CETENKO v. Arlene Schaefer, Claimant and Appellant. (1981)

The appellant received a “lien on judgment” under Code of Civil Procedure section 688.1 on July 19, 1979, “upon stipulation of the parties.” According to the recitals in said pleading, attorney Schwartz and appellant's attorney appeared and so stipulated. The conflict here is between Schwartz who claims all of the recovery in the underlying action and appellant who was and is a judgment creditor of said Schwartz' client, Cetenko, plaintiff in said action. Appellant's judgment against Cetenko was dated March 8, 1977.

Schwartz contends that his fee of $47,683.73 has a greater priority over Cetenko's recovery than appellant's court-ordered lien. The record does not disclose any order under Code of Civil Procedure section 688.1 granting Schwartz a lien.

The record herein consists only of selected portions of the clerk's transcript. Nothing appears by way of admitted evidence, but Schwartz, evidently by letters, claimed a written fee agreement with Cetenko that spanned a period from November 15, 1976, to January 6, 1979. There were the following:

(1) Letter of November 15, 1976.

(2) Letter of June 10, 1977, with “security agreement”.

(3) Letter of March 29, 1978.

(4) Letter of January 6, 1979, with attachment.

Cetenko purportedly signed the pertinent letters and other documents (security agreement and UCC-1), despite escalation of the rate of compensation and complexity of the fee arrangements.

The first letter of November 15, 1976, required Cetenko to pay $100 per hour to Schwartz for fees, $500 on account, costs as billed, with $65 per hour of the fees to be deferred and be a lien on the recovery. It is important to note that in this original letter agreement that fees are not contingent upon recovery but only a portion to be deferred and to be a lien.

Three months after appellant's judgment, Schwartz' second letter (June 10, 1977) for the first time mentions that the deferred amount is payable only from the expected recovery. He also enclosed the security device.

On March 29, 1978, the third letter appears, materially changing the hourly rate and other terms, and now attaching the UCC-1. This purported agreement requires Cetenko to pay $1,000 on account in advance, costs upon billing, and gives Schwartz a lien, but does not condition any fees upon recovery.

The fourth and last letter of January 6, 1979, purports to amend the March 29, 1978, agreement. The entire letter must be read to get the full impact, but the following is the gist:

Paragraph 1 associates Attorney Gilman and the fee escalates to $130 per hour, retroactively.

Paragraph 2 acknowledges fees to the then date of $15,129.67.

Paragraph 3 requires Cetenko to remove an earlier UCC-1 on his dental practice, inventory and assign the same to Schwartz. (We note that Schwartz' UCC-1 covered only the recovery in the underlying action.)

Paragraph 4 provides that if Schwartz arranges a loan for Cetenko on said dental inventory (with a 10 percent finder's fee) that the sum of $15,000 from said loan proceeds will be paid on Schwartz' fees.

Schwartz' billings do not have a detailed breakdown, but only such entries as:

June, 32.5 hours, $ $75 per hour $2,437.50;

June, 60.5 hours $ $130 per hour, $7,865.

July, 28.2 hours $ $75 per hour, $2,115.

July, 83.5 hours $ $130, $10,855.

The billing of September 1, 1979, shows $1,500 having been paid on a previous balance.

Schwartz filed a “notice of attorneys lien” December 18, 1978, but neither this document nor the order appealed from purport to give Schwartz a lien under Code of Civil Procedure section 688.1.

Plaintiff Cetenko evidently was successful in recovering $31,848.28 in the within action, and on the basis of claimed fees and said agreements, Schwartz filed his motion for release of all funds to himself. He filed a declaration, wherein at paragraph 5 he states Cetenko told him there were no other assets to pay fees and the lien was the only source.

The trial court heard the motion without evidence and granted it.

There are no findings except what may be implied. Appellant appeals from the order signed following the hearing.

I

The letter agreements do not constitute a contingent fee by any standard. As shown above, the fees are still owing to Schwartz. In the only statement under oath, he gives his client's statement that he has no assets to pay the fees and costs. While hearsay, it does show that both Cetenko and Schwartz considered the recovery as only one of the sources of payment. Schwartz received some moneys for fees and costs from Cetenko as shown by the letters and the billings.

As will be shown hereinafter, there is, however, no need to pursue such analysis. There may be different rules as to whether an attorney has a lien in a contingent fee arrangement and not in a retainer relationship, but the distinction is unnecessary here. Nor is there any need to interpret Schwartz' and Cetenko's arrangements or whether Schwartz' fees were reasonable and necessary. Weighing and adjusting the relative equities is not a method granted us under Code of Civil Procedure section 688.1 at this point, and the Supreme Court has disposed of the matter.

Code of Civil Procedure section 688.1 was first enacted in 1941, and the only significant amendment was in 1968 when the remedies were permitted against “any party,” not just a plaintiff.

The statute is clear but not comprehensive. By following the procedure required, a judgment creditor can file and notice a motion in a pending action and the court may, “in his discretion,” order a lien on the cause or judgment, and may permit an intervention. Once granted the lien shall be satisfied before the determination of the action. Nothing in the statute refers to priorities among creditors or between creditors and the attorney for the debtor-litigant.

The Supreme Court cases dealing with the statute are:

(1) Takehara v. H. C. Muddox Co. (1972) 8 Cal.3d 168, 104 Cal.Rptr. 345, 501 P.2d 913, which resolves the problem of multiple creditors who have each reduced a prior judgment against a party to a lien under Code of Civil Procedure section 688.1. There was insufficient money to pay anyone except the creditor obtaining the first lien. The Supreme Court affirmed the trial court and held that priority was properly given to the judgment creditor who first obtained the order granting a lien under the statute. The court relied on Civil Code section 2897 which provides, “Other things being equal, different liens upon the same property have priority according to the time of their creation ” The court also stated (at pp. 172-173, 104 Cal.Rptr. 345, 501 P.2d 913) that historical background is not helpful, that section 688.1 provides for creation of a lien at the time of the order and that while it might be more equitable to divide proceeds pro-rata, nonetheless “the statutes are clear and are controlling.”

(2) Roseburg Loggers, Inc. v. U. S. Plywood-Champion Papers, Inc. (1975) 14 Cal.3d 742, 122 Cal.Rptr. 567, 537 P.2d 399, which involved a priorities question between two creditors of a litigant, but one of them was the Department of Human Resources Development. The facts are vital. The department had recorded a certificate under the Unemployment Insurance Code (s 1703) which provides for the equivalent of a judgment lien on all property of the delinquent employer in the county of filing. The recorded certificate was properly filed against the debtor litigant.

Thereafter, a judgment creditor of the employer obtained a lien under Code of Civil Procedure section 688.1. Eight months later, the department received a similar lien. The Supreme Court held that the Takehara rule applied despite the difference in nature of the claims and despite the Unemployment Insurance Code. The Supreme Court in Roseburg, at page 749, 122 Cal.Rptr. 567, 537 P.2d 399, states: “Section 688.1 provides the exclusive procedure by which a judgment creditor may satisfy a judgment against a cause of action.” (Italics added.) At page 750, 122 Cal.Rptr. 567, 537 P.2d 399 the court said “the first judgment creditor to obtain a lien pursuant to section 688.1 has priority.”

These Supreme Court cases have been cited by the courts of appeal in different contexts. Wilkinson v. Wilkinson (1975) 51 Cal.App.3d 382, 388-389, 124 Cal.Rptr. 870, which held that a purchaser of real property under a Cal-Vet contract of sale could not quiet title against a lien under Revenue and Taxation Code section 6757 because the lien attached to the equitable interest. This case is obviously distinguished. Atiya v. Di Bartolo (1976) 63 Cal.App.3d 121, 133 Cal.Rptr. 611, which held that the potential frustration of settlement negotiations was not alone sufficient to sustain an order denying a lien claim under Code of Civil Procedure section 688.1 on a pending cause of action. Abatti v. Eldridge (1980) 103 Cal.App.3d 484, 163 Cal.Rptr. 82, which held that the trial court properly granted a lien under section 688.1 against defendants in a specific performance action against them where they received money as performance by plaintiffs. “Cause of action” and “judgment subsequently obtained” as used in the statute were broadly interpreted.

The California cases dealing with attorney's liens on recoveries fall into several categories: (1) disputes between attorneys and clients, (2) disputes between successive attorneys where one is discharged, and (3) priorities between attorneys and transferees, encumbrances or levying creditors of the attorney's client.

As between attorney and client, clearly the cases permit a lien by contract or by implication an “equitable lien.” (Tracy v. Ringole (1927) 87 Cal.App. 549, 262 P. 73; Haupt v. Charlie's Kosher Market (1941) 17 Cal.2d 843, 112 P.2d 627; Rest., Restitution, s 161.) Certainly, the attorney has a prior lien over attaching creditors (Haupt, supra ), execution creditors (Gelfand, Greer, Popko & Miller v. Shivener (1973) 30 Cal.App.3d 364, 105 Cal.Rptr. 445) and mala fide takers with notice. (Wagner v. Sariotti (1943) 56 Cal.App.2d 693, 133 P.2d 430.)

The case of Del Conte Masonry v. Lewis (1971) 16 Cal.App.3d 678, 94 Cal.Rptr. 439, gives priority to the judgment creditor of a plaintiff over the plaintiff's attorney and others, because the judgment creditor was the first to assert a claim by filing the 688.1 motion. The court cited Smitton v. McCullough (1920) 182 Cal. 530, 534, 536, 189 P. 686, and then said (at p. 681, 189 P. 686), “Priority based on time of creation may therefore be subordinated to the equitable preference accorded to the party who is first to assert his claim Under this reasoning respondent as first to assert a claim, by notice of motion under section 688.1, was properly given first priority.” The court went on to state “the time of the occurrences which gave rise to the underlying substantive right” may control when an equitable right is created.

Gelfand, supra, also deals with attorneys fees which were the basis of a lien against a wrongful death recovery, but the adverse claimant was a former spouse of decedent who had a support judgment against decedent and who was levying a writ of execution. The prior fee lien prevailed. But attachment and execution can reach only the interest of the judgment debtor, and if he has previously created a lien (as in Haupt and Gelfand ) there may be no leviable interest garnered by the writ. Both Del Conte and Gelfand came before Roseburg and thus do not consider Code of Civil Procedure section 688.1 as the “exclusive procedure by which a judgment creditor may satisfy a judgment against a cause of action.”

Nor do those cases consider the effect of Civil Code section 2883 on the subject setting. That section permits creation of a lien against property acquired in the future, but it also states the lien “attaches from the time when the party agreeing to give it acquires an interest in the thing, to the extent of such interest.” One might argue that the “thing” in the case before us is the cause of action, but what Schwartz and Cetenko referred to was the recovery. This came into being, at the earliest, when judgment was received by said plaintiff. Under this approach, Schwartz could not have created a lien.

He tried to perfect a lien but did not and could not without a lien or judgment and without following the procedure of section 688.1. His filing a notice of attorney's lien was inadequate because he had no judgment and he could not comply with the statutory requisites. He stipulated to appellant's lien. He should have asked the trial court to stay the motion.

It may well be that policy considerations compel a procedure giving the trial court the power to (1) review the conflicting claims, (2) rule on their reasonableness and genuineness, and (3) establish an equitable distribution or even withhold relief pending the outcome of the case and then hear all claims. But in the instant case Schwartz had no judgment lien and appellant did. Since section 688.1 is exclusive, the judgment (order) appealed from is reversed, with a directive that appellant be given priority.

I dissent.

I view the factual background on the law underlying this proceeding quite differently from that presented by my colleagues. For that reason, I must reiterate some of the facts as I take them from the record.

In February 1976, Cetenko defaulted in payment of an $8,000 promissory note to Schaefer, and in March 1977, Schaefer obtained a default judgment against Cetenko in a Santa Cruz County Superior Court action.

On November 15, 1976, Cetenko and his attorney, Francis Schwartz, concluded an agreement that Schwartz would defer payment of fees and that they would constitute a lien on any recovery received by Cetenko in the underlying proceeding by judgment or settlement. This lien was confirmed by a letter of June 10, 1977, in the then current amount of $2,414.75.¹

On March 29, 1978, Schwartz and Cetenko revised their agreement in a separate letter agreement to provide that Schwartz's fee services would be billed at $75 per hour, but which again indicated that all charges by Schwartz, including accrued but unpaid charges of $2,479.75, were to be a lien on any recovery in the underlying action. Contemporaneously, Schwartz and Cetenko executed a written security agreement for legal fees and costs under which Cetenko's right, title, and interest to his cause of action and any resulting settlement or judgment were given to Schwartz as security for fees and costs.

On April 6, 1978, a UCC-1 form was filed with the Secretary of State showing Schwartz as the secured party and collateral consisting of the cause of action and all settlements or judgments resulting from Cetenko's claim in this lawsuit.

On December 18, 1978, Schwartz filed a notice of attorney's lien within the action.

By letter agreement dated January 6, 1979, the agreement of March 29, 1978, was again modified to include services rendered by cocounsel Christopher M. Gilman.

On July 19, 1979, an order issued in the trial court granting Arlene Schaefer a lien on the judgment in the underlying action.

The underlying action resulted in a judgment in favor of Cetenko for $31,848.28. At that time deferred fees and costs amounted to $47,683.

The November 15, 1976, agreement provided among other things the agreement “shall become a lien upon any recovery by way of settlement, litigation or otherwise, of any monies, things of value or property whatsoever, and upon any property, legal files or otherwise which is in the possession of (Schwartz), said deferred compensation shall be in a first position and recoverable by (Schwartz) prior to (Cetenko's) recovery of any funds from (Cetenko's) account.”²

The law in California has for over 40 years recognized specific nonpossessory charging liens arising out of attorney's contingent fee contracts. (See Irsin v. Superior Court (1965) 63 Cal.2d 153, 157, 45 Cal.Rptr. 320, 403 P.2d 728.) An attorney's lien created by contract with his client has general priority over a subsequently asserted lien (writ of execution). The general rule is that an attorney's lien will prevail as against proceedings in the nature of attachment or execution. (Haupt v. Charlie's Kosher Market (1941) 17 Cal.2d 843, 846, 112 P.2d 627; Gostin v. State Farm Ins. Co. (1964) 224 Cal.App.2d 319, 36 Cal.Rptr. 596.)

An agreement for a lien (attorney's contingent fee contract) is decisive as to its existence and constitutes a valid equitable assignment pro tanto of the judgment or the proceeds of a settlement. (Bandy v. Mt. Diablo Unified Sch. Dist. (1976) 56 Cal.App.3d 230, 235, 126 Cal.Rptr. 890.)

Schaefer asserted a lien arising out of a default judgment in another action. As such, the lien is not entitled to special statutory priority, but reaches only the interest of her debtor (Cetenko) in the proceeds of the judgment. As such, her lien is subject to prior equities against Cetenko, in this instance the attorney's charging lien.

Counsel for Schaefer has suggested, without citation of authority, that public policy should preclude such equities in favor of charging liens created by attorney's contingent fee contracts. I fail to find any authority or reason for such a policy.

In the same vein, it is suggested that Code of Civil Procedure section 688.1 establishes a statutory lien with priority over equitable liens. The suggestion assumes it to be fact. Such bootstrapping cannot be utilized. The section does not provide for priority in the present circumstances. The priorities of the claims are governed by the provisions of Civil Code section 2897.

Code of Civil Procedure section 688.1 simply provides a means of obtaining a judgment lien against a cause of action or separate judgment. The priority of the court ordered lien is established by Civil Code section 2897 which provides in pertinent part that, “Other things being equal, different liens upon the same property have priority according to the time of their creation, ” The terms of Code of Civil Procedure section 688.1 do not vitiate in any way the establishment of lien priorities pursuant to Code of Civil Procedure section 2897.

Moreover, I view the factual circumstances and legal analysis presented in Del Conte Masonry Co. v. Lewis (1971) 16 Cal.App.3d 678, 94 Cal.Rptr. 439, as strikingly similar and apropos to the instant proceeding. In Del Conte Masonry, an attorney and his client, by agreement, created an equitable lien for attorney's fees to be asserted against an anticipated judgment. A statutory lienholder also asserted his lien against the anticipated judgment but did so and perfected his claim prior to the assertion of the nonspecific charging equitable lien by the attorney. The court in that instance, in recognizing the method of establishment of priority and acknowledging the propriety of an equitable lien arising out of an agreement for attorney's fees, stated, “Respondent's lien right as a judgment creditor was authorized by statute (fn. omitted), but the statute does not expressly regulate lien priorities. As for appellant, in California an attorney does not automatically have a lien for the value of his services upon a judgment obtained through his efforts, but an equitable lien may be created by agreement between the attorney and his client. (Wagner v. Sariotti (1943) 56 Cal.App.2d 693, 697-698 (133 P.2d 430).) Similarly, a debtor may grant an equitable lien to creditors such as the materialmen here involved. (31 Cal.Jur.2d, Liens, s 10.)

“Appellant and respondent both rely on Civil Code section 2897, which provides that, ‘Other things being equal, different liens upon the same property have priority according to the time of their creation, ’ Appellant points out that the liens in favor of the attorney and the materialmen were created by agreement a few days before respondent's lien was created by the court's order granting respondent's motion under section 688.1. Thus, according to appellant, the consensual liens are prior by the terms of section 2897.

“Where one lien has been created by contract and another under a statute, ‘the wording of the statutes or code determines the question of priority, ’ (First Nat. Bank v. Silva (1927) 200 Cal. 494, 496 (254 P. 262).) Arguing from the statutes, appellant claims that, ‘It should be noted that 688.1 states that there shall be endorsed upon the judgment ”a statement of the existence of the lien, the date of entry of the order creating the lien ,“ thus indicating that the operative date is the date of the order creating the lien.’ Code of Civil Procedure section 688.1 contains no language explicitly regulating priority, but the provision that the judge ‘may, in his discretion, order that the judgment creditor be granted a lien’ suggests broadly that the lien might be subordinate to other claims and that questions of priority ought to be decided by reference to general principles of equity. In Smitton v. McCullough (1920) 182 Cal. 530 (189 P. 686), the Supreme Court declared that, ‘where successive conflicting interests, purely equitable in nature, are in all other respects equal, the equity prior in time prevails. (Civ.Code, s 2897.) The time of creation, however, is the last element for consideration when determining the priority of equitable claims, and (a) claim can predominate by reason of antedating (another) equity only if the two interest are in all other respects equal.

“ ‘Interests are equal in equity when each is entitled to the same recognition and protection by reason of possessing to an equal degree those elements of right and justice which are recognized and aided by courts of equity.’ (182 Cal. at p. 534 (189 P. 686).) Priority based on time of creation may therefore be subordinated to the equitable preference accorded to the party who is first to assert his claim. (182 Cal. at p. 536 (189 P. 686).) Under this reasoning respondent, as first to assert a claim, by notice of motion under section 688.1, was properly given first priority. Moreover, even if time of creation were controlling, an equitable lien may be deemed created, not at the time of the judgment or order which declares its existence, but at the time of the occurrences which gave rise to the underlying substantive right. (Hise v. Superior Court (1943) 21 Cal.2d 614, 627 (134 P.2d 748); Holder v. Williams (1959) 167 Cal.App.2d 313, 317 (334 P.2d 291).)” (Emphasis in original; id. at pp. 680-681, 94 Cal.Rptr. 439.)

By reason of the foregoing, Attorney Schwartz must prevail. His notice of lien was filed with the court on December 18, 1978, and appellant Schaefer was granted a lien on the judgment by the court on July 19, 1979.

The harshness of the circumstances confronting Schaefer as a judgment creditor, i. e., the disparity between the amount of attorney's fees asserted as a lien and the amount of the judgment, must be recognized. However, the law does not distinguish such circumstances while acknowledging the efficacy of the equitable lien arising out of the agreement for payment of attorney's fees.

I would affirm the judgment.

FOOTNOTES

FOOTNOTE.  

1.  The letter from Schwartz to Cetenko read in part:“Pursuant to our retainer agreement dated November 15, 1976, I am entitled to $65.00 per hour in addition to the $35.00 per hour I have already billed you for my services, but payable only out of the proceeds of any settlement or judgment you may achieve in the Sacramento lawsuit, or otherwise.““ payable out of the above sources is the sum of $2,414.75, which, according to our agreement, constitutes a lien against any such lawsuits, settlements or judgments.” (Emphasis in original.)

2.  To the extent the agreement may have created a general retaining (possessory) lien upon property which was of no economic value to Schwartz, that portion was void. (Academy of California Optometrists, Inc. v. Superior Court (1975) 51 Cal.App.3d 999, 1006, 124 Cal.Rptr. 668; see also Weiss v. Marcus (1975) 51 Cal.App.3d 590, 599, 124 Cal.Rptr. 297.

CECCHETTINI, Associate Justice.* FN* Assigned by the Chief Justice.

REGAN, Acting P. J., concurs.