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Category: Bill Padding

Law Firm Can’t Dismiss Bill Padding Claims in California

February 1, 2024

A recent Law 360 story by Lauren Berg, “O’Melveny Can’t SLAPP Bill-Padding Claims, Calif. Panel Says”, reports that a California appellate panel refused to strike allegations that O'Melveny & Myers LLP padded its legal bills while investigating the alleged mismanagement of funds at an apartment cooperative, saying disputes related to a firm's billing practices don't arise from activity protected by the state's anti-SLAPP statute.

In an opinion, a Second District Court of Appeal panel largely rejected O'Melveny's arguments that a Los Angeles Superior Court judge should have relied on California's anti-SLAPP statute to strike Ocean Towers Housing Corp.'s allegations that the law firm's invoices were excessive, it charged exceptionally high hourly rates and it padded its bills.  Anti-SLAPP, or anti-strategic lawsuits against public participation, laws are intended to prevent litigants from using the courts to intimidate people who are exercising their First Amendment rights.

"But disputes about the validity of an attorney's fees or billing practices do not arise from protected petitioning activity just because 'petitioning activity is part of the evidentiary landscape within which [the allegations] arose,'" the panel said.  "Instead, these allegations arise from an attorney's independent professional duties to ensure that 'fee agreements and billings "[are] fair, reasonable, and fully explained"' and to avoid charging unconscionable fees."

Ocean Towers is a cooperative housing corporation operating a beachside apartment complex in Santa Monica, and every person who buys a residential unit at the property also acquires shares of company stock, according to the opinion.  Shareholders pay monthly fees to the company in proportion to the number of shares they own.  The dispute goes all the way back to 2015, when an Ocean Towers shareholder filed a derivative lawsuit alleging board member John Spahi and others "caused Ocean Towers to incur significant expenses for [Spahi's] personal benefit," the opinion states.

The board in April 2017 put together a committee to investigate the claims, which chose O'Melveny to assist with the investigation, according to the opinion.  Under two contracts — one signed in April 2017 and the other in December 2017 — the committee would be O'Melveny's client, while Ocean Towers agreed to pay the legal bill.  By September 2017, Ocean Towers had paid $1.27 million of O'Melveny's invoices, but in December 2017, CEO Joseph Orlando told the law firm that the company's financial condition had deteriorated to the point that it wouldn't be able to pay any other fees.  O'Melveny, however, continued to perform work for the committee and charge Ocean Towers through June 2019, according to the opinion.

In March 2021, O'Melveny sued Ocean Towers to recover the unpaid balance, which is put at nearly $1.1 million, the opinion states.  Ocean Towers hit back with a cross-complaint in December 2021, alleging the law firm breached the contracts by "unethically billing" the company, charged "exceptionally high hourly rates for tasks that were unnecessarily performed by far more lawyers than were needed" and engaged in "bill padding and duplicative billing."

O'Melveny in March 2022 filed an anti-SLAPP motion to strike the cross-complaint, arguing it attacked the adequacy and scope of an investigation performed by an attorney while representing a client, the expenditure of money to prosecute an action and the circumstances around O'Melveny's retention, which it said are protected by the anti-SLAPP statute.  In June 2022, the trial court sided with Ocean Towers, finding the cross-complaint was "essentially about a fee dispute" and that "resisting what is essentially a collection action is not a SLAPP," the opinion states.

In its opinion, the three-judge appellate panel rejected O'Melveny's argument that because Ocean Towers was not technically the law firm's client — the committee was — the cross-complaint billing allegations fall under the scope of the anti-SLAPP law.  "The gravamen of Ocean Towers's claims against O'Melveny is not the petitioning activity that the firm conducted on its client's behalf; nor is Ocean Towers a third party completely uninvolved in the underlying litigation," the panel said.  "Rather, we are addressing limited allegations about fees and billing practices, made by a payor who is contractually obligated to pay the invoices generated by the law firm."

However, the panel did reverse the trial court's denial of the motion as to the allegations that target the validity of O'Melveny's client, which are based on Ocean Towers' claims that retired Judges Michael Latin and James Steele were wrongly appointed to serve on the committee, the opinion states.  The panel found the law firm has demonstrated that those claims arise from protected activity because the two judges were appointed to the committee through a court order and the Ocean Towers' board's resolution carrying out that order, according to the opinion.