Chandler’s fee application,

and ordered disgorgement of fees Chandler had already received from Debtor

McIntosh. We have jurisdiction under 28 U.S.C. § 158(d). We review de novo

BAP decisions and apply the same standard of review that the BAP applied to the

bankruptcy court’s ruling. Boyajian v. New Falls Corp. (In re Boyajian), 564 F.3d

1088, 1090 (9th Cir. 2009). We affirm.

      The orders on appeal arise from a disagreement between Debtor and her

former bankruptcy attorney, David N. Chandler, Jr., over his fees. Debtor owed

$450,000 in attorneys’ fees to a law firm, Carr, McClellan, Ingersoll, Thompson &

Horn (“CMITH”), for contesting a will on her behalf. Of that amount, $230,000

was secured by a third priority deed of trust on Debtor’s residence. CMITH sued

Debtor in the California Superior Court, and sought to foreclose on its security

interest and to obtain a money judgment for the outstanding fees and costs. After

she was served with CMITH’s complaint, Debtor retained Chandler to file a

Chapter 13 bankruptcy case, in part to enforce Debtor’s homestead exemption in

her residence. Chandler initiated an adversary proceeding against CMITH in the

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bankruptcy court, in which he argued that the deed of trust for the benefit of

CMITH was invalid under California Rule of Professional Conduct 3-300 because

CMITH had not advised McIntosh that she may seek advice from separate counsel

before entering into such a transaction with CMITH.1 Chandler was successful;

CMITH voluntarily re-conveyed the deed of trust to McIntosh and formally

released its deed of trust as a lien against Debtor’s property. Free of the deed of

trust, Debtor’s house was then sold; the proceeds were used to pay off some

creditors, and the remaining $57,712 balance was held in escrow under the

jurisdiction of the bankruptcy court. Debtor’s First Amended Plan of confirmation

was subsequently approved by the bankruptcy court. The First Amended Plan

explicitly provided that any claims for taxes due and amount owed to CalHFA

Mortgage Assistance Corp. would be paid from the escrow, and that because of the

applicability of the homestead exemption, the Debtor would receive any remaining

proceeds.

      While the $57,712 remained in the escrow, a disagreement arose between

Debtor and Chandler. Debtor obtained new counsel, who moved to dismiss the

bankruptcy proceeding and to have the escrowed funds released to CalHFA and

1
  In relevant part, this rule reads: “A member shall not enter into a business
transaction with a client…unless…[t]he client is advised in writing that the client
may seek the advice of an independent lawyer of the client’s choice and is given a
reasonable opportunity to seek that advice.”

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Debtor pursuant to the approved First Amended Plan. Chandler filed an

application for attorneys’ fees, moved to distribute the remaining proceeds of the

house sale to the Chapter 13 Trustee, and argued that the deed of trust to CMITH

was not void under said Rule 3-300 – as he had previously argued – but instead

was invalid under § 544(b)(1)2 of the Bankruptcy Code (such that it instead had

been preserved automatically for the benefit of the estate under 11 U.S.C. § 551)3

and that the remaining proceeds of the sale should be distributed to the Trustee

rather than to the Debtor and CalHFA as per the Debtor’s approved First Amended

Plan. Once in the hands of the Trustee, the funds would be subject to the claims of

unsecured creditors, including Chandler.

      The bankruptcy court held a hearing on the motions, and found that

Chandler had indeed violated his duty of loyalty to Debtor by taking a position

adverse to his former client on an issue on which he had previously represented the

client—namely, whether the CMITH lien was preserved for the benefit of the

estate, or whether the funds subject to the lien could be distributed to Debtor

2
  § 544(b)(1) reads: “the trustee may avoid any transfer of an interest of the debtor
in property or any obligation incurred by the debtor that is voidable under
applicable law by a creditor holding an unsecured claim that is allowable under
section 502 of this title or that is not allowable only under section 502(e) of this
title.”
3
 § 551 reads: “Any transfer avoided under section 522, 544, 545, 547, 548, 549, or
724(a) of this title, or any lien void under section 506(d) of this title, is preserved
for the benefit of the estate but only with respect to property of the estate.”

                                           4
pursuant to her homestead exemption. Accordingly, the bankruptcy court (1)

granted Debtor’s motion to dismiss her bankruptcy case, which resulted in $21,000

of the escrowed sale proceeds being distributed to CalFHA and the remainder

distributed to Debtor on account of her homestead exemption; (2) denied

Chandler’s motion for an order directing the escrow company to pay the net sales

proceeds to the Chapter 13 Trustee; and (3) denied Chandler’s fee application and

required him to disgorge what he had previously been paid by Debtor McIntosh.

      The bankruptcy court’s findings of fact are reviewed for clear error. Cont’l

Ins. Co. v. Thorpe Insulation Co. (In re Thorpe Insulation Co.), 671 F.3d 1011,

1019 (9th Cir. 2011); In re Leavitt, 171 F.3d 1219, 1222 (9th Cir. 1999).

      The bankruptcy court did not clearly err in finding that Chandler had

breached his duty of loyalty to Debtor. State rules of professional responsibility

apply to the dispute between Debtor and Chandler, as long as those rules do not

conflict with the Bankruptcy Code or the Bankruptcy Rules. In re Song, 2008 WL

6058782, at *11 & n.27 (B.A.P. 9th Cir. Feb. 12, 2008). Under California law, the

duty of loyalty survives the end of the attorney–client relationship; “after severing

his relationship with a former client” an attorney “may not do anything which will

injuriously affect his former client in any manner in which he formerly represented

him.” People ex rel. Deukmejian v. Brown, 624 P.2d 1206, 1208 (Cal. 1981); see

also Oasis W. Realty, LLC v. Goldman, 250 P.3d 1115, 1121 (Cal. 2011) (same).

                                          5
Whether Chandler breached his a duty of loyalty is a question of fact, and thus, the

bankruptcy court’s finding of breach is reviewed for clear error.

      In identifying Chandler’s misconduct, the bankruptcy court pointed to

Chandler’s statements in December 2013 that the CMITH lien was not preserved

for the estate and that the equity created by removing that lien would go towards

Debtor’s homestead exemption. It also pointed to Chandler’s post-termination

argument that, in October of 2014, the CMITH lien was preserved under § 551 as

an avoided transfer that should be distributed to the Trustee, which would result in

the liened assets becoming available to pay unsecured creditors like Chandler,

rather than going to debtor McIntosh as homestead exemption funds. The

bankruptcy court noted that the complaint brought against CMITH in the adversary

proceeding sought relief solely on the basis of California Rule of Professional

Responsibility 3-300, not under any provision of the Bankruptcy Code. Based on

the facts before the bankruptcy court, it was not clearly erroneous for that court to

conclude that Chandler changed his argument concerning the applicability of § 551

to the CMITH lien, a change that had an injurious effect on Debtor, and served as a

basis to conclude that Chandler breached his duty of loyalty to Debtor. That injury

includes the expense and effort expended by Debtor in responding to Chandler’s

change in position, which was adverse to Debtor, and the delay in Debtor’s receipt

of the funds held in escrow. Those injuries were the consequences of the breach of

                                          6
loyalty.

      The bankruptcy court did not abuse its discretion by dismissing the

bankruptcy case and not awarding Chandler attorney’s fees. See Rodriguez v.

Disner, 688 F.3d 645, 653 (9th Cir. 2012) (a district court’s decision to grant or

deny attorney’s fees is reviewed for abuse of discretion); In re Ellsworth, 455 B.R.

904, 914 (B.A.P. 9th Cir. 2011) (the bankruptcy court’s dismissal of a Chapter 13

bankruptcy case is reviewed for abuse of discretion). At oral argument, Chandler

abandoned his claim challenging the bankruptcy court’s disgorgement order.

      AFFIRMED.

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