In a November 14, 2017 decision, the New Jersey Supreme Court addressed two important questions arising under Article 9 of the Uniform Commercial Code governing the pledging and perfection of a security interest in an attorney’s contingency fee.
(1) Is the pledge of an anticipated attorney’s fee considered an account receivable that can be secured?
(2) Did the creditor properly perfect its security interest in the anticipated counsel fee?
The Court answered both questions in the affirmative. Click here [1] to read the syllabus of the Court’s decision.
In this particular case the attorney (Diane Acciavatti) was pursuing a legal malpractice case on behalf of her client on a contingency fee basis. This meant she would not charge her client unless she recovered money. Betting that she would be successful with the legal malpractice case Acciavatti pledged her anticipated counsel fee to a lender known as OKS Realty (“OKS”) as collateral for a $125,000 loan. OKS reported its security interest in the anticipated counsel fee by filing a financing statement with the New Jersey Department of Treasury.
After borrowing money from OKS Acciavatti ran into trouble with two other creditors. As part of court ordered settlements with both creditors Acciavatti consented to granting each a lien against her anticipated counsel fee award in the underlying legal malpractice case.
A jury awarded $1,597,193 for Acciavatti’s client in the legal malpractice action. Both litigants then appealed. While the appeal was pending Acciavatti withdrew from the practice of law, and a new law firm (the Roper firm) took over the legal malpractice case. The Appellate Division ultimately reversed the jury’s award, and the case eventually settled for $840,000.
The Roper firm filed a new case to determine the distribution of the $840,000 settlement. The trial judge carved out 2/3 of the settlement for the legal malpractice plaintiff, and ordered that the remaining 1/3 be escrowed. The Roper firm agreed to accept a $40,000 flat fee which left about $239,000 for distribution to Acciavatti’s creditors.
The trial judge concluded that the judgment creditors should be paid ahead of OKS, which resulted in the judgment creditors receiving 100% of their claims while OKS received only $13,185.0. OKS appealed, claiming it was entitled to a first priority position. The Appellate Division agreed with OKS.
A further appeal was taken by the judgment creditors. The New Jersey Supreme Court agreed with the intermediate appellate court’s holding that “that, under certain circumstances, an attorney’s pledge of anticipated counsel fees can be considered an account receivable and secured under Article 9” of the Uniform Commercial Code. In this particular instance it was determined that OKS properly perfected its security interest in Acciavatti’s counsel fees by sufficiently describing the collateral in its financing statement filed before the judgment creditors obtained their liens in the same collateral.
Accordingly, the Court held that OKS’s secured claim for the escrow balance had priority over the judgment creditors’ claims.
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