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Category: Ethics & Professional Responsibility

Forced Sale of Client’s Lamborghini Not a Proper Legal Fee

May 7, 2018

A recent Bloomberg Big Law Business story by Mindy L. Rattan, “Forced Sale of Client’s Lamborghini Not a Proper Legal Fee,” reports that the Florida Supreme Court on May 3 suspended a lawyer for three years for taking an interest in a client’s Lamborghini as a fee and for taking financial interests in his client’s litigation and doing business with a client.  Lawyer Jon Douglas Parrish made a deal to get paid after selling his client’s 1989 Lamborghini sports car.  He also loaned money to property owners his client was suing and had his client subordinate his interests in that property to mortgages Parrish took out to secure his loan. 

This case provides examples of deals with a client that a lawyer should never make.  Parrish represented Spruce River Ventures, LLC and its principal, Benjamin Bergaoui in several matters.  Parrish and Bergaoui signed an agreement giving Parrish a $30,000 security interest in Bergaoui’s Lamborghini, the court said, citing the referee’s findings for all facts.  Bergaoui had 90 days to sell the car to pay Parrish $30,000 in fees.  If he didn’t sell it in that time, Parrish could sell it and either give Bergaoui “a credit for current and future legal fees in the amount of the sale or in the amount of $80,000, at the firm’s discretion,” the court said.  The referee’s report said that Bergaoui sold the car within 90 days and Parrish accepted $42,000 to settle the balance of $54,000 in fees owed.

Parrish also loaned $150,000 to defendants in a dispute over real property he pursued on behalf of Spruce River, the court said.  The defendants were delinquent in paying taxes on parcels of land they purchased, and Parrish testified the entire case could be dismissed if the parcels were subject to forfeiture, the court said.

Parrish was trying to “preserve his client’s claim and protect his interest in his fee, which was now a contingency fee.”  He got the defendants to give him a security interest in the property that Bergaoui was pursuing, and convinced Bergaoui to subordinate his interests in the property to Parrish’s.  Parrish asked a colleague, John White, to prepare the mortgage, the subordination agreement, and the promissory note for the loan, the court said.

Parrish also attempted to enter into a settlement agreement that created a new company owned by Parrish’s firm, his client, and a few of the defendants, the court said.  The new company would join the litigation in the place of its defendant owners.  Parrish and Bergaoui would have equal decision-making authority, the court said.

One of the other defendants moved to disqualify Parrish, who then prepared an affidavit for Bergaoui to sign saying he declined to seek independent counsel, the court said.  Bergaoui wouldn’t sign it so Parrish then claimed White was independent counsel for Spruce River.  Bergaoui then got independent counsel, Brad Bryant, who told Parrish that Bergaoui didn’t want to be business partners with him, the court said.

No Car for Fees

The court agreed with the referee that Parrish violated Rule Regulating the Florida Bar 4-1.8(a), which prohibits transactions with clients unless the terms are fair and reasonable and fully disclosed to the client, the client is advised to seek independent counsel, and the client gives written informed consent.  The court said the comment to the rule explains that this rule doesn’t apply to an “ordinary fee arrangement,” which is covered by Rule 4-1.5. Rule 4-1.5 says all fees must be reasonable and not excessive.

The Lamborghini agreement clearly pertained to legal fees and wasn’t ordinary, the court said.  The referee focused on the forced sale provision and found it didn’t satisfy the requirements of Rule 4-1.8(a).  The agreement gave Parrish an opportunity to collect an indeterminate amount of funds from the sale of his client’s Lamborghini, which “would constitute an excessive fee,” the court said.

The court agreed with the referee that Parrish violated rules 4-1.5(a), 4-1.8(a) and 3-4.3 (“commission by a lawyer of any act that is unlawful or contrary to honesty and justice may constitute a cause for discipline”).

No Loans, No Financial Help

The court agreed with the referee that Parrish violated Rule 4-1.2, which says a lawyer must “abide by a client’s decisions concerning the objectives of representation” and “reasonably consult with the client as to the means by which they are to be pursued.”  Parrish having “co-equal decision-making authority with his client in directing litigation strategy,” violated the rule.

And Parrish again failed to meet the requirements of Rule 4-1.8(a) for entering into the subordination agreement with his client, the court said.  The court deferred to the referee’s determination that Parrish’s and White’s testimony about White being independent counsel for Bergaoui wasn’t credible.

The court also agreed with the referee that Parrish violated Rule 4-1.8(e), which prohibits a lawyer from providing “financial assistance” to a client.  Parrish’s loan to the defendants was a form of financial assistance for the benefit of his client, the court said.

The court agreed that Parrish violated 4-1.8(i), which prohibits a lawyer from acquiring a proprietary interest in a litigation.  The court rejected Parrish’s argument that the mortgage wasn’t a “proprietary interest.”  It also found that he failed to act diligently and competently in another matter.

But the court determined that the referee’s recommendation of a one year suspension wasn’t supported by a “reasonable basis in the case law.”  The court said the other conflict of interest cases the referee relied upon were factually distinguishable.  Unlike in several of those cases, Parrish “engaged in multiple instances of unethical conduct,” that resulted in several rule violations.  Another case the referee cited was over 15 years old and the court has since imposed more severe discipline than in the past, it said.

Attorneys in GMO Corn Cases Accused of Unfair Fee Scheme

April 25, 2018

A recent Courthouse News story by Dionne Cordell-Whitney, “Lawyers in GMO Corn Cases Accused of Unfair Fee Scheme,” reports that a class of more than 60,000 farmers claim they were tricked into agreeing to pay an unfair amount of attorney fees in their cases against agribusiness giant Syngenta over its genetically modified corn.

Lead plaintiff Kenneth P. Kellogg and his company Kellogg Farms sued the Texas-based law firm Watts Guerra LLP and its various joint venture partners Tuesday in Minneapolis federal court.

Kellogg claims Watts Guerra orchestrated a scheme against more than 60,000 corn growers in the United States in connection with lawsuits against Syngenta filed in federal and state courts since 2014 over its genetically modified corn.

Syngenta is the world’s largest seed supplier. Lawsuits were filed across the country against the company arising from its commercialization of genetically modified corn seed products Viptera and Duracade, which contained the MIR 162 trait that was not approved by China.

Kellogg and other farmers alleged Syngenta’s commercialization of its products caused genetically modified corn to be commingled with the rest of the corn supply in the United States, and that China rejected all imports of corn from the United States because of the MIR 162 trait.

Corn prices dropped significant as a result, the farmers alleged. One lawsuit claimed U.S. corn exports dropped 85 percent after Sygenta’s rush to the market.

According to Tuesday’s lawsuit filed by Douglas J. Nill with FarmLaw in Minneapolis, the farmers were solicited to sign 40 percent contingent fee retainer contracts with Watts Guerra and its partners to pursue individual lawsuits.

But Kellogg claims he and other farmers were “secretly excluded” from participating in class actions against Syngenta in federal court multidistrict litigation in Kansas and Minnesota, where attorneys’ fees are determined by the courts as fiduciaries for members of the class.

Last year, a federal jury in Kansas awarded nearly $218 million to a group of a farmers who sued Syngenta over its GMO corn, and the agribusiness giant reached a $1.5 billion global settlement in March to end all the pending lawsuits.

“Farmers were dishonestly told that a ‘mass tort … individual suit’ is better than a class action, because class actions only recover coupons for plaintiffs,” Tuesday’s complaint states.

The 142-page lawsuit quotes attorney Mikal Watts at a meeting of corn growers in Iowa in 2015 as saying that, with a class action, “lawyers will get all the money and the farmers may get a gift certificate.”

“Attorney fee awards in class actions, with a common fund damage award, are typically about 10-12 percent of the fund for funds of $200-900 million or larger,” the complaint states. “With defendants’ ‘mass tort …individual suit’ model, each grower will pay 40 percent of the claim proceeds for the same result.”

Kellogg and the other farmers call Watts Guerra’s alleged fee scheme “an epic fraud of omission.”

“Defendants never advised farmers of the class action proceedings in federal and state court covering the farmers and their claims. Defendants never advised farmers of the merits of those proceedings and what is in the best interest of the farmers,” the lawsuit states.

The farmers are asking the court to declare their retainer contracts as void. They also seek a declaration that the law firms have forfeited their claim to any compensation from the farmers.

Mikal Watts of Watts Guerra said in a statement that the “lawsuit is worth less than the $400 it took for this single lawyer to file it.”

“In fact, his lawsuit is not worth the paper it is written on, nor the ink it took to pollute the pages of his petition. This lawsuit is without merit, and it is frivolous,” he said Wednesday.

Watts continued, “We will vigorously defend this frivolous lawsuit filed yesterday, and will defeat it with both facts and law, and with the same diligence, ethical conduct and hard work that it took to achieve this settlement on behalf of farmers across America in the first place.”

The plaintiffs’ attorney, Nill, echoed the claims in his lawsuit in a statement: “The defendant law firms deprived farmers of the opportunity to make an informed decision as to whether to pursue an individual claim or a class action claim without representation by the defendants, hereby subjecting the farmers to defendants’ fraudulent scheme to collect unreasonable fees.”

New York Lawyer Censured for Falsifying Billing Records

January 11, 2018

A recent New York Law Journal by Jason Grant, “Manhattan Lawyer Censured for Falsifying Time Records, Even Though Clients Unscathed” reports that a Manhattan lawyer has been publicly censured for adding 94.8 hours of fabricated billing to his law firm’s internal records, in an effort to look busy to his partners, even though he removed the false entries before the bills went out to clients.

A unanimous Appellate Division, First Department, panel censured lawyer Jeffrey Leighton, while noting that the Attorney Grievance Committee and Leighton had stipulated to the punishment, even though there is apparently no precedent for a censure when the clients aren’t cheated.  The panel also noted, under mitigating factors weighing against a harsher punishment, that Leighton, a 34-year veteran lawyer, had lost his partnership at his firm because he’d padded the bills.

“The [First Department Attorney Grievance] Committee found no precedent for any public censure for falsifying time records where clients were not harmed,” the panel wrote, adding, “Disciplinary cases involving false or over-billing that have resulted in public discipline involved more egregious conduct in which the clients were directly impacted by the misconduct.”

However, the panel also pointed out that “the Committee and [Leighton] agree that public censure is appropriate because he engaged in this conduct for a period of over two years, he is a senior attorney with extensive experience, and although he did not intend to financially benefit or over-bill his clients, he intended to and did ‘deceive his colleagues and his firm about how busy he was.’”

Leighton was admitted in the Second Judicial Department in 1983, according to the panel, which consisted of Justices David Friedman, Marcy Kahn, Ellen Gesmer, Cynthia Kern and Peter Moulton.  He had an office in the First Judicial Department at all relevant times, and the committee and Leighton stipulated that between March 2012 and September 2013 he’d engaged in a pattern of making fake internal firm billing entries, the panel wrote in the Jan. 4 decision.

In mitigation of the punishment, the panel pointed out in Matter of Jeffrey Leighton, 2018 NY Slip Op 00089, that Leighton had never previously been the subject of a disciplinary investigation, that he cooperated with the committee, and that he’d “expressed genuine remorse and embarrassment.”

Bitcoin for Legal Fees?

December 21, 2017

A recent Law.com story, by Ben Hancock, “What’s Next: Blockchain and Justice; Net Neutrality Fights Brews; Bitcoin for Legal Fees,” reports that the skyrocketing prices for crypto-currencies are making for some interesting legal battles, but they also present another novel question to lawyers: What if my client wants to pay my legal fees in Bitcoin?  In an op-ed, Kaufman Dolowich & Voluck attorney Ian Anderson walks through the ethical and practical considerations of that question — and notes that Bitcoin isn’t treated by the IRS as legal tender.

“Like the country lawyer accepting a bushel of apples for drafting a will, payment in Bitcoin is payment in property,” Anderson writes.  He also notes that payment in crypto-currency raises money laundering concerns, and that if the value of the token goes to zero, it could put the client and attorney in conflict.

Takeaway: “Some attorneys believe … that such flexible payment models attract new clients.  But for cases with minimal fees or attorneys who are not tech-savvy, receiving payment in Bitcoin may be more trouble than it’s worth.”

PA Supreme Court: Unethical Fee-Splitting Not Automatically Unenforceable

December 19, 2017

A recent Legal Intelligencer story, by Zack Needles, “Unethical Fee-Splitting Agreements Not Automatically Unenforceable, Justices Say,” reports that, in a closely watched case that waded into the murky ethics of business arrangements between lawyers and nonlawyers, a majority of the Pennsylvania Supreme Court could agree on only one thing: fee-splitting arrangements between lawyers and nonlawyers are not per se unenforceable just because they violate attorney ethics rules.

But beyond that, a majority of the six-member court—Justice Sallie Updyke Mundy recused because of her participation on the lower court panel—was unable to reach a consensus in SCF Consulting v. Barrack, Rodos & Bacine.  The larger questions of how best to deter unscrupulous lawyers from entering into unethical agreements and what responsibility, if any, nonlawyers have to avoid such agreements remain without definitive answers.

The overall effect of the decision was to reverse a ruling by a split three-judge panel of the state Superior Court, which held that a consultant to Philadelphia securities litigation firm Barrack, Rodos & Bacine was not entitled to an allegedly promised cut of the firm’s profits from cases he worked on because that type of fee-splitting agreement violates Rule 5.4 of the Pennsylvania Rules of Professional Conduct.  The high court remanded the case to the Philadelphia trial court to determine whether this particular agreement is enforceable.

But other than proceeding with the understanding that there is no bright-line rule rendering an unethical fee-sharing agreement unenforceable, ”the common pleas court will be in a position of making its own judgment as to the relevance of any wrongful conduct on [the nonlawyer party’s] part, without present guidance from this court,” Chief Justice Thomas G. Saylor wrote in the opinion announcing the judgment of the court (OAJC), which was joined by Justice Kevin M. Dougherty.

In SCF Consulting, the Superior Court said the alleged arrangement in which Scott C. Freda—SCF Consulting’s sole member—was to receive 5 percent of the firm’s annual profits generated by cases he assisted with violated Rule 5.4, which bars, with few exceptions, attorneys from sharing legal fees with nonlawyers.

According to court documents, SCF alleged it was induced by Barrack Rodos to work exclusively on the firm’s behalf in securities class actions in exchange for both a fixed annual consulting fee and a 5 percent cut of any profits gained from cases SCF worked on.

SCF alleged that the firm subsequently refused to make the profit-share payments, however, court documents said.  Following discovery, the firm moved for summary judgment and Philadelphia Court of Common Pleas Administrative Judge Gary S. Glazer granted the motion, finding that the fee-sharing aspect of the alleged payment arrangement ran afoul of Rule 5.4.

On appeal, Senior Judge James J. Fitzgerald III, joined in the majority by Judge Jacqueline O. Shogan, affirmed Glazer’s ruling rejecting SCF’s argument that the agreement fell within the exception to Rule 5.4 that allows nonlawyer employees to participate in profit-sharing compensation or retirement plans.

“As the trial court accurately noted, appellant was not an employee of the firm participating in a formalized program benefiting employees based upon the profitability of the firm,” Fitzgerald said.  “Therefore, the exception in Rule 5.4(a)(3) is unsustainable in the instant case because there is a direct link between the specific fees and specific payment to appellant, a nonlawyer.”

The Supreme Court granted allocatur in the case in February, agreeing to decide “whether the trial court and Superior Court erred in sustaining [respondent's] demurrer to all [c]ounts of [petitioner's] complaint, where, even assuming arguendo that the compensation plan was in violation of Rule 5.4, Pennsylvania law, public policy and the interests of justice require such an agreement to be enforced because an attorney must not be shielded from liability, nor financially rewarded for violating the Rules of Professional Conduct.”  The high court heard arguments in the case in October.

In their Dec. 19 OAJC, Saylor and Dougherty took the position that while an unethical fee-splitting agreement between a lawyer and a nonlawyer is not per se unenforceable, it may still be deemed unenforceable if it’s determined that the nonlawyer party bore some responsibility for the ethical violation.

“The ultimate outcome of this case may turn on factual findings concerning Appellant’s culpability, or the degree thereof, relative to the alleged ethical violation,” Saylor said in the OAJC.

But Justice Max Baer, in a concurring and dissenting opinion joined by Justice Debra Todd, said that while he agreed with the OAJC’s rejection of a bright-line prohibition on enforcing unethical fee-sharing agreements, he disagreed with the notion that a nonlawyer could bear any culpability for a breach of ethics rules that only govern attorneys.

Baer said he would have held that the agreement between Barrack Rodos and plaintiff SCF Consulting was enforceable and did not violate public policy.  “I agree with the OAJC insofar as it holds that a fee-sharing agreement between a lawyer and a non-lawyer in violation of Rule of Professional Conduct 5.4(a) is not per se unenforceable as a violation of public policy,” Baer said.  “However, because a nonlawyer is not bound by the Rules of Professional Conduct, the non-lawyer committed no unethical or illegal act by entering into the agreement and, thus, can bear no measure of responsibility relative to the law firm’s material violation of the rules governing the profession.”

“To ensure compliance with the professional conduct rules prohibiting the type of fee-sharing agreement at issue, I would refer the law firm or responsible attorney to the Disciplinary Board for prosecution of purported ethical violations and imposition of disciplinary sanctions,” Baer added.

Justice David N. Wecht, joined by Justice Christine L. Donohue, penned a dissenting opinion, supporting a third approach: adopting a bright-line rule rendering unethical fee-splitting agreements unenforceable while still allowing nonlawyer parties to seek relief in equity.

“To prevail in equity (as distinct from a claim at law in tort or contract), the nonlawyer would have to demonstrate all of the predicates of an equity claim, such as unjust enrichment, unclean hands, or other elements, and would have to show that he or she entered into the agreement with clean hands,” Wecht said.  “In my view, this time-honored standard best accommodates the OAJC’s recognition that the parties’ relative levels of responsibility should be considered.”

Dougherty, in an opinion concurring with the OAJC, expressed concern that a bright-line rule rendering all unethical fee-splitting agreements unenforceable might actually encourage dishonest attorneys to enter into such agreements knowing they’ll never have to uphold their end of the deal.

Wecht acknowledged that allowing nonlawyer parties to pursue equitable remedies may still not be enough to deter such practices by lawyers.  In response to that anticipated criticism, he made a recommendation similar to Baer’s.

“Courts that encounter such fee-splitting agreements, whether in enforcement pleadings or equity actions, should report the attorneys involved to the Office of Disciplinary Counsel for investigation,” he said.  “Further, in principle, I see no impediment that would bar the Disciplinary Board itself from requiring disgorgement of fees when appropriate.”

SCF’s attorney, George Bochetto of Bochetto & Lentz in Philadelphia, noting that the Supreme Court offered “broad guidance” but left a lot of details to be worked out in the trial courts, said he foresees additional litigation stemming from fee-splitting arrangements.