A recent Law 360 story, “Future Attys’ Fees Can Be Security Interest, NJ Panel Says,” reports that the New Jersey Appellate Division for the first time clarified that anticipated legal fees constitute a valid security interest under the Uniform Commercial Code, handing a victory to a bankrupt attorney’s creditor who challenged the distribution priority of the attorney’s assets.

In a published opinion on an issue of first impression in New Jersey courts, a three-judge panel upended a lower court’s ruling that creditor OKS Realty could collect on its $125,000 loan to former attorney Diane Marie Acciavatti only after two other creditors got paid because Acciavatti didn’t yet have a true interest in the fees she pledged to OKS as collateral.

The panel rejected the lower court judge’s reasoning that because Acciavatti secured the loan with anticipated counsel fees from a malpractice lawsuit, they were an asset that didn’t exist at the time it was promised.  The lower court judge’s reasoning “clearly ignored” the language of the security agreement between OKS and Acciavatti, which identified the counsel fees as collateral for the loan, the panel said.

The anticipated fees indeed qualified as an account and therefore an asset of Acciavatti’s, under the secured transactions provision of UCC guidelines, the panel ruled.  OKS further complied with UCC requirements to “perfect,” or ensure, the security interest by filing a financing statement covering the collateral of Acciavatti's anticipated counsel fees, the opinion said.  The December 2010 statement was filed before the other creditors, accounting firm Rotenberg Meril Solomon Bertiger & Guttilla PC and the law firm Gourvitz & Gourvitz LLC, entered their own liens against Acciavatti.

“As such, OKS's security interest was perfected before Gourvitz or Rotenberg obtained their liens and, therefore, OKS enjoyed priority over both,” said the opinion, which remanded the distribution issue back to court for further proceedings. 

While no other New Jersey case has considered whether an attorney's pledge of an anticipated counsel fee can be considered a receivable under UCC Article 9, the panel said, other courts have uniformly held that contracts for legal fees, including pending ones, are considered accounts for Article 9 purposes.

The panel cited as examples the First Circuit’s 2001 decision in Cadle Co. v. Schlichtmann, which held that amounts to be paid under contingent-fee agreements are accounts, and In re: Holstein Mack & Klein, a 2000 decision by the Seventh Circuit that determined fees to be earned from personal injury suits and class actions are considered receivables.

The security agreement between OKS and Acciavatti identified as "collateral" the legal fees owed to Acciavatti in a malpractice matter in which she represented a client, John Giovanni Granata, suing Broderick Newmark & Grather PC over its representation in Granata’s whistleblower lawsuit against Prudential Insurance Co. of America.

While Granata’s case was pending, Acciavatti left her law firm and an attorney-trustee was appointed for her practice.  The Granata case settled in January 2014 for $840,000, after which OKS, Gourvitz and Rotenberg Meril claimed liens upon any legal fees owed to her from her work on the case, the opinion said.  Acciavati filed for bankruptcy in March 2014.

Acciavatti’s October 2010 loan agreement with OKS included a promissory note indicating that monthly payments would begin on Dec. 1, 2010, and required Acciavatti to pay the full amount on the loan either when she received legal fees from the Granata case or on Nov. 1, 2013, according to the opinion.

The Gourvitz lien stemmed from Acciavatti’s representation of a Gourvitz client in 2009 in the firm’s suit against the client for unpaid counsel fees as well as the client’s own malpractice suit against the firm, the opinion said.  “For reasons that are not clear in the record,” Acciavatti agreed to pay Gourvitz $82,500 from fees she expected to receive in the Granata v. Broderick matter.

The Gouvritz client was also ensnared in litigation with Rotenberg Meril, according to the opinion.  Rotenberg Meril sued the client for unpaid fees and she in turn filed claims relating to its accounting practices.  Rotenberg Meril prevailed, and Acciavatti signed a $75,000 settlement agreement assuming the client’s debt to Rotenberg, the opinion said.  A judge later entered a $133,652 default judgment against Acciavatti, the opinion said.

OKS intervened in the Granata v. Broderick litigation and claimed that the trial judge erred in placing it last in priority among Acciavatti's creditors, arguing it had a perfected security interest in legal fees owed to Acciavatti before the Gourvitz or Rotenberg liens were filed.

The appeals panel’s opinion also maintained the award of $279,000 in counsel fees in the Granata v. Broderick case, which Granata had appealed because of how the fees would be distributed.  Granata, who ended up filing a malpractice case against Acciavatti over her representation in his case against Broderick, argued that any consideration of claims by Acciavatti’s creditors should await the outcome of his malpractice case against Acciavatti, the opinion said.

“Given our narrow scope of review, we are satisfied that the motion judge was presented with abundant, unchallenged evidence to support his quantum meruit findings, and Granata has failed to demonstrate any procedural irregularities that would require reversal of the order granting attorney's fees to Acciavatti,” the panel said.

The cases are John Giovanni Granata v. Edward F. Broderick Jr. Esq. et. al., case numbers A-2928-14T2 and A-3036-14T2, in the New Jersey Appellate Division.