Qudrat S. Kapoor

UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
PACER Cover Sheet
for Electronically Filed Documents
Any data shown here are current as of 	. Any element of information on this form,
except the received date, is subject to change as changes may be made to the Court's official docket.
Case Title:
Case Number:
Document Information
Description:
Date Filed:
Date Entered On
Docket:
Filer Information
Submitted By:
If this form is attached to the document identified above, it serves as an endorsed copy of the
document as it existed on the above date. To confirm that nothing has changed since then,
review the docket.
06/12/06
Qudrat S. Kapoor
00-10814
Memorandum Opinion re: [108-1] Application For Administrative Expenses and for
Equitable Apportionment of any fee earned in bad faith insurance claim by
Jeffries & Rugge, PC .
Received on: 2003-04-01 08:30:22.000
2003-04-01 00:00:00.000
2003-04-01 00:00:00.000
James Burke
Case 00-10814-s7 Doc 123 Filed 04/01/03 Entered 04/01/03 10:17:00 Page 1 of 14

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
QUDRAT KAPOOR,
Debtor. No. 7-00-10814 S
MEMORANDUM OPINION ON JEFFRIES & RUGGE, P.C.'S
APPLICATION FOR ALLOWANCE OF ADMINISTRATIVE FEES
AND FOR EQUITABLE APPORTIONMENT OF ANY FEE
EARNED IN BAD FAITH INSURANCE CLAIM
This matter is before the Court on the Application for
Allowance of Administrative Fees and for Equitable
Apportionment of Any Fee Earned in Bad Faith Insurance Claim
(doc. 108) (“Application”) filed by Daniel J. Behles on behalf
of the firm of Jeffries and Rugge, P.C. ("J&R"), Debtor's
former counsel. The Trustee Oralia Franco filed an objection
pro se (doc. 112), but since has hired the firm of Carpenter &
Chavez to represent her. The United States Trustee ("UST")
also filed an objection (doc. 103). The parties have also
filed briefs: J&R (doc. 117); Trustee (doc. 121); and UST
(doc. 119). This is a core proceeding. 28 U.S.C. §
157(b)(2)(A), (B) and (K).
Debtor, a physician, retained J&R on or about December 3,
1999, to represent him in connection with a pending state
court action and a bad faith litigation action to be filed
against an insurance company and hospital. J&R was employed
on a contingency fee basis and paid $14,952.57 as a retainer.
Case 00-10814-s7 Doc 123 Filed 04/01/03 Entered 04/01/03 10:17:00 Page 2 of 14

Page -2-
J&R filed the actions and conducted research and pursued
discovery. Debtor filed a chapter 7 petition on February 16,
2000. J&R still holds $4,430.88 in the retainer. In an
earlier adversary proceeding before this Court, Adv. No. 00-
1197, the Court determined that the actions filed by the
Debtor were estate property. The chapter 7 trustee did not
continue the employment of J&R in connection with the case.
Instead, the chapter 7 trustee employed Carpenter & Chavez to
represent her in the lawsuit.
J&R claims that any recovery the trustee receives will be
in part due to the services provided by J&R. J&R argues state
law that one cannot accept the benefits of a contract without
assuming the burdens. J&R therefore requests an equitable
apportionment of any fees earned in the case as an
administrative expense. It also claims an attorney's charging
lien.
Trustee objects to J&R's claim, arguing that J&R's claim
is a prepetition unsecured claim. She claims that she did not
employ J&R, and that therefore it is not entitled to an
administrative claim. Furthermore, she claims that J&R has
provided little or no information to her regarding the suit.
The UST also objects to J&R's claims. First, the UST
argues that an attorney's charging lien cannot displace
Case 00-10814-s7 Doc 123 Filed 04/01/03 Entered 04/01/03 10:17:00 Page 3 of 14

Page -3-
priorities of the bankruptcy code. It also argues that J&R
does not have a charging lien because there has not yet been a
recovery. Finally, the UST argues that J&R is not entitled to
an administrative claim because it is not a creditor and also
because it was never employed by the Trustee.
Benefits and Burdens
J&R cites Ulibarri Landscaping Material, Inc. v. Colony
Materials, Inc., 97 N.M. 266, 639 P.2d 75 (Ct. App. 1981) for
the general proposition that one cannot accept the benefits of
a relationship without acknowledging the burdens and
obligations of that relationship. This may be true under
state law. It is certainly true when the trustee assumes a
pre-petition contract. Ashland Petroleum Company v. Appel (In
re B&L Oil Company), 782 F.2d 155, 159 (10th Cir. 1986). See
also 11 U.S.C. § 365(b) (Trustee must cure defaults,
compensate for pecuniary loss and provide assurance of future
performance to assume defaulted executory contract or
unexpired lease.) It is clear from the record, however, that
Trustee has not proposed to assume a contract with J&R.
Therefore, Trustee need not assume the burdens associated with
the contract.
Administrative Claim
Case 00-10814-s7 Doc 123 Filed 04/01/03 Entered 04/01/03 10:17:00 Page 4 of 14

111 U.S.C. § 726(a)(1) provides: "... property of the
estate shall be distributed --
(1) first, in payment of claims of the kind specified in,
and in the order specified in, section 507 of this title ...
211 U.S.C. § 507(a)(1) provides: "The following expenses
and claims have priority in the following order:
(1) First, administrative expenses allowed under section
503(b) of this title..."
311 U.S.C. § 503(b) provides, in part:
(b) After notice and a hearing, there shall be allowed
administrative expenses... including --
(1)(A) the actual, necessary costs and expenses of
preserving the estate ...
(2) compensation and reimbursement awarded under section
330(a) of this title,
(3) the actual, necessary expenses, other than
compensation and reimbursement specified in paragraph (4)
of this subsection, incurred by --
[creditors filing involuntary petition or recovering
property transferred or concealed by the debtor,
creditors connected with criminal prosecution,
creditors making a substantial contribution in a
case under chapter 9 or 11, superceded custodians of
property, certain committee members]
(4) reasonable compensation for professional services
rendered by an attorney or an accountant of an entity
whose expense is allowable under paragraph (3) of this
subsection...
...
Page -4-
Pursuant to 11 U.S.C. § 726(a)(1)1 and § 507(a)(1)2,
administrative expenses allowed under § 503(b)3 are entitled
to priority of payment. The Court of Appeals for the Tenth
Circuit has adopted the widely cited Mammoth Mart test, Cramer
v. Mammoth Mart, Inc. (In re Mammoth Mart, Inc.), 536 F.2d 950
(1st Cir. 1976), for determining eligibility for
administrative expense priority:
Case 00-10814-s7 Doc 123 Filed 04/01/03 Entered 04/01/03 10:17:00 Page 5 of 14

4An exception is recognized for administrative expenses
incurred prior to the filing of a bankruptcy petition that are
compensable under 11 U.S.C. § 503(b)(3)(D) (relating to
parties that have made a substantial contribution to a case
under chapter 9 or 11 only) if those expenses are incurred in
efforts which were intended to benefit and which did directly
benefit the bankruptcy estate. Haskins v. United States (In
re Lister), 846 F.2d 55, 57 (10th Cir. 1988).
Page -5-
[T]he debt must arise from a transaction with the
debtor-in-possession. When the claim is based upon
a contract between the debtor and the claimant, the
case law teaches that a creditor's right to payment
will be afforded first priority only to the extent
that the consideration supporting the claimant's
right to payment was both supplied to and beneficial
to the debtor-in-possession in the operation of the
business.
Isaac v. Temex Energy, Inc. (In re Amarex, Inc.), 853 F.2d
1526, 1530 n.4 (10th Cir. 1988). "What is crucial is what
consideration supports the [claim], and whether such
consideration, or a portion of it, was pre-petition services."
Id. at 1531 (Emphasis in original.) Only post-petition
services that benefit the estate and are provided to the
debtor-in-possession are entitled to priority. Id.
Generally, claims arising from prepetition services to debtor
are not entitled to administrative expense treatment4.
Christian Life Center Litigation Defense Committee v. Silva
(In re Christian Life Center), 821 F.2d 1370, 1373-74 (9th
Cir. 1987). See also Bachman v. Commercial Financial
Services, Inc. (In re Commercial Financial Services, Inc.),
Case 00-10814-s7 Doc 123 Filed 04/01/03 Entered 04/01/03 10:17:00 Page 6 of 14

511 U.S.C. § 330(a)(1) provides: "After notice ... and a
hearing, ... the court may award to ... a professional person
employed under section 327 ...-- [reasonable compensation and
reimbursement of actual necessary expenses].
Page -6-
246 F.3d 1291, 1295 (10th Cir. 2001)("[T]he liability must
arise post-petition; it is not enough that the right to
payment arose after the debtor in possession assumed
control.”).
J&R seeks administrative treatment for its services
provided to the debtor pre-petition. First, under Amarex and
Mammoth Mart J&R is not entitled to administrative priority
because the services were provided on behalf of the debtor
pre-petition, not the Trustee or a debtor-in-possession.
Second, J&R does not fit into any category that would allow
503(b) treatment: (1) the services were not "rendered after
the commencement of the case", see § 503(b)(1)(A); (2) the
claim is not for compensation and reimbursement awarded under
section 330(a)5 because J&R was never hired under section 327,
see § 503(b)(2); (3) sections 503(b)(3) and (4) do not apply
because J&R has never been employed by a creditor of the
debtor, see §§ 503(b)(3) and (4). See generally In re
Albrecht, 245 B.R. 666, 670-71 (10th Cir. B.A.P. 2000).
In summary, J&R is not entitled to priority status as
holder of an administrative claim for its services. To
Case 00-10814-s7 Doc 123 Filed 04/01/03 Entered 04/01/03 10:17:00 Page 7 of 14

Page -7-
nevertheless give J&R an administrative claim would be to
displace the payment priorities of the Code. In re
Studebaker's of Fort Lauderdale, Inc., 104 B.R. 411, 413
(Bankr. N.D. Fla. 1989). Thus, if J&R is entitled to any such
recovery ahead of the non-priority unsecured claims, it will
only be as the holder of a secured claim.
Attorney's Lien
Absent a federal law, "property" and "interests in
property" are determined by reference to state law. Barnhill
v. Johnson, 503 U.S. 393, 398 (1992)(citing McKenzie v. Irving
Trust Co., 323 U.S. 365, 369-70 (1945)). In bankruptcy, state
law controls questions of attorneys’ liens. Electronic Metal
Products, Inc. v. Bittman (In re Electronic Metal Products,
Inc.), 916 F.2d 1502, 1504 (10th Cir. 1990); Weed v.
Washington (In re Washington), 242 F.3d 1320, 1322-23 (11th
Cir. 2001); Matter of Richland Building Systems, Inc., 40
B.R. 156, 157 (Bankr. W.D. Wi. 1984). Therefore, the
determination of whether J&R has a valid attorney's lien
depends on state law.
Cases often distinguish between attorney "retaining"
liens and attorney "charging" liens:
A retaining lien permits the attorney to retain
possession of personal property of the client, such
as a deposit or files, until fees are paid. A
charging lien permits the attorney to satisfy his
Case 00-10814-s7 Doc 123 Filed 04/01/03 Entered 04/01/03 10:17:00 Page 8 of 14

Page -8-
fee claim out of the subject matter of the
litigation.
Electronic Metal Products, 916 F.2d at 1505. See also
Thompson v. Montgomery & Andrews, P.A., 112 N.M. 463, 465, 816
P.2d 532, 534 (Ct. App.), cert. denied 112 N.M. 388, 815 P.2d
1178 (1991); Prichard v. Fulmer, 22 N.M. 134, 159 P. 39, 40
(1916). The lien in this case would be a charging lien,
because J&R seeks to recover from the proceeds of the lawsuit.
Under New Mexico law, an attorney must satisfy a four
part test to have a valid charging lien.
First, there must be a valid contract, either express or
implied. Sowder v. Sowder, 127 N.M. 114, 117, 977 P.2d 1034,
1036 (Ct. App. 1999). The contract does not have to assert
the lien explicitly. Id.
Second, the attorney must recover a fund. Id. This
element is somewhat flexible; the predecessor attorney who has
played some part in the recovery may be paid if a successor
attorney recovers the fund. Rhodes v. Martinez, 122 N.M. 439,
443, 925 P.2d 1201, 1205 (Ct. App. 1996), overruled on other
grounds, Cherpelis v. Cherpelis, 125 N.M. 248, 259 P.2d 973
(1998); see Robison v. Campbell, 99 N.M. 579, 585, 661 P.2d
479, 485 (Ct. App.), cert. denied, 99 N.M. 578, 661 P.2d 478
(1983).
The third requirement is:
Case 00-10814-s7 Doc 123 Filed 04/01/03 Entered 04/01/03 10:17:00 Page 9 of 14

Page -9-
that clear and unequivocal notice be given of the
intention to assert a lien against any judgment or
recovery so that all parties concerned are aware
that no voluntary payment should be made without
protecting the attorney's claim of fees and costs.
Sowder, 127 N.M. at 117, 977 P.2d at 1037 (citing Thompson v.
Montgomery & Andrews, P.A., 112 N.M. at 466, 816 P.2d at 535).
Notice must be given to opposing counsel and opposing
counsel's client and the client of the attorney asserting the
lien. Id. It appears that filing some sort of notice in the
lawsuit is also a prerequisite. See Thompson, 112 N.M. at
466, 816 P.2d at 535 ("Additionally, the attorney claiming a
charging lien should file notice of such lien in the court
file, if suit is then pending, or later, when filed."); Rhodes
v. Martinez, 122 N.M. at 443, 925 P.2d at 1205 ("Camacho
properly filed his lien in the underlying lawsuit before the
Branch firm entered its appearance and later mailed a copy to
the Branch firm. There is no assertion that Camacho gave
inadequate notice of his claim."); Cherpelis, 125 N.M. at 250,
959 P.2d at 975 (attorney filed a motion in the lawsuit for a
charging lien. Notice was not raised as an issue.); Sowder,
127 N.M. at 116-17, 977 P.2d at 1036-37 (Attorney filed notice
in County Clerk's office and District Court invalidated lien
because party did not receive notice that was clear and
unequivocal. Court of Appeals did not decide whether notice
Case 00-10814-s7 Doc 123 Filed 04/01/03 Entered 04/01/03 10:17:00 Page 10 of 14

6In its brief J&R states that it timely filed notice of
its charging lien. Argument in the brief is not evidence,
however. Furthermore, filing the lien may be necessary but
not sufficient notice under the cases discussed above.
7See In re Studebaker's of Fort Lauderdale, Inc., 104 B.R.
at 412-13 ("Bankruptcy does not invalidate a charging lien
perfected prior to the filing of the petition."). See also
Philipbar v. Philipbar, 127 N.M. 341, 345, 980 P.2d 1075, 1079
Page -10-
was proper, but rather invalidated lien because it was not
timely.); Moffat v. Branch, 132 N.M. 412, 49 P.3d 673, 674
(N.M. Ct. App. 2002)(Moffat filed a notice of attorney
charging lien in federal court; lack of notice not discussed).
The fourth requirement for a charging lien is timely
assertion. Sowder, 127 N.M. at 117, 977 P.2d at 1037.
In the present case, the Court lacks the evidentiary
foundation necessary to determine whether J&R has an attorney
charging lien. Relevant portions of the attorney-client
contract are set out in J&R's brief, and it appears that a
lien was within the contemplation of the parties. The Court
cannot determine if proper notice of the lien was given to the
required parties6 or when. Therefore, the Court should deny
the Motion without prejudice to the extent it seeks to
establish an attorney's charging lien.
An issue not discussed in the briefs is whether, when or
how an attorney's charging lien can be perfected under state
law7, whether the automatic stay would have prevented
Case 00-10814-s7 Doc 123 Filed 04/01/03 Entered 04/01/03 10:17:00 Page 11 of 14

(Ct. App. 1999)("A charging lien is perfected by giving clear
and unequivocal notice to all interested parties of the
intention to assert it."). Compare Electronic Metal Products,
916 F.2d at 1505 (Attorney must file notice of lien to perfect
against trustee; applying Colorado law.); Efraim Rosen, Inc.
v. Tavormina (Matter of Armando Gerstel, Inc.), 43 B.R. 925,
929-30 (Bankr. S.D. Fla. 1984), aff'd in part and rev'd in
part on other grounds, 65 B.R. 602 (S.D. Fla. 1986)(Florida's
common law attorney lien perfects through notice and once lien
attaches it relates back in time to commencement of services.)
See also In re Albert, 206 B.R. 636, 640 and n.3 (Bankr. D.
Mass. 1997)(Discussing liens that relate back to commencement
of attorney's services and impact of § 546(b).)
Page -11-
perfection if the lien was not already perfected when the
chapter 7 was filed, and the power of a chapter 7 trustee to
avoid perfection. Therefore, the Court makes no findings or
conclusions related to these issues.
Conclusion
Based on the foregoing, the part of the Application which
seeks an administrative claim will be denied. The part which
seeks the imposition or recognition of an attorney’s lien
against estate property will be denied without prejudice to
J&R proving up an attorney’s lien, establishing that it holds
a secured claim by virtue of the funds which it received
prepetition and still holds, or both. This result is not
inequitable or against common sense, since J&R had the
opportunity to protect its interest, however small or great it
Case 00-10814-s7 Doc 123 Filed 04/01/03 Entered 04/01/03 10:17:00 Page 12 of 14

8 See § 542(e), which requires an attorney to turn over or
disclose to the trustee recorded information relating to the
debtor’s property, subject to “any applicable privilege.”
9 The Trustee suggested the payment of the prepetition
retainer was a preferential transfer (§ 547), Trustee’s
Objection at 1, but the United States Trustee stated that the
payment of the fees would probably not be called into question
unless it were pursuant to § 329. United States Trustee’s
Brief in Opposition to Jeffries and Rugge’s Administrative
Claim for Attorney Fees (doc 119) (“UST Brief”), at 6.
However, § 329 refers to “[A]ny attorney representing a debtor
in a case under this title, or in connection with such a
case...,” and the United States Trustee states that J&R never
represented the trustee, and that “J&R asserts it has always
represented the debtor individually only” [i.e., never as
bankruptcy counsel]. UST Brief, at 1.
Page -12-
might be, through the filing of a retaining lien8 or a
charging lien prior to the petition being filed. If it has
failed to do that, it will have simply contributed to the well
being of the debtor’s estate, as is the situation with all the
other creditors holding non-priority unsecured claims.
If J&R seeks to refile papers to establish a lien against
property of the estate, it must file an adversary proceeding.
See Federal Bankruptcy Rule 7001(2). Similarly, if the
Trustee continues to seek the return of some or all of the
prepetition retainer, see Objection to Jeffries & Rugge,
P.C.’s Application for Allowance of Administrative Fees and
for Equitable Apportionment of Any Fee Earned in Bad Faith
Insurance Claim (doc 112) (“Trustee’s Objection”)9, she too
Case 00-10814-s7 Doc 123 Filed 04/01/03 Entered 04/01/03 10:17:00 Page 13 of 14

Page -13-
must do that in the context of an adversary proceeding.
Federal Bankruptcy Rule 7001(1).
Honorable James S. Starzynski
United States Bankruptcy Judge
I hereby certify that on April 1, 2003, a true and correct
copy of the foregoing was either electronically transmitted,
faxed, delivered, or mailed to the listed counsel and parties.
William H Carpenter
1600 University Blvd NE Ste A
Albuquerque, NM 87102-1724
Daniel J Behles
PO Box 415
Albuquerque, NM 87103-0415
Oralia B. Franco
2000 E Lohman Ste B
Las Cruces, NM 88001-3100
United States Trustee
c/o Atty Leonard Martinez-Metzgar
PO Box 608
Albuquerque, NM 87103-0608
Case 00-10814-s7 Doc 123 Filed 04/01/03 Entered 04/01/03 10:17:00 Page 14 of 14