Counsel Fees: When an Attorney’s Pledge of Anticipated Counsel Fees Can Be Considered an Account Receivable

In Granata v. Broderick, 172 A.3d 538 (N.J. 2017), the New Jersey Supreme Court was tasked with considering whether an attorney’s pledge of anticipated attorney’s fees can be considered an account receivable and secured under Article 9 of the Uniform Commercial Code (UCC). It also determined whether the lender complied with the requirements of the UCC to perfect its security interest.

In 2007, John Giovanni Granata retained Diane Acciavatti to bring a legal malpractice complaint against Edward F. Broderick Jr. and Broderick, Newmark, & Grather. Ms. Acciavatti accepted a $10,000 retainer and agreed to a contingent fee arrangement. After a jury trial, Granata was awarded a judgment of $1,597,193, and the trial judge granted Ms. Acciavatti’s motions for fees, costs and pre-judgment interest. The Broderick defendants appealed, and Granata filed a cross-appeal. Ms. Acciavatti had an oral agreement with Mr. Granata to represent him at $350 per hour and told him she would seek counsel fees from the defendants after the appeal.

While the appeal was pending, Ms. Acciavatti withdrew from the practice of law. In April 2013, Dominic Caruso was appointed attorney-trustee for Ms. Acciavatti’s practice. On March 28, 2013, the firm of Roper & Twardowsky, LLC (the Roper firm) filed a substitution of counsel form for Ms. Acciavatti. In July 2013, the Appellate Division reversed and remanded for a new trial. In January 2014, following a two-day mediation, the case settled for $840,000. Thereafter, three of Ms. Acciavatti’s creditors claimed liens upon any legal fees owed to her from the case.

The first creditor was Gourvitz & Gourvitz, LLC, and Elliot H. Gourvitz, Esq. Ms. Acciavatti agreed to pay Gourvitz & Gourvitz, LLC, and Elliot H. Gourvitz $82,500 from fees she expected to receive in the Granata v. Broderick matter. On August 19, 2011, a trial judge entered an order declaring that “[t]here would be no disbursements of attorney’s fees to Ms. Acciavatti in Granata v. Broderick until the fees were paid to Gourvitz.” On October 6, 2011, after Ms. Acciavatti defaulted, a $98,638.65 judgment was entered against her. On November 4, 2011, the judgment was recorded as a lien. Gourvitz filed a writ of execution on August 19, 2013.

The second creditor was the accounting firm of Rotenberg, Meril, Solomon, Bertiger & Guttilla, P.C. (Rotenberg). On March 21, 2011, Ms. Acciavatti agreed to pay Rotenberg $75,000 as part of a settlement agreement. After Ms. Acciavatti defaulted, a final judgment of default was entered against Ms. Acciavatti for $133,652.42. The judgment was recorded as a lien on January 24, 2013, and a writ of execution was filed in January 2014.

The third creditor was OKS Realty. On October 27, 2010, OKS loaned Acciavatti, LLC, $125,000. On that date, a security agreement was signed by Ms. Acciavatti on behalf of the firm. The security agreement identified as collateral the legal fees owed to Ms. Acciavatti. On December 2, 2010, OKS filed a UCC-1 financing statement with the Department of Treasury, which listed as collateral the attorney’s fees due to Ms. Acciavatti in Granata v. Broderick.

On February 12, 2014, Granata, through the Roper firm, filed a motion seeking an order declaring that no attorney’s lien attach to any settlement proceeds payable to Granata. On March 14, 2014, the trial judge heard argument on Granata’s motion and determined that Granata was entitled to two-thirds of the settlement amount and ordered the defendant to issue a check for the full settlement amount of $840,000 to the Roper firm, with two-thirds to be released to Granata and one-third to be held in escrow for any subsequent award of attorney’s fees.

On July 7, 2014, the Roper firm informed the trustee, Caruso, that they and Granata had agreed to a flat fee of $40,000. The judge indicated that, of the proceeds available for attorney fee distribution, $40,000 would go to the Roper firm. The judge then addressed distribution of Ms. Acciavatti’s attorney’s fee award to her three creditors. The judge determined that OKS was last in priority because the $840,000 settlement was not finalized until January 2014. The judge reasoned that OKS had a security interest in something that did not exist, while Rotenberg and Gourvitz both had judgments and issued writs of execution. On January 26, 2015, the judge entered an order setting the amounts to be distributed and the order of priority of Ms. Acciavatti’s creditors: (1) $83,284.97 to Gourvitz; (2) $133,652.42 to Rotenberg; and (3) $13,185.05 to OKS.

OKS appealed, claiming error in its placement as last in priority. The Appellate Division agreed and vacated the order setting distribution priorities. The Appellate Division considered whether Ms. Acciavatti possessed an interest in her anticipated legal fees in 2010 and whether OKS’s UCC filing granted it a perfected interest in those fees. The Appellate Division noted that, although no reported New Jersey case has considered whether an attorney’s pledge of an anticipated counsel fee can be considered a receivable under UCC Article 9, other courts have uniformly held that contracts for legal fees, including fees in pending contingency fee cases, are accounts for Article 9 purposes. The Appellate Division expressed agreement with the other jurisdictions and held that, under certain circumstances, an attorney’s pledge of anticipated counsel fees can be considered an account receivable and secured under Article 9. The Appellate Division held that OKS complied with the requirements to perfect its security interest by filing a financing statement covering the collateral of Ms. Acciavatti’s anticipated counsel fees, whether owed to Ms. Acciavatti or her firm, Acciavatti, LLC. Therefore, OKS enjoyed priority over Gourvitz or Rotenberg since OKS’s security interest was perfected before they obtained their liens.

The Supreme Court granted Gourvitz’s and Rotenberg’s petitions for certification to review their challenges to the determinations regarding the distribution priorities of the attorney’s fee award—more specifically the rulings that an attorney’s pledge of anticipated attorney’s fees can be considered an account receivable and secured under Article 9 of the UCC—and whether the lender complied with the requirements of the UCC to perfect its security interest by filing a financing statement covering the collateral of the anticipated attorney’s fees. Ultimately, the Supreme Court affirmed the Appellate Division’s holding that under certain circumstances, an attorney’s pledge of anticipated counsel fees can be considered an account receivable. Therefore, OKS had priority over the other two creditors.

This issue is particularly important for defense attorneys working in New Jersey. Before Granata, no reported New Jersey case had considered whether an attorney’s pledge of an anticipated counsel fee can be considered a receivable under UCC Article 9.

*Jeremy is an associate in our Mt. Laurel, New Jersey office. He can be reached at 856.779.6103 or jjzacharias@mdwcg.com.

_{Defense Digest, Vol. 24, No. 4, December 2018. Defense Digest is prepared by Marshall Dennehey Warner Coleman & Goggin to provide information on recent legal developments of interest to our readers. This publication is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. ATTORNEY ADVERTISING pursuant to New York RPC 7.1. © 2018 Marshall Dennehey Warner Coleman & Goggin. All Rights Reserved. This article may not be reprinted without the express written permission of our firm. For reprints, contact tamontemuro@mdwcg.com.}