Court Opinion

ID: 771129
Source: CourtListenerOpinion
Date Created: 2012-04-18 10:46:14+00
Date Added: 2024-06-11T08:53:48.978468
License: Public Domain

232 F.3d 611 (7th Cir. 2000)
IN RE HOLSTEIN MACK & KLEIN, a partnership, Debtor.AMERICAN NATIONAL BANK & TRUST CO.  OF CHICAGO, Plaintiff-Appellee,v.ROBERT A. HOLSTEIN & ASSOCIATES, P.C., Defendant-Appellant.
No. 99-2363
In the  United States Court of Appeals  For the Seventh Circuit
Argued January 13, 2000Decided November 14,  2000

Appeal from the United States District Court  for the Northern District of Illinois, Eastern  Division.  No. 98 C 8141--John A. Nordberg, Judge.
Before BAUER, POSNER, and ROVNER, Circuit  Judges.
ROVNER, Circuit Judge.

1
Robert Holstein  was a principal in the now-defunct  Chicago law firm of Holstein Mack & Klein  ("HMK"). When that firm dissolved in  1996, it owed the American National Bank  and Trust Company of Chicago ("ANB" or  "the bank") more than $1.5 million. After  litigation over the debt had commenced,  the bank entered into a forbearance  agreement with, among others, Robert  Holstein and his new firm, Robert A.  Holstein & Associates ("RAHA"). In  exchange for the forbearance, the bank  was given a secured interest in the fees  that RAHA earned during the term of that  agreement. RAHA and the bank also agreed  to divide the fees realized from certain  cases in which RAHA had succeeded HMK as  counsel. Shortly after the agreed-upon  forbearance period expired, RAHA was  awarded substantial fees in one of these  cases. The bank claims entitlement to the  entire award based on the expiration of  the forbearance period and its security  interest in RAHA's accounts receivable.  RAHA, on the other hand, contends that it  remains entitled to a quarter of the  award based on the language of the fee-  sharing provision, which calls for  division of the fees regardless of when  those fees are received. The bankruptcy  and district courts found in favor of the  bank, as do we.

I.

2
Until its dissolution, HMK principally  engaged in personal injury and class  action litigation. Beginning in 1989, ANB  made a number of loans to HMK and of  course took a security interest in the  firm's property, including its accounts  receivable. In 1996, when HMK defaulted  on its loan obligations, ANB terminated  the firm's line of credit and the firm  dissolved. By this time, HMK owed the  bank more than $1.5 million. ANB sued HMK  and its principals in state court, and in  furtherance of its security interest, the  bank signaled that it planned to contact  HMK's former clients and have them pay  any fees they owed the defunct firm to  ANB directly. This did not bode well for  the firm's principals, who had taken many  of HMK's clients with them when the firm  dissolved.

3
Settlement negotiations ensued and  culminated in a January 3, 1997  forbearance agreement between ANB, HMK,  Holstein, and RAHA, among other parties.  In that agreement, the parties  acknowledged that the loans ANB had  extended to HMK were in default and the  entire amount of HMK's debt was due and  payable at once. They also confirmed that  the bank's security interest in HMK's  accounts receivable, as well as the  guaranties given by HMK's principals,  remained in full force and effect.  Furthermore, paragraph 13 of the  agreement granted to ANB a new, first-  priority security interest in RAHA's  "accounts, chattel paper, contract  rights, and general intangibles" insofar  as they arose from professional services  that the new firm provided during the  period of the forbearance agreement.

4
In exchange for the affirmation of  existing obligations and the new interest  in RAHA's receivables, ANB agreed  temporarily to forbear from the full  exercise of its rights to collect on the  overdue debt. It consented to a stay of  the two collection actions that were  pending in state court, and it agreed to  lengthen the time given HMK and its  principals to make good on the debt.  para.para. 2, 11, 14.

5
The bank also gave RAHA access to monies  to which ANB would otherwise have been  entitled to lay claim, in whole or in  part, pursuant to its security interests.  Approximately $135,000 remained in HMK's  existing account with ANB, for example.  Rather than taking all of this money to  reduce the outstanding debt, the bank  took only $45,000. The remaining $90,000  was transferred to a new account for RAHA  at ANB, which RAHA subsequently used to  handle day-to-day operating expenses. See  para. 12. The agreement also provided for  the sharing of fees received by HMK and  RAHA (after the associated costs were  paid) according to percentages specified  in the agreement. para. 16. Paragraph  16(a) of the agreement provided that  where the net fees exceeded $100,000, the  bank would take 75 percent, while RAHA  would take 25 percent. Paragraph 16(e),  which lies at the heart of the instant  dispute, specified that with respect to  certain pending lawsuits identified in an  attachment to the agreement, the fees  paid to HMK and RAHA "shall be  distributed" between ANB and RAHA in  accordance with the fee-sharing  arrangement "without regard to the date  upon which the [money] is received . . .  ." (We shall refer to this as the  "[whenever] received" provision of the  agreement.) The upshot of these  provisions was that RAHA obtained access  to vital working capital (by ANB's  account, some $400,000) to see the firm  through its early days as a spinoff from  the defunct HMK.

6
Provided that no further defaults  occurred, the forbearance period was  originally to have expired no later than  June 30, 1997. para. 10. By that time, it  was hoped, HMK and its principals would  have paid off HMK's outstanding debt or,  in the alternative, the parties would  have extended the agreement. para. 11.  The parties in fact did extend the term  of the forbearance period for at least  two months, through August 31, 1997. In  late September, however, ANB notified HMK  and RAHA that the forbearance period had  expired. Paragraph 38 of the agreement  made clear what the bank's rights were in  this circumstance: HMK's liabilities  would become due and payable immediately,  and ANB would be entitled to pursue all  of the rights and remedies available to  it under the original loan agreements,  the forbearance agreement, and the  Illinois Commercial Code.

7
One of the cases listed in the  forbearance agreement from which net fees  were to be shared by the bank and RAHA  "[whenever] received" was a lawsuit that  had been pending in the Circuit Court of  Cook County, Illinois, since 1992 under  the name Trucway v. GECAL. That case  eventually was settled, and in a series  of orders entered in July, August, and  September 1997, the state court approved  a fee award of just under $700,000,  payable jointly to both HMK and RAHA.  Payment of the fees was delayed, however,  by uncertainty as to who had a right to  claim those fees. HMK's share of the  award--$469,279.48--was ultimately turned  over to ANB in January 1998. The  appropriate disposition of RAHA's portion  of the net fees--which came to  $108,696.29--remained in controversy,  however, and that sum was placed in  escrow. There was no dispute that RAHA  earned its share of the Trucway fees  during the term of the forbearance  agreement and that, as a result, ANB had  a security interest in those fees that  the bank could enforce once the period of  forbearance concluded. Notwithstanding  that interest, RAHA believed that it  remained entitled to a 25-percent  allocation of those fees under Paragraph  16(a) and (e) of the agreement.

8
The bankruptcy court and the district  court each concluded that ANB was  entitled to take the full amount of the  fees awarded to RAHA. In the bankruptcy  court's view, the forbearance agreement  granted ANB a secured interest in any and  all fees that RAHA earned during the life  of the agreement. That interest  necessarily extended to the fees that  were allocated to RAHA under Paragraph  16(a). In other words, RAHA had a right,  so long as the forbearance period lasted,  to 25 percent of the fees awarded to it  in the Trucway litigation, but that  allocation was still subject to ANB's  security interest. Consequently, once the  forbearance term expired, the bank was  free to enforce its interest and take  RAHA's entire share of the Trucway fees

9
[This] is the only reading that will give  effect to the Agreement's provisions  without adding new restrictive terms to  which the parties did not agree. For  example, it is significant that nothing  in the Agreement excludes fees placed in the RAHA account pursuant to para. 16(a)  from ANB's security interest. It should  also be noted that prior to entering into  the Agreement, ANB already had a security  interest in HM&K's share of any fee  award. Thus, the only reason for creating  the new security interest in para. 13 of  the Agreement would be to allow ANB to  proceed against RAHA's portion of fee  awards.

10
American Nat'l Bank & Trust Co. of  Chicago v. Law Offices of Robert A.  Holstein & Assocs., P.C. (In re Holstein  Mack & Klein), Adv. No. 98 A 00159,  Memorandum Decision, at 10 (Bankr. N.D.  Ill. Nov. 18, 1998) (Lefkow, J.). The  district court agreed. No. 98 C 8141,  1999 WL 284721 (N.D. Ill. April 28)  (Nordberg, J.).

II.

11
RAHA's appeal turns on the proper  construction of the terms of the  forbearance agreement. As such, it  presents a question of law, and our  review of the decisions below is de novo.  E.g., Bourke v. Dun & Bradstreet Corp.,  159 F.3d 1032, 1036 (7th Cir. 1998).

12
RAHA's principal argument is  straightforward. Under Paragraph 16(a) of  the agreement, RAHA had a right to 25  percent of the net fees it realized in  the Trucway litigation and the bank had a  right to 75 percent of those fees. RAHA  acknowledges that Paragraph 13 granted to  ANB a security interest in the fees that  RAHA earned during the life of the  agreement, including the Trucway fees,  and that the bank was free to enforce  that interest once the forbearance period  expired. But in RAHA's view, ANB's  security interest is effectively limited  by the language in Paragraph 16(e)  indicating that fees realized from  Trucway and the other identified cases  "shall be distributed" according to the  formula specified in Paragraph 16(a)  "without regard" to when those fees were  received. (Emphasis supplied.) The sole  purpose and effect of this "[whenever]  received" clause, in RAHA's view, was to  make clear that RAHA was entitled to a  25-percent allocation even if the fees  were received after the forbearance term  had expired. As RAHA sees things, then,  one can permit ANB to enforce its  security interest by taking RAHA's 25-  percent allocation of the Trucway fees  only by reading Paragraph 16(e) out of  the contract altogether.

13
We disagree. As RAHA concedes, Paragraph  13 granted ANB a security interest in the  fees that RAHA earned during the life of  the forbearance agreement, and "[t]he  sec. 13 security interest, on its face,  unambiguously applies to the disputed  Trucway fees." RAHA Br. 6. Possessed of  that interest, ANB had a right under  Paragraph 38 to reach RAHA's share of the  Trucway fees once the forbearance period  had come to an end. Nothing in either  Paragraph 13 or Paragraph 38 restricted  the bank's rights in that regard. Nor do  we find such a limitation in Paragraph  16(e). Paragraph 16 says nothing at all  about ANB's security interest. It simply  serves to allocate to RAHA a share of the  fees awarded in Trucway and like cases.  So long as the forbearance period  continued, RAHA would enjoy the use of  those fees, much as ANB had consented to  grant RAHA the use of $90,000 of the  funds left in HMK's account with the  bank. But even if we assume, as RAHA  argues, that fees in these cases were to  be divided as specified by Paragraph 16  not only during the period of  forbearance, but after that period as  well, the percentage of such fees  allocated to RAHA was still subject to  ANB's security interest. Thus, assuming  that RAHA retained the right to a 25-  percent distribution of the Trucway fees  once the forbearance period had expired,  ANB had the right, by virtue of its  security interest, to step in and collect  RAHA's percentage, just as the bank had  the right to take any fees that RAHA  clients owed to the firm for work it  performed during the forbearance period.  para.para. 13, 38; see 810 ILCS 5/9-502.  In the exercise of its discretion,  perhaps, ANB might have elected not to  claim RAHA's share of the Trucway fees.  Or perhaps other assets might have proven  sufficient to satisfy the outstanding  debt. In any case, whatever right RAHA  had to an allocation of the Trucway fees,  the bank's undisputed security interest  in that allocation gave it the right,  upon the close of the forbearance period,  to keep those fees.1

14
RAHA secondarily and alternatively  argues that if the "[whenever] received"  clause does not resolve what it perceives  to be the conflict between paragraphs 13  and 16(e) of the agreement, then there is  an ambiguity as to the relationship  between the two provisions which opens  the door to parol evidence as to the  parties' understanding of the agreement.  See Bourke, 159 F.3d at 1036-37. We  discern no ambiguity in the agreement,  however. Whatever questions Paragraph  16(e) might raise as to RAHA's right to  receive its allocated percentage of  attorney fee awards after the forbearance  period ended are answered by Paragraphs  13 and 38, which granted ANB a security  interest in those fees together with the  right to enforce that interest. Nothing  in the contract remotely suggests that  this interest was anything less than a  full, first-prior security interest that  ANB could enforce in the usual ways.  Thus, once the bank was no longer  contractually obligated to forbear,  RAHA's right to a 25-percent allocation  of the Trucway fees was really a right in  name only, wholly subordinate to the  bank's right to enforce its security  interest.

III.

15
Under the plain terms of the forbearance  agreement, ANB was entitled to take  RAHA's share of Trucway fees in  furtherance of the bank's security  interest, as both the bankruptcy and  district courts concluded.

AFFIRMED

Notes:

1
 We need not consider whether the bank was enti-  tled to reach other funds allocated to RAHA under  the agreement, including monies that had already  been distributed to the firm during the forbear-  ance period.