United States v. $1,264,000.00 in U.S. Currency ( 2020 )

NOT RECOMMENDED FOR PUBLICATION
File Name: 20a0589n.06
Case No. 19-4262
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
FILED
Oct 16, 2020
UNITED STATES OF AMERICA, ) DEBORAH S. HUNT, Clerk
)
Plaintiff-Appellee, )
)
ON APPEAL FROM THE
v. )
) UNITED STATES DISTRICT
) COURT FOR THE NORTHERN
$1,264,000.00 in U.S. CURRENCY,
) DISTRICT OF OHIO
Defendant, )
) OPINION
TODD N. ZAPPONE, et al., )
)
Claimants-Appellants, )
)
DUNN COUNSEL PLC, et al., )
)
Claimants-Appellees.
)
BEFORE: COLE, Chief Judge; McKEAGUE and WHITE, Circuit Judges.
McKEAGUE, Circuit Judge. In 2012, after suspecting the Zappones of engaging in tax
evasion and structuring, the Internal Revenue Service seized $1,264,000 in cash from the
Zappones’ scrap-metal company. That seizure spawned a litany of lawsuits filed by the Zappones
in both state and federal court, a civil forfeiture action, a criminal investigation, and bankruptcy
proceedings. After the United States and the Zappones reached a settlement agreement regarding
the seized currency, the district court granted charging liens to two of the Zappones’ former
attorneys for unpaid legal fees. The Zappones appeal the grant of the charging liens, and we now
AFFIRM.
Case No. 19-4262, United States v. $1,264,000 in U.S. Currency, et al.
I.
The story begins in 2012, when the Internal Revenue Service, Criminal Investigation
Division (IRS-CI) began investigating Todd and Carrie Zappone for potential tax evasion and
structuring violations. The Zappones owned Ohio Scrap Corporation, a scrap-metal operation and
towing service. The IRS-CI obtained bank records from the scrap corporation that revealed
banking activity consistent with structuring: specifically, forty-four withdrawals of amounts
greater than $9,000 but not in excess of $10,000, in violation of 31 U.S.C. § 5324(a)(3). On
November 8, 2012, the IRS-CI executed a search warrant at the Zappones’ scrap company and
seized $1,264,000.00 in currency.
The United States then initiated a civil forfeiture action on April 22, 2013. The Zappones
had several different attorneys represent them during the forfeiture proceeding. One of them was
Robert Fedor, who was retained in May 2013. Fedor filed the Zappones’ answer to the
government’s Verified Complaint, Verified Claims for the scrap company and the Zappones, a
Motion to Lift Stay of Civil Forfeiture Proceeding, and a Motion for Hardship Release or
Substitution of Assets. Fedor also represented the Zappones in their bankruptcy proceeding and
in an action against Fifth Third Bank. At the Zappones’ request, Fedor filed a deprivation of rights
action under 42 U.S.C. § 1983 and prepared a Bivens complaint against the federal agents who
seized the currency. When the Zappones stopped paying Fedor’s legal fees, he withdrew from his
representation. Attorney Stephen Dunn took over in September 2014. Dunn negotiated a
favorable settlement agreement with the government and prepared and filed the Zappones’
delinquent tax returns. Like Fedor, Dunn withdrew when the Zappones stopped paying his fees.
The settlement agreement between the United States and the Zappones provided that part
of the seized currency would be used to pay off the Zappones’ federal tax liability and debt to
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Farmers & Merchants State Bank, that part of it would be returned to the Zappones, and that the
bankruptcy proceedings would be dismissed. The government also agreed to create a judgment
fund in the amount of $140,000 to pay the Zappones’ attorney’s fees. Attorneys Dunn and Fedor
filed charging liens against the fund for unpaid attorney’s fees in the amounts of $67,562.25 and
$104,860.00, respectively. In support of their motions for charging liens, Dunn and Fedor
submitted affidavits and billing statements detailing their work on behalf of the Zappones.
On November 22, 2019, the district court issued an order exercising its ancillary
jurisdiction over the charging liens and granting Dunn’s and Fedor’s motions in part. The district
court found that four of Dunn’s and eleven of Fedor’s billing entries were not reasonably connected
to obtaining a judgment in the Zappones’ favor and excluded them from their total amounts due.
Lastly, the court concluded that Dunn and Fedor were not entitled to reimbursement of their out-
of-pocket expenses. In the end, the court calculated that Dunn was owed $63,651.75 and Fedor
was owed $102,943.00. Because the total amount due to each attorney exceeded the amount
available in the judgment fund, the court instead awarded them a proportionate percentage: 38.21%
for Dunn, or $53,494.00, and 61.79% for Fedor, or $86,506.00.
The Zappones appeal the district court’s decision to grant the charging liens and argue that
the court erred in (1) exercising ancillary jurisdiction over the charging liens, (2) allowing Dunn
and Fedor to recover attorney’s fees for work done on matters other than the civil forfeiture
proceeding, and (3) improperly shifting the burden of production from Dunn and Fedor to
themselves to disprove the reasonableness and fairness of the fees.
II.
The Zappones urge this Court to review the district court’s exercise of ancillary jurisdiction
and decision to grant the charging liens de novo. Their argument rests on the premise that charging
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liens are contractual in nature and contract interpretation is reviewed de novo. But attorney
charging liens are not contracts; rather, they are “founded on the equitable principle that an attorney
is entitled to be paid his or her fees out of the judgment rendered in the case.” Fire Prot. Res., Inc.
v. Johnson Fire Prot. Co., 594 N.E.2d 146, 148 (Ohio Ct. App. 1991) (quoting Mancino v.
Lakewood, 523 N.E.2d 332, 337 (Ohio Ct. App. 1987)). The right to a charging lien exists
regardless of whether the attorney and client have an agreement as to the payment of fees. Id. The
Zappones’ reliance on In re Brunswick Apartments of Trumbull County., Ltd., a bankruptcy appeal
in which the court reviewed de novo an award of attorney’s fees pursuant to a promissory note, is
unavailing. 215 B.R. 520, 522 (B.A.P. 6th Cir. 1998). This case does not concern a contract or
written agreement for attorney’s fees but rather the equitable right of an attorney to payment of
fees earned in obtaining a judgment, which the Zappones themselves concede in their brief. See
Zappone Br. at 16 (“The charging lien is an equitable lien and the courts engage in an equitable
proceeding in ruling on attorney charging liens.”).
Under Ohio law, the decision to grant a charging lien is reviewed for abuse of discretion.
See Galloway v. Galloway, 80 N.E.3d 1225, 1231 (Ohio Ct. App. 2017) (“Whether an attorney
should be granted a charging lien ‘is left to the sound discretion of the court of equity, the exercise
of which should be based on the facts and circumstances of the case.’” (quoting Minor Child of
Zentack v. Strong, 614 N.E.2d 1106, 1108 (Ohio Ct. App. 1992))); see also Cuyahoga Cnty. Bd.
of Comm’rs. v. Maloof Props., Ltd., 968 N.E.2d 602, 604 (Ohio Ct. App. 2012). We do, however,
review a district court’s determination of subject-matter jurisdiction de novo. See Hudson v.
Coleman, 347 F.3d 138, 141 (6th Cir. 2003).
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A. Ancillary Jurisdiction
Appellants first argue that the district court erred in exercising its ancillary jurisdiction to
grant Dunn’s and Fedor’s charging liens. A federal court may exercise ancillary jurisdiction
“(1) to permit disposition by a single court of claims that are, in varying respects and degrees,
factually interdependent; and (2) to enable a court to function successfully, that is, to manage its
proceedings, vindicate its authority, and effectuate its decrees.” Peacock v. Thomas, 516 U.S. 349,
354 (1996) (quoting Kokkonen v. Guardian Life Ins. Co., 511 U.S. 375, 379-80 (1994)). The
district court invoked the second category, which is generally referred to as ancillary enforcement
jurisdiction. See Hudson, 347 F.3d at 142. Ancillary enforcement jurisdiction stems from a federal
court’s inherent power to enforce its judgment and has been exercised over a “broad range of
supplementary proceedings involving third parties to assist in the protection and enforcement of
federal judgments—including attachment, mandamus, garnishment, and the prejudgment
avoidance of fraudulent conveyances.” Peacock, 516 U.S. at 356.
The Zappones claim the district court erred in exercising its ancillary jurisdiction because
attorneys Dunn and Fedor did not “come into court with clean hands,” as individuals who seek
equitable relief must. The Zappones conflate two issues: (1) whether the district court erred in
exercising ancillary jurisdiction, and (2) whether the district court abused its discretion in granting
the charging liens because Dunn and Fedor did not provide competent representation to the
Zappones.
As for the first issue, the district court properly exercised its ancillary jurisdiction over the
motions for charging liens. Under Ohio law, an attorney may bring a charging lien against a
monetary judgment awarded to the attorney’s present or former client on the theory that the
attorney’s “services and skill created the fund” and that equity creates a right in the attorney to be
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paid out of that fund any “fees earned in the prosecution of the litigation to judgment.” Cuyahoga
Cnty. Bd. of Comm’rs, 968 N.E.2d at 605 (quoting Cohen v. Goldberger, 141 N.E. 656, 656 (Ohio
1923)). Counsel who have been discharged as of the date of the judgment may also assert a
charging lien “so long as counsel can demonstrate the significance his contribution has to that
judgment.” Id. Federal courts may exercise ancillary jurisdiction over fee disputes between
litigants and their attorneys when the dispute relates to the main action. See, e.g., Exact Software
N. Am., Inc. v. DeMoisey, 718 F.3d 535, 545 (6th Cir. 2013); Kalyawongsa v. Moffett, 105 F.3d
283, 287 (6th Cir. 1997) (“Resolution of related fee disputes is often required to provide a full and
fair resolution of the litigation.”). Dunn’s and Fedor’s fee disputes are directly related to the
resolution of the main action (the civil forfeiture proceeding) because part of the overall settlement
included the creation of the $140,000 judgment fund for unpaid attorney’s fees. The district court
properly exercised ancillary jurisdiction over the charging liens.
As for the second issue, whether the district court abused its discretion in granting the
charging liens because Dunn and Fedor did not come into court with clean hands, Dunn and Fedor
argue that the Zappones have forfeited this argument by not raising it before the district court.
Scottsdale Ins. Co. v. Flowers, 513 F.3d 546, 552 (6th Cir. 2008) (“[A]n argument not raised before
the district court is waived on appeal to this Court.”). We deviate from this general waiver rule
only when it “would produce a plain miscarriage of justice or when there are exceptional
circumstances that militate against finding a waiver.” Hayward v. Cleveland Clinic Found., 759
F.3d 601, 615 (6th Cir. 2014) (internal quotations omitted).
There are no exceptional circumstances here. The Zappones’ “clean hands” argument is a
highly intensive question of fact that would require an evidentiary hearing in order to determine
whether Dunn and Fedor competently represented the Zappones in their many lawsuits over the
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span of eight years. Moreover, the Zappones had ample opportunity to raise the “clean hands”
argument in their responses in opposition to Dunn’s and Fedor’s charging liens, at the evidentiary
hearing on September 25, 2019, and in their post-hearing briefing regarding the scope of the liens.
The Zappones have also failed to demonstrate any exceptional circumstances that would have
prevented them from raising this issue in the district court. Therefore, we decline to consider the
Zappones “clean hands” argument.
B. Scope of Charging Liens
Next, the Zappones argue that the district court erred in granting attorney’s fees to Dunn
and Fedor for work that was not related to the civil forfeiture proceeding. The court found that
Dunn’s and Fedor’s work on the Zappones’ tax, bankruptcy, and criminal matters, as well as the
related litigation against Fifth Third Bank, was necessary to achieve the overall settlement with
the government, and we agree. Ohio law permits attorneys asserting a charging lien to include
fees earned in related lawsuits “resolved as part of the overall settlement in the underlying lawsuit.”
Galloway, 80 N.E.3d at 1232. Dunn prepared and filed the Zappones’ delinquent income tax
returns in an effort to avoid criminal charges. He also negotiated with Farmers Bank to seek
settlement of the Zappones’ business debt. Similarly, by working with IRS-CI, Fedor was able to
obtain a declination of criminal tax charges against the Zappones as well as resolve their
outstanding tax liability. Fedor then filed a Chapter 11 bankruptcy proceeding for the scrap
company to prevent Farmers Bank from seeking a receivership over the business. Fedor also filed
an action against Fifth Third Bank because the Zappones maintained that the bank staff directed
them to withdraw amounts of less than $10,000 to reduce their paperwork.
The ultimate settlement of the civil forfeiture action, including the dismissal of the
Zappones’ bankruptcy proceeding, the settlement of their IRS liability and business debt to
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Farmers Bank, and the creation of the attorney-fee judgment fund, was a result of the “skills and
services” rendered by Dunn and Fedor in the several intertwined matters. See id. (upholding the
trial court’s order granting a charging lien for attorney’s fees from several related lawsuits that
were necessary to achieve the client’s overall goal). Accordingly, the district court was correct in
awarding charging liens that included Dunn’s and Fedor’s work on related matters.
C. Burden of Production
Lastly, the Zappones argue that the district court improperly shifted the burden of
production from Dunn and Fedor to the Zappones to disprove the reasonableness and fairness of
the fees. The Zappones are correct in noting that “[t]he party seeking equitable relief has the
burden of providing the court of equity with every necessary evidence in aid of its contention.”
Garrett v. City of Sandusky, No. E-03-024, 2004 WL 1125157, at *4 (Ohio Ct. App. 2004). But
the district court adhered to this standard in requiring Dunn and Fedor to produce, in support of
their motions for charging liens, affidavits and billing statements describing their services and the
amounts billed. In response to the motions, the Zappones argued that several of the billing entries
Dunn and Fedor submitted were for work that was not related to obtaining the final judgment. The
court agreed with some of these contentions and excluded several billing entries from both Dunn
and Fedor that were not reasonably connected to the overall settlement.
The Zappones take issue with the following conclusion in the district court’s order: “The
Zappones fail to disprove the assertions by Fedor and Dunn that their work on tax, criminal, and
bankruptcy matters, as well as on related litigation against Fifth Third Bank, was necessary to
obtain the final resolution of the Zappones’ overall goal of recovering the funds the government
sought.” The court did not shift the burden of production from Dunn and Fedor to the Zappones,
but instead found that Dunn and Fedor had met their burden of production by providing affidavits
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and billing statements detailing their work. Thus, the Zappones needed to demonstrate that the
work Dunn and Fedor performed on their tax, criminal, and bankruptcy matters was unrelated to
the overall settlement, which they failed to do. We find no error in the district court’s analysis.
III.
For the foregoing reasons, we AFFIRM the judgment of the district court.
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