Dolores Gebhardt (Courtesy photo)
For matrimonial attorneys, getting paid—rarely an easy feat—has become more difficult. An unintended consequence of the 2016 amendments to the Domestic Relations Law has rendered the common law and statutory right to a charging lien unenforceable in many matrimonial cases.
The common law right is codified in Judiciary Law §475, which provides in relevant part:
From the commencement of an action…the attorney who appears for a party has a lien upon his or her client’s cause of action, claim or counterclaim, which attaches to a verdict, report, determination, decision, award, settlement, judgment or final order in his or her client’s favor, and the proceeds thereof in whatever hands they may come; and the lien cannot be affected by any settlement between the parties before or after judgment, final order or determination…
The purpose of Judiciary Law §475 is to “protect an attorney against the knavery of his client.” Freihofner v. Freihofner, 8 Misc.3d 1020(A), 803 N.Y.S.2d 18, (Supreme Ct., Westchester County 2005), affd., 39 A.D.3d 465, 835 N.Y.S.2d 234 (2d Dept. 2007), quoting Matter of City of New York (United States of America-Coblentz), 5 N.Y.2d 300, 157 N.E.2d 587, 184 N.Y.S.2d 585 (1959), cert. denied sub nom. United States v. Coblentz, 363 U.S. 841 (1960). Parties may not collude and intentionally structure their settlement in a way that defeats an attorney’s claim for fees. Haser v. Haser, 271 A.D.2d 253, 707 N.Y.S.2d 47 (1st Dept. 2000) (Parties in a matrimonial action intentionally termed wife’s equitable share of husband’s medical license “additional child support.”)
In a matrimonial action, the question is: To what proceeds may the charging lien attach? What is the “verdict, report, determination, decision, award, settlement, judgment or final order in [the] client’s favor”?
The possible financial issues in a matrimonial case, and thus the potential transfer of funds from one spouse to the other, are (i) spousal support (maintenance); (ii) child support; and (iii) equitable distribution of the marital assets and debts. As we will see, a charging lien will not attach to either (i) or (ii).
A charging lien may not attach to maintenance awards. Turner v. Woolworth, 221 N.Y. 425, 117 N.E. 814 (1917); Rosen v. Rosen, 97 A.D.2d 837, 468 N.Y.S.2d 723 (2d Dept. 1983).
Several courts have held that as a matter of public policy, a charging lien may not attach to an award of child support. Haser v. Haser, 271 A.D.2d 253, 707 N.Y.S.2d 47 (1st Dept. 2000); Shipman v. City of New York Support Collection Unit, 183 Misc.2d 478, 703 N.Y.S.2d 389 (Supreme Ct., Bronx Co., 2000); J.K.C. v. T.W.C., 39 Misc.3d 899, 966 N.Y.S. 2d 812 (Supreme Ct., Monroe Co. 2013). Moreover, like maintenance awards, child support awards are “exempt from application to the satisfaction of a money judgment, except such part as a court determines to be unnecessary for the reasonable requirements of the judgment debtor and his dependents.” CPLR §5205(d)(3).
In dicta, the Fourth Department has stated that there is no categorical exclusion of child support awards from an attorney’s charging lien. Mura v. Mura, 128 A.D.3d 1344, 7 N.Y.S.3d 766 (4th Dept. 2015); lv to appeal dismissed, 26 N.Y.3d 951, 38 N.E.3d 812, 17 N.Y.S.3d 68 (2015). In that case, the parties were divorced in 1993. The judgment of divorce had directed the husband to pay child support arrears in excess of $25,000, but the wife never sought payment. Sixteen years later, she finally retained counsel to enforce the judgment, which, with interest, had increased to over $549,000. While the enforcement action was pending, the former husband sold his residence; the funds were escrowed pending the determination of the enforcement action. The former wife failed to pay her attorney, who sought to enforce a charging lien against the escrowed funds. The wife opposed, arguing that the escrowed funds were intended to pay child support arrears, and thus, pursuant to Shipman v. City of New York Support Collection Unit, a charging lien could not attach.
The Appellate Division affirmed the Supreme Court’s finding that the charging lien could attach to the funds in question because no determination had been made in the enforcement action as to the amount necessary to satisfy the child support arrears. Certainly, the unique facts of Mura do not support the proposition that charging liens may be enforced against child support awards in every instance.
In a matrimonial action, a charging lien may be enforced only to the extent that an equitable distribution award reflects the creation by the attorney of a “new fund” that is greater than the value of the interests already held by the client. Theroux v. Theroux, 145 A.D.2d 625, 536 N.Y.S.2d 151 (2d Dept. 1988). In the Haser case cited earlier, the charging lien attached to funds representing the client’s share of the value of her former spouse’s medical license. That license was, obviously, titled in the husband’s name only; the wife had no separate interest until the judgment of divorce.
Effective Jan. 23, 2016, the Domestic Relations Law was amended to, in effect, statutorily overrule O’Brien v. O’Brien, 66 N.Y.2d 576, 489 N.E.2d 712, 498 N.Y.S.2d 743 (1985), which established as a marital asset the enhanced earning capacity generated by a license, degree, celebrity goodwill or other career enhancement earning during a marriage. See DRL §236 (B)(5)(d)(7). An unintended consequence of this amendment is the elimination of several possible “new funds” to which counsel for a non-titled spouse could enforce a charging lien: if the enhanced earning capacity generated by a license or degree earned during the marriage is no longer an asset for distribution, it cannot be a “new fund” created by the attorney’s efforts.
A charging lien may still be enforced against an equitable award of a share of the value of a business or practice. But what if the parties to a matrimonial litigation are W-2 employees? What would constitute a “new fund” under these circumstances?
A charging lien may not attach to the client’s share of an IRA, which had been funded through a rollover of the share of the other spouse’s IRA, because the rollover did not create “proceeds” for the client. J.K.C. v. T.W.C., supra.
The most valuable asset that many divorcing couples have is their home… the “marital residence.” However, several courts have held that a client’s share of the proceeds of sale of the marital residence is not a “new fund” because the client already owned an interest in the marital residence with his or her spouse as tenants by the entirety. Charnow v. Charnow, 134 A.D.3d 875, 22 N.Y.S.3d 126 (2d Dept. 2015); Moody v. Sorokina, 50 A.D.3d 1522, 856 N.Y.S.2d 755 (4th Dept. 2008); Zelman v. Zelman, 15 Misc.3d 372, 833 N.Y.S.2d 375 (Supreme Ct., New York Co. 2007). But is that really the case? Should it be?
A tenancy by the entirety reflects the common law principle that a husband and wife are legally considered one person. The tenancy cannot be severed until (i) death; or (ii) a court severs it by divorce; for this reason, one spouse cannot force the sale of the marital residence during the pendency of the matrimonial action. Kahn v. Kahn, 43 N.Y.2d 203, 371 N.E.2d 809, 401 N.Y.S.2d 47 (1977). Since the attorney’s services result in the severance of the tenancy by the entirety, thus creating the client’s sole and separate share in the first place, why is this not a “new fund?” The Appellate Division ignored this argument in Charnow…in which I represented the plaintiff wife.
The Appellate Division further ignored the underlying facts in Charnow that led to my motion to enforce a charging lien. On the eve of trial and at the court’s direction, defendant, the monied spouse, agreed to pay plaintiff’s counsel fees in the amount of $150,000. This provision was incorporated into the judgment of divorce. Rather than comply, defendant filed for bankruptcy. The only legitimate debt shown on his Bankruptcy Court filing was the debt to my firm. As the bankruptcy case wound its way through litigation, my firm sought to enforce its charging lien—set at $150,000—against plaintiff. As a result of the Appellate Division’s decision, I was paid nothing. There were no other significant assets to which my charging lien could attach. Via a settlement in the bankruptcy case, defendant eventually paid pennies on the dollar.
At least one Supreme Court decision has found that a client’s equitable share of the proceeds of sale of a marital residence did create a new fund. In Noble v. Noble, 2011 N.Y. Slip Op. 30835(U), 2011 WL 1430041 (Supreme Ct., Albany Co. 2011), the court found that:
To the extent that the judgment [of divorce] transferred defendant’s interest as a tenant by the entirety in the marital residence to plaintiff, less her separate property contribution and tenant by the entirety interest, such provision constituted the creation of a new fund.
Unfortunately, by virtue of the Charnow decision, the law in the Second Department, at least, is that an equitable award of a share of a residence owned as tenants by the entirety does not create a new fund to which a charging lien may attach. In light of the elimination of maintenance and child support awards, and now awards of an equitable share of the enhanced earnings generated by a license or degree obtained during the marriage, I submit that there is not much left to which a charging lien may attach in many matrimonial cases. Unless the attorney is able to get for the client (i) more than 50 percent of the marital property, or (ii) property that is the spouse’s separate property, it has become less likely that the attorney will be found to have created a “new fund” to which a charging lien may attach.
The attorney’s sole recourse is to commence a plenary action against the client, or, if the unpaid fees are less than $50,000, seek fee arbitration if the client consents. Both of these methods generate additional expense and delay that the common law charging lien and Judiciary Law §475 were designed to avoid. Consequently, attorneys may decline to represent the non-monied spouse, which will return the practice to the days before the courts and the Legislature leveled the playing field via Prichep v. Prichep, 52 A.D.3d 61, 858 N.Y.S.2d 667 (2d Dept. 2008) and the 2010 amendments to DRL §237—when the monied spouse used the power of the pocketbook to control the litigation.