Unpublished Disposition, 857 F.2d 1478 (9th Cir. 1987)

MEMORANDUM^* 

Appellant Herbert Wolas, trustee in bankruptcy for appellee Herman Kaye, appeals the district court's orders (1) denying his motion to be substituted as the plaintiff; and (2) distributing $125,000 to the attorneys who represented Kaye in the civil rights action against the City of Los Angeles (the "City"). We vacate and remand.

FACTS

Herman Kaye brought a civil rights action against Los Angeles and several of its police officers in 1983. The action alleged that certain officers illegally deprived Kaye of his civil rights by wrongfully procuring an arrest warrant and by concealing exculpatory information about him. After three and a half years of discovery, the parties stipulated to a settlement by which Kaye agreed to dismiss his action and Los Angeles agreed not to oppose the expungement of Kaye's criminal record. The settlement also stated that Kaye would take nothing monetarily by it, but that Los Angeles would pay directly to Kaye's attorneys, fees of $125,000. An order approving the settlement was filed by the district court on April 8, 1987.

The next day, Kaye filed for bankruptcy under Chapter 7; Herbert Wolas was appointed trustee. Following conversations with Wolas' attorneys, the City refused to disburse to Kaye's civil rights attorneys the funds agreed to in the settlement. On June 8, 1987, Kaye's attorneys, Leonard Levine and Joseph Fischbach, filed an ex parte application in the district court seeking an order directing disbursement of the settlement funds. Wolas filed an opposition, contending that the settlement, having been signed within 90 days before the filing for bankruptcy, was a voidable preferential transfer under 11 U.S.C. § 547 and that the $125,000 in fees belonged to the estate.

In an order dated June 16, 1987, the district court directed the City to issue a check for the agreed amount and stated: "The Court finds that plaintiff acquired no rights in the monetary payment contained in the Stipulation for Settlement and Dismissal filed April 8, 1987." On July 7, Wolas filed a motion requesting: (1) a clarification of the June 16 order to specify whether the court found that Kaye transferred an interest in property; (2) an extension of time to file a notice of appeal from the order distributing settlement proceeds; and (3) the substitution of Wolas as plaintiff pursuant to Fed. R. Civ. P. 25(c). On July 14, the court issued an order scheduling a hearing date for the motion for clarification, extending the time for appeal until 30 days after its entry of an order on the motion for clarification and denying Wolas's Rule 25 motion for substitution.

Six days later, a hearing was held on Wolas's motion for clarification, at which the court heard arguments from counsel for the City, for Wolas, and for Kaye. The court granted Wolas's motion for clarification, stating in its order: " [No] transfer of an interest in property of the Debtor, and his successor-in-interest, the Trustee, occurred by the signing by the parties of ... the Stipulation for Settlement...." Wolas filed a notice of appeal on August 18, 1987.

JURISDICTION

The district court's order denying Wolas's motion to be substituted as the plaintiff was filed on July 14, 1987. Wolas did not file notice of appeal until 35 days later, on August 18. The appeal was not timely, and we therefore lack jurisdiction to review the order denying substitution. Fed. R. App. P. 4(a).

As to the order distributing the settlement proceeds, however, the court extended the time for appeal until 30 days after it entered its order on Wolas' motion for clarification. That order was filed July 20. Accordingly, Wolas' notice of appeal was timely, and we have jurisdiction pursuant to 28 U.S.C. § 1291.

DISCUSSION

The question before us is whether the district court erred in ordering the distribution of the settlement proceeds to Kaye's attorneys. Wolas argues that the civil rights suit against the City was an "interest" belonging to Kaye and that any fees recovered pursuant to the action also belonged to Kaye. Under 11 U.S.C. § 547(b) (4) (A), a trustee in bankruptcy may avoid a transfer of an interest of the debtor made within 90 days before the debtor filed for relief. Wolas contends that, by signing an agreement that made fees for services already rendered "payable solely and only" to the lawyers, Kaye transferred an interest in payment of an antecedent debt. Payments for antecedent debts are avoidable under 11 U.S.C. § 547(b) (2).

This appeal thus turns on whether Kaye ever had an interest in the attorneys' fees. If he did, his agreement to the settlement would constitute an avoidable transfer, unless monies recovered as part of a civil rights suit do not become property of a bankruptcy estate under 11 U.S.C. § 541(a) (1).¹  If Kaye did not have an interest, then he obviously had nothing to transfer and the settlement would stand.

Unfortunately, we are unable to decide on the record before us whether Kaye had an interest in the fees. The district court determined that he did not, but based that ruling on its conclusion of law that attorney's fees under 42 U.S.C. § 1988 "go to the counsel rather than result [ing] in a windfall to a litigant." Tr. of 7/20/87 Hearing at 33. The court's reliance on 42 U.S.C. § 1988 was misplaced. While Kaye's action was brought under 42 U.S.C. §§ 1983 and 1988, the award of fees was made pursuant to a settlement between the parties, not an award of fees under Sec. 1988 made by the court as a statutory award. Thus, it was to the settlement, not to the civil rights statute, that the court should have looked to determine whether an avoidable transfer had occurred.

The intention of the City of Los Angeles in agreeing that the fees be paid directly to the attorneys is central to determining whether Kaye transferred an interest. It is possible, for example, that Los Angeles may have insisted on specifying that only the lawyers would receive the fees. The City may have a set policy of paying fees directly to attorneys, to discourage litigants from bringing speculative Sec. 1983 actions in hopes of landing a windfall. If it is, in fact, City policy never to agree to pay fees directly to a litigant, or would not have settled this case if any portion of the proceeds went to Kaye, the settlement probably did not constitute a transfer by Kaye. Since Kaye could not in any case have convinced the City to pay him directly, he had nothing to transfer.

If, on the other hand, Los Angeles merely regarded the $125,000 as the price of the settlement and was not concerned with who received it, the direct payment to the lawyers may have been an avoidable preference. If the City cared only about settling the suit, then it was Kaye's decision to agree to direct the $125,000 to his attorneys. Since his debt to his attorneys was antecedent, his payment could represent a prepetition preference of one creditor over others--precisely the type of transfer section 547 empowers the trustee to avoid.²  In the event Los Angeles would have been willing to pay Kaye, the district court should also have looked into the fee agreement between Kaye and his attorneys to determine whether the fee arrangement was protected by a lien on the claim for relief enforceable under California law or other device that would avoid the preference.

Because it interpreted the attorneys' fees provision in the settlement as mandated by Sec. 1988, the district court made no findings of fact as to the parties' intention in structuring the settlement as it did. Our court has held that under Fed. R. Civ. P. 52(a), " [w]hen a trial court's findings of fact do not support the judgment, the appellate court may vacate and remand for further findings." In re Financial Securities Litigation, 729 F.2d 628, 630 (9th Cir. 1984). Although most rulings on motions, such as the motion for clarification here, do not by the terms of Rule 52 require such findings, we will nonetheless remand anytime "both the trial court's determination and our review are particularly dependent on factual considerations." Dias v. Bank of Hawaii, 764 F.2d 1292, 1295 (9th Cir. 1985) (per curiam). See also 9 Wright & Miller, Federal Practice and Procedure Secs. 2575, 2577 at 694, 697 (1971).

In this case, both our review and the district court's ruling depend entirely on specifying what, if anything, Kaye gave up by agreeing to the settlement. Before we can assess the validity of the district court's ruling, it must determine in the first instance whether the settlement terms were at the instance of Kaye and his attorneys or that of the City to pay directly to the lawyers. The district court may also need to determine the nature of the fee arrangement between Kaye and his attorneys and its legal consequences. Since the record is silent, we vacate and remand so that the district court can undertake factfinding consistent with this opinion and make such determinations of law as its findings require.

VACATED AND REMANDED.