The Virginia Business Litigation Blog
Russell Lee Ebersole recently won a $45,000 judgment in a case for defamation and business conspiracy, racking up over $135,000 in attorney fees to obtain it. In September, Judge Cacheris ruled that only around $80,000 of the incurred fees were reasonable, and awarded fees to the plaintiff accordingly. Alas, it appears that Mr. Ebersole is never going to see any of this money, because he owes the government–which timely perfected its restitution lien–over $700,000.
Shortly after the judgment was entered, the government applied for a Writ of Continuing Garnishment to enforce its lien against the proceeds. Ebersole’s lawyers intervened and objected, claiming that the superpriority of their attorney’s lien (under 26 U.S.C. § 6323(b)(8)) applied to all fees billed to their client, not just the amount deemed reasonable by Judge Cacheris.
The priority of a federal lien based on an order of restitution is generally determined by who got there first, i.e. “first-in-time, first-in-right,” and the government’s lien was filed first. But there is an exception to that rule. An attorney’s lien “to the extent of his reasonable compensation for obtaining such judgment” enjoys superpriority status under 26 U.S.C. § 6323(b)(8). 
Regulations interpret “reasonable compensation” as the amount customarily allowed under local law for similar legal work based on the individual case circumstances.
The government argued that the law firm had superpriority only to the extent of the $79,786.42 that Judge Cacheris had ordered the defendant to pay Ebersole’s attorneys in the earlier action. Judge Cacheris had expressly excluded fees over that amount from the “reasonable compensation” he’d awarded, including the fees equal to the $45,000 in compensatory and punitive damages the defendant had to pay. Thus, it argued, the entire $45,000 fell outside the amount of reasonable compensation that might be accorded superpriority. The law firm argued that Virginia law would consider the full contractual amount “reasonable compensation.”
Judge Brinkema agreed with the government, finding that the superpriority exception only applied to that portion of the firm’s fees that had been adjudged “reasonable” in the earlier matter.