In the context of enforcing a judgment, creditors have the right to levy execution on a debtor’s non-exempt assets within the court’s jurisdiction, which can include cash in bank accounts. If a creditor identifies the debtor’s bank account, they can direct the sheriff to serve a notice of levy on the bank, resulting in a freeze of the account. The bank must then transfer the funds to the sheriff, who subsequently delivers them to the creditor.
However, complications arise when the debtor’s funds are held in an account under another person’s name or within a client trust fund maintained by an attorney. This scenario was recently addressed in the case of Dickson v. Mann, 2024 WL 3421751 (Cal.App.Distr. 4, July 16, 2024), where the California Court of Appeals provided clarity on this issue.
Nicholas Dickson secured a $12 million judgment against Jack Mann, related to alleged misconduct involving Dickson’s living trust. To enforce the judgment, Dickson had the sheriff levy Mann’s law firm, Higgs, Fletcher & Mack LLP (HFM), on August 22, 2022, for any funds HFM was holding for Mann. HFM then submitted a third-party claim, asserting it held $585,000 of Mann’s funds as payment for legal services.
The HFM engagement agreement specified that Mann had agreed to pay a flat fee of $585,000, inclusive of costs. Although this fee was meant to cover all services, including defense against Dickson’s judgment enforcement, HFM’s agreement also acknowledged that Mann had the right to have the fee deposited into a trust account and entitled him to a refund if services were not completed.
At the time of the levy, HFM had not yet begun providing services covered by the flat fee. Dickson opposed HFM’s claim, arguing that the funds were held in HFM’s client trust account, which should mean they still belonged to Mann.
The Superior Court of San Diego ruled in favor of Dickson, ordering HFM to surrender the $585,000. The Court based its decision on two key points:
California Rules of Professional Conduct: These rules dictate that a flat fee is not considered earned until the legal services are completed. Since HFM had not yet performed the services, the funds held in the client trust account remained Mann’s property.
Fraudulent Transfer: The Court also concluded that Mann’s transfer of funds to HFM might have been intended to defraud Dickson, applying the California Uniform Voidable Transactions Act (CUVTA) to potentially invalidate the transfer.
HFM’s motion for reconsideration to retain $53,458 for previously provided services was denied as untimely. On appeal, the California Court of Appeals upheld the Superior Court’s ruling, emphasizing that the location of funds in a trust account was not determinative. Instead, the terms of the engagement agreement dictated how and when fees could be considered earned.
The Court of Appeals also highlighted that a flat fee is only deemed earned upon completion of agreed-upon tasks or at the conclusion of the legal matter, unlike a true retainer, which can be earned upon receipt.
If HFM had been owed fees, it would have been classified as an unsecured creditor behind the judgment lien held by Dickson, potentially recovering nothing due to the priority of the judgment lien.
To mitigate such risks, attorneys representing debtors should consider billing hourly rather than accepting flat fees and securing a lien on the client’s funds. This case illustrates the vulnerability of attorneys to having their fees levied if they do not ensure proper handling and protection of client funds.
In conclusion, while asset protection plans can shield assets, they often fail to provide mechanisms for funding a post-judgment defense. Effective planning should account for the possibility of costly legal battles and the need to sustain adequate legal representation throughout.
