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November 16, 2005.

FAYE TAYLOR, Appellant and Defendant,
JOSPEH KANE & DORIS KANE, Appellees and Plaintiffs.

The opinion of the court was delivered by: MARILYN PATEL, District Judge



Appellant Faye Taylor filed this action seeking relief from summary judgment granted in the United States Bankruptcy Court for the Northern District of California. Taylor contends that the Bankruptcy Court erred in invalidating a lien Taylor had on certain real property owned by defendants Joseph and Doris Kane. Having considered the parties' arguments and submissions, and for the reasons set forth below, the court rules as follows.


  I. The Lien

  Appellant Taylor is an attorney. The instant action arises from Taylor's legal representation of Doris Kane and the subsequent malpractice suit filed by the Kanes against Taylor. Taylor represented Doris Kane in a number of matters between 1998 and April 2002. By the end of October 2000, Doris Kane owed Taylor legal fees in the amount of $52,210.50. Bankruptcy Transcript ("Tr.") at 586. Taylor attempted to secure the debt via a lien on the Kanes' residence. On November 1, 2000, Taylor sent the Kanes a Note Secured by Deed of Trust ("the Note") for $52,210.50 and a Deed of Trust ("the Deed") on the Kanes' home at 604 Canyon Drive. Tr. at 591-94. The Note and Deed secured the $52,210.50 owed for past legal services. Id. The Deed provided that future monthly bills for legal services would be added to the Deed unless objected to within ten days of mailing. Id. The Deed also specified that, in the event of default by the Kanes, Taylor could immediately file a notice of default and have the property sold at auction. In combination, these two terms effectively insulated from judicial scrutiny any fees to which the Kanes did not object within the 10-day window. Taylor attached a cover letter to the Note and Deed stating "I would encourage you to review the promissory note and deed of trust with counsel of your choosing." Tr. at 589. The Kanes executed the Note and Deed, securing Taylor's debt, on November 29, 2000. The Note and Deed were recorded on December 20, 2000. Tr. at 308.

  Prior to the execution of the Note and Deed, the CIT Group held a first mortgage on 604 Canyon Drive in the amount of $390,792. The Kanes obtained a second mortgage on the property at the same time they were negotiating the terms of the Note and Deed with Taylor. On November 2, 2000, the Kanes signed a deed of trust on the 604 Canyon Drive home with Household Finance Corp. in the amount of $161,939.65 (the "Household Deed of Trust"), which was recorded on November 8, 2000. Tr. at 312. The Household Deed of Trust was superior to the Taylor Deed.

  The Kanes' ongoing legal and financial difficulties resulted in a voluntary petition for Chapter 7 bankruptcy, filed on June 12, 2001. Tr. at 728. The Kanes were represented before the bankruptcy court by independent bankruptcy counsel Barbara McEntyre, with assistance by Taylor. Tr. at 604, 557-60. The 604 Canyon Drive property was exempt from the Chapter 7 proceedings because the combined secured debt of two mortgages and the Note and Deed, now valued at $95,680,*fn1 exceeded the property's value. Tr. at 613-14. The Taylor Deed was essential in securing this exemption; without it, the 604 Canyon Drive property could have been sold to settle a portion of the Kanes' debt. The Bankruptcy Court issued a discharge under 11 U.S.C. section 727 on December 12, 2001.

  Taylor continued to represent the Kanes in a variety of matters, accumulating additional legal fees on the promissory note, until April, 2002. The Kanes allegedly owed Taylor some $110,000 in fees, secured by the Note and Deed, as of that date. On February 7, 2003, Talyor filed a Request for Notice of Default and Sale of 604 Canyon Drive with the Marin County Recorder's Office.

  II. Proceedings Below

  On October 3, 2003, the Kanes filed a malpractice action against Talyor in Marin County Superior Court, alleging inter alia that Taylor's actions relating to the Note and Deed violated California State Bar Rule of Professional Conduct 3-300, which governs business transactions between attorneys and their clients, and constituted malpractice.*fn2 Tr. at 8-17. On July 7, 2004, the Kanes filed for bankruptcy protection a second time, under Chapter 13. Tr. at 430. The Kanes' 604 Canyon Drive home was again exempt from the Chapter 13 bankruptcy action because the debt secured by the house, including the $110,000 value of the Deed*fn3 and the $75,000 homestead exemption, exceeded the $750,000 value of the home. Tr. at 438.

  Taylor removed the state malpractice action to federal Bankruptcy Court by notice filed August 19, 2004. After a hearing on the removal petition, the Bankruptcy Court remanded the bulk of the action to state court and retained the sole issue of the "validity, extent and priority of Ms. Taylor's Deed of Trust on 604 Canyon Drive." Tr. at 36. On November 17, 2004, Taylor's counsel took part in a particularly acrimonious deposition of Doris Kane in an attempt to explore her knowledge of finance in general, as well as her understanding of secured debt and the terms of the Taylor Note. Tr. at 116-29. Kane's counsel instructed Kane not to answer any questions that did not immediately relate to Taylor's legal representation of the Kanes. Taylor's counsel terminated the deposition after asking a handful of questions and filed a motion to compel. Tr. at 128-29. At the hearing on the motion to compel, the Bankruptcy Court declined to rule on the motion and suspended further discovery until both parties submitted motions for summary adjudication of the validity of the Note and Deed. Tr. at 174. The judge stated that he would decide if further discovery was needed after review of the motions for summary judgment. Tr. at 175.

  Following briefing and a hearing, the Bankruptcy Court issued a Memorandum of Decision invalidating the Note and Deed on the grounds that Taylor violated Rule 3-300 of the California Rules of Professional Conduct. In particular, the Bankruptcy Court found that Taylor violated the requirement of Rule 3-300(A) that any transaction between an attorney and a client 1) be fair and reasonable; and 2) the terms of the transaction be transmitted in writing to the client in a manner which should reasonably have been understood by the client. Tr. at 421-22.

  Taylor argues on appeal that the Bankruptcy Court erred in granting the Kanes' motion for summary judgment because Talyor complied with California Rule of Professional Conduct 3-300, the Bankruptcy Court failed to consider relevant factors and considered irrelevant factors in its decision, and the Bankruptcy Court failed to compel discovery that would have materially affected the motions for ...

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