Mismanaged Bankruptcy Tastes Bitter
You know what the biggest waste of space is? A busload of lawyers going off a 1,000-foot cliff, and there are two vacant seats.
Bob Murray
Ask him, and Merrill Frank (Bob) Murray will tell you that everything negative that has ever been said or written about lawyers is true.
If Murray’s opinion of lawyers sounds harsh, it is understandable. He has been entangled in a legal morass for seven years, much of it created, he says, by a San Diego law firm he hired in a routine bankruptcy matter. Instead of helping him, a federal bankruptcy judge found, the firm of Jennings, Engstrand & Henrikson worsened Murray’s financial woes through its negligence.
Murray, 60, is a former heavy-equipment salesman from Santa Barbara who converted a small fortune from a 9-to-5 job and was able to retire in 1975, at age 46. Over the years, he invested his savings in income property and at one time was worth about $7 million, until his first wife divorced him in 1976.
When he retired, the easy-going Murray owned a condominium in Hanalei, Hawaii, where he spent the winter, and commercial and residential buildings throughout California, including Carlsbad and Mira Mesa. Even after his divorce, Murray’s fortune was estimated to be $4 million.
But, in 1982, his financial world began to crumble. Rising interest rates forced him to seek protection from creditors, and Murray hired Jennings, Engstrand & Henrikson, one of San Diego’s oldest, largest and most prestigious firms, on the advice of a Santa Barbara lawyer. The move turned into a legal nightmare that continues to haunt him.
“That’s what sold me to go there (Jennings). I was told they had their act together. Gosh, their act must have disintegrated the day before I walked in,” Murray said. “My experience with them was similar to ‘Alice in Wonderland.’ Everything was incredibly backward. It cost me everything I had.”
Initially, Murray wanted to stave off creditors, who held about $1.3 million in notes, long enough to obtain lower-interest loans to pay off his existing debts. Instead, Murray lost his entire fortune, including a 3.6-acre parcel in Carlsbad valued at $2 million, because of Jennings’ ineptitude, said Murray’s attorney, William Rathbone of San Diego.
After losing everything he owned, Murray received a 223-page bill, about the size and thickness of a telephone directory, for $208,523.84 from Jennings. When Murray sued to avoid paying the bill, Jennings said the law firm would seek an additional $136,000, the amount it spent to defend itself against his lawsuit.
The legal and financial problems were too overwhelming for Murray’s wife, a Fulbright scholar who studied at UCSD and returned to her native Poland in August with the couple’s 3-year-old daughter.
“My wife and child admire Poland. Anybody that admires Poland, you know they had a bad time here,” Murray said.
In 1988, six years after the bankruptcy petition was filed, Murray filed his lawsuit over attorneys’ fees against Jennings. His lawyer, Rathbone, explained to a bankruptcy judge in July, 1988, how Murray “could walk into the offices of Jennings, Engstrand & Henrikson with $3.5 million worth of assets and now appear before this court . . . penniless and living below the poverty level.”
Decision Took 6 Months
After a nearly monthlong trial, bankruptcy Judge John J. Hargrove took the matter under submission. Six months later, Hargrove released a 91-page written decision that supported Murray’s argument and lambasted Jennings. The judge used words like “unethical conduct” and “numerous transgressions” to describe the law firm’s performance in representing Murray and ruled that the firm did not deserve to be paid.
The firm “failed to exercise the skill, care, prudence and diligence as other members of the legal profession commonly possess and exercise in bankruptcy matters,” Hargrove said in his decision.
The judge also ruled that Jennings was not entitled to collect attorneys’ fees because of negligence. Furthermore, Hargrove politely said that the firms’ attorneys lied in their testimony.
“This court concludes that (Jennings) is not entitled to any attorneys’ fees or costs . . . by virtue of its unethical conduct and numerous transgressions and omissions as previously discussed, reflected in its less than candid disclosures to the court and creditors of this estate,” Hargrove said.
In addition, the judge ruled that Murray signed the promissory note for attorneys’ fees under duress, and that Jennings misled him when the firm’s attorneys told him that Hargrove did not need to review their fees.
Last month, Murray cleared another legal hurdle, when Superior Court Judge James R. Milliken allowed him to pursue a malpractice suit against Jennings in Superior Court. Milliken denied a motion by Jennings to dismiss the lawsuit. Murray said he hopes to recover the money he lost through Jennings’ negligence “plus some interest and other damages.”
Decision Appealed
Meanwhile, Jennings has appealed Hargrove’s decision. The firm’s attorneys, and those who represented Murray in the bankruptcy matter but who no longer work at Jennings, declined to comment. Manny Ramos, who is representing the firm in the appeal, issued a brief statement:
“We respectfully disagree with the decision. It’s on appeal. Because of ongoing litigation, we do not think it is appropriate to discuss the case.”
Despite his financial downfall, Murray remains indefatigable in his attempt to “right the wrong that lawyers have done to me.” The quest has turned into an obsession for a man who was once a self-made millionaire.
During the bankruptcy trial, Jennings’ lawyers attempted to portray Murray as a sophisticated businessman who was knowledgeable about complex real estate matters. They argued that Murray was largely to blame for his financial hardships.
However, the judge found otherwise.
“Murray was not a sophisticated owner and operator of real estate,” Hargrove wrote, “but rather a retired salesman of heavy equipment who had accumulated some real estate assets for his retirement but had never . . . been involved in a complex real estate transaction.”
Before losing his fortune, Murray lived a well-to-do retiree’s life in Del Mar, vacationing in Europe and the Far East, and driving a treasured Austin Healy about town. Today, he lives in a duplex in Oceanside, where he makes a living by renting out 20 refrigerators for $30 a month each, and by working part-time for a telephone soliciting company.
“Some people were born with silver spoons in their mouths. I was born with a do-it-yourself kit,” he says proudly. “But let me tell you, your life style changes when you lose your money. When that happens, you’re lucky to go from Oceanside to downtown San Diego. It makes you humble.”
Critical of Attorney
Sitting in his living room, Murray waved a copy of Hargrove’s decision and told a visitor that it is a biographical sketch of his last seven years. Throughout the document, the judge criticized attorney Jack Cohen, who formerly worked at Jennings and handled Murray’s bankruptcy, and the law firm for hiding numerous transactions from the court and “misleading” the court.
“This court concludes that attorney Cohen’s comments to the court . . . as to the status of the estates, were materially misleading and his statements regarding the fact that Murray had obtained financing were false,” Hargrove said.
Keith McWilliams, Cohen’s supervisor at Jennings, also came in for criticism from the judge.
“Further, this court finds that attorney Williams did not adequately supervise attorney Cohen in his handling of these proceedings and that this is a substantial cause of the problems which occurred in the case,” Hargrove said.
Cohen declined to comment, telling a reporter that he did not wish “to try this case in the press.” McWilliams, after initially agreeing to an interview, had a secretary call and cancel. A request for another interview was denied.
Among the “transgressions” committed by Cohen and Jennings, according to Hargrove’s decision, were:
* Failure to obtain court approval before hiring three additional law firms to work on the bankruptcy.
* Pressuring Murray to accept a $70,000 bill from one outside attorney, who presented him with a one-page statement that contained no details about what he did to earn the fee. Jennings also directed Murray to sign a promissory note to a Santa Barbara attorney for $38,500 and $4,920 for the attorney’s firm.
* Opening a secret joint checking account at Bank of America under the name of Murray and former Jennings attorney McWilliams. The account was used to pay some creditors and provide living expenses for Murray without court approval.
* Allowing Murray to obtain several additional loans, further burdening his liabilities, without obtaining court approval while going through bankruptcy.
* Employing Coldwell Banker real estate to handle the sale of Murray’s Carlsbad property without getting authorization from the court. Jennings prepared documents that included a provision that caused Murray to personally guarantee a $120,000 commission to Coldwell Banker.
* Employing an attorney to protect Murray’s interest in Hawaii without court approval. Murray said the attorney was supposed to save his condominium, but he lost the house. According to Hargrove’s decision, Murray also ended up with a $21,000 judgment filed against him by the homeowners association.
‘Numerous Transgressions’
In his decision, Hargrove noted Jennings’ “repeated violations of various provisions of the Bankruptcy Code and Bankruptcy Rules.” The judge concluded that “the record in this case does not reflect an isolated incident or two of inattention or omission by (Jennings) . . . but rather a systematic pattern of numerous transgressions beginning in late 1983.”
Gordon L. Gerson, an experienced San Diego bankruptcy lawyer, said Murray’s case “is neither common nor uncommon.”
“A case of this magnitude is about as frequent as Hurricane Hugo coming through town,” Gerson said. “I don’t think the bankruptcy court system should be judged by this case. There’s nothing wrong with the system that’s not already being addressed or continually reviewed by local bankruptcy judges or the bankruptcy bar.”
According to Gerson, beginning this week new rules will take effect in local bankruptcy court that will require attorneys to list separately the fee charged clients for each legal matter and explain what they did to earn the fee. In addition, attorneys will be required to file quarterly fee applications with the court.
“These are examples of how the bankruptcy system is trying to take care of its own problems,” Gerson said.
Gerson said he was surprised by Jennings’ performance in Murray’s case because “they are good lawyers.” “Jennings is an excellent law firm. I think that bankruptcy lawyers at Jennings today and in the past generally have been excellent lawyers,” he added.
His observation was echoed by Hargrove, who was perplexed by the way Jennings handled the case.
“What is most disturbing is that some of the members at (Jennings) who handled this proceeding are exceptionally experienced in bankruptcy proceedings . . . Supervising attorney McWilliams was a former bankruptcy judge and is very experienced in bankruptcy matters,” Hargrove said in his decision.
During the trial, Jennings attorneys contradicted each other’s testimony, and even an expert witness hired by the firm to further its case inadvertently helped Murray’s case instead. These contradictions were noted by Hargrove in his decision.
Cohen testified that Murray contributed to his financial demise by repeatedly refusing to follow his legal advice. To buttress this testimony, Cohen testified that he had trouble communicating with Murray. However, Hargrove noted that Michael Van Horne, who also worked at Jennings, testified that “Murray was somewhat of a pest who showed up frequently at the offices of (Jennings) without appointments.”
Attorney Robert G. Sullivan, who was hired by Jennings to testify as an expert in a complex real estate deal arranged by the firm to sell Murray’s Carlsbad property, ended up supporting Murray’s position.
In drawing up the real estate documents, Jennings allowed the buyer to take about $250,000 out of escrow in April, 1984. Under questioning by Rathbone, Murray’s attorney, Sullivan, testified that it was “unusual” for a buyer to take money out of escrow and added that the bankruptcy court “would have been interested” in reviewing the sale arranged by Jennings.
In his opinion, Hargrove wrote that the law firm had “given away” the estimated $250,000. Jennings “also caused the estate to lose approximately $62,500 in interest” and “waived” a $30,000 extension in its handling of the sale of the Carlsbad property, Hargrove wrote.
No Court Authorization
It was Jennings’ handling of Murray’s Carlsbad property, 3.6 undeveloped acres that represented his major asset, that was singled out for most of the criticism by Hargrove. At the time, the land was appraised at $2 million. In the end, Property Mortgage, a Beverly Hills company, foreclosed and ended up with the property, paying only $950,000 for it in a sale that was completed without authorization from the court.
“This was the major asset in the estate and in the absence of a disclosure statement and plan the bankruptcy court would have been required to carefully scrutinize the terms of the sale. . . . (Jennings) deprived this court and the creditors the opportunity to review the transaction, which obviously provided substantial greater risk to the estate,” Hargrove wrote in his opinion.
Murray was left with a $120,000 debt to Coldwell Banker and a $65,000 judgment from a sanitation company that was renting part of his Carlsbad property. “That’s what I got from the sale. That’s what I got from the $2 million the property was worth,” Murray said.
His bankruptcy experience has left him with bitter feelings about lawyers, Murray said. Attorneys, he added, are allowed to stand above the law.
“The judge’s decision says that the lawyers broke the law,” he said. “They didn’t abide by the bankruptcy laws, but nobody went to jail. I can’t believe it. Can this happen in America?”
