ALAN JAROSLOVSKY, Bankruptcy Judge
Debtors Joseph Kane have filed two bankruptcy petitions in recent years. Their first bankruptcy was a Chapter 7, filed on June 12, 2001. Their second, still pending, is a Chapter 13 filed on July 7, 2004.
Prior to their Chapter 7 filing, the Kanes had been accused of elder abuse in state court. They had retained defendant Faye Taylor, an attorney, to defend them in those proceedings. After they filed their Chapter 7 petition, an adversary proceeding making the same elder abuse accusations was filed in this court. After trial, the court ruled in favor of the Kanes. The court assumed that its ruling put an end to long and difficult litigation. This assumption was wrong.
On October 3, 2003, the Kanes sued Taylor in state court for malpractice relating to her representation of them in the state court. When the Kanes commenced their Chapter 13 case, Taylor removed the state court action to this court.
Two bankruptcy issues are intertwined in the Kanes' action against Taylor. First, some of the actions alleged in the complaint took place before the Chapter 7 was filed, so the Chapter 7 trustee may have an interest in any recovery. Second, a deed of trust taken by Taylor from the Kanes in December, 2000 impedes the Kanes' ability to confirm a Chapter 13 plan.
The Chapter 7 case has been re-opened and the Chapter 7 trustee has participated in this case; no Chapter 7 issues are now pending. However, if Taylor's deed of trust is valid it bars confirmation of the Kanes' Chapter 13 plan. Therefore, the court must decide the validity of this deed of trust before remanding the rest of the case back to state court.
By late 2000, the Kanes owed Taylor more than $50,000.00 in fees which they were unable to pay. At the suggestion of another lawyer consulted by the Kanes, Taylor accepted a note from the Kanes for $52,210.50 secured by a deed of trust to the Kanes' home. The deed of trust secured not only this amount but also "Payment of amounts owing for legal services rendered by Faye Taylor to Doris Kane on future monthly statements which are not objected to within ten days of mailing by Doris Kane." The court must now decide if this deed of trust is void because Taylor failed to comply with Rule 3-300 of the California Rules of Professional Conduct. Both sides have made motions for summary judgment, and the issue is ripe for summary adjudication.
Rule 3-300(A) requires that before an attorney can validly take a security interest in a client's property the terms must be fair and reasonable to the client and they must be fully disclosed and transmitted in writing to the client in a manner the client should reasonably understand. Taylor violated both provisions of this rule, by drafting a deed of trust that was not fair and reasonable and then failing to fully explain the ramifications to the Kanes.
Whenever an attorney takes a note and deed of trust from a client for fees, the essential fact which must be explained to the client is that in the event of a future dispute between them the deed of trust can be used to summarily extinguish the client's interest in the property without any judicial scrutiny over disputed fees. Hawk v. State Bar (1988) 45 Cal.3d 589, 600; see also Fletcher v. Davis (2004) 33 Cal.4th 61, 67-68. Taylor utterly failed to explain this to the Kanes in writing and her deed of trust must be voided for this reason alone.
Taylor's argument that the terms of the deed of trust were plain misses the mark. It was the implication of those terms which she was bound to explain to the Kanes: that without the deed of trust, a court would have to rule in her favor in any dispute over her fees before the Kanes had to pay, but with a deed of trust she could foreclose without judicial review.
Moreover, the terms of the deed of trust are not fair to the Kanes. The Kanes were given only ten days (from the date of mailing, no less) to object to any billing or the fees were automatically added to their secured obligation. This grace period was far too short to be fair, even assuming that any restriction on the right to contest a bill was fair.
For the following reasons, the court will make the following orders and judgments:
1. The Kanes' motion for summary judgment will be granted. The issue of the validity of the deed of trust shall be severed from the remaining issues and a final judgment declaring the deed of trust to be void will be entered pursuant to FRCP 54(b), there appearing to be no just reason for delay.
2. After entry of said judgment, the remainder of this adversary proceeding shall be remanded to state court.
3. The Kanes' Chapter 13 plan will be confirmed, provided that the Chapter 13 trustee certifies that no further objections to confirmation are pending.
Counsel for the Kanes shall submit appropriate forms of orders and judgment.
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