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