Liens Case Analysis

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The decision in this case creates a clear rule governing attorneys’ personal liability to the health care providers of their clients: a health care provider (or anyone else asserting that the attorney’s personal injury client assigned away his rights in a future settlement) cannot recover from the attorney personally, unless the attorney agreed to be bound.

However, the decision leaves the law governing equitable liens as murky as ever.

The decision fails to even definitively state what the elements are for an equitable lien.

The court lists the elements of an equitable lien as containing only two: (1) a debt, duty or obligation owing by one person to another; and (2) a res to which that obligation fastens, which can be identified or described with reasonable certainty. Citing McIntryre v. Cox, 68 Wis.2d 597, 602, 229 N.W.2d 613 (1975).

The court then adds unjust enrichment as a de facto third element, something the dissent took issue with.

However, it leaves unanswered whether there exists a fourth element: that both the debt, duty or obligation, and the res, arise from written contracts showing an intention to charge some particular property with the payment of the debt.

This language comes from McIntyre, immediately following the two above-listed elements. Id. The court acknowledged this language, but, because the court found there was no equitable lien, even if there are only two elements, it did not address this element, stating in footnote 12, “The formulation of the elements is not important for purposes of this case.”

Cases decided since McIntyre are not consistent on this point.

In In re Stoffregen, 206 B.R. 939, 943-944 (Bankr. E.D. Wis.1997), the court stated the law as creating alternatives — the questionable third element is not an element of an equitable lien, but an alternative ground for creation of an equitable lien. The decision in that case also lists unjust enrichment, as an element.

The most recent published court of appeals decision on the issue, O’Connell v. O’Connell, 2005 WI App 51, 279 Wis.2d 406, 694 N.W.2d 429, takes a different approach. There, the court stated the elements as though the questionable third element is part of the test. Id., 694 N.W.2d at 434. However, the court then proceeded to declare an equitable lien, without addressing that element. Id., at 434-435.

Had the court addressed the third element, it could not have plausibly found an equitable lien to be present.

In O’Connell, two brothers and their wives owned lake property as co-tenants beginning in 1951. Apparently, one of the brothers, Gerald, made lots of improvements, and the other brother, Emmett, was something of a free-rider. In 1994, a warranty deed was executed, pursuant to which, effectively, Emmett and his wife sold their half of the property to their two sons. Id., at 432.

In 1999, the parties agreed to partition after the sons brought action for an accounting and Gerald sought reimbursement for unfairly borne expenses — roughly $50,000. Id.

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Had the court addressed the third element, it could not have ruled that there was an equitable lien, for there would be no written contract showing an intent to charge the property with the payment of a debt. Instead, there was just a warranty deed.

Nor would there be unjust enrichment for the entire amount of the improvements. The value of any improvements performed prior to the 1994 warranty deed would have unjustly gone to Emmett and his wife; the purchase price paid by the sons, however, would have accounted for that increased value.

Just as in the case at bar, where the court held that Hernandez, rather than Durkin, was the party unjustly enriched, so, too, the parents, rather than the sons, were the parties unjustly enriched in O’Connell (at least as for any improvements before 1994).

The scenario in O’Connell is a relatively common one. Despite the perils, family members will continue to buy property together, and the potential always is present that one or more will become a free-rider.

The decision in the case at bar does not dictate whether an equitable lien can result or not. Although the dissent discussed O’Connell at length, and approved its reasoning, the majority opinion engages in no discussion of it.

Nevertheless, any party aggrieved by the erroneous reasoning in O’Connell should preserve the issue — what are the elements for an equitable lien — for potential review in the Supreme Court, citing footnote 12.

– David Ziemer

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David Ziemer can be reached by email.