Charging Liens and Trump Cards: Specific Isolated Funds Not Required

“Each player must accept the cards life deals him or her: but once they are in hand, he or she alone must decide how to play the cards in order to win the game.”
– Voltaire

Where a creditor has a lien attached to proceeds of a particular transaction “in whose hands they may come,” does the charging lienor have to identify a specific, isolated fund to which its lien attaches? In In re Trump Entertainment Resorts, Inc., the United States Bankruptcy Court for the District of Delaware answered “no” (at least with respect to attorney’s charging liens in New Jersey). In so doing, the Bankruptcy Court also affirmed the common law rule that “first in time is first in right.”
Know When to Hold ‘Em
In early 2008, the debtors, a group of Trump Entertainment Resorts entities, hired a law firm to represent them in a series of tax appeals in the Tax Court of New Jersey. The law firm agreed to a reduced hourly rate, which would be credited against a contingency fee of 17.5% based on any tax savings from the appeals. The law firm eventually negotiated a settlement that reduced the tax assessments on the debtors’ casino properties, yielded an immediate tax refund of $35.5 million in cash, and produced $15 million in credits against future taxes due and owing for the Trump Taj Mahal casino.
When the debtors received the cash portion of their tax refund, they deposited it in their general bank account. The cash in the bank account was unrestricted, not segregated, and available to pay ordinary operating expenses. Shortly thereafter, the Tax Court, at the law firm’s request and with the consent of the debtors, entered an order granting the law firm a perfected statutory attorney’s charging lien for the protection of the law firm’s unpaid fee.
Know When to Fold ‘Em
The law firm subsequently agreed, at the debtors’ request, to accept payment in installments rather than in a lump sum. Further, after a series of amendments to the original fee agreement, the law firm agreed to accept $7,250,000 instead of the $8,837,500 due to it (17.5% of the $50.5 million total tax savings).
The debtors paid all but the last $1.25 million installment owed to the law firm. After the debtors defaulted on the final installment, the law firm sought to enforce its perfected attorney’s charging lien in the New Jersey Tax Court. The Tax Court issued a writ of execution directing the Sheriff of Atlantic County to satisfy the $1.25 million judgment by levying on the debtors’ bank account, which the sheriff thereafter served.
Know When to Walk Away
Shortly thereafter, the debtors commenced their chapter 11 cases. Postpetition, the law firm moved in Bankruptcy Court for an order fixing the value and priority of its claim and allowing that claim as secured in full pursuant to section 506(a) of the Bankruptcy Code.
And Know When to Run
The debtors opposed the motion, primarily on the ground that the cash from the refund was spent and not traceable, so the firm’s charging lien attached to nothing.
The bankruptcy court, however, rejected the debtors’ argument on the basis of the New Jersey Attorney’s Lien Statute, which provides that a lien for services attaches to the proceeds flowing from such services “in whose hands they may come.” New Jersey law interprets the attachment to proceeds “in whose hands they may come” as exempting the charging lienor from having to identify a specific, isolated fund. Consequently, the law firm had an attached and perfected lien over the debtors’ cash for the remaining fees it was owed.
Never Count Your Money When You’re Sittin’ at the Table
The law firm, however, had not quite hit the jackpot. Also objecting to the law firm’s motion was a group of Icahn-affiliated secured lenders. The Icahn entities held a perfected lien against the debtors’ assets. These lenders argued that their lien, which arose in 2007, took priority over the law firm’s lien. Even though the bankruptcy court found that the law firm’s lien “related back” to the commencement of the tax appeal in 2008, the lien still arose after the Icahn entities’ lien. The law firm nevertheless argued that its statutory charging lien “trumped” the Icahn entities’ lien (pun intended).
The opinion does not set forth the law firm’s reasoning for asserting a priming charging lien, and the bankruptcy court rejected the assertion out of hand, holding that an attorney’s lien does not take precedence over liens already encumbering the property. Therefore, because the New Jersey Attorney’s Lien Statute did not provide for any form of statutory priority over existing liens, the common law rule of “first in time is first in right” applied, and the law firm’s charging lien, although secured, fell behind the Icahn entities’ lien.
There’ll Be Time Enough for Countin’ When the Dealin’s Done
Aside from the Delaware Bankruptcy Courts’ excellent use of a “Trump” pun, its decision In re Trump Entertainment Resorts, Inc. is important because it clarifies and re-affirms several important concepts, at least under New Jersey law:

  • Where a lien is attached to proceeds “in whose hands they may come,” the charging lienor need not identify and monitor a specific, isolated fund.
  • The charging lien was inchoate and related back to the time the law firm began to provide services. Accordingly, if the Icahn entities had made their loans to the debtors after such time – even without any constructive notice of the possible charging lien – the result may have been different.
  • Absent statutory language to the contrary, the age-old maxim “first in time is first in right” still holds true.

This post was authored by Ben Farrow