CALIFORNIA ATTORNEY'S FEES

Ethics, Referral Agreements: Joint Venture Agreement Between Two Firms, Where One Firm Failed To Register As A Professional Law Corporation, Was Not Unenforceable As Against Public Policy

No Clients Were Harmed, So Enforcing The Agreement Was Fine Under The Circumstances.

               In Liberty Law Office, Inc. v. The Bloom Firm, Case Nos. A165269 et al. (1^st Dist., Div. 1 Mar. 20, 2024) (unpublished; opn. modified and rehearing denied), arbitrators, the lower court, and the appellate court all agreed that a Joint Venture Agreement (JVA) between two firms, even though The Bloom Firm did not properly register as a professional law corporation as required by statutes, was not unenforceable as against public policy.  Except in the unlicensed contractor area, not all contracts entered into by unlicensed entities are automatically void.  Here, registration was really for tax and personal liability protection for the firm, and the record showed no clients were harmed under the JVA—so there was no justification to declare the contract unenforceable under the operative facts.

Quantum Meruit, Referral Agreements: Client Only Signing A Disclosure And Acknowledgment Understanding Letter Section Did Not Give Written Consent As Required Under Former Rule 2-200 Of State Bar Rules Of Professional Conduct For Referral Agreements

Result Was Reversal As A Matter Of Law Of Jury Verdict Based On Contractual Breach And Quantum Meruit, Because Contract Was Unenforceable And QM Claim Was Time Barred.

            Reeve v. Meleyco, Case No. C085867 (3d Dist. Mar. 24, 2020) (published) is an ethics reminder to all practitioners to get an express written consent from a client to a referral fee arrangement.  If not, the attorney has no contractual claim, being left to a quantum meruit claim which has a shorter two-year statute of limitations.

            What happened here is that plaintiff attorney sued defendant attorney after he refused to pay a referral fee, with a jury find in attorney’s favor on both a breach of contract and a quantum meruit theory relating to a $900,000 settlement (although finding that plaintiff had sued too late to get a referral fee for a $3.375 million settlement).  The jury awarded plaintiff $78,750 on both theories, with the trial judge adding another $49,364.35 in prejudgment interest.  Defendant prudently appealed, and it all went POOF! based upon a reversal as a matter of law.

            Justice Mauro, the authoring justice for a 3-0 panel of the Third District, decided that the facts did not show a compliant written consent required under former rule 2-200 of the State Bar Rules of Professional Conduct (now rule 1.5.1).  The writing was defendant’s letter informing client “that the twenty-five percent (25%) referral fee that I [the referred-to attorney] am paying to [plaintiff referring attorney] will come out of my fee and will not increase the fees to either you or your daughter.” Client signed the writing as well as signed a pretyped acknowledgement stating: “I, JAMES G. LUOMA, acknowledge receipt of this letter and understand the contents.” In signing the acknowledgment, client merely confirmed that he received the writing and that he understood what it said.   The Third District did not believe this was actual consent, finding consent way different from dictionary definitions for disclosures, receipt, or understanding.  That meant that the contract was unenforceable such that the contract claim verdict could not stand.

            That brought the appellate court to the quantum meruit verdict, with the claim having a two-year statute of limitations.  The problem here was that plaintiff sued over three years after the settlement money was distributed, way too late.  Plaintiff argued that the four-year limitations for written contracts applied, but this was swept away because quantum meruit is not based on a contract (especially one which is unenforceable).  The judgment was reversed as a matter of law, including the prejudgment interest award.

Class Action/Referral Agreements: $310 Million Fee Recovery Fixed In Long-Standing Federal Antitrust Case

 

     As reported by Andrew Longstreth in an April 4, 2013 post at Thomson Reuters News & Insight, N.D. Cal. U.S. District Judge Susan Illston awarded dozens of plaintiffs’ law firms $310 million in attorney’s fees in a long-running antitrust price-fixing case where over $1 billion in settlements were obtained in a dispute over thin-film liquid-crystal display panels used in a range of electronic products (including laptops and TVs).

     In In re TFT-LCD (Flat Panel) Antitrust Litig., N.D.Cal. Case No. 07-md-01827, District Judge Illston adopted the recommendations of a special master, not uncommon in these type of cases. Co-lead counsel objected to the special master’s fee recommendations, arguing it had an agreement with the other co-lead counsel to divide the fees differently. The special master found the objecting co-lead counsel had not met its burden on the issue, with District Judge Illston agreeing and also determining that the alleged agreement was unenforceable, also, because the fee-sharing agreement was not in writing and signed by the clients under federal/California law.

Class Actions/Equity/Referral Agreements: Attorney May Be Equitably Estopped From Enforcing Fee-Sharing Agreement Violations Where Attorney Prevented Other Participating Attorneys From Compliance With Fee-Sharing Requirements

 

Equity Can Play a Role In These Disputes, Rules Fourth District, Division 3.

     Barnes, Crosby, Fitzgerald & Zeman, LLP v. Ringler, Case No. G045872 (4th Dist., Div. 2 Dec. 19, 2012) (published) goes to show you that equity does interplay with ethical fee-sharing restrictions.

     Here, the Fourth District, Division 3, in a 3-0 opinion authored by Justice Ikola, held that an attorney may be equitably estopped from claiming a fee-sharing contract in a class action is unenforceable where that attorney may have been responsbile for noncompliance with the fee-sharing restrictions and may have unfairly prevented the other attorneys from complying with such mandates.

     The appellate court reversed a trial court ruling based on fee-shifting restrictions, finding that the controlling class action attorney may have steered client control to impede the fee-sharing attorneys from getting a written fee split agreement. Any other result, said the court, might “have a dampening effect on attorney referrals.”

     So, even though the trial court awarded $13.5 million in fees to the offending attorney, it did not preclude supplemental pleadings by the aggrieved attorneys on the equitable estoppel theory.

Referral Agreements: Attorney Suing Another Attorney For Quantum Meruit, Breach Of Contract, Fraud And Interference For Division Of Fees From Settlement Did Not Recover Anything

Third District Finds No Remedy Available Against Other Attorney and Applies Litigation Privilege in Sustaining Defense Judgment.

     In a decision just recently certified for publication, the Third District affirmed a defense judgment in a case involving a dispute between two attorneys over the division of fees in a personal injury action that settled. The decision is Olsen v. Harbison, Case No. C058943 (3d Dist. Dec. 28, 2010) (certified for publication) and has an interesting discussion of the remedies available to a discharged attorney under a fee sharing agreement consented to by the client.

     Client hired plaintiff as her attorney, and plaintiff in turn associated in defendant as counsel. The attorneys reached a fee division agreement, which was approved by client pursuant to California Rules of Professional Conduct rule 2-200. Client soon fired defendant, and her personal injury case settled for $775,000. Plaintiff did not receive any fees, suing defendant attorney for quantum meruit, breach of contract, fraud, intentional interference, breach of fiduciary duty, declaratory relief, and constructive trust/unjust enrichment. After plaintiff abandoned some theories and following a series of rulings in the litigation, the trial court entered judgment in favor of defendant, which led to plaintiff’s appeal.  Here is how it panned out:

Fee-Sharing Agreement: Defendant Clients Not Entitled To Attorney's Fees Where No Fee Entitlement in Fee-Sharing Agreement

Fourth District, Division 3 Finds Fees Clause in Contingency Agreement Was Inconsequential.

     Earlier, in our September 21, 2008 post, we reported on Strong v. Beydoun, 166 Cal.App.4^th 1398 (2008), where defendant clients owed no unjust enrichment recovery to an attorney who failed to obtain clients' signatures to a fee-sharing agreement with clients' other counsel. The fee-sharing agreement was unenforceable because clients did not sign it and suing attorney was barred from recovering any form of compensation from them.

     We now have the follow-up proceedings. After having won, prevailing defendants moved for attorney's fees, claiming they were prevailing parties under the contingent fee agreement containing a fees clause. The request was denied by the trial court. Clients appealed, and fared no better.

     The Fourth District, Division 3 in Strong v. Beydoun, Case No. G040238 (4^th Dist., Div. 3 Apr. 22, 2009) (unpublished) affirmed the fee denial. Presiding Justice Sills, on behalf of a 3-0 panel, found there was no fee clause, implied or otherwise, in the fee-shifting agreement that would give defendants a basis for fee recovery. The contingency fee agreement was immaterial, because losing attorney had sued under an unjust enrichment theory instead. The reciprocity principle of Civil Code section 1717 did not kick in because attorney would have been entitled to fee recovery in any event.

Ellen Peck's January 2009 Article In California Bar Journal Has Nice Tips For Recovering Fees in Contingency, Limited Partner, Executor, and Client Fee Sharing Representations

 

Ms. Peck Reviews Stroud, Shimko, Miller, and Strong Decisions.

     Ellen R. Peck, a former State Bar Court judge and Encino solo practitioner, has written a fine article in the January 2009 edition of the California Bar Journal with astute tips of upfront, prophylactic actions that can be taken for successfully recovering fees in diverse client representation situations. We summarize them here:

Referral Agreements: Suing Attorney Cannot Sue Client For Noncontractual Recovery

Fourth District, Division Three Affirms Determination on First Impression Issue.

            In our category “Cases:  Referral Agreements,” we have surveyed past cases on requirements governing enforcement of referral agreements by which attorneys agree to fee sharing agreements in the prosecution of a case on behalf of a client.  One of the most conspicuous requirements is that the client must consent in writing to the referral agreement between attorneys; if not, an attorney cannot enforce the contractual agreement against either the client or other attorney.  (Chambers v. Kay, 29 Cal.4^th 142, 156, 159 (2002), relying on rule 2-200 of the Rules of Professional Conduct of the State Bar.) 

            However, the harshness of this requirement was ameliorated somewhat in Huskinson & Brown v. Wolf, 32 Cal.4^th 453, 458-459 (2004).  There, our state supreme court decided that rule 2-200 did not prevent an aggrieved attorney from obtaining quantum meruit recovery against the other attorney failing to honor the referral agreement. 

            This brings us to the first impression issue faced by our local Santa Ana Court of Appeal:  can the aggrieved attorney seek quantum merit recovery for rendered services against the client?  Answer:  No.

            Presiding Justice Sills, the author on behalf of a 3-0 panel, found that quantum meruit recovery should not be allowed in this context because the financial arrangement for the suing attorney was with the attorney failing to honor the referral arrangement, not the client.  Because rule 2-200 was adopted for protection of the client, “[i]t makes no sense to allow an attorney whose only connection to the client is through an unenforceable fee-sharing agreement to recovery fees directly from that client.  [Suing attorney’s] recourse is against [the attorney failing to honor the referral arrangement].” 

(As an aside, suing attorney’s case against the other attorney was still ongoing, because the appeal only focused on the trial court’s sustaining of a demurrer without leave as to the claims against client.  Suing attorney alleged that she was entitled to at least $75,000 for her work.)

            The case is Strong v. Beydoun, Case No. G039758 (4^th Dist., Div. 3 Sept. 19, 2008) (certified for publication). 

                                                                                                               

Fee-Splitting Agreement Not Disclosed To Court In Class Action Fairness Proceedings Precluded Later Suit To Enforce The Agreement

California Rule of Court 3.769(b) Compels Heightened Disclosure and Scrutiny in Class Action Contexts.

            In our July 28, 2008 post, we discussed Manley v. Burunsuzyan, an unpublished decision that reinforced the need for client consent to a fee-splitting arrangement between counsel pursuant to Rules of Professional Conduct, rule 2-200(A).  Aside from the need for client consent, there is an additional rule that must be complied with in class action cases.  California Rules of Court, rule 3.769(b) requires that any fee arrangement between counsel about fees “must be set forth in full in any application for approval of the dismissal or settlement of an action that has been certified as a class action.” Rule 3.769(b) was squarely at issue in the next discussed opinion emanating from our local Santa Ana-based Court of Appeal.

            In Mark v. Spencer, Case No. G038314 (4^th Dist., Div. 3 Aug. 22, 2008) (certified for publication), two attorneys and likely now former friends (Mark and Spencer) entered into a fee agreement to act as co-counsel in a class action, agreeing to split any fees generated in the case.  A settlement was reached in the case.  Although both attorneys sought fees, nothing in the papers or argument made at the fairness/fee application hearing disclosed the existence of the fee-splitting agreement to the trial court.  (Curiously, Mark did not even appear at the hearing on his fee application.)  The trial court approved a little over $401,000 in fees to Spencer and only about $76,500 in fees to Mark.  Spencer failed to honor their fee-splitting agreement, which inspired Mark to sue Spencer in a second suit.  The trial court sustained Spencer’s demurrer without leave based on failure to comply with rule 3.769(b) and on res judicata grounds.  Mark appealed.

            Justice Aronson, on behalf of a 3-0 panel of the Fourth District, Division Three, affirmed both grounds of the dismissal below.

            Mark’s failure to comply with rule 3.769(b) was fatal to enforcing the agreement between counsel in a separate action.  In this respect, the appellate panel followed almost identical reasoning in Rebney v. Wells Fargo Bank, 220 Cal.App.3d 1117, 1142-1143 n. 8 (1990).  It dismissed Mark’s challenge as follows:  “Because an existing fee-splitting agreement could affect a class action court’s decision to approve a proposed settlement, attorneys would have little incentive to disclose the agreement if they could simply enforce it in a separate action.  To avoid encouraging the violation of rule 3.769(b), and the potential harm to class members from undisclosed conflicts, we apply the same prophylactic rule the Supreme Court applied for violations of Rules of Professional Conduct, rule 2-200, and hold that the parties’ failure to fully disclose the fee-splitting agreement to the [class action] court when they petitioned for approval of the class action settlement bars later enforcement of the agreement.” (Slip Opn., at p. 9.)

            Independently, Justice Aronson agreed that Mark’s subsequent claims were barred by the doctrine of res judicata.  Mark had fair opportunity to bring the fee-splitting agreement to the court’s attention and his claimed ignorance of the rule was no excuse.  Because the court must fully consider attorney’s actual efforts to benefit class members when awarding fees, the trial court below was not blindly tethered to the Mark-Spencer fee agreement, especially based on the judge’s verbal comments that he found Mark’s work on the case was not as valuable as Spencer’s.  (See In re Vitamin Cases, 110 Cal.App.4^th 1041, 1056 (2003) [co-liaison counsel should not normally determine fee allocation after the fact; this is usually reserved for the trial court to do before fees are awarded].) 

            Even though Spencer did not honor his bargain with Mark, public policy reasons justified the result. 

            BLOG OBSERVATION—Disclosure is usually heightened in class actions because of the presence of absent class members who cannot protect their rights.  Even though class notice was sent out, no one knew about the existence of the fee-splitting agreement between counsel.  This case cautions that attorneys choosing to practice in the class action area need to be familiar with not only class action concepts but ethical rules which delineate some of the attorneys’ fiduciary duties to the class.

Oral Referral Agreements Between Attorneys—Make Sure They Are Confirmed In Retainer Agreement or Side Letter Copied to All Involved Attorneys for Plaintiffs

Second District, Division Four Affirms Jury Verdict Finding No Oral Referral Agreement.

            An oral referral agreement between attorneys—typically, where an attorney takes a plaintiff’s case and agrees to pay a percentage of the eventual recovery to the referring attorney—is enforceable.  (Mink v. Maccabee, 121 Cal.App.4^th 835, 838.) The only writing required is one signed by the client, consenting to the fee-shifting arrangement. (Ibid.; Rules of Prof. Conduct, rule 2-200.)  As the next case demonstrates, however, prudence requires that the referral arrangement should be confirmed in a writing that is then transmitted to the client and all attorneys involved in the referral.

            In Manley v. Burunsuzyan, Case No. B196369 (2d Dist., Div. 4 July 23, 2008) (unpublished), plaintiff attorney claimed that another attorney orally promised to give plaintiff 25% of the eventual contingency fee collected in a personal injury case commenced on behalf of plaintiff’s son.  Plaintiff had son sign a handwritten note agreeing to a referral fee, but this note was never sent to the working attorney hired by the son.  Nothing in the son-working attorney retainer agreement mentioned any referral fee.  After working attorney successfully handled son’s suit and garnered a $880,000 contingency fee, plaintiff sued for breach of oral contract once working attorney refused to turn over a 25% piece to plaintiff.  A jury trial ensued, with plaintiff, son, and plaintiff’s wife all testifying to the oral referral agreement.  Working attorney denied any such agreement was made, pointing to the fact the client’s consenting “note” was never sent to him and emphasizing the obvious familial bias of all the supporting witnesses for plaintiff.  The jury found there was no oral referral agreement, a determination affirmed on appeal by a 3-0 panel of the Second District, Division Four (in an unpublished opinion authored by Justice Willhite).  This result reinforces the suggestion we make in the first paragraph of the post—get the referral agreement in writing and circulate it to all involved participants and the client. 

            We learned something from one of the claims of error.  Over objection, the defense put on expert testimony about the custom and practice of putting referral agreements in writing, either in the retainer letter or a signed side letter.  The appellate panel found this was error, although harmless error.  For those practitioners interested in the authorities on this point, see Rabin v. Craft, 100 Cal.App.2d 808, 811 (1950) [custom and practice evidence can be used to interpret an agreement, but cannot be offered to prove a contract was made when the defense denies the existence of the agreement]; Williams v. Elliott, 127 Cal.App.2d 357, 364-365 (1954) [cannot be offered to show that plaintiff’s version of the terms of the contract were more probable than defendant’s version]; Dutton D. v. U.S.F.&G. Co., 136 Cal.App. 574, 576-579 (1934) [cannot be offered to show a lack of contract formation].