Court Decides Novel Issue Concerning Priority of a Contractual Lien for Legal Services


In Pou Chen Corp. v. MTS Products, 2010 DJDAR 4577 (March 26, 2010), the California Court of Appeal, 2nd District, decided a novel issue concerning the priority of a contractual lien for legal services.


GBMI entered into a contract with MTS whereby GBMI would buy products that MTS intended to sell to Wal-Mart. Subsequently, the parties negotiated and entered into as a joint venture and formed a new entity named BHE. A third entity, Pou Chen Corp., contributed $10 million for purchase of a 70 percent interest in the new entity, BHE. MTS began withholding payments from BHE due to a business dispute. BHE and GBMI sued MTS to recover the withheld funds. At trial, the jury awarded BHE and GBMI $46,485,578 and awarded MTS $11,476,877 against Pou Chen on its cross-complaint.

Subsequently, two law firms entered into a joint retainer agreement with MTS to collect MTS’s judgment against Pou Chen.

The law firms negotiated a contractual lien on any recovery obtained against Pou Chen. Later, BHE and GBMI obtained a writ of execution and levied on MTS’s bank accounts, resulting in payment to BHE and GBMI of $24,813,458. Thus, approximately $23,643,689 was unpaid on the BHE judgment. BHE and GBMI then assigned the unpaid judgment to Pou Chen for $100,000 and Pou Chen moved to offset the judgments.

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