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Lustig v. Zahuranec

January 21, 2006


The opinion of the court was delivered by: Charles J. Siragusa United States District Judge



This is an action in which Plaintiff Douglas J. Lustig, as the Chapter 7 Trustee ("the Trustee") for the bankruptcy estate of Terry Zahuranec ("Mr. Zahuranec"), commenced an adversary proceeding against Linda J. Zahuranec, the debtor's former spouse ("Mrs. Zahuranec"), and Friedlander & Friedlander, P.C. ("Friedlander"), Mrs. Zahuranec's matrimonial attorneys. Now before the Court is Friedlander's appeal under 28 USC § 158(a) from the Order of the Honorable John C. Ninfo II, U.S. Bankruptcy Judge, entered on November 1, 2004, granting the Trustee's motion for summary judgment. For the reasons that follow, the Court rejects the appeal and affirms and adopts Judge Ninfo's Decision and Order in its entirety.


On October 31, 2001, Friedlander, on behalf of Mrs. Zahuranec, commenced an action for a divorce against Mr. Zahuranec in New York State Supreme Court, Chemung County, seeking equitable distribution of the marital property. Subsequently, Mr. Zahuranec received a purchase offer on a parcel of real estate known as 751 E. Church Street, Elmira, New York ("Church Street Property"). Mr. Zahuranec had acquired title to the parcel in April 1999, and held title solely in his name. The sale was completed on July 8, 2003 and generated net proceeds of $62,815.66. On August 26, 2003, Mr. Zahuranec's attorney transferred half of the net sale proceeds, $31,536.86, to Friedlander, as attorneys for Mrs. Zahuranec. Friedlander deposited the check into its attorney trust account.

A few days later, on September 12, 2003, while the matrimonial proceeding was still pending, Mr. Zahuranec filed a Chapter 7 bankruptcy petition. Thereafter, on September 19, 2003, Mrs. Zahuranec instructed Friedlander to withdraw from the trust account the sum of $7,234.23, for its fees, and forward the remainder to her. Friedlander did as instructed.*fn1

On January 5, 2004, at the direction of the Trustee, Mr. Zahuranec's attorney wrote to Friedlander and requested that the sale proceeds be turned over to the Trustee. Friedlander refused, claiming that the proceeds were marital property belonging to Mrs. Friedlander, and were not part of the bankruptcy estate.

On May 14, 2004, the Trustee filed a "Complaint to Avoid Preferential and/or Fraudulent Transfer, For Turnover of Money or Property of the Estate, for Equitable Subordination and Attorney's Fees" in the bankruptcy base pending before Judge Ninfo, seeking relief under 11 U.S.C. §§544, 547, 548, 510(c) and/or New York Debtor and Creditor Law Article 10 and §276-a. The Trustee subsequently moved for summary judgment, seeking the return of the $31,536.86. Friedlander cross-moved for summary judgment, arguing that the sale proceeds were settlement funds belonging to Ms. Zahuranec, upon which the firm had a lien. More specifically, Friedlander claimed that, as to the $7,234.23 which it retained as payment for fees and disbursements, it had a lien on the funds pursuant to New York Judiciary Law § 475, which provides:

From the commencement of an action.the attorney who appears for a party has a lien upon his client's cause of action, claim or counterclaim, which attaches to a verdict, report, determination, decision, judgment or final order in his client's favor, and the proceeds thereof in whatever hands they may come; and the lien cannot be affected by any settlement between the parties before or after judgment, final order or determination..

New York Judiciary Law § 475 (McKinney 2005)*fn2 Friedlander maintained that, since the funds were subject to the statutory charging lien, the transfer was not avoidable as a preferential payment.

Judge Ninfo issued a Decision and Order on October 20, 2004, granting the trustee's application and denying Friedlander's cross-motion, for the following reasons:

(1)... it seems clear that the Zahuranecs' matrimonial attorneys were instrumental in bringing about the division of the proceeds of the sale of Church Street in large part to insure that their then-current fees and expenses were paid; (2) there was no formal settlement agreement that was specifically approved by the Matrimonial Court in their pending matrimonial case, only a series of letters between their matrimonial counsel; (3) Friedlander's charging lien, for purposes of Section 545, 547 and 550 of the Bankruptcy Code, came into existence with respect to the net proceeds of the sale of Church Street, only when the legal and equitable interest in one-half of those net proceeds had been transferred from the Debtor to Linda Zahuranec within the meaning and intent of 547(b) and (e); (4) at no time did Friedlander's charging lien under the Judiciary Law attach to Church Street or its net proceeds while legal title to the property and the net proceeds remained in the debtor, and whether legal and equitable title to the net proceeds passed to Linda Zahuranec or Friedlander at the time when a settlement was agreed to or when one-half of the net proceeds were placed in escrow with attorney Denton or with Friedlander, an avoidable preferential transfer under 547(b) had already occurred; (5) it was only after the legal and equitable title to one-half of the net proceeds was transferred by the Debtor to or for the benefit of Linda Zahuranec and Friedlander that the Friedlander charging lien provided for by the Judiciary Law, attached; (6) if the Debtor had filed bankruptcy before attorney Denton had paid over one-half of the net proceeds to Friedlander, this Court would have held the proceeds to be free and clear assets of the Debtor's estate under Section 541; and (7) as legal precedent for the Court's decision, I refer the parties to O'Keefe v. Landow, et. al., 289 F.2d 465 (2d Cir. 1961).

Transcript of Oral Decision, pp. 2-3. Friedlander then filed ...

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