Freda Wolfson
Freda Wolfson (Carmen Natale)

A former New Jersey attorney, disbarred for misappropriating client funds in the face of a fee dispute, cannot use bankruptcy to erase the former clients’ nearly $1 million claim against him, a federal judge has ruled.

Feng Li, who had a law office in Parsippany, N.J., filed notice Aug. 25 that he will appeal an Aug. 22 decision by U.S. District Judge Freda Wolfson of the District of New Jersey that upheld a bankruptcy court ruling barring discharge of the debt because of the misappropriation and Li’s failure to disclose certain financial information, including his attorney trust information, in his bankruptcy filings.

The fee flap arose in a New York case where Li won a $3.5 million judgment in 2007 for a group of doctors who were business partners in a commercial real estate investment.

Li was the third lawyer to take on the case, which had been filed in 1990, and one of the prior lawyers had recovered $515,000. That brought the total amount to be distributed to about $4 million after the judgment was upheld in 2009, according to Wolfson’s opinion. Li held the money in two attorney trust accounts.

Wolfson, who sits in Trenton, N.J., observed that Li’s retainer appeared to be governed by New Jersey law in that it provided a sliding scale of percentages for the contingent fee and did not provide for a fee on the prejudgment interest—a significant sum, given the age of the litigation.

The Disciplinary Review Board opinion on which Li’s disbarment was based said it was the first retainer agreement that Li, who was admitted in 2004, had ever prepared and he used a form he found on the Internet. The clients wanted to follow the agreement but Li claimed he made a mistake and wanted to follow New York law, which allowed him a one-third fee on everything, including the interest.

In the midst of the dispute, Li “engaged in unethical self-help and simply acted as if his version of the fee agreement were in force,” Wolfson said.

He transferred about $1.26 million of the litigation proceeds to personal trusts set up for the benefit of his children, according to Wolfson. The clients retained Willard Shih of Wilentz, Goldman & Spitzer in Woodbridge, N.J., who sent letters telling Li not to dissipate the money.

Li responded with “a thinly veiled threat” to report to the New York court that some of them had misrepresented their damages at trial and openly threatened to charge them an additional $273,375 fee for handling the appeal and collection actions if they persisted, according to Wolfson.

The clients sued in New Jersey and the same day got Middlesex County Assignment Judge Travis Francis to issue an order to show cause with temporary restraints. Li’s wife, “at his direction,” transferred about $1.3 million—the prior amount plus interest—to Chinese nationals and bank accounts, Wolfson said.

Li disregarded a court order to return the money and instead tried to get a New York judge in Westchester County to enjoin the New Jersey suit. The judge, however, refused, according to Wolfson.

On Jan. 26, 2012, the day after he lost his appeal of that decision, Li filed for bankruptcy.

During a deposition in the bankruptcy, Li testified that he has used the money to pay business debts and law school loans, without disclosing that he had transferred it to people and accounts in China, Wolfson said.

While the bankruptcy was under way, Li’s former clients complained about him to ethics authorities in New Jersey and New York, where he was also admitted, according to Wolfson.

Li got the New York proceeding stayed. Wolfson said she felt compelled to mention what she termed a “flagrant misrepresentation” by Li, in the brief he filed with her, in which he wrote that New York had refused to suspend or discipline him.

The New Jersey ethics case went forward and a special master, Bernard Kuttner of Millburn, N.J., recommended disbarment.

Kuttner found that Li mistakenly prepared a New Jersey retainer for use in a New York case and that his clients decided to benefit from this mistake. Nevertheless, Kuttner concluded that Li committed knowing misappropriation and violated other ethics rules regarding the handling of client funds and prohibiting dishonest conduct.

A divided DRB agreed in April 2013. Four members thought Li should lose his license, while two said they would have suspended him for one year, and one supported a three-month suspension.

The New Jersey Supreme Court disbarred Li on May 22, 2013.

U.S. Bankruptcy Judge Michael Kaplan of the District of New Jersey, who sits in Trenton, adopted the Supreme Court’s misappropriation finding in his ruling that Li could not discharge the clients’ $938,356 claim under the exception for fraud, embezzlement and larceny in Section 523(a)(4) of the Bankruptcy Code.

Kaplan further held that Li was collaterally estopped from challenging the Supreme Court’s findings in the adversary action brought by his former clients.

The claim was also nondischargeable under Section 727(a)(4), which applies to debtors who make a “‘false oath or account’” in their petitions, Kaplan said.

Wolfson’s Aug. 22 opinion in Peng v. Li affirmed on both grounds.

In an interview, Li said he is entitled to the fee he took and that New Jersey had no jurisdiction. Li said his right to the money should have been adjudicated in New York, where the fees were earned and most of the clients lived.

Shih declined comment.

Contact the reporter at mgallagher@alm.com.