Schoenmann v. Bach Construction, Inc. et al

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
-1-	MEMORANDUM DECISION
UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
In re
MARIA O. SEGOVIA,
Debtor.
E. LYNN SCHOENMANN, TRUSTEE,
Plaintiff,
vs.
BACH CONSTRUCTION, INC., VICTOR A.
SEGOVIA, an individual, and WELLS
FARGO BANK, N.A.,
Defendants.
BACH CONSTRUCTION, INC.,
Cross-Claimants,
vs.
VICTOR A. SEGOVIA,
Cross-Defendant.
____________________________________
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
Case No. 06-30387 TEC 7
Chapter 7
Adv. Proc. No. 06-3180 TC
MEMORANDUM DECISION
The court conducted a trial in the above-captioned proceeding
from December 3-5, 2007. 	David D. Draper appeared for Bach
Signed and Filed: March 20, 2008
________________________________________
THOMAS E. CARLSON
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
March 20, 2008
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 06-03180 Doc# 88 Filed: 03/20/08 Entered: 03/20/08 16:19:01 Page 1 of
21

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
1 The court has already overruled Victor’s objection to BCI’s
claim. 	See infra at 9, n.15.
2 Maria began working at Wells Fargo in 1974, and worked there
until her termination on October 5, 2005.
3 Maria, her mother Olga, and her sister Patricia held record
title to the Properties as follows: Maria, 50%; Olga, 34%; and
Patricia, 16%.
-2-	MEMORANDUM DECISION
Construction, Inc. (BCI). 	Victor A. Segovia (Victor) appeared on
his own behalf. 	This memorandum constitutes the court’s findings
of fact and conclusions of law regarding BCI’s and Victor’s cross-
claims. 	For the reasons stated herein, the court sustains in part
BCI’s objection to Victor’s claim, and determines that BCI’s
equitable subordination claim is moot. 1
FACTS
In the beginning of 2000, Maria Segovia (Maria), a bank
executive employed by Wells Fargo, 2 owned residential real property
located at 320 Maple Street (the 320 Property) and 322 Maple Street
(the 322 Property), San Francisco, California (collectively, the
Properties). 3
On February 17, 2000 and April 3, 2000, Peter Bach, on behalf
of licensed general contractor BCI, and Maria executed a written
demolition agreement and a written remodel agreement (Remodel
Contract) regarding the 320 Property. 	Both agreements require
Maria to pay BCI its costs plus 20% (10% for overhead, 10% for
BCI’s profit) and provide that payments made more than 10 days
after billing will bear interest at 18% per annum. 	The contracts
include a written estimate that the total cost would be $351,000.
Case: 06-03180 Doc# 88 Filed: 03/20/08 Entered: 03/20/08 16:19:01 Page 2 of
21

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
4 As discussed below, home improvement contracts are highly
regulated in California and must contain certain provisions and
have a format specified by statute. 	See Cal. Bus. & Prof. Code
§ 7159. 	The Remodel Contract did not contain all of the required
provisions and had some formatting errors.
-3-	MEMORANDUM DECISION
The Remodel Contract is printed in at least 10-point typeface; 4
includes a description of the work to be performed; identifies the
start date of the project; specifies payment terms; provides when
and how mechanics’ liens will be released; provides a process for
change orders; contains a notice that contractors are required by
law to be licensed; provides that the parties shall exchange
certificates of insurance; notifies Maria of her right to require
BCI to provide a performance and payment bond; includes a waiver of
Maria’s statutory right to cancel the contract; attaches a two-and-
one-half page addendum regarding the California mechanic’s lien
law; and contains a provision that the prevailing party in
litigation under the contract shall be entitled to reasonable
attorneys fees and expenses.
BCI first billed Maria on March 1, 2000. 	By February 2001,
BCI had billed Maria for $350,000, and Maria had paid all of BCI’s
invoices in full and without complaint. (Plaintiffs’ state-court
trial exhibit no. 101). 	Maria expressed her complete satisfaction
regarding the work BCI had performed on the 320 Property.
(Defendant’s state-court trial exhibit no. 1092). 	Maria also
introduced Peter Bach to a Wells Fargo colleague, recommending BCI
for construction work needed by Wells Fargo. 	(Id.) 	Maria and
Peter Bach had become friends, meeting at family gatherings.
In the spring of 2001, after Maria noticed that her next-door
neighbors had reaped a $1.5 million profit on the sale of their two
flats, she and BCI entered into an oral contract to remodel the 322
Case: 06-03180 Doc# 88 Filed: 03/20/08 Entered: 03/20/08 16:19:01 Page 3 of
21

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
5 The first time BCI charged Maria interest on her late
payments was in November 2003. 	See infra at 5, n.7.
-4-	MEMORANDUM DECISION
Property. (See Defendants’ state-court trial exhibit nos. 1069,
1073, and 1428 at 13:22-28; 14:1-10). 	Throughout 2001 and most of
2002, Maria did not dispute any of BCI’s bills, and did not
complain about the quality of BCI’s work on the 322 Property.
Maria began to complain about the amount of BCI’s bills (but
not the quality of BCI’s work) only when she began to have trouble
refinancing the Properties to pay those bills. (E.g., Defendants’
state-court exhibit nos. 1115, 1119). 	In an e-mail to Peter dated
October 25, 2002, she specifically questioned why BCI had charged
$140,000 more than what the parties had agreed to. (Id., no. 1120).
Peter promptly responded that he was preparing a list of the
additional work Maria had requested. 	(Id., no. 1122).
On November 22, 2002, Maria’s refinance application was
denied. (Id., no. 1126). 	Maria explained to Peter that the
appraised value of the Properties had decreased by $700,000 between
April and November 2002, that the loan-to-value ratio had jumped
from 42% to 71%, and that she could not obtain the loan without a
co-signor. (Id.)
In December 2002, although Maria continued to question Peter
about a limited portion of the amount BCI had charged re the 322
Property, she e-mailed Peter that she would pay BCI the amounts
owing. (Id., nos. 1133, 1137).
Although Maria substantially was behind in payments to BCI,
BCI did not stop work on the 322 Property or charge Maria interest
on her late payments. 5 	BCI offered to meet with Maria to answer her
questions. 	(See Defendants’ state-court trial exhibit no. 1147).
Case: 06-03180 Doc# 88 Filed: 03/20/08 Entered: 03/20/08 16:19:01 Page 4 of
21

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
6 The March Invoice bills Maria for work provided by four
subcontractors for painting, repairing copper gutters, and
installing: (i) a carpet runner for the front stairs, (ii) granite
counters on kitchen and bathroom vanities, (iii) “fireplace
surround”, and (iv) staircase cap. 	The March Invoice also includes
a Home Depot materials charge of $100.
7 $22,403 for interest owed on previous late payments, plus
interest owed for late payment of a November 2002 invoice.
8 The pre-Lawsuit correspondence of the parties is in the
unnumbered file “Segovia v Bach Construction”, submitted into
evidence by Victor for the December 3-5, 2007 bankruptcy-court
trial.
-5-	MEMORANDUM DECISION
On March 27, 2003, BCI issued an invoice showing $15,613 due
for services and materials provided by five subcontractors and one
vendor (the March Invoice). 6 	BCI waived its normal charges for
labor, profit, and overhead, totaling $6,123. 	Maria did not pay
the March Invoice.
On November 14, 2003, BCI issued a new invoice (November
Invoice), which contained the same items in the March Invoice, plus
an additional fee for glass provided by W.J. Banks ($1,591), plus
BCI’s labor ($3,150), plus 20% for overhead and profit ($4,071).
The principal amount of the November Invoice totaled $24,425. 	The
November Invoice also included accrued interest in the amount of
$25,011. 7 	Maria did not pay the November Invoice.
In early December 2003, Maria retained her brother Victor, a
licensed attorney, to handle her dispute with BCI. 	Victor wrote a
letter to counsel for BCI, disputing the March and November
Invoices, and arguing that Maria had ordered BCI to stop all work
on August 28, 2002.
In December 2003, counsel for BCI sent two written offers to
Victor to settle the matter for immediate payment of the principal
amount of $24,425. 8 	When BCI was unable to substantiate $3,000 of
this amount, it offered to reduce its settlement demand to $21,425
Case: 06-03180 Doc# 88 Filed: 03/20/08 Entered: 03/20/08 16:19:01 Page 5 of
21

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
9 The Amended Complaint also names as a defendant the Surety
Company of the Pacific, the alleged bonding company for Defendants.
-6-	MEMORANDUM DECISION
and to extend the settlement deadline. 	On December 19, 2003, BCI
informed Victor that it would file suit, absent immediate
resolution of the dispute. 	BCI mailed Victor a cover page for the
complaint BCI intended to file, and submitted the matter to the
American Arbitration Association.
On February 16, 2004, Victor wrote a letter challenging AAA’s
jurisdiction over the dispute and, on February 17, 2004, filed in
the San Francisco Superior Court a complaint on behalf of Maria,
Olga, and Patricia against BCI and its principals, Peter and Hans
Bach, commencing case no. CGC0-04-428834 (Lawsuit). 	Prior to
filing the Lawsuit, Victor did not give BCI or the Bachs any
specific warning that a suit would be filed, nor is there evidence
that he or any of the other Segovias raised with BCI or the Bachs
any of the claims asserted in the Lawsuit.
Nine days after filing the Lawsuit, Victor filed a first
amended complaint seeking recovery of $973,000 (Amended Complaint).
The Amended Complaint is 30 pages long, and asserts nine claims
against BCI and the Bachs: 9 (1) two fraud claims re alleged
misrepresentations with respect to the remodeling of the
Properties; (2) three reformation-of-contract claims re the
demolition contract, the Remodel Contract, and the oral contract to
remodel the 322 Property, based on alleged violations of Bus. &
Prof. Code § 7159; (3) a section 17200 claim based on alleged
violations of Bus. & Prof. Code § 7159; (4) a claim for alleged
breaches of the covenant of good faith and fair dealing; (5) a
negligence claim (failure of duty to perform and oversee
construction in a competent manner); and (6) unspecified common
Case: 06-03180 Doc# 88 Filed: 03/20/08 Entered: 03/20/08 16:19:01 Page 6 of
21

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
10 This is the amount of the March Invoice. 	See supra at 5,
n.6.
-7-	MEMORANDUM DECISION
counts. 	The fraud claims appear to seek recovery of all amounts
paid to BCI for the remodel of the Properties. 	The section 17200
claim seeks recovery of BCI’s profits. 	In other words, the Amended
Complaint asserts claims well beyond the narrow pre-litigation
dispute regarding the March and November Invoices.
In contrast to the scorched-earth approach of the Segovias,
Bach’s cross-complaint against Maria only sought to recover the
amount owing under the November Invoice.
After the Superior Court denied in toto the Segovias’ two
separate motions for summary judgment, the Lawsuit went to trial
before a jury, beginning September 19, 2005. 	On October 31, 2005,
the jury reached its verdict, finding against the Segovias on all
of their claims (except the 17200 claim, which was to be tried to
by the court). 	The jury found the reasonable value of goods and
services provided by BCI to be $15,189. 10 	On November 22, 2005,
judgment was entered in favor of BCI in the amount of $15,189, with
post-judgment interest thereon at the rate of 10% per annum.
On December 16, 2005, the court held a hearing on BCI’s motion
for attorneys fees and costs. 	On January 4, 2006, the court
entered an order determining that BCI was the prevailing party, and
awarding BCI, pursuant to paragraph 17 of the Remodel Contract,
fees and costs in the amount of $610,731.
On January 27, 2006, the court held a hearing on the Segovias’
claim under Business & Professions Code section 17200, and denied
the claim.
On March 3, 2006, the Superior Court entered an order upon
stipulation of the parties reducing the award of fees and costs to
Case: 06-03180 Doc# 88 Filed: 03/20/08 Entered: 03/20/08 16:19:01 Page 7 of
21

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
11 The only claims Maria scheduled other than a first and
second mortgage are two credit card claims totaling less than
$15,000, a negligence claim by Olga and Patricia for Maria’s
alleged mismanagement of the remodel, the BCI judgment, and a claim
by Victor for attorneys fees and costs.
12 This amount includes interest at ten percent. 	The actual
amount of the claim is $726,000. 	See infra at 11, n.16.
13 On March 8, 2007, the trustee filed an amended complaint.
The amended complaint does not assert any new claims against the
Defendants.
-8-	MEMORANDUM DECISION
$511,076. 	On March 8, 2006, BCI recorded an abstract of judgment
in the amount of $526,265.
On May 17, 2006, Maria, her mother Olga, and her sister
Patricia each filed a chapter 7 bankruptcy case. 11 	On September 15,
2006, Victor filed a secured claim in the amount of $820,830 for
the legal services he provided to Maria beginning on December 1,
2003. 12
On September 25, 2006, the chapter 7 trustee sold the
Properties for $2,240,000, free and clear of the liens asserted by
BCI and Victor.
On December 1, 2006, the chapter 7 trustee filed the above-
captioned adversary proceeding against BCI, Victor, and Wells Fargo
Bank. 	The complaint seeks to avoid and the liens recorded by the
Defendants in the 90 days before the bankruptcy petitions were
filed. 13
On January 18, 2007, BCI answered the complaint and asserted a
cross-claim against Victor, asserting that Victor’s claim should be
disallowed or equitably subordinated, and seeking declaratory
relief.
Case: 06-03180 Doc# 88 Filed: 03/20/08 Entered: 03/20/08 16:19:01 Page 8 of
21

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
14 The trustee expressly consented to BCI’s prosecution of the
equitable subordination claim.
15 This court summarily overruled Victor’s objection to BCI’s
claim because that claim is based on a final state-court judgment
in favor of BCI. 	See, e.g., Exxon Mobil Corp. v. Saudi Basic
Industries Corp., 544 U.S. 280, 284 (2005)(pursuant to Rooker-
Feldman doctrine, lower federal courts lack jurisdiction to review
final determinations of a state court in judicial proceedings).
-9-	MEMORANDUM DECISION
On April 6, 2007, the court granted Victor’s motion to dismiss
BCI’s claim for declaratory relief, and denied Victor’s motion to
dismiss BCI’s claim objections and equitable subordination claim. 14
On May 7, 2007, Victor answered BCI’s cross-complaint and
filed a cross-complaint objecting to BCI’s claim.
Trial on BCI’s and Victor’s cross-claims was held before this
court on December 3-5, 2007.
DISCUSSION
This action presents four issues: (1) BCI’s objection to
Victor’s claim against the bankruptcy estate for prepetition legal
services provided to Maria; (2) BCI’s objection to Victor’s
asserted lien on the Property to secure payment of his fees and
expenses; (3) BCI’s claim for equitable subordination of Victor’s
claim; and (4) Victor’s objection to BCI’s claim. 	The first two
issues are discussed below. 	The third issue is moot, as the
court’s decision to allow Victor’s claim in the amount of $50,000
appears to leave the bankruptcy estate solvent. 	The fourth issue
this court resolved at trial, dismissing Victor’s cross-claim in
its entirety. 15
I. Reasonableness of Attorneys Fees
Victor’s claim for attorneys fees and costs may be allowed
only to the extent it is reasonable. 	Section 502(b)(4) provides
that a prepetition claim based on services performed by an attorney
Case: 06-03180 Doc# 88 Filed: 03/20/08 Entered: 03/20/08 16:19:01 Page 9 of
21

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
-10-	MEMORANDUM DECISION
or insider shall be disallowed to the extent the claim exceeds the
reasonable value of the services performed. 	Victor’s claim is
subject to this limit both on the basis that he acted as Debtors’
attorney, and on the basis that he is an insider of each of the
Debtors. 	§ 101(31)(A)(1). 	Whether attorneys fees are reasonable
for the purpose of section 502(b)(4) is a question of federal law.
Landsing Diversified Properties–II v. First Nat’l Bank & Trust Co.
of Tulsa (In re Western Real Estate Fund, Inc.), 922 F.2d 592, 597
(10th Cir. 1991).
A claim for attorney fees is unreasonable under federal law to
the extent the attorney seeks fees that are disproportionate to the
likely recovery. 	The Ninth Circuit held that prior to commencing
an action, an attorney is obligated to consider:
(a) Is the burden of the probable cost of legal services
disproportionately large in relation to the size of the
estate and maximum probable recovery?
(b) To what extent will the estate suffer if the services
are not rendered?
(c) To what extent may the estate benefit if the services
are rendered and what is the likelihood of the disputed
issues being resolved successfully?
Unsecured Creditors’ Committee v. Puget Sound Plywood, Inc., 924
F.2d 955, 959 (9th Cir. 1991). 	The Ninth Circuit BAP held that a
court may abandon the lodestar approach in determining reasonable
fees where the “time spent by counsel is not helpful because it is
grossly disproportionate to the amount at stake.” 	Digesti & Peck
v. Kitchen Factors, Inc. (In re Kitchen Factors, Inc.), 143 B.R.
560, 562 (9th Cir. BAP 1992). 	Furthermore, the court noted, “an
attorney must scale his or her efforts to the ‘reasonably expected
recovery,’ not the potential optimum recovery.” 	Id.
Case: 06-03180 Doc# 88 Filed: 03/20/08 Entered: 03/20/08 16:19:01 Page 10 of
21

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28 	16 Victor’s proof of claim is for $820,830, but that includes
interest at ten percent. 	In December 2005, Victor recorded a
Voluntary Attorney’s Lien that listed the amount due as $726,000.
-11-	MEMORANDUM DECISION
Although Puget Sound Plywood and Kitchen Factors interpret the
meaning of “reasonable” compensation under section 330 (governing
counsel employed by the bankruptcy estate), similar principles
should govern the interpretation of “reasonable” fees under section
502(b)(4) (governing counsel employed by debtor prepetition). 	See
In re Boulders on the River, Inc., 169 B.R. 969, 979 (Bankr. D.
Ore. 1994) (large fee in action that attorney should have known
would be fruitless is not “reasonable” for purpose of section
506(b)). 	The Supreme Court has stated that an attorney should not
in any context be compensated for hours that are not reasonably
expended.
The district court also should exclude from this
initial fee calculation hours that were not “reasonably
expended.” . . . just as a lawyer in private practice
ethically is obligated to exclude such hours from his fee
submission. 	“In the private sector, ‘billing judgment’
is an important component in fee setting. 	It is no less
important here. . . .”
Hensley v. Eckerhart, 461 U.S. 424, 434 (1983).
The basic outlines of the present case invite close
examination as to whether Victor exercised appropriate billing
judgment. 	At the time Victor filed an action on behalf of Debtors,
BCI had claimed it was due $49,436, had indicated it was willing to
accept $21,425, and had not initiated legal action against Debtors.
The Amended Complaint sought recovery of the entire $973,000
Debtors had paid BCI. 	The trial court awarded judgment against
Debtors in the amount of $526,625 ($15,189 on BCI’s original claim
plus a fee award of $511,076). 	For visiting this disaster upon
Debtors, Victor asserts a claim for $726,000 in fees and costs. 16
Case: 06-03180 Doc# 88 Filed: 03/20/08 Entered: 03/20/08 16:19:01 Page 11 of
21

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28 17 Section 7159 details precisely what language home
improvement contracts must contain, such as what must be on the
first and last pages of the contract, what the headings must say,
and the minimum permissible font size.
-12-	MEMORANDUM DECISION
In determining whether Victor exercised appropriate billing
judgment, the court must first determine the reasonably expected
recovery in the action. 	This should be done free of hindsight,
viewing the question in light of the facts and circumstances
evident at the time.
The Amended Complaint filed by Victor sought recovery of the
entire $973,000 Debtors had paid BCI. 	The first cause of action
asserted that BCI had defrauded Debtors by estimating that the work
on the 320 Property would cost $256,000, and then claiming and
collecting $324,608. 	The second cause of action asserted that BCI
had defrauded Debtors by estimating that the work on the 322
Property would cost $250,000 and then claiming and collecting
$647,399. 	The third through fifth causes of action asserted that
the contracts between BCI and Debtors violated the requirements of
section 7159 of the Business and Professions Code and were
therefore void. 	The sixth and seventh causes of action asserted
that BCI had violated Business and Professions Code 17200 and the
implied covenant of good faith and fair dealing.
It was unlikely that Debtors would prevail on their claims
under section 7159 to void the contracts and recover all the
amounts paid to BCI. 	Admittedly, the written Remodel Contract re
the 320 Property did not comply with all of the technical
strictures of Business & Professions Code section 7159, 17 and the
oral contract re the 322 Property wholly failed to comply with that
section. 	The California Supreme Court held, however, that in
appropriate circumstances, contracts violating section 7159 will be
Case: 06-03180 Doc# 88 Filed: 03/20/08 Entered: 03/20/08 16:19:01 Page 12 of
21

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
-13-	MEMORANDUM DECISION
enforced in order to “‘avoid unjust enrichment to a defendant and a
disproportionately harsh penalty upon the plaintiff.’” 	Asdourian
v. Araj, 38 Cal.3d 276, 292 (1985) (citation omitted). 	In the same
decision, the court cited with approval a prior decision enforcing
a wholly oral home improvement contract in circumstances much like
those of the present case. 	Id. at 293-94 (citing Calwood
Structures Inc. v. Herskovic, 105 Cal. App. 3d 519 (1980)). 	In
Asdourian and Calwood, as in the present case, the homeowner was
sophisticated, the homeowner and builder were social friends who
had past business dealings, the contractor performed according to
the parties’ agreement, and the homeowner accepted the improvements
provided by the contractor. 	Id. at 293. 	Victor should have known
that, given the similarity of the facts at issue to those in
Asdourian and Calwood, a court would be unlikely to void the
contracts between Maria and BCI, and that BCI likely would be
allowed to recover on a quantum meruit basis.
Victor should have known that Plaintiffs were no more likely
through their fraud claims to be able to recover money already
paid. 	Maria, a sophisticated businesswoman, voluntarily paid all
of the amounts billed re the 320 Property. 	She questioned only
$140,000 of the amounts billed re the 322 Property. 	Furthermore,
after questioning BCI regarding the scope of services provided to
remodel the 322 Property, Maria voluntarily paid all but $49,436 of
the billed amount ($647,399). 	In total, Maria paid $972,000 (95%)
of the approximately $1,031,443 billed by BCI. 	In such
circumstances, it is unlikely that she would recover these payments
under a fraud theory. 	See American Oil Service v. Hope Oil Co.,
194 Cal. App. 2d 581, 586 (1961) (“a payment voluntarily made with
Case: 06-03180 Doc# 88 Filed: 03/20/08 Entered: 03/20/08 16:19:01 Page 13 of
21

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
18 This doctrine does not impair Plaintiffs’ claims regarding
the disputed March and November Invoices.
19 This court could find no other decision that addressed
whether a violation of section 7159 was an unfair business practice
under section 17200.
-14-	MEMORANDUM DECISION
knowledge of the facts affords no ground for an action to recover
it back.”). 18
Victor did have some basis to expect that Plaintiffs might
require BCI to disgorge the profits earned on the Project. 	An
unreported California appellate decision held that the failure to
use a written contract containing the provisions required under
section 7159 can constitute an unfair business practice under
Business and Professions Code 17200. 	Mallery-Feiner Co. v. Tersol,
2002 WL 31854956 (Cal. App. 6th Dist. 2002). 19 	The court held that
the contractor could be required to disgorge the profit earned,
even though the contractor was allowed some recovery in quantum
meruit under Asdourian to prevent unjust enrichment. 	Plaintiffs
had at least a colorable claim for such relief, because the written
contract for the 320 Property did not satisfy all the requirements
of section 7159, and there was no written contract for the 322
Property.
It should be noted, however, that Plaintiffs’ claims under
section 17200 were weaker factually than those at issue in Tersol.
The contractor in Tersol had provided no written contract
whatsoever. 	Id. at 3. 	In the present case, BCI provided an
extensive written contract for remodel of the 320 Property in which
the deviations from the requirements of section 7159 were minor,
and the work on the 322 Property could be construed as an expansion
of the project re the 320 Property. 	See supra pp. 3-4. 	In
Asdourian, the California Supreme Court noted with apparent
Case: 06-03180 Doc# 88 Filed: 03/20/08 Entered: 03/20/08 16:19:01 Page 14 of
21

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
20 BCI’s profit was a ten-percent markup applied to materials
and labor. 	BCI added another ten-percent markup for overhead.
Thus, on costs of $100,000, profit would be $10,000 and overhead
would be $10,000, yielding a total amount due of $120,000. 	The
appropriate formula for determining profit from the total amount
paid is: profit = total/12. 	Using this formula, the profit earned
by BCI on the $973,000 paid was $81,083.
21 The jury awarded BCI the amount of the March Invoice, which
waived interest, and not the amount of the November Invoice, which
included interest.
22 See supra at 9, n.14.
-15-	MEMORANDUM DECISION
sympathy that many contractors remain unaware of all of the highly
technical regulations governing home improvement contracts.
Asdourian, supra, 38 Cal 3d at 294, n.12.
Had Plaintiffs prevailed on the section 17200 claim, they
would likely have recovered approximately $81,000. 	Plaintiffs paid
BCI approximately $973,000, which included a ten-percent profit. 20
It thus appears that Plaintiffs had a reasonable possibility
of recovering less than $150,000. 	They had a reasonable chance of
disputing the approximately $25,000 BCI claimed due but that
Plaintiffs had not yet paid. 	They appear to have been successful
in disputing BCI’s claim for approximately $25,000 in prejudgment
interest. 21 	Based on Tersol, Plaintiffs had a reasonable
possibility of requiring BCI to disgorge profits of approximately
$80,000.
I find that the $726,000 Victor seeks 22 is grossly
disproportionate to the amount realistically at stake in the
litigation. 	In such circumstances, this court need not determine
the amount to be allowed on a lodestar basis, and may instead
calculate a reasonable fee from the amount recovered or some other
Case: 06-03180 Doc# 88 Filed: 03/20/08 Entered: 03/20/08 16:19:01 Page 15 of
21

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
23 An additional reason for not calculating the fee to be
allowed on the basis of time spent is that Segovia acknowledges
that he does not have contemporaneous time records. 	He testified
that his original time records were lost when he dropped his
computer, and that he had to reconstruct his time.
-16-	MEMORANDUM DECISION
measure of what was at stake in the litigation. 23 	Puget Sound
Plywood, supra, 924 F.2d at 959-61; Kitchen Factors, supra, 143
B.R. at 563.
I find that $50,000 is the maximum amount that can be allowed
to Victor as reasonable compensation. 	In so finding, I rely upon
the following facts and circumstances. 	First, Victor should have
known that the maximum recovery Plaintiffs were likely to obtain
was less than $150,000. 	Second, Victor should have known that any
substantial recovery was highly questionable: (a) because the court
was likely to allow quantum meruit under Asdourian; (b) because
Maria had paid without protest virtually the entire amount BCI
sought as quantum meruit; and (c) because the case for disgorgement
or profits was weaker than in Tersol, where the contractor never
supplied any written contract. 	Thus, Victor had reason to know
that Plaintiffs might lose and be forced to pay BCI’s fees. 	Third,
Victor acknowledges that Plaintiffs have already reimbursed him
$150,000 for costs. 	Had Victor properly scaled his efforts to the
maximum likely recovery, the costs incurred would have been much
less. 	The $50,000 allowed claim is intended to be all-inclusive,
and Victor is not allowed any additional recovery for costs.
Fourth, the results achieved were not good. 	In fact, the results
achieved were a disaster for Plaintiffs. 	BCI had offered to accept
$21,425 in full satisfaction of its claim. 	Plaintiffs ended up
owing BCI $526,625.
Case: 06-03180 Doc# 88 Filed: 03/20/08 Entered: 03/20/08 16:19:01 Page 16 of
21

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
-17-	MEMORANDUM DECISION
II. Validity of Attorney Lien
BCI contends that Victor’s lien against the Property is
invalid, because it does not comply with California Rule of
Professional Conduct 3-300. 	Under that Rule, an attorney who takes
a lien on property of a client to secure repayment of fees acquires
an interest that is adverse to the interest of the client.
Fletcher v. Davis, 33 Cal.4th 61, 68-70 (2004). 	An attorney may
properly take such a lien only under the following circumstances.
(A) The transaction or acquisition and its terms are
fair and reasonable to the client and are fully disclosed
and transmitted in writing to the client in a manner
which should reasonably have been understood by the
client; and
(B) The client is advised in writing that the client
may seek the advice of an independent lawyer of the
client’s choice and is given a reasonable opportunity to
seek that advice; and
(C) The client thereafter consents in writing to the
terms of the transaction or the terms of the acquisition.
Cal. R. Prof. Conduct 3-300.
The written attorney lien Victor relies upon was executed in
two separate stages that occurred two years apart.
On December 1, 2003, Olga, Patricia, Maria, and Victor
executed a written fee agreement (the Fee Agreement). 	The Fee
Agreement provides in writing that Victor will have a lien on any
recovery obtained from BCI and on the clients’ real property.
Clients grant Attorney a lien on all their claims
and causes of action that are the subject of the
representation of Clients under this Agreement, on all
proceeds of any recovery obtained (whether by settlement,
arbitration award, or court judgment) and on all real
property for attorney’s fees and costs advanced. . . . If
there is no settlement or no recovery or the recovery is
insufficient to reimburse Attorney in full for
outstanding attorneys fees earned and costs advanced,
Clients grant Attorney permission to file a notice of
lien upon their real property in substantially the same
form as shown in Attachment 2.
Fee Agreement, ¶ 11 (emphasis added).
Case: 06-03180 Doc# 88 Filed: 03/20/08 Entered: 03/20/08 16:19:01 Page 17 of
21

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
-18-	MEMORANDUM DECISION
The Fee Agreement informs the clients that they can retain
independent counsel at their own expense to advise them regarding
the Fee Agreement. 	It is unclear whether a blank attorney lien
form was actually attached to the Fee Agreement that was submitted
to the clients. 	There is no evidence that the attorney lien form
was completed and signed by the clients before December 2005 (two
years after execution of the Fee Agreement). 	It is also unclear
how much time the clients were afforded to consult independent
counsel between the time they were presented with the Fee Agreement
and the time they signed that Agreement.
On December 16, 2005, Olga, Patricia, and Maria signed a form
entitled California Voluntary Attorney’s Lien that Victor had
completed (the Lien Form). 	The Lien Form specified the amount of
fees to be secured as $726,000, and identified the Property by
assessor’s parcel, street address, and metes and bounds. 	The Lien
Form was recorded on the same day it was signed. 	The Lien Form
does not inform the clients that they may consult independent
counsel before executing the form. 	It is not clear how much time
the clients were afforded to consult independent counsel between
the time they were presented with the Lien Form and the time they
signed that form.
Victor did not explain to his clients either orally or in
writing, either in 2003 or in 2005, that his holding a lien on the
Property could enable him to force a sale of their residence
without their consent. 	Nor did he explain that his holding a lien
on the Property could prevent them from selling or borrowing
against the Property without either paying his lien in full or
obtaining his consent. 	None of the clients at any time actually
Case: 06-03180 Doc# 88 Filed: 03/20/08 Entered: 03/20/08 16:19:01 Page 18 of
21

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
-19-	MEMORANDUM DECISION
consulted independent counsel about the Fee Agreement or the Lien
Form.
Based on the facts set forth above, I determine that the
attorney lien asserted by Victor is not an enforceable lien created
in compliance with Rule 3-300.
The Fee Agreement does not create an enforceable lien, because
it does not adequately describe the property to be encumbered. 	The
asserted attorney lien is technically a mortgage, because it
provides that real property is “hypothecated for the performance of
an act.” 	Cal. Civ. Code § 2920. 	A mortgage can be created only
via a writing “executed with the formalities required in the case
of a grant of real property.” 	Id. § 2922. 	Real property can be
adequately identified by assessor’s parcel, street address, or
metes and bounds. 	12 Witkin, Summ. of Calif. Law, Real Property
§ 271 (10th ed. 2005). 	The reference in the Fee Agreement to: “all
real property” and “their real property” does not remotely satisfy
this standard.
The Lien Form does not comply with Rule 3-300, because it does
not inform the clients that they may consult with an independent
attorney regarding the creations of the lien. 	Although the Fee
Agreement did contain the required statement, it would be wholly
inappropriate to read the two documents together and thereby treat
the Fee Agreement as curing this defect in the Lien Form. 	The
clients received the completed Lien Form more than two years after
they signed the Fee Agreement.
Based on the finding that the attorney lien asserted by Victor
does not comply with Rule 3-300, I conclude that the lien is not
enforceable. 	Although Rule 3-300 does not specify the remedy to be
Case: 06-03180 Doc# 88 Filed: 03/20/08 Entered: 03/20/08 16:19:01 Page 19 of
21

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
-20-	MEMORANDUM DECISION
applied upon breach, the California Supreme Court has held that an
attorney lien that does not comply with Rule 3-300 is invalid.
We therefore conclude that an attorney who secures
payment of hourly fees by acquiring a charging lien
against a client’s future judgment or recovery has
acquired an interest that is adverse to the client, and
so must comply with the requirements of rule 3-300.
Fletcher failed to comply with the rule. 	Accordingly,
Fletcher’s lien may not be enforced in this proceeding.
Were we to hold otherwise, “we would, in effect, be both
countenancing and contributing to a violation of a rule
we formally approved in order to ‘to protect the public
and to promote respect and confidence in the legal
profession.’”
Fletcher, supra, 33 Cal.4th at 71-72 (citations and footnotes
omitted).
CONCLUSION
For the reasons stated above, the claim filed by Victor
Segovia is allowed only in the amount of $50,000 and only as a
general unsecured claim. 	The California Voluntary Attorney’s Lien
recorded on December 16, 2005 shall have no force or effect.
**END OF MEMORANDUM DECISION**
Case: 06-03180 Doc# 88 Filed: 03/20/08 Entered: 03/20/08 16:19:01 Page 20 of
21

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
-21-	MEMORANDUM DECISION
Court Service List
Daniel M. Linchey, Esq.
Goldberg, Stinnett, Meyers and Davis
44 Montgomery Street, Suite 2900
San Francisco, CA 94104
David B. Draper, Esq.
Law Offices of Terra Law
177 Park Avenue, 3rd Floor
San Jose, CA 95113
Victor A. Segovia, Esq.
Segovia Law Office
712 Bancroft Road, Suite 268
Walnut Creek, CA 94521
Austin P. Nagel, Esq.
Law Offices of Austin P. Nagel
5776 Stoneridge Mall Road
Suite 360
Pleasanton, CA 94588
Michael C. Fallon, Esq.
Law Offices of Michael C. Fallon
100 E Street, Suite 220
Santa Rosa, CA 05404
Case: 06-03180 Doc# 88 Filed: 03/20/08 Entered: 03/20/08 16:19:01 Page 21 of
21