Failure to Disclose Lack of Insurance Makes Fee Agreement Unenforceable – Fifth DCA

Hance v. Super Store Industries, Fifth Appellate Dist, case no. F075852, filed 1/23/20.

Lawyers in a class action case agree to divide fees.  They have the class representatives sign fee agreements.   One of the lawyers does not disclose in the fee agreement that he does not have legal malpractice insurance, as required by former Rule 3-410 (current Rule 1.4.2.)  The class representatives approved the fee division agreement, although one class representative later retracted consent.

Needless to say, the lawyers later dispute the fee division agreement.  The trial court approves the class action settlement and the division of fees, awarding 30% ($1.29 million) to the lawyer with the non-compliant fee agreement.  The other lawyer appealed.

The Court of Appeal reversed and remanded. It found it unnecessary to reach arguments that there had been inadequate compliance with former Rule 2-200 (now 1.5.1) and went straight to the heart of the failure to disclose the lack of malpractice insurance.

Noting that the duty disclose was mandatory and a Rule of Professional Conduct, the Court acknowledged the public policy purpose of allowing the client to make an informed choice of counsel, aware of that counsel’s insurance status.  Finding no cases directly addressing the failure to disclose insurance under Rule 3-410, the decision cited a number of cases where the failure to comply with Rules of Professional Conduct resulted in an unenforceable fee agreement, including the California Supreme Court’s recent decision in Shepard Mullin v. J-M Manufacturing (2018) 6 Cal.5th 59.  It found the in pari delicto exception (McInto.sh v. Mills (2004) 121 Cal.App.4th 333, 347) inapplicable; because this was an absolute duty under the Rules, the offending lawyer could not be “less morally blameworthy” than his opponent, the one seeking enforcement, despite the opponent’s actions.  Finally, the Court noted that important public purpose of the Rule, overcoming the incentive the uninsured attorneys would have to avoid disclosure.  The agreement was held to be unenforceable.

But all was not lost for the non-compliant lawyer.  Violations of the Rules of Professional Conduct don’t always result in loss of all right to compensation, despite the uncompromising language of some of the earlier cases (see Clark v. Millsap (1926) 197 Cal. 765.) Citing Sheppard, the Court of Appeal found the factors to be addressed in deciding whether the offending lawyer might recover in quantum meruit, for the reasonable value of the lawyer’s services, as “the egregiousness of the attorney’s conduct, its potential and actual effect on the client and the attorney-client relationship, and the existence of alternative remedies” (Sheppard at 89.)  The trial court never considered recovery in quantum meruit.  The Court remanded the case back to the trial court for consideration of possible quantum meruit recovery, giving the lawyer another bite at the apple but almost certainly less than a $1.9 million bite; while the offending lawyer was counsel of record, most of the work on the case was apparently done by his opponent.

Reversal Reversed: Bradshaw Case Heads Back to State Bar Court

 

The Drexel Bradshaw case was examined in an earlier post on this blog, Reversal of Fortune. Now, fickle Fortune reverses itself again, the California Supreme Court granting a petition from the Office of Chief Trial Counsel by remanding the case back to the Review Department for reconsideration of its July 2019 decision that dismissed the case after a disbarment recommendation from the Hearing Department.  A unanimous Supreme Court asked the Review Department to reconsider the dismissal ‘in light of the June 14, 2019, Amended Statement of Decision on Petition After Trial And Order in San Francisco Superior Court Case No. PTR-17-301118.” It also directed the Review Department to consider whether to return Bradshaw to inactive enrollment under Business and Professions Code section 6007, subdivision (c)(4), pending its reconsideration of the underlying disciplinary matter.  That section provides for automatic inactive enrollment whenever a disbarment recommendation is made in the State Bar Court.

While the State Bar functions as the California Supreme Court’s administrative arm in the area of discipline, the high court seldom grants petitions for review by either respondents or the Office of Chief Trial Counsel, although it reviews all the disciplinary recommendations made by the State Bar Court.