Photograph by Maura Teague
Update (December 9, 2015): For Minnesota civil litigators this holiday season, the Minnesota Court of Appeals giveth but it looks like the Minnesota Supreme Court might take away…
As discussed in the original post, at issue in Whitney Bank v. O’Brien & Wolf (not the “official” case name, but the real parties in interest in the appeal), the fight is between two creditors: a debtor’s secured lender (that is, a bank) and a debtor’s law firm that recovered money in a lawsuit on behalf of the debtor.
It’s a little more complicated than that stripped down scenario but the basic question is who gets paid first from the proceeds of the lawsuit?
Why?
As a lawyer, I conclude that the question is quite obvious: lawyers always get paid first because, otherwise, is just plain wrong.
As you might expect bankers (who already have vaults full of money, I note as an aside) feel otherwise.
Seriously, it is an interesting and important question.
[SKIP THIS PARAGRAPH IF YOU KNOW WHAT A SECURED TRANSACTION IS AND RELATED IDEAS OF LIEN ATTACHMENT AND PERFECTION OF LIENS] All creditors and collection lawyers understand the idea of “secured” loans, the idea of “lien attachment,” and the idea of “perfecting a lien.” In plain English, a loan is “secured” when repayment is legally tied to specific asset(s) of the debtor. The most familiar examples of secured loans are car loans or home loans. “Lien attachments” are the legal ties between the debt and the asset. So, for example, I might make an unsecured loan and I might later reach an agreement with the debtor to secure the loan. The timing for when the security interest, the lien, attaches, can be extremely important — especially when various creditors have claims against a debtor, which is when “lien priority” becomes an issue. This brings us to “perfecting” a lien, which is the process by which a creditor takes action to announce its security interest to the universe so that all subsequent lenders are deemed to have knowledge of the prior lien (whether or not they actually do). When a secured loan is perfected has important ramifications as to who gets paid first among competing creditors.
Alas (from the perspective of one who always sides with lawyers), the Bank’s petition for review of the Minnesota Court of Appeals decision makes a great deal of sense. It is a well-written petition by Tom Boyd and John Holper of Winthrop & Weinstine making the basic point that lawyers must record their liens to perfect them. The O’Brien & Wolf law firm did what it could, in response, but that was not enough to avoid Supreme Court review.
Practice Pointer: Feel free to wait and see how the Supreme Court decides this case or, to be conservative, lawyers planning and expecting to be paid from the proceeds of litigation might want to get their arms around U.C.C. Article IX and, specifically, the mechanics of filing financing statements.
Original post (September 15, 2015): Good news last week for Minnesota litigators on a narrow but possibly important point of Minnesota attorneys’ lien law.
Recently retired Olmsted County District Court Judge Robert Birnbaum ruled in favor of Bank and against Law Firm. The district court found that a clause in the lien statute saying, “as against third parties, from the time of filing the notice of the lien claim…” applied to Law Firm’s lien in the case and Law Firm’s lien notice followed Bank’s garnishment lien. But the Minnesota Court of Appeals found that the district court did not get the statute quite right. That required notice did not apply to a “cause of action attorney lien.” Rather it only applies to a variant, known as a “property lien.”
It is difficult for me to assess just how frequently these lien priority claims arise and, therefore, I cannot assess how much of an impact this will have on Minnesota litigators. I have to agree with the Court of Appeals, though, that when Law Firm’s efforts result in a recovery of cash to Client, it would not seem to make much sense to let Client discharge an unrelated debt with the proceeds of the Law Firm’s successful handling of Client’s cause of action.