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Category: Fee Allocation / Splitting

Fee Allocation Dispute in Toyota’s Defective Accelerator Settlement

February 5, 2018

A recent Star Tribune story by Randy Furst, “Lawyers in Minnesota Toyota Case Battle Over Legal Fees,” reports that three years after a Minneapolis jury awarded $11 million in a suit against Toyota over a high-speed crash that led to three deaths, the lawyers for some of the victims are in a bitter dispute over the spoils.

More than $1 million in legal fees is at stake, and law firms continue to battle over who gets what, with some accusing others of exaggerating their roles in winning the hefty verdict and appeals.  A jury found that a 1996 Toyota Camry’s accelerator was defective.

“These money disputes between and among lawyers often bring out the worst in lawyers,” says Joseph Daly, emeritus professor of law at Mitchell Hamline College of Law. “It fits the stereotype of lawyers not pursuing justice but pursuing money.”

One firm, Napoli Shkolnik, based in New York, is accused by other lawyers of having so botched its role it should get no payout at all.

“What cannot be disputed is that the Napoli firm’s conduct was grossly negligent, in reckless disregard of their duties as lead counsel and harmful to plaintiffs,” wrote attorney W.B. Markovits of Cincinnati in a court document filed on Jan. 5.

The Napoli firm’s response is sealed. But in an earlier brief, Napoli’s Nicholas Farnolo argued that Napoli’s lawyers did not conduct themselves “in bad faith” and that “no actual fraud was conducted and the firm deserves to be paid for its work.”

It’s all in the hands of U.S. District Judge Ann Montgomery, who presided at the February 2015 trial where lawyers for Koua Fong Lee of St. Paul convinced a jury that the fatal 2006 crash was caused by an accelerator that became stuck, increasing speed even as he applied the brakes.

Three people died and several others were seriously injured.

Neither Lee nor his attorneys, headed by Texas lawyer Bob Hilliard, are involved in the post-trial dust-up over fees, though Hilliard was the lead attorney and most responsible for the victory at trial.

The dispute instead largely involves the lawyers who represented the people who were riding in the Oldsmobile Ciera that Lee’s Camry struck, along with their surviving families.

Killed in the crash were Javis Trice-Adams, Sr., 33, and Javis Trice-Adams Jr., 10, both of whom died instantly, and Devyn Bolton, 6 at the time of the accident, who died a year later after being rendered quadriplegic.

In the civil verdict against Toyota, the main payouts went to Bolton’s mother, Beatrice Trice ($5.5 million); Lee ($785,000); his wife, Panghoua Moua ($884,000); Bolton’s grandfather Quincy Adams ($1.7 million); and Trice-Adams Sr.’s daughter Jassmine Adams ($3 million).

The Trice family went through several attorneys.

The victims in the Ciara first retained attorney Michael Padden of Lake Elmo. Padden sought the assistance of lawyer Kenneth R. White of Mankato.

White and Padden brought in the firm of Waite Schneider Bayless & Chesley of Cincinnati. But a key lawyer in that firm was accused of wrongdoing in an unrelated case and recommended he withdraw, to be replaced by the Napoli firm.

In 2014, Trice learned the Napoli firm made a pretrial offer to Toyota — to settle for $5 million — without consulting her or her attorneys, White and Padden. Toyota then broke off settlement talks because the “demands were too high to lead to productive negotiations,” according to documents.

Trice fired Napoli and retained the law firm of Markovits, Stock & DeMarco. “This conduct breached your fiduciary duty with me and is totally unacceptable,” she wrote Napoli. Padden also wrote Napoli that “the whole scenario is unconscionable and incomprehensible to me and Mr. White.”

The other lawyers also accused the Napoli firm of failing to disclose all the medical bills in time for trial, costing Trice $500,000 that the jury might have awarded, and $250,000 in prejudgment interest. “Under the facts and law presented herein, the Napoli firm has forfeited any right to attorney’s fees arising out of this case,” Markovits wrote.

Farnolo of the Napoli firm wrote that not communicating with his clients “was a harmless error” and that the demand was similar to the award ultimately gained through the trial. He said attorney White shares the blame because he did not disclose the additional medical bills, either.

Markovits also said that while Padden was supposed to get 30 percent of the fees and White 15 percent, it should be reversed. “The evidence does not support that the service performed by Mr. Padden warrants 30 percent of the fee,” firm representatives wrote. “He has no time records supporting work performed, and the record shows that his substantive involvement was minimal.”

Padden’s response is redacted but he includes among his exhibits an affidavit from former St. Paul Pioneer Press reporter Emily Gurnon in which she said Padden was her “main source” for articles on the case and his work was “very important.”

“While publicity may have helped Mr. Padden,” Markovits wrote in response, “Mr. Padden cannot be suggesting that the jury verdict or the post-trial or appellate decisions in this case were due to his public relations efforts. This was not significant, nor time-consuming, substantive work.”

Daly, the professor, said if Montgomery does not decide the matter herself, she will order the law firms to hire a mediator.

If she decides the case, Daly said, “In all likelihood she’ll consider three things: the quality of work, the amount of time and effort put in by each law firm, and the degree of negligence, if any, by the lawyers handling the case.”

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.

Judge: Reed Smith Can’t Sue for Share of Attorney Fees in Class Action

November 21, 2017

A recent New York Law Journal story by Christine Simmons, “Judge Says Reed Smith Can’t Sue for $7M Slice of SAC Capital Fees,reports that a Manhattan federal judge ruled that Reed Smith can't sue former co-counsel Wohl & Fruchter in state court for a chunk of class action attorney fees.  A federal judge has shot down Reed Smith’s attempt to sue its former co-counsel law firm Wohl & Fruchter, in state court for its share of fees from a class action against SAC Capital Advisors, finding Reed Smith was “seeking a mulligan.”

U.S. District Judge Naomi Reice Buchwald of the Southern District of New York ruled that she had misgivings about Wohl’s conduct—including its settling a case amid the expulsion of Reed Smith from the plaintiffs’ counsel group—but said Reed Smith, which had served as class co-counsel for a brief period in September 2016, missed an opportunity to seek its fees in the right venue.

“The sequence of events surrounding Reed Smith’s retention and subsequent termination certainly raises questions regarding Wohl and [Wohl & Fruchter's] motivations.  But Reed Smith was given an opportunity to fully raise those questions, and it failed to do so,” Buchwald said, enjoining Reed Smith’s lawsuit in New York state court against the Wohl firm.

In the underlying class action case against hedge fund SAC Capital and other defendants alleging insider trading of securities, plaintiffs attorneys in May were awarded $27 million in attorney fees after obtaining a $135 million settlement.  About a month after the fee award, Reed Smith, which submitted no fee application in federal court, sued attorney Ethan Wohl and his four-attorney law firm in New York state court arguing it was entitled to fees for its work under tortious interference and unjust enrichment claims.  The firm was seeking at least $6.75 million.

Reed Smith claimed that Wohl & Fruchter, when looking for co-counsel, realized that it was a small firm “overmatched by the resources available to the SAC defendants,” represented by Paul, Weiss, Rifkind, Wharton & Garrison, Willkie Farr & Gallagher, Goodwin Procter and Bracewell.  After Reed Smith was retained, the firm said, it immediately committed significant resources to the SAC action.  And soon after Reed Smith filed notices of appearance in the case, the SAC defendants reached out to Wohl for settlement discussions, Reed Smith said.  “Reed Smith’s appearance was the obvious catalyst for the settlement discussions, which proved to be successful,” the firm claims.

But Reed Smith asserts that when counsel for the SAC defendants at Paul Weiss mused about a possible conflict involving Reed Smith before Southern District Judge John Koeltl, the Wohl firm saw an opportunity to eliminate Reed Smith and “intentionally exploited Paul Weiss’ statements.” Reed Smith formally withdrew from the SAC case in December 2016.

In her Nov. 16 ruling, Buchwald rejected Reed Smith’s jurisdictional arguments.  “We have jurisdiction over the fee dispute between Reed Smith on the one hand and Wohl and [Wohl & Fruchter] on the other, and our jurisdiction is exclusive,” Buchwald said, adding that Reed Smith’s presentation of a tort-based theory of recovery “does not change the reality that some quantum of attorneys’ fees is the ultimate recovery sought.”

Buchwald also considered collateral estoppel issues. “The amount of fees to which [Wohl & Fruchter] was entitled was an issue that was litigated, and Judge Koeltl determined that a $27 million award was ‘fair and reasonable,’” she said.  Analyzing the case broadly, Buchwald said she found “little about either side’s conduct that is sympathetic.”

“The rapid succession of events—Reed Smith’s entry into the case, the settlement, and Reed Smith’s dismissal—naturally raises questions as to Wohl and [Wohl & Fruchter's] actions and motivations, and these questions are amplified when the weakness of [Wohl & Fruchter's] conflicts arguments are considered,” she said.  “The record is hardly inconsistent with Reed Smith’s theory that it was terminated by [Wohl & Fruchter's] so that [Wohl & Fruchter] could obtain a larger share of attorneys’ fees.”

However, Reed Smith missed an opportunity to submit an application for fees, she noted.  “We find little equity in allowing Reed Smith to take a mulligan, through duplicative litigation, on an issue that had been squarely teed up,” Buchwald said.

Reed Smith’s explanation for why it failed to do so—that it did not want to interfere with approval of the settlement—“holds little water,” Buchwald said, noting that Reed Smith’s declaration supporting its withdrawal from the federal case detailed its grievances with Wohl and raised questions about the propriety of the settlement.

While the judge said she was enjoining Reed Smith from prosecuting the state court lawsuit “and the implicit application for fees contained therein,” she denied Wohl’s request to reject Reed Smith’s application for attorney fees in federal court.  “Reed Smith has never made a direct application for attorneys’ fees in this court, and there accordingly exists no such application for us to deny,” Buchwald said.

Fee Allocation Dispute in Dow Chemical Nuclear Pollution Class Action

November 3, 2017

A recent Law 360 story by Juan Carlos Rodriguez, “Class Counsel in Dow Pollution Suit Slam Attys’ Fee Bid,” reports that lead class counsel representing residents in a $375 million settlement with Dow Chemicals Co. in a nuclear pollution suit have told the Tenth Circuit that three individual attorneys who say they were denied a share of $150 million in fees have filed a frivolous claim.

Attorneys at Berger & Montague PC said that the objectors primarily worked on the case while they were employed by Waite Schneider Bayless & Chesley Co. LPA, but that they left the firm in 2012.  By the time the fee petition in the Dow case was filed in January of this year, WSBC “was effectively being operated in bankruptcy,” Berger & Montague said.  “The objectors have filed no claim in the Ohio proceeding for their work on Cook while they were employed by WSBC, although Ohio state court is the proper forum for such claims,” Berger & Montague said.

According to Berger & Montague, WSBC did submit a timely fee application — including for time worked by the objectors — and WSBC was allocated some of the fee award.  But the three former WSBC attorneys never filed a separate petition on their own behalf.  “Nor, in connection with the fee petition filed in this case, did the objectors file anything saying, or even suggesting, that they had some ‘personal’ right to be compensated for time they spent on Cook while they were employed by WSBC," Berger & Montague said.

The three objecting attorneys, who say they worked on the 26-year-long case from 1990 until 2012, earlier this month told the 10th Circuit that it has jurisdiction over their appeal.  The three attorneys say they spent more than 4,500 hours working on the case.  The long-running matter, brought by Colorado residents who claimed injuries from exposure to waste from a nuclear weapons facility, was settled in 2016.

In response to the attorneys’ brief, Berger & Montague acknowledged that a final district court ruling on the attorney fee dispute possibly gives the appeals court jurisdiction, but said the effort remains “frivolous,” and that they may move to dismiss the appeal at the “appropriate time.”

A Colorado federal district court issued final judgment on the suit in April, granting $150 million in attorneys fees and ordering lead counsel Berger & Montague PC to allocate them to various class counsel as reflected by their contributions, according to the objecting attorneys.

“Berger refused to supply appellants with the amounts allocated to all other class counsel,” the attorneys said earlier this month.  “Berger also refused to pay appellants any portion of the $150 million fee on the legal ground that as lead counsel it could only pay fees to the now defunct law firm that employed appellants until 2012, rather than to appellants as individual class counsel.”

The case is Roselle et al. v. Berger & Montague PC, case number 17-1328, in the U.S. Court of Appeals for the Tenth Circuit.

Judge Stands By Fee Split in Wells Fargo Class Action

November 2, 2017

A recent Law 360 story by Dave Simpson, “Court Won’t Nix Fee Split in Wells Fargo Case Dispute” reports that an Iowa federal judge declined to set aside a decision that requires one of the firms that handled a $25 million class action against Wells Fargo & Co. to give half its fee award in the case to one of its co-counsel, ruling that an arbitration agreement between the firms is not within the court’s jurisdiction.  U.S. District Judge Robert W. Pratt said that Reese LLP’s gripes over the amount of work done by Finkelstein Blankinship Frei-Pearson & Garber LLP’s do nothing to cancel out an arbitration agreement it signed with the firm.

“FBFG and Reese LLP — neither of whom are parties to this class action — present a separate dispute over their independent contractual obligations to each other as set out in [their arbitration agreement],” Judge Pratt said.  “That dispute is not amenable to resolution by this court in this case.  Rather, FBFG and Reese LLP have properly engaged in arbitration and discrete litigation concerning confirmation of the arbitration award in the state and federal courts of New York.”

The decision rejects Reese’s July motion, in which it told the court that Finkelstein Blankinship had not done enough work to justify taking 50 percent of Reese’s share of the Wells Fargo settlement.  Reese claimed that the fee-sharing agreement between Reese and Finkelstein Blankinship contradicted the settlement terms and asked the court to set aside an arbitration panel’s decision to uphold the agreement.

Judge Pratt shot down that argument as well, ruling that the agreement does not conflict with the settlement terms.  “FBFG’s request for fees is directly and exclusively related to the legal services rendered, whether or not the claimed fee and the amount of work are proportionate,” he said.

Reese’s July motion was swiftly opposed by Finkelstein Blankinship, Reese’s co-counsel Scott & Scott Attorneys at Law LLP, and Reese’s former partner Kim E. Richman, now of the Richman Law Group, who has also sued Reese in New York state court concerning Richman’s share of the fees from the case.

The firms all represented homeowners in a class action accusing Wells Fargo of ordering unnecessary property inspections and charging delinquent borrowers that concluded in 2015 with a $25.75 million settlement, the attorneys in which have been tied up in Reese’s fee dispute with FBFG, according to Scott & Scott.

The case is Edward Huyer et al. Wells Fargo & Co. et al., case number 4:08-cv-00507 in the U.S. District Court for the Southern District of Iowa.