United States District Court, N.D. California
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
MEMORANDUM & ORDER
DENYING APPELLANT'S APPEAL FROM SUMMARY JUDGMENT.
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 summary judgment. The Kanes rebut these
arguments and allege that Taylor's appeal to this court is moot.
A district court's standard of review over a bankruptcy court's
decision is the same as that used by an appellate court over a
district court's decision. In re Boyd, 243 B.R. 756, 759 (N.D.
Cal. 2000) (citing In re Baroff, 139 F.3d 439, 441 (9th Cir.
1997)). On appeal, a district court must review a bankruptcy
court's findings of fact under the clearly erroneous standard,
and its conclusions of law de novo. Fed.R. Bankruptcy P. 8013;
see also In re Van DeKamp's Dutch Bakeries, 908 F.2d 517, 518
(9th Cir. 1990).
The test for clear error is not whether the appellate court
would make the same findings, but whether the reviewing court, on
the entire evidence, has a definite and firm conviction that a
mistake was made. Anderson v. City of Bessemer City,
470 U.S. 564, 573-74 (1985). Stated another way, a reviewing court may not
overturn a decision, even if it would have weighed the evidence
in a different manner, so long as the trial court's view of the
evidence is plausible in light of the entire record. Id. In
applying the clearly erroneous standard of review, the appellate
court views the evidence in the light most favorable to the party
who prevailed below. Lozier v. Auto. Owners Ins. Co.,
951 F.2d 251, 253 (9th Cir. 1991). A decision of the bankruptcy court on summary judgment is
reviewed de novo. In re Dominion Corp., 199 B.R. 410, 412 (9th
Cir. BAP 1996). A bankruptcy court's decision regarding a
discovery motion is reviewed for abuse of discretion. Qualls v.
Blue Cross, 22 F.3d 839, 844 (9th Cir. 1994) ("We will only find
that the district court abused its discretion if the movant
diligently pursued its previous discovery opportunities, and if
the movant can show how allowing additional discovery would have
precluded summary judgment").
Application of the doctrine of judicial estoppel is reviewed
for an abuse of discretion, even in the context of a grant of
summary judgment. Johnson v. Start of Oregon, 141 F.3d 1361,
1364 (9th Cir. 1998). A court abuses discretion when it bases its
ruling on a clearly erroneous assessment of the evidence.
Cannery Row Corp. v. Leisure Corp., 234 B.R. 916, 920 (9th Cir.
I. Mootness of Taylor's Appeal
The Kanes first argue that Taylor's appeal to this court is
moot because Taylor no longer has any financial interest in the
property at 604 Canyon Drive. While appeal to this court was
pending, Taylor executed a Substitution of Trustee and Deed of
Full Reconveyance, relinquishing her interest in the property.
The Kanes subsequently sold the property on August 5, 2005 to an
unrelated third party. The Kanes assert that the reconveyance and
sale render any further legal action moot.
"[A] case is moot when the issues presented are no longer
`live' or the parties lack a legally cognizable interest in the
outcome." County of Los Angeles v. Davis, 440 U.S. 625, 631
(1979) (quoting Powell v. McCormack, 395 U.S. 486, 496 (1969)).
The mootness doctrine may apply to a case, as here, where an
appellant has relinquished her interest in the property in
controversy and the property itself is sold to a third party.
However, there are four generally recognized exceptions to the
doctrine, which are discussed in PUC v. FERC, 100 F.3d 1451,
1459 (9th Cir. 1996). One of the exceptions applies "where a
petitioner would suffer collateral legal consequences if the
actions being appealed were allowed to stand." Id. at 1461.
The Bankruptcy Court retained jurisdiction over a single claim
in the instant action and remanded the other claims to state court. Specifically, the
second, third, and fourth causes of action in the Kanes' state
malpractice suit, which have been remanded, involve the execution
of the Note and Deed, the validity of which was decided by the
Bankruptcy Court. Tr. at 10-18. The final disposition of the
Bankruptcy Court's decision on the Rule 3-300 claim will
undoubtedly be used in the state action; therefore, the ruling
creates collateral legal consequences that prevent the appeal to
this court from being moot.
In addition to the direct effect on the state proceedings, the
Bankruptcy Court's findings may have consequences for Taylor's
ability to practice law. In Lasar v. Ford Motor Co., 399 F.3rd
1101 (9th Cir. 2005), the district court cited counsel for
contempt and revoked his pro hac vice status. On appeal, the
Ninth Circuit stated that the appeal was not moot because the
lower court's decision "may expose [counsel] to further sanctions
by the bar and portends adverse effects upon counsel's careers
and public image . . . the controversy thus remains live and
demands consideration." Id. at 1109 (citing Kleiner v. First
Nat'l Bank of Atlanta, 751 F.2d 1193, 1200 n. 14 (11th Cir.
1985)). A finding that counsel violated a California State Bar
Rule of Professional Conduct may similarly expose Taylor to
sanctions by the state bar and have lasting effects on Taylor's
career and public image. For at least these reasons, the court
finds that Taylor's appeal of the Bankruptcy Court's decision is
live and not moot. The Court will therefore consider the merits
of Taylor's claim.
II. Grant of Summary Judgment
California Rule of Professional Conduct 3-300 states that a
lawyer shall not enter a business transaction or assume an
interest adverse to a client unless
(A) The transaction or acquisition and its terms are
fair and reasonable to the client and are fully
disclosed and transmitted in writing to the client in
a manner which should reasonably have been understood
by the client; and
(B) The 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; and
(C) The client thereafter consents in writing to the
terms of the transaction or the terms of the
Cal. State Bar Rule of Prof. Conduct 3-300. The acquisition of a note for legal services secured by a deed of
trust in a client's real property is an "adverse interest" under
Rule 3-300. Hawk v. State Bar, 45 Cal.3d 589, 601 (1988). An
attorney such as Taylor, seeking to secure fees by deed of trust
in real property, must therefore comply with the terms of Rule
3-300 in obtaining such a deed.
The Bankruptcy Court found that the execution of the Note and
Deed fell short of the requirements of Rule 3-300(A) because
Taylor failed to fully disclose the terms and implications of the
Deed in writing and because the terms of the Deed were not fair
and reasonable to the Kanes. For the reasons explained below,
this court holds that the Bankruptcy Court correctly applied
California state law in granting the Kanes' motion for summary
Rule 3-300(A) requires that all terms of a transaction between
a lawyer and client that is adverse to the client's interest be
in writing. The Bankruptcy Judge found that Taylor violated the
disclosure portion of Rule 3-300(A) because she failed to
disclose in writing "that in the event of a future dispute
between them the deed of trust can be used to summarily
extinguish the client's interest in the property without any
judicial scrutiny over disputed fees." Kane v. Taylor, No.
04-11647, slip op. at 3 (Bankr. N.D. Cal. 2005). According to the
Bankruptcy Court, "Taylor utterly failed to explain this to the
Kanes in writing and her deed of trust must be voided for this
reason alone." Id. Taylor does not argue that the Note and
Deed, on their face, call attention to the lack of a judicial
remedy. Instead Taylor argues that the standard language
describing the foreclosure process in the Note and Deed was
sufficient to satisfy Rule 3-300. Taylor asserts that the
"standard language [of the Deed] objectively discloses the nature
of the transaction." Appellant's Opening Brief at 18. Paragraph
11 of the Deed contains the operative language, that "upon
default by Trustor in payment of any indebtedness secured hereby"
the "Beneficiary may declare all sums secured hereby immediately
due and payable" by sale of the property secured by the Deed.
Id. at 17.
While the language in the Deed might be sufficient disclosure
in the context of an arms-length transaction, Taylor had a
heightened responsibility to explain the implications of the
terms of the Deed to her clients. The California Supreme Court quoted Lord
Eldon in requiring an attorney who enters into a business
transaction with a client to "make it manifest that [she] gave to
[her] client `all that reasonable advice against [herself] that
[she] would have given [her] against a third person.'" Beery v.
State Bar, 43 Cal. 3d 802, 812 (1987) (quoting Gibson v.
Jeyes, 31 Eng. Rep. 1044 (1801)). Here, it is the combination of
the ten-day objection period with the foreclosure provision that
is most detrimental to the Kanes, and Taylor did not explain this
detriment in writing. The Bankruptcy Court found Taylor was
deficient in adequately explaining the terms of the Note and Deed
to the Kanes, and this court has been presented with no
persuasive reason to change that decision.
The inquiry in a Rule 3-300 analysis is "whether the entire
transaction, in the language of Rule 3-300 was `fair and
reasonable to the client.'" Matter of Gillis, 4 Cal. State Bar
Ct. Rptr. 387 (2002). California courts have repeatedly indicated
disapproval of fee arrangements between attorneys and their
clients that permit the attorneys to collect fees in an extra
judicial proceeding. See Hawk, 45 Cal. 3d at 600; Hulland v.
State Bar, 8 Cal. 3d 440, 450 (1972). An attorney securing fees
with a deed in real property "bears the burden of showing that
the dealings between the parties were fair and reasonable and
were fully known and understood by the client." Hunniecutt v.
State Bar, 44 Cal. 3d 362, 372-373 (1988) (citing Clancy v.
State Bar, 71 Cal. 2d 140, 146-147 (1969)). Courts are
particularly careful in guarding the client's interest in a
lawyer client transaction because the lawyer is in "a superior
position to exert unique influence over the dependant party."
Beery v. State Bar, 43 Cal. 3d 802, 813 (1987).
The Deed provides that bills for new legal services are
automatically added to the Deed after a ten-day grace period,
during which the Kanes might object. Talyor argues that the
fairness of the ten-day period was not briefed by the Kanes and
the Bankruptcy Court incorrectly found the ten-day period unfair.
With respect to Taylor's first point, in deciding a motion for
summary judgment, a court is permitted indeed, it is required
to examine the entire record whether it is discussed in the
briefs or not. Radobenko v. Automated Equip. Corp.,
520 F.2d 540, 543 (9th Cir. 1975). With regard to Taylor's second point, the Bankruptcy Court noted that,
under terms of the Deed, it would be possible for Taylor to
submit a bill for legal services and proceed with a forced sale
of the property secured by the Deed to satisfy the debt ten days
later. As noted above, there is a strong presumption against the
fairness of fee arrangements between a lawyer and a client that
permit the attorney to collect the fees in an extra judicial
proceeding. This court agrees that the combination of the short
grace period and the secured nature of the debt were unfair to
the Kanes in violation of Rule 3-300(A).
C. Failure to Compel Discovery
Taylor's counsel unsuccessfully attempted to question Doris
Kane about her understanding of the terms of the Note and Deed in
order to show that the Kanes understood the terms and
implications of the Note and Deed. The Bankruptcy Judge did not
allow further discovery before ruling on the motions for summary
judgment in favor of Kanes. Taylor alleges that the Bankruptcy
Court denied her due process of law and abused its discretion by
failing to compel discovery.
This court reviews discovery decisions for an abuse of
discretion. Qualls, 22 F.3d at 844. A court abuses its
discretion regarding discovery on a motion for summary judgment
if the moving party can show that additional discovery would have
precluded a grant of summary judgment. Id. In this case the
Bankruptcy Court did not abuse its discretion by failing to
compel further discovery. The Bankruptcy Court ruled in favor of
the Kanes because it determined that Taylor failed to fully
disclose the terms and implications of the Deed and because the
terms of the Deed were not fair and reasonable to the Kanes.
These are objective inquiries, based only on the language of the
Note and Deed. And, it is clear from the Bankruptcy Court's
decision that the Judge was basing his conclusion on the terms of
the Deed and its "implications", as well as the fact gleaned from
the Deed that the Kanes were given only ten days to object to the
billings, which the court found was "far too short to be fair".
Tr. at 422. Additional discovery by Taylor would not have altered
the Bankruptcy Court's determination that the Deed's terms were
not fair and, therefore, the Bankruptcy Court did not abuse its
discretion with regard to discovery.*fn4 D. Improper Motivation to Confirm the Chapter 13 Plan
Taylor also alleges that the Bankruptcy Court found the lien to
be invalid as a result of an improper desire to confirm the
Kanes' Chapter 13 plan, citing three portions in the record.
First, Taylor notes statements made by the Bankruptcy Judge at
the September 27, 2001 hearing regarding the validity of the Note
and Deed. Tr. at 50-52. Second, Taylor notes the Bankruptcy
Judge's statements about proceeding in a timely manner at the
hearing on a motion to compel. Tr. at 174-75. Finally, Taylor
cites the Bankruptcy Court's Memorandum of Decision itself. The
court finds the allegation of improper motivation to be without
At the September 27, 2001 hearing, Judge Jaroslovsky stated
that the valididity of the Note and Deed needed to be determined
before a Chapter 13 plan could be approved. Tr. at 50-52.
However, these statements accurately reflect the law and do not
indicate that Judge Jaroslovsky was motivated by a desire to
approve a Chapter 13 plan. At the hearing on Taylor's motion to
compel, Judge Jaroslovsky did mention a desire to proceed in a
timely manner, but there is no indication of improper motivation.
Judges are certainly permitted, and encouraged, to seek
expeditious resolutions of matters on their dockets. See
Southern California Edison Co. v. Lynch, 307 F.3d 794, 807 (9th
Cir. 2002). Despite Taylor's assertion to the contrary, Judge
Jaroslovsky's Memorandum of Decision does not suggest that the
Kanes' ability to conform to a Chapter 13 plan was a motivating
factor in the disposition of the case. Therefore, this court
holds that the Bankruptcy Court did not improperly consider
qualification for a Chapter 13 plan in invalidating the Note and
III. Application of Judicial Estoppel
Finally, Taylor alleges that the Bankruptcy Court should have
enforced the Deed against the Kanes under a theory of judicial
estoppel. The Kanes avoided a judicial lien on their home at 604
Canyon Drive in the Chapter 7 and Chapter 13 bankruptcy
proceedings because the homestead exemption and the secured debt
against their home exceeded the property's stated value. The debt
secured by the Deed to Taylor was essential in both proceedings
to prevent a judicial lien. Taylor argues that the Kanes should
be estopped from alleging the Note and Deed are invalid because
they derived a benefit from the Note and Deed in prior judicial
"Judicial estoppel is a flexible equitable doctrine that
encompasses a variety of abuses, one form of which is preclusion
of inconsistent positions that estops a party from gaining an
advantage by taking one position and then seeking another
advantage from an inconsistent position." In re Cheng,
308 B.R. 448, 452 (9th Cir. B.A.P. 2004). Although judicial estoppel is an
equitable doctrine that is not easily defined, the United States
Supreme Court has identified three factors that are relevant to
the application of the doctrine. New Hampshire v. Maine,
532 U.S. 742, 750 (2001). First, a party's position in the second
matter must be "clearly inconsistent" with it's position in the
first matter. Id. Second, a court must have accepted the
party's earlier position. Id. at 750-751 (noting that a party's
inconsistent position does not pose a threat to judicial
integrity unless accepted). The third consideration is whether
the party asserting an inconsistent position "would derive an
unfair advantage or impose an unfair detriment on the opposing
party if not estopped. Id. at 751.
In re Cheng provides a close factual parallel to the instant
action and explains the application of the "clearly inconsistent"
standard in a bankruptcy proceeding. In In re Cheng, the
appellants avoided a judicial lien on their home through a
combination of the homestead exemption and secured debt against
their home. In re Cheng, 308 B.R. at 452. Part of the secured
debt was to K&S Diversified Investments ("K&S") in the amount of
$268,054. Id. This debt was necessary for the Chengs' to avoid
the lien. Id. Shortly after filing for lien avoidance the
Chengs' filed an objection to the K&S debt on the grounds that,
in an earlier bankruptcy proceeding, the value of the K&S debt
was listed as $156,000. Id. K&S moved for summary judgment on
the basis of judicial estoppel because the Chengs' benefitted
from the higher debt valuation in their filing for lien
avoidance. Id. The bankruptcy court granted summary judgment,
finding that the two positions on the value of the debt were
inconsistent and estoppel was necessary to "protect the integrity
of the bankruptcy system." Id. at 458.
The Bankruptcy Appellate Panel for the Ninth Circuit reversed
and remanded, holding that the Bankruptcy Court abused its
discretion by failing to consider the different capacities in
which the Chengs asserted their claims. Id. at 458. The Bankruptcy
Appellate Panel held that the Chengs were acting as individuals
in filing for lien protection under the Homestead Act. Id. at
454. In filing an objection to the value of the K&S debt, the
Chengs were acting as debtors in possession "performing the
trustee's fiduciary duty to object to claims in order to maximize
payment by the estate on legitimate claims." Id. The Appellate
Panel remanded the case for a determination if the Chengs'
positions on the value of the K&S debt were in actual conflict,
and to determine if the procedural posture of the filings
prevented the application of judicial estoppel. Id..
The record in the instant action indicates that the Bankruptcy
Court considered the doctrine of judicial estoppel. Tr. at
413-14. Although the Memorandum of Decision does not discuss
estoppel, there are legitimate reasons why the Bankruptcy Court
could have decided against application of the doctrine. Tr. at
420-22. As in Cheng, the Bankruptcy Court could have decided
that the Kanes' seemingly adverse positions on the status of
Taylor's Deed were not in conflict. Likewise, the Bankruptcy
Court could have determined that a feasible remedy under judicial
estoppel did not exist. See Cheng, 308 B.R. at 459
(transferring a windfall from one party to another in bankruptcy
does not satisfy the equitable requirement to "avoid doing
inequity"). For at least these reasons, this court holds that the
Bankruptcy Court did not abuse its discretion in declining to
apply the doctrine of judicial estoppel.
For the forgoing reasons, this court holds that the memorandum
of decision and order of the Bankruptcy Court granting appellee's
motion for summary judgment is AFFIRMED.
IT IS SO ORDERED.
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