Client’s Mere Acknowledgement Insufficient to Satisfy Fee Splitting Rule

Reeve v. Meleyco, Third App. Dist., case no. C085867, filed 3/24/20.  Client contacts lawyer 1 about a serious traffic accident inuring the client’s wife and child.  Client and lawyer 1 meeting with lawyer 2 about the case and discuss a division of fees, 35% to lawyer 1.  Lawyer 2 and client sign a fee agreement without any discussion of the fee division.  Lawyer 1 continues to work on the case. Client becomes nervous that he will have to pay lawyer 1 in addition to paying lawyer 2 his contingent fee.  Lawyer 2 sends client a document that asks him to certify his “understanding” that lawyer 1 would receive 25% of the fees and that the total fee would not be increased because of the division.  Client signs the following acknowledgment “I, [client], acknowledge receipt of this letter and understand the contents.”  The case settles, the money is disbursed but lawyer 1 is not paid.  He files an action against lawyer 2 and recovers a judgment based on breach of the fee splitting agreement and quantum meruit.  On appeal, the judgment is reversed. The Court of Appeal finds the fee-splitting agreement is unenforceable because the client did not expressly approve the terms of the division, as required by former Rule of Professional Conduct 2-200 (now Rule 1.5.1. It also found that the quantum meruit claim was barred by the two-year statute of limitations (Code Civ. Proc. §339.)

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.

Court of Appeal Test Drives New Candor Rule

 

 

The First District Court of Appeal, Div. 2, issued a Halloween-eve decision that surely qualifies as some lawyers’ horror story. The decision Davis v. TWC Dealership Group, Inc., case no. A155030, filed 10/30/19, involved arbitration clauses in employment contracts, but it was published to “also affirm—and remind the profession of—the importance of candor toward the court.”

The underlying thicket is a series of employment agreements signed by the Plaintiffs when they began their ultimately unhappy relationship with their employer.  Those agreements purported to bind Plaintiffs to arbitrate their claims in language the Court described as a “paragon of prolixity,” whose substance is “opaque,” and which has sentences that are “complex, filled with statutory references, and legal jargon.” But the Court of Appeal had some help in reaching its description because the same paragraph had been the subject of a California Supreme Court opinion OTO, L.L.C.v. Kho (2019) 8Cal.5th 111, 128) (Kho).  In fact, the same law firm had argued the Kho case before the Supreme Court. The TWC Court noted no complete version of any of the three fee agreements appeared in the record, and that extensive use of ellipsis was made in the briefing to omit large parts of the contracts.

The Kho decision was filed shortly after the close of briefing in the TWC case but it was not brought to the appellate court’s attention.  In its order, the Court asked the parties to address the impact of Kho but the associate attorney dispatched to argue the case was unprepared.  Neither of the attorneys who signed briefs appeared, having left the firm.

The Court of Appeal found the failure to inform the Court of the Kho decision was an “obvious” violation of Rule of Professional Conduct 3.3(a)(2), given that the same law firm had appeared in Kho:

A lawyer shall not …fail to disclose to the tribunal legal authority in the controlling jurisdiction known to the lawyer to be directly adverse to the position of the client and not disclosed by opposing counsel. or knowingly misquote to a tribunal the language of a book, statute, decision or other authority. . . .’ ” ..”

This rule is new in California.  Prior Rule of Professional Conduct 5-200 contained a similar prohibition against “intentionally” misquoting to a tribunal the language of a book, statute, or decision but no positive duty to disclose known adverse authority. It also contained the same general prohibition against using means inconsistent with truth or seeking to mislead a judicial officer with ” by an artifice or false statement of fact or law” contained in Business & Professions Code section 6068(d).  The origin of the new rule is Model Rule 3.3.

“Known” is a defined term in the new Rules; Rule 1.0.1(f): “Knowingly,”“known,” or “knows” means actual knowledge of the fact in question. A person’s knowledge may be inferred from circumstances.”

Since the same law firm argued Kho and the Court of Appeal specifically asked counsel to address Kho (as well as counsel’s failure to bring Kho to the court’s attention) finding knowledge isn’t much of a stretch.  One feels for the firm associate who appeared at the oral argument.

The Court of Appeal finding of lack of candor wasn’t necessary to decide TWC; the law of unconscionability, exemplified by Kho, supplied the necessary rule of decision.  The Court of Appeal also did not refer the matter to the Office of Chief Trial Counsel (OCTC), despite the “obvious” rule violation.  No sanction was sought or imposed and the conduct does not otherwise meet the statutory reporting requirements of Bus. & Prof. Code section 6086.7.  OCTC will surely see this decision and has the power to open its own investigation.

Whether or not discipline results, the Court of Appeal has given us a significant test drive of one of the new rules, meant to send a message that the duty of candor has some new teeth in California.