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IN RE SAMUEL AUGUST & CO.

April 23, 1964

In the Matter of SAMUEL AUGUST & CO., Inc., Bankrupt


The opinion of the court was delivered by: WORTENDYKE

This case comes before the undersigned on petition for review of an order of Honorable William H. Tallyn, Referee in Bankruptcy, dated October 23, 1963.

The Findings of Fact made by the Referee (included in his Certificate of Review) are not challenged. They are as follows:

 'On July 12, 1963, Myron S. Lehman, Esquire, was retained by Samuel August & Co., Inc. to represent the corporation with respect to its financial difficulties. The corporation agreed to pay Mr. Lehman a fee of $ 2,000.00 for his services. Only $ 350.00 of this fee has been paid. Mr. Lehman attempted to effect a common-law settlement with the creditors of Samuel August & Co., Inc., but the creditors demanded that an assignment for their benefit be made to their attorney. Such an assignment was made on July 31, 1963.

 'On August 6, 1963 an involuntary petition in bankruptcy was filed against Samuel August Co. Inc., and on August 14th, the receiver in bankruptcy obtained an order directing Mr. Lehman to surrender the books and records of the corporation. This order was made without prejudice to Mr. Lehman's claim to an attorney's retaining lien on the books and records.

 'Subsequently, the corporation was adjudicated bankrupt; and Mr. Lehman moved for an order establishing the validity of his attorney's retaining lien on the books and records. This motion was heard on August 20, 1963 and again on September 10th, at which time decision was reserved.

 'An order denying the application of Mr. Lehman was entered on October 23, 1963. His petition for review of this order was filed within time.'

 The Referee concluded as a matter of law that where a corporation makes an assignment for the benefit of its creditors, there no longer remains in the assignor any property on which its attorney can claim a retaining lien, especially when the attorney claiming the lien participated as the attorney for the assignor in making the assignment. The Referee therefore held that petitioner did not have a retaining lien on the bankrupt's books and records and that the trustee in bankruptcy held title to the books and records by virtue of Section 70, sub. a of the Bankruptcy Act, 11 U.S.C. § 110, sub. a.

 Petitioner argues that, under Brauer v. Hotel Associates, Inc., 1963, 40 N.J. 415, 192 A.2d 831, he has an attorney's retaining lien on the bankrupt's books and records which was not lost by the transfer of those books and records to the receiver pursuant to the Referee's order, which made the transfer subject to any such lien.

 The trustee contends that the Referee should be upheld in concluding that, under the New Jersey statutes governing assignments for benefit of creditors, such an assignment constitutes a loss of any such retaining lien and an attorney's participation in such an assignment amounts to a voluntary waiver by him of any such lien. The Referee had concluded that the Brauer case, supra, was not controlling because it involved the appointment of a receiver in a creditor's suit under the New Jersey corporate insolvency statute.

 While the existence and effect of the right to an attorney's retaining lien is fixed by state law, Donaldson, Hoffman & Goldstein v. Gaudio, 10 Cir. 1958, 260 F.2d 333, 335, the right to assert such a retaining lien against a bankrupt is determinable exclusively by the bankruptcy court, Jackson v. Vance, 10 Cir. 1949, 179 F.2d 154, 157, cert. den. 1950, 339 U.S. 937, 70 S. Ct. 673, 94 L. Ed. 1355, in accordance with Federal law, Halpert v. Industrial Commissioner, 2 Cir. 1945, 147 F.2d 375, 376; 4 Collier on Bankruptcy, 14th Ed. para 70.70(2), pp. 1523-1526. See also In re Pack-It, Inc., D.C.N.J.1958, 158 F.supp. 148, and In re Mayfair Construction Co., D.C.N.J. 1959, 170 F.Supp. 657.

 Under New Jersey law, an attorney has a common law retaining lien in all papers, books, documents, securities, moneys and property of the client which come into the attorney's possession in the course of and with reference to his professional employment. It gives the attorney only the right to retain possession of the client's property until the entire balance due him for legal services is paid. The effectiveness of the lien is not measured by the value of the property but by the inconvenience to the client in being denied access to his property, i.e., the subjective worth to the client. If the client, or his representative, considers the elimination of the inconvenience to be as valuable as the amount due the attorney, that amount will be paid to dissolve the lien. Brauer v. Hotel Associates, Inc., supra, 40 N.J. 419-420, 422-423, 192 A.2d 831.

 The retaining lien, created before the insolvency of a New Jersey corporation, is not dissolved by the insolvency of the corporation and the appointment of a receiver pursuant to N.J.R.S. 14:14-1 et seq., N.J.S.A., and the statutory receiver takes title to the corporation's property subject to any such retaining lien which could have been asserted against the corporation prior to the appointment of the receiver, Brauer v. Hotel Associates, Inc., supra, 40 N.J. 421-422, 192 A.2d 831.

 Although N.J.S 2A:19-1, N.J.S.A., as pointed out by the Referee, provides that a general assignment for benefit of creditors transfers all of the debtor's property, such an assignment and the assignee's title are subject to all valid liens existing against the assigned property at the date of the assignment, West Hudson County Trust Co. v. Wichner, Ch.1936, 121 N.J.Eq. 157, 160, 187 A. 579. And see N.J.S. 2A:19-13, N.J.S.A., which gives the assignee only the power to dispose of the assigned property which the assignor had at the date of the assignment. Consequently, an attorney's retaining lien created on property before the assignment should survive such an assignment by a corporation as it would an insolvency of the corporation under Brauer, supra. The fact that the former transfer was voluntary and prepared by the attorney and the latter was involuntary does not change the result. In either case, the transfer could convey no more than the debtor owned and would be subject to any valid retaining lien on the debtor's property. Such a retaining lien would not, therefore, be dissolved by a general assignment for benefit of creditors under N.J.S. 2A:19-1 et seq., N.J.S.A.

 The retaining lien in this case would not be void under N.J.S. 2A: 19-3, N.J.S.A., because, on the facts before me, the bankrupt's retainer agreement with and the transfer of its books and records to the attorney was not with the intention of preferring any creditor, including the attorney, but rather for the purpose of compromising the claims of creditors. Nor under New Jersey law did the attorney's surrender of the books and records, pursuant to the order of the bankruptcy court directing him ...


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