                                                                                                                           Opinions of the United
2005 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


5-5-2005

In Re: Daniel Finney
Precedential or Non-Precedential: Non-Precedential

Docket No. 04-4360




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                                                NOT PRECEDENTIAL

         UNITED STATES COURT OF APPEALS
              FOR THE THIRD CIRCUIT


                        No. 04-4360


                 IN RE: DANIEL FINNEY

                                               Debtor


ESTATE OF DANIEL FINNEY d/b/a FINNEY CONSTRUCTION


                                               Appellant

                              v.

               DENNIS J. SPYRA, ESQUIRE




       On Appeal from the United States District Court
          for the Western District of Pennsylvania
                   (D.C. No. 03-cv-01125)
        District Judge: Honorable David S. Cercone




      Submitted Pursuant to Third Circuit L.A.R. 34.1(a)
                        May 3, 2005

Before: McKEE, VAN ANTWERPEN, and WEIS, Circuit Judges

                    (Filed: May 5, 2005)


                   OPINION OF THE COURT
VAN ANTWERPEN, Circuit Judge.

       Now before us is an appeal by Debtor-Appellant Daniel Finney (“Finney”) of a

Memorandum Order of the United States District Court of the Western District of

Pennsylvania affirming an Amended Order of the United States Bankruptcy Court for the

Western District of Pennsylvania granting costs and fees to Dennis J. Spyra, Esq.

(“Spyra”) in the sum of $64,537.85. For the foregoing reasons, we affirm the District

Court in part and reverse in part.




                                          I. Facts

       Because the only dispute between the parties in the instant case is one concerning

the contingent fee arrangement between Finney and Spyra, we need only restate the facts

pertinent to that claim. Spyra was retained by Finney in 2000 to file a petition under

Chapter 11 of the United States Bankruptcy Code. Spyra was to be paid for this service at

a rate of $150.00 per hour, and filed a Chapter 11 petition on Finney’s behalf on

September 13, 2000.

       In the summer of 2000, a fire destroyed a residential building and damaged a

nearby barn on Finney’s estate. His insurer, Royal SunAlliance Insurance Company

(“Royal”) initiated an investigation, and ultimately alleged that Finney had contributed to

the arson that destroyed his property. On October 25, 2000, Royal formally denied

                                             2
Finney’s insurance claim. Soon after, Spyra agreed to represent Finney in an action

against Royal for its denial of Finney’s claim under the insurance policy. This action was

filed in United States Bankruptcy Court, but was later transferred to District Court.

Pending resolution of the claim, Royal paid Finney’s mortgagee the outstanding balance

on the estate’s mortgage, which it was required to do under the insurance contract.

        On April 2, 2001, Finney signed a contingent fee agreement with Spyra entitling

Spyra to (in addition to all costs and expenses) one-third of “all funds or property

accruing to [Finney] as a result of [Spyra’s] service [in connection with any legal action

against Royal].” The fee agreement was approved by the Bankruptcy Court on May 9,

2001.

        Following a trial in the suit against Royal, a jury returned a verdict in favor of

Finney in the amount of $600,000.1 After the set-off payment for the mortgage that had

already been paid was deducted from the award, judgment was entered for Finney in the

amount of $147,225.54 plus $38,584.08 in prejudgment interest. Because the jury

awarded Finney $638,584.08, Spyra sought compensation under the contingent fee

arrangement in the amount of $212,861.00 for legal representation in the insurance suit.

Finney refused to pay, and Spyra sought leave of the Bankruptcy Court to compel Finney

to sign over the proceeds from the insurance company. Leave was granted, and Spyra

   1
     The jury found in favor of Royal with regard to Finney’s claim that it had acted in
bad faith. Consequently, the jury did not award Finney punitive damages or attorney’s
fees. The jury also found against Royal on its counterclaims for arson, fraud, and
misrepresentation.

                                               3
presented his application for payment to the Bankruptcy Court. Finney objected, and the

Bankruptcy Court conducted an evidentiary hearing. At the conclusion of that hearing,

the Bankruptcy Court concluded that (1) the contingent fee agreement was an enforceable

agreement that was separate from Spyra’s representation of Finney in the Chapter 11 case,

(2) the contingent fee agreement was reasonable, and (3) Finney was an intelligent and

articulate businessman who was aware of the essential terms of the agreement before he

signed it. Accordingly, the Bankruptcy Court entered an Amended Order on May 23,

2003, awarding Spyra $64,537.85.2

       Finney appealed these findings and the Bankruptcy Court’s Amended Order to the

District Court. On review, he contended that (1) the contingent fee agreement was

unconscionable, (2) he was denied due process, and (3) the Bankruptcy Court allowed

Spyra to recover double payment for his services. The District Court ruled in favor of

Spyra as to each claim of error, and affirmed the Amended Order. Finney then timely

appealed to this Court.

       On appeal before us, Finney argues three points: (1) the contingent fee agreement

is unconscionable and is not enforceable as it is unreasonable; (2) both the Bankruptcy

Court and the District Court made manifest errors of fact; and (3) both the Bankruptcy

Court and the District Court erred in not finding that Spyra received duplicate pay for the



   2
    This amount is the total owed to Spyra (including costs for representing Finney in all
Chapter 11 matters) minus the proceeds from the insurance company that were signed
over to him. This amount was claimed against Sypra’s bankruptcy estate.

                                             4
same service.




                         II. Jurisdiction and Standard of Review

       The Bankruptcy Court had subject matter jurisdiction to entertain the instant case

pursuant to 28 U.S.C. § 157(b). The District Court had appellate jurisdiction over the

final order of the Bankruptcy Court in favor of Spyra pursuant to 28 U.S.C. § 158(a)(1).

Our jurisdiction is grounded in 28 U.S.C. §§ 158(d) & 1291. “Exercising the same

standard of review as the [D]istrict [C]ourt, we review the [B]ankruptcy [C]ourt’s legal

determinations de novo, its factual findings for clear error and its exercise of discretion

for abuse thereof.” In re United Healthcare System, Inc., 396 F.3d 247, 249 (3d Cir.

2005) (citations and internal quotation marks omitted).




                                       III. Discussion

       As a threshold matter, we first address Spyra’s contention that Finney’s claim to

recover any portion of the contingent fee is barred by the doctrines of res judicata or

collateral estoppel. We agree with Finney that Spyra’s failure to raise these arguments

below constitutes waiver. “The general rule is that the failure to plead or raise in a timely

manner matters calling for the application of the doctrines of res judicata and collateral

estoppel is regarded as a waiver.” 47 Am. Jur. 2D Judgments § 717 (2004); see also

Rycoline Prod., Inc. v. C & W Unlimited, 109 F.3d 883, 886 (3d Cir. 1997) (“Res


                                              5
judicata is an affirmative defense and not a doctrine that would defeat subject matter

jurisdiction of this court.”). Consequently, as this is the first time Sypra has raised these

arguments, we cannot entertain them.

       Turning to the merits of this case, Finney first contends that the contingent fee

agreement is unconscionable and hence not enforceable because its terms are

unreasonable. As we have said before, “courts should be reluctant to disturb contingent

fee arrangements freely entered into by knowledgeable parties.” Ryan v. Butera,

Beausang, Cohen & Brennan, 193 F.3d 210, 215 (3d Cir. 1999). That being said, a

District Court must be alert to a fee agreement that would unjustifiably enrich an attorney

through oppression or overreaching. See McKenzie Const., Inc. v. Maynard, 758 F.2d 97,

102 (3d Cir. 1985).

       After a review of the record, we agree with the District Court that Finney has not

demonstrated that the contingent fee agreement between him and Spyra is

unconscionable. In Pennsylvania,3 the test for unconscionability is two-fold: first, one of

the parties to the contract must have lacked a meaningful choice about whether to accept

the provision in question; and second, the challenged provision must unreasonably favor

the other party to the contract. Koval v. Liberty Mut. Ins. Co., 531 A.2d 487, 491

(Pa.Super. 1987). Here, the Bankruptcy Court found, and the District Court agreed, that



   3
    Whether or not a contract is unconscionable is quintessentially a question of state
law. As such, we apply the law of the Commonwealth of Pennsylvania to this claim. Erie
R. R. v. Tompkins, 304 U.S. 64, 78 (1938).

                                              6
Finney was “an intelligent, articulate businessman who ran more than one business” who

“was aware of all the essential terms of the agreement, and also understood the

ramifications of signing the agreement.” Memorandum Order of the District Court at 4.

Finney has adduced no evidence countering these findings, nor can we find any on

independent review.4 We therefore will not unseat the conclusions of both the

Bankruptcy Court and the District Court that Finney had a meaningful choice as to

whether or not he would submit to the contingent fee agreement.

       Moreover, the agreement does not unreasonably favor Spyra. A contingent fee

agreement will be considered valid and enforceable only where it is fair, just, and

reasonable. 7A C.J.S. Attorney & Client § 395 (2004). The Third Circuit has adopted the

“equity and fairness standard” for determining whether or not an attorney’s fee is

reasonable.5 Ryan, 193 F.3d at 214. Under this standard, “a court must evaluate the

contract as to its reasonableness both as of the time the parties entered into it and in light

of subsequent circumstances concerning performance and enforcement, which may make

a contract unfair in its enforcement.” Id. at 215 (internal quotation marks omitted). The

agreement requires that Spyra be paid one-third of all funds or property accruing to


   4
    We are especially persuaded by Finney’s admission to the Bankruptcy Court that he
negotiated Spyra’s contingent fee percentage from 40% to 33 1/3%. Appendix to Brief of
Appellant at 333a.
   5
     We have previously held that we must apply federal law to the examination of a
contingent fee arrangement’s reasonableness, as such review implicates our responsibility
to supervise the members of our Bar. Dunn v. H.K. Porter Co., Inc., 602 F.2d 1105, 1110
n.8 (3d Cir. 1979).

                                               7
Finney as a result of Spyra’s services in the insurance suit. We find this provision to be

unambiguous. This was a fair and reasonable bargain on the day that Finney signed the

agreement, and remained so throughout his relationship with Spyra. The position that

Spyra takes–that he is entitled to one-third of the $600,000 award, and not merely the net

money paid directly to Finney–is reasonable when we consider that Finney not only

received a money judgment in the amount of $147,225.54, but also free and clear title to a

formerly encumbered property.6 To restrict Spyra’s access to the majority of the jury

verdict (the money used to satisfy Finney’s obligation to his mortgagee), simply because

it was paid directly to the mortgagee prior to the rendering of the verdict in the insurance

suit, is an inequitable perversion of an otherwise clear contract. Because we conclude

that the contingent fee agreement envisioned payment of one-third of the total award, and

because we further conclude that the fees sought by Spyra are reasonable given the

verdict in Finney’s insurance claim, the contingent fee agreement is not unconscionable.

       Moving next to Finney’s contention that the Bankruptcy Court erred in its findings

of fact, we conclude that none of the factual findings pointed to by Finney were clearly

erroneous. Without belaboring the point, Finney again points to nothing in the record that



   6
     In Pennsylvania, a contingent fee is considered reasonable if it is computed upon the
amount of actual recovery, not on the amount of the verdict rendered. Miernicki v.
Seltzer, 458 A.2d 566, 569 (Pa.Super. 1983), aff’d 479 A.2d 483 (Pa. 1984). For
example, an attorney whose client’s jury award has been reduced by a counterclaim
cannot claim as his fee a percentage of the jury verdict, but rather the net proceeds
received by his client after the counterclaim amount has been deducted. Such is not the
case here.

                                              8
supports his claims of error with regard to the Bankruptcy Court’s findings of fact.

       Finally, there is one point on which we part company with the District Court:

duplicative fees. We disagree with the District Court that enforcement of the contingency

fee agreement will not cause duplicative billing with regard to work done by Spyra on

Finney’s insurance suit prior to the signing of the contingent fee agreement. Despite the

District Court’s assertion to the contrary, we note that the itemized bill sent to Finney on

September 3, 2002, contains numerous billing entries regarding the insurance suit against

Royal, specifically for legal research and preparation of the “Turnover Complaint.” The

contingent fee agreement covers “any action arising from a dispute with Royal & Sun

Insurance Company,” and there is no language in the agreement restricting its coverage to

representation that occurred after the date the agreement was signed-we thus read the

contract to be unambiguous in terms of what services are covered. As such, we conclude

that the contingent fee agreement covers all legal representation associated with the

insurance suit, and consequently, any hourly fees charged to Finney in connection with

this suit must be stricken as duplicative.




                                       IV. Conclusion

       For these reasons, we affirm the District Court in part and reverse in part. On

remand, we instruct the District Court to further remand this case to the Bankruptcy Court

with instructions to (1) strike any hourly fee charged by Spyra for work dealing with



                                              9
Finney’s insurance suit against Royal, and (2) alter its Amended Order of May 23, 2003

accordingly.




                                          10
