American Asset Finance, LLC v. Trustees of the Client Protection Fund

DEBORAH S. EYLER, J. In this appeal, American Asset Finance, LLC (“AAF”), the appellant, challenges a decision of the Trustees of the Client Protection Fund of the Bar of Maryland (“the Fund”), the appellee, to deny in all or in part four claims submitted by AAF. The Fund’s final determination of AAF’s claims was affirmed on judicial review by the Circuit Court for Baltimore County. AAF presents one question for our review, which we have rephrased: Did the Fund err in determining that AAF lacked standing to seek compensation with respect to three of its claims and part of a fourth claim? 1 For the reasons to follow, we shall affirm the judgment of the circuit court. ³⁰⁸ FACTS AND PROCEEDINGS The facts are undisputed. AAF is a limited liability company registered under the laws of New Jersey.

It is owned and operated by Sherry and Tim Foley. As part of its business, AAF purchases from attorneys interests in settlements and estates that are not yet subject to disbursement. AAF pays the attorney a lump-sum cash payment in exchange for the attorney’s promise to assign to AAF a portion of his or her interest in the proceeds of the settlement, or estate disbursement. The amount of the assignment (ie., AAF’s interest) increases over time to give the attorney an incentive to promptly and efficiently close out the case and disburse AAF’s share to it.

In the instant case, between May 2007 and July 2008, AAF entered into four such agreements with one Bradley Schwartz, who at that time was a member of the Maryland Bar. In the first, on May 22, 2007, AAF agreed to pay Schwartz $100,000 in exchange for his assignment of the first $110,000 of $149,000 in attorneys’ fees from a $449,000 total settlement. In the second, on September 18, 2007, AAF agreed to pay Schwartz $60,000 in exchange for his assignment of the first $64,800 of $83,333.33 in attorneys’s fees from a $250,000 total settlement. In the third agreement, on June 16, 2008, AAF agreed to pay Schwartz $50,000 in exchange for his assignment of the first $54,000 of $62,000 in attorneys’ fees from a $150,000 total settlement.

In the fourth and final agreement, executed on July 25, 2008, AAF agreed to pay Schwartz $65,000 in exchange for his assignment of the first $70,200 of $150,000 in attorneys’ fees from a $362,000 total settlement. AAF also entered into an assignment agreement with one of Schwartz’s clients, Tara Jackson. Jackson was the beneficiary of an estate in a case related to the case giving rise to AAF’s September 18, 2007 assignment agreement with Schwartz. On October 26, 2007, AAF agreed to pay Jackson $2,500 in exchange for her assignment of $2,750 of her $9,000 interest in the estate. ³⁰⁹ The four assignment agreements between Schwartz and AAF all were structured the same way and used nearly identical language, although the amount paid to Schwartz, the amount AAF was assigned, and the penalties for late payment varied.

Each was titled, “Assignment of Interest in Settlement and Limited Irrevocable Power of Attorney” (“Assignment Agreement”). Schwartz was designated as the “Assign- or” and AAF as the “Assignee.” In the recitals and Section 1, Schwartz agreed that he was an attorney of record in a specified case, had an interest in a settlement of a specified amount, and wished to “receive an immediate lump sum cash payment for a portion of [his] interest in the Settlement and to that end wish[ed] to assign such interest to [AAF].” In each Assignment Agreement, Schwartz represented the extent of his interest in the particular settlement and agreed that he was “hereby selling] and assigning] to [AAF] [his] entire right, title and interest in and to [his interest in the settlement] to the extent described herein.” Thereafter, each Assignment Agreement set forth the exact sum Schwartz was assigning to AAF, as well as a formula for increasing that amount incrementally depending upon how long it took for AAF to receive its payment. 2 Section 2 set out fourteen “Representations, Warranties, and Agreements” by Schwartz, including that: he owned title to his interest in the settlement free and clear of any liens or claims; he understood that AAF was “relying on [his] professional expertise and the representations made by [him] in pricing this transaction”; he would “take all steps necessary to ensure that [AAF] receive[d] the Property”; he was “an attorney competent to understand the transaction provided for ³¹⁰ in this agreement”; after receiving the settlement proceeds and until such time as AAF’s interest was disbursed, he would “hold [AAF’s interest] in safekeeping as [its] agent and fiduciary”; and he would disburse to AAF its interest in the settlement within four days of his receiving it and depositing it in his IOLTA account. At Section 12 of each Assignment Agreement, Schwartz agreed to execute and/or to authorize AAF to execute a financing statement securing AAF’s “first priority security interest” in its assigned interest in the settlement, which AAF agreed to terminate upon receiving payment. Each Assignment Agreement included an attached and incorporated Power of Attorney agreement by which Schwartz appointed AAF his attorney-in-fact for the purposes of endorsing any checks payable to him with respect to the particular case and executing documents necessary to effectuate the payment of its interest in the settlement of that case.

Finally, in each case, Schwartz executed a “Notice of Assignment, Irrevocable Direction of Payment, & Authorization to Release Information” (“Notice of Assignment”). Each Notice of Assignment was addressed to defense counsel in the underlying case in which the settlement had been reached. It informed defense counsel of the Assignment Agreement between Schwartz and AAF, and directed defense counsel to pay AAF its interest in the settlement directly. AAF agreed, however, to hold each Notice of Assignment in “escrow” and only deliver it to defense counsel if Schwartz failed to respond within seven days to a request for an update on the status of the case.

AAF’s Assignment Agreement with Jackson differed in certain respects. As relevant here, Jackson warranted that she had “irrevocably authorized and directed [Schwartz] to arrange for delivery of [AAF’s interest] to him and [for him] to remit it to [AAF] immediately on receipt in accordance with [AAF’s] instructions.” She further warranted that Schwartz would act “as [AAF’s] fiduciary” in this respect. ³¹¹ Within days of executing each Assignment Agreement, including the one between AAF and Jackson, AAF wired the agreed upon lump-sum payment directly to Schwartz, less a $20 wire transfer fee. In each case, within months, the settlement proceeds in the underlying case were disbursed to Schwartz and deposited in his IOLTA account. Schwartz never paid AAF its assigned interest in any of the proceeds in any of the cases, however.

On March 23, 2009, Schwartz was disbarred by consent from the practice of law in Maryland based upon his having misappropriated funds deposited in his IOLTA account. See Attorney Grievance Comm’n v. Schwartz, 408 Md. 34 , 968 A.2d 139 (2009). Thereafter, AAF filed three separate claims with the Fund seeking reimbursement of the amounts it maintained were owed to it under the Assignment Agreements from May 2007, June 2008, and July 2008, and one combined claim seeking reimbursement of the amounts it maintained were owed to it under the September 2007 Assignment Agreement between it and Schwartz and the October 2007 Assignment Agreement between it and Jackson. It attached copies of the Assignment Agreements to its claims.

The total sum sought by AAF was $391,433.33, which included the agreed assignment in each case plus penalties that had accrued under the terms of each agreement. The Fund investigated the claims. In each case, Schwartz was asked to respond to the claim. In each case involving an assignment by Schwartz, he responded that he never had represented AAF in any capacity, but that he had borrowed money from AAF at a high interest rate and “[d]ue to economic circumstances” had been unable to repay those loans.

In the Jackson sub-claim, he represented that he had paid the $2,500 he had received from AAF on her behalf directly to her, but had been unable to pay AAF its assigned interest. The Fund’s investigation revealed, however, that Jackson never received any funds from Schwartz. The Fund consolidated the three claims involving the Assignment Agreements between Schwartz and AAF and, on ³¹² May 13, 2010, issued an “Initial Determination” denying the consolidated claims. It explained that, while each “transaction” between AAF and Schwartz was memorialized in an Assignment Agreement, each amounted to a personal loan from [AAF] to Schwartz, secured by the grant of an interest by Schwartz to [AAF] of Schwartz[’s] expectancy in an attorneys [sic] fee which he did not yet earn and did not yet receive.

The Claims are not eligible for payment from the Fund since there is no attorney-client or fiduciary relationship between [AAF] and Schwartz. A debtor-creditor relationship is the actual nature of the relationship between [AAF] and Schwartz and not a fiduciary relationship or attorney-client relationship. Because the “statute, the rules and the regulations governing the Fund” require that there be or have been an attorney-client or fiduciary relationship between the defalcating attorney and the claimant, and there was no such relationship here, the Fund denied AAF’s claims. In the unconsolidated claim, the Fund denied the sub-claim arising out of the Assignment Agreement between AAF and Schwartz for the same reasons as in the consolidated cases, but granted, in part, the sub-claim arising from the Assignment Agreement between AAF and Jackson.

It explained that, under the authority of Advance Finance Co. v. Trs. of the Clients’ Sec. Trust Fund, 337 Md. 195 , 652 A.2d 660 (1995), because Jackson, a client, had authorized and directed Schwartz, her attorney, to accept the settlement proceeds and pay AAF its share of those proceeds, Schwartz and AAF had a fiduciary relationship giving rise to a compensable claim. It awarded AAF $2,500, which was the amount it had wired to Schwartz on behalf of Jackson. The Fund denied AAF’s claim for an additional $2,000 AAF claimed was due to it under the terms of its Assignment Agreement with Jackson, finding that that amount was “lost interest.” On May 28, 2010, AAF exercised its right to seek reconsideration of the Initial Determinations. It challenged the denials of the consolidated claims and the unconsolidated sub-claim ³¹³ arising out of its Assignment Agreements with Schwartz.

(It did not challenge the partial denial of the Jackson sub-claim.) It argued that the transactions underlying these denied claims were assignments of an interest in property, not loans. It maintained that there were two separate bases to support a finding that it had a relationship with Schwartz giving rise to a compensable claim: 1) an attorney-client relationship evidenced by the language in the agreements stating that it was relying upon Schwartz’s professional expertise; and 2) a fiduciary relationship that formed when Schwartz agreed to receive the settlement funds and hold AAF’s shares of those funds in his I0LTA account until they could be disbursed to AAF. AAF requested a hearing on its motion for reconsideration. The Fund held a hearing and, on April 15, 2011, issued its Final Determination in the consolidated claims and in the unconsolidated claim.

It explained that there were “several grounds upon which the Trustees could deny the Claims,” but that it was denying the claims based solely upon its conclusion that AAF did not have standing “to make a claim with the Fund because of a lack of attorney-client or fiduciary relationship with Schwartz.” With respect to the absence of an attorney-client relationship, the Fund found that the only legal service Schwartz was to provide to [AAF] was the collection and disbursement of the settlement and estate proceeds from the case[s] in which Schwartz was the attorney. But these were not legal services to be provided to [AAF], Schwartz was already bound, as the attorney for his law client, to collect and disburse the settlement proceeds. Moreover, the language of the Assignment belies an attorney-client relationship: nothing in that language suggests that [AAF] would be deferring in their dealings to legal expertise and judgment of Schwartz. Finally, there was no legal representation agreement____ (Emphasis in original.) With respect to the absence of a fiduciary relationship, the Fund explained that the “kind of fiduciary relationship neces ³¹⁴ sary to have standing to make a claim with the Fund did not exist between [AAF] and Schwartz.” This was so because the Fund’s regulations define the term “fiduciary relationship” to mean “a lawyer acting in a fiduciary capacity traditional and customary in the practice of law, such as a court-appointed lawyer, a personal representative of a probate estate, a trustee of an express trust, a guardian, a custodian acting per statute, or an attorney-in-fact by written appointment.” (Emphasis supplied by Fund.) In light of this definition and the history of the Fund, the Fund reasoned that, for a loss to be compensable, the “defalcating Maryland attorney must have acted not as a general fiduciary, but instead in the more limited capacity contemplated by the language of the Regulation governing operations of the Fund.” (Emphasis in original.) The Fund found unpersuasive AAF’s reliance on the language in the Assignment Agreements that stated that Schwartz agreed to act as AAF’s fiduciary, explaining that, although the parties to those agreements were bound by their terms, it was not.

Instead, it looked to the “real relationship” between AAF and Schwartz, which it concluded was not “a fiduciary relationship that is ‘traditional and customary in the practice of law.’ ” Rather, the “representations, warranties and covenants made by Schwartz ... [were] more like those made by an applicant for a loan and contained in a promissory note or security agreement.” The Fund found that the “essence” of the assignments was an agreement by Schwartz to repay a loan with interest at a rate of between 32 and 40 percent per annum. The Fund explained that when a lawyer acts as a traditional fiduciary he or she “interacts with a third person or entity on behalf of a client.” For example, if a client directs his or her lawyer to pay funds directly to a third party to discharge the client’s debt, the lawyer, once in receipt of those funds, becomes a fiduciary of the third party. Here, Schwartz entered into the agreements with AAF directly and for his own benefit, not on behalf of a client. The Fund ruled that, in ³¹⁵ that circumstance, Schwartz was not a fiduciary of AAF and that AAF lacked standing to make a claim against the Fund. 3 On July 27, 2011, AAF filed a petition for judicial review in the circuit court.

On January 11, 2013, the circuit court issued an order affirming the Final Determination of the Fund. This appeal followed. STANDARD OF REVIEW Rule