by A state default judgment lien was avoidable in bankruptcy under the court’s inherent power to police attorney conduct where the lien was security for unpaid attorney fees which were unreasonable. Moore v. Sanchez (In re Sanchez), No. 20-1267 (D. N.M. Sept. 22, 2021).
The debtor hired the creditor, Moore, to represent him in his divorce case. The case went two months without a fee agreement, then Moore presented the debtor with a bill for fees and costs in the amount of $15,000. The debtor paid him $7,000 and they reached a compromise as to the remaining portion of the bill. They entered into a retainer agreement providing for a 2% monthly interest rate on unpaid fees and an automatic lien on the debtor’s personal and real property as security. In January, 2011, Moore sued the debtor in state court to collect unpaid fees. The court awarded Moore a default judgment of $18,732.64 at 24% interest per year. By February, 2018, the debt had grown to $50,073.90, and Moore moved for foreclosure on the debtor’s home. The debtor filed for chapter 7 bankruptcy. In his petition, the debtor valued the house at $55,300.00 and claimed it as fully exempt. He also listed the debt to Moore as secured and disputed. He moved to avoid the judicial lien against his exempt property.
The bankruptcy court rejected Moore’s argument that the lien was consensual and therefore could not be avoided. It found the value of the debtor’s residence was less than the homestead exemption and granted the debtor’s motion for quiet title to the property. It further found that Moore could not enforce the state default judgment because the fee agreement was in violation of New Mexico Rules of Professional Responsibility (NMRA). In so holding, the court exercised its inherent authority to police the conduct of attorneys practicing before it. Specifically, the court found the 2% per month interest rate to be excessive stating, “[i]If any interest was to be charged at all, it should have been at a rate no higher than needed to compensate Moore for the time value of money. Moore is an experienced, able attorney. It looks terrible when a stalwart member of the bar charges an unsophisticated client a very high rate of interest, gets a default judgment against him that accrues interest at the same high rate, waits years for the judgment debt to mushroom, and then tries to take the client’s house through foreclosure.[] Such actions bring dishonor to an honorable profession. No lawyer should try to take a poor man’s house to pay a fee, especially if most of the fee is accrued interest.”
Moore appealed to the district court. That court referred the matter to the Magistrate for Proposed Findings and Recommended Decision (PFRD) and adopted the PFRD.
On appeal, Moore challenged the bankruptcy court’s authority to determine that the state court default judgment was unenforceable because it was based on a fee agreement that violated the NMRA. He argued that the finding had no basis in law or fact, and that, if there were misconduct on his part, the bankruptcy court should have referred the matter to the appropriate attorney licensing agency.
The court, in adopting the PFRD, found that the bankruptcy court did not abuse its authority. It found the bankruptcy court’s conclusion to be based on the facts that Moore “enter[ed] into a written agreement months after representation began, charg[ed] an interest rate more than 20% above the prime interest rate at the time, wait[ed] years to collect on the judgment and allow[ed] it to mushroom, tr[ied] to take his client’s house through foreclosure, and [did] all of the above to an unsophisticated client with a limited ability to read and write.”
The court was also unpersuaded by Moore’s argument that his conduct was proper because it was in keeping with that of any creditor seeking to enforce a judgment and lien. Citing In re Snyder, 472 U.S. 634, 105 S.Ct. 2874, 86 L.Ed.2d 504 (1985), the court found this argument ignored the higher standard of conduct attorneys are held to. The court found that under Federal Model Rules of Professional Conduct, an attorney must charge a reasonable fee and enter into a fee agreement within a reasonable time of being engaged by the client. Here, the court found, Moore did neither.
Contrary to Moore’s argument that the only recourse the bankruptcy court had was to refer the matter to the proper licensing agency, the court found the bankruptcy court’s authority under section 105(a) gave it authority to police the conduct of attorneys practicing before it.
The court turned to Moore’s argument that the doctrines of issue and claim preclusion precluded the bankruptcy court from avoiding the lien. The court noted that claim preclusion impacts the existence and amount of a debt but, as discharge is a purely federal function, does not determine its dischargeability in bankruptcy. Here, the bankruptcy court did not alter the underlying state court judgment with respect to the amount or existence of the debt. Rather, the bankruptcy court found the judgment to be unenforceable in the bankruptcy context under its authority to police the reasonableness of attorney fees. Finding that order proper, the district court concluded that the “Bankruptcy Court did not violate res judicata principles and did not abuse its discretion in exercising its inherent authority to regulate the practice of attorneys appearing before it and/or its authority pursuant to 11 U.S.C. § 105 to prevent an abuse of process when it concluded that the default judgment was unenforceable for violation of NMRA § 16-105’s prohibition against collecting an unreasonable fee or expense.”
The bankruptcy court’s order likewise did not violate the doctrine of issue preclusion which prohibits a court from relitigating an issue actually litigated in a prior action. The court found that default judgments necessarily do not involve actual litigation of the issues. In this case, there was no evidence that the state court considered the reasonableness of Moore’s fees when granting default judgment.
The district court, therefore, affirmed the bankruptcy court’s Order Quieting Title, Avoiding Judicial Lien, and Granting Other Relief.