Third District Finds That Attorney Lien Prevailed Over Bank’s Recorded Secured Interest and Notices of Judgment Lien.
In our May 26, 2008 post, we reviewed Fletcher v. Davis and the requirements for creating an enforceable contractual lien for attorney’s fees. We noted that the attorney lien is a “secret” lien that frequently has priority over even blanket collateral security interests granted in favor of lending institutions. A bank learned that sad fact, when the Third District reversed a determination in its favor, holding the attorney lien had wholesale priority in Waltrip v. Kimberlin, Case No. C054324 (3d Dist. June 30, 2008) (certified for publication).
The Third District summarized key principles applicable to attorney liens:
- The contractual lien is created and takes effect upon fee agreement execution;
- The lien is a secret lien, with no notice being required before it is effective against an executing judgment creditor;
- The attorney lien on a judgment for services prevails over later encumbrances;
- The attorney lien does not have priority over prior liens on the same property;
- A judgment creditor’s lien has priority if the contractual lien is created after an action has been filed and after judgment creditor gives the specified notice; and
- The attorney lien cannot displace a creditor’s recorded security interest in real property that is the subject of litigation.
The upshot in Waltrip, a 3-0 decision penned by Justice Morrison on behalf of the Third District panel, is that commercial tort claims were not considered “general intangibles” at the time the Bank’s security agreement attached, meaning that the attorney lien had priority. No different result occurred because Bank had an after-acquired property clause in the security agreement, because a security interest does not attach to a commercial tort claim under this type of clause.
Bank did no better on its judgment lien notice arguments. Commercial tort claims are not covered by the judgment lien that Bank filed on personal property. As to the judgment lien on the pending litigation, it was filed too late—several months after creation of the contractual lien under the retainer agreement—and did not “relate back” because the prior lien did not attach to commercial tort claims.
Unfortunately, although revolving around the technical distinctions that frequently make or break the validity of security agreements, the financial institution in Waltrip felt the sting of the “secret” attorney lien, resulting in an entire settlement fund going to the commercial tort attorneys rather than some portion going into the bank’s treasury.