Memorandum of Decision Re: Deed of Trust Taken by Attorney

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re ROBERT and ELLYN SINNICKSON,                                       No. 1-87-01740      Debtors. ___________________________/ ROBERT SINNICKSON,      Plaintiff,    v.                                                                                                A.P. No. 92-1089 NEIL BLOOMFIELD,      Defendant. ______________________________/
Memorandum of Decision
     Defendant Neil Bloomfield is the former attorney for debtors Robert and Ellyn Sinnickson in this Chapter 11 proceeding. By this adversary proceeding, plaintiff Robert Sinnickson seeks to void a deed of trust on his residence which he and his wife gave to Bloomfield to secure Bloomfield's legal fees.      In 1988, Bloomfield drafted a plan of reorganization for the Sinnicksons which provided for a deed of trust to him to secure his fees. At that time, he should have carefully explained to the Sinnicksons that his fees would have to be paid in full upon confirmation unless he agreed to other treatment and that he would agree to defer payment of his fees if he was given a deed of trust on their home. The benefit to them, he should have explained, was that his agreement would allow them to get a plan confirmed but the detriment was that if their house had to be sold and less than $40,000.00 was left over after payment of other liens, he would get the money and not them. Their alternative, he should have explained, was to convert to Chapter 7. There would be no reorganization then, but they would have $40,000.00 to start over with.      Bloomfield did not explain any of the facts outlined in the preceding paragraph, nor did he advise them to seek independent counsel. The Sinnicksons signed the plan and disclosure statement Bloomfield prepared without fully understanding the ramifications or alternatives.      The residence has now been sold, and about $40,000.00 is being held in escrow pending resolution of this adversary proceeding. Bloomfield was awarded $170,000.00 in legal fees, of which the debtors paid $135,000.00. At issue now is whether the remaining funds go to the Sinnicksons on account of their homestead or to Bloomfield on account of his deed of trust.      The California State Bar Rules of Professional conduct prohibit an attorney from taking a deed of trust on a client's real real property unless full disclosure is made, the terms are fair and reasonable, and the client has consented in writing after an opportunity for review by independent counsel. Hawk v. State Bar, 45 Cal.3d 589 (1988). While the terms were fair and reasonable, Bloomfield's disclosure was wholly inadequate and the Sinnicksons were never advised of their right to independent counsel. Their signatures on the plan and disclosure statement are not sufficient written consent, as its ramifications were not sufficiently explained to them.      Bloomfield argues that the deed of trust he took was given in 1991, some three years after confirmation, at a time when at least Robert Sinnickson had independent counsel. This argument might have merit except that Bloomfield obtained the deed of trust by asserting that he had a right to it under the plan. In at least three instances Bloomfiled or his attorney referred to the deed of trust as being required by the plan. Bloomfield is accordingly estopped from now arguing that the deed of trust arose solely at a time when he was no longer the Sinnicksons' lawyer. If the right to the deed of trust arose while he was still their lawyer, it is no defense for Bloomfiled to argue that the right was not exercised until after the attorney-client relationship had ceased.      The most troublesome aspect of this case from a legal standpoint is that the confirmed plan has the effect of a judgment, which has now become final. See Sure-Snap Corp. v. State Street Bank, 948 F.2d 869, 873-74 (2nd Cir.1991); In re Chattnooga Wholesale Antiques, Inc., 930 F.2d 458, 463 (6th Cir.1991). Since the plan requires the deed of trust, an argument might be made that principles of res judicata bar the litigation of this matter now. While the court is unaware of any authority on the issue, it decides the issue in favor of Sinnickson by finding that the policy in favor of upholding the attorney-client relationship outweighs the policy in favor of finality of judgments.      The court concludes that the deed of trust is void due to lack of disclosure. Accordingly, the court will enter a judgment that the funds now held in escrow be turned over to Robert and Ellyn Sinnickson as the proceeds of their exempt homestead up to the amount declared exempt. Any dispute between the Sinnicksons, who are now estranged, as to the division of the funds shall be resolved in state court.      The court notes that there is still a debt owed to Bloomfield, which Bloomfield may enforce in state court or by seeking conversion of the case to Chapter 7.      This memorandum constitutes the court's findings and conclusions. Counsel for Sinnickson shall submit an appropriate form of judgment.
Dated: September 5, 1992                                                                            _______________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy