Sunday, October 9, 2016

CONFLICTS: No Clearance, No Cash?

From the California Lawyer, Kate G. Kimberlin and Jessica R. MacGregor, two lawyers at Long & Levit focused defending lawyers published an excellent overview for anyone who believes that getting paid is much better than the alternative: "Fee Disgorgement (Special Credit): Attorneys who fail to disclose conflicts to clients may lose their right to collect fees—and may have repay fees already collected." --
  • "In the Sheppard Mullin case [Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing (2016) 244 Cal.App.4th 590], the appellate court found that a law firm’s failure to adequately disclose a conflict of interest between two existing clients was sufficient to deny the firm $3.8 million in fees billed for more than a year of work in a litigation matter."
  • "Attorneys in California risk disgorgement or forfeiture of their fees where they have engaged in violations of the Rules of Professional Conduct. However, California has no bright-line rule for determining whether a particular rule violation will result in disgorgement or forfeiture.  Rather, it is a question which must be addressed on a case-by-case basis.  It is therefore important to understand the cases on this subject and avoid the types of misconduct which the courts have highlighted as a basis for denial of fees."
  • "The last time the California Supreme Court offered its views on the subject of fee forfeiture was in Huskinson & Brown v. Wolf (2004) 32 Cal.4th 453. There, the Court observed that an attorney may be denied fees as a result of a violation of the Rules of Professional Conduct, but recognized that disgorgement is reserved for those cases in which the attorney violated 'a rule that proscribed the very conduct for which compensation was sought, i.e., the rule prohibiting attorneys from engaging in conflicting representation or accepting professional employment adverse to the interests of a client or former client without the written consent of both parties.' Huskinson & Brown, 32 Cal.4th at 463 (citing Jeffry v. Pounds (1977) 67 Cal.App.3d 6 and Goldstein v. Lees (1975) 46 Cal.App3d 614)."
  • "Three years after Huskinson & Brown, the Court of Appeals sought to further clarify matters in Mardirossian & Assoc., Inc. v. Ersoff (2007) 153 Cal.App.4th 257. There, an attorney agreed to represent two clients in litigation. Prior to taking the representation, the attorney identified various potential conflicts of interest which might arise.  Both clients signed separate, comprehensive documents consenting to the attorney’s joint representation despite the identified potential conflicts. When the attorney sought his fees from one of the clients, however, the client argued that the attorney should be prohibited from recovering fees because there had been an actual (rather than just potential) conflict of interest at the inception of representation in violation of Rule 3-310(C). The trial court ruled against the client, finding that, at most there had been a potential conflict of interest."
  • "Four years after Mardirossian, the court of appeal issued its decision in Fair v. Bakhtiari (2011) 195 Cal.App.4th 1135... In Fair, the attorney and clients entered into multiple real estate business arrangements over a ten-year period.  When the attorney sought to collect fees owed to him, the client alleged that the attorney had violated RPC 3-300, which prohibits attorneys from entering into business transactions with their clients without first obtaining the client’s informed, written consent. The trial court found that the attorney failed to comply with rule 3-300 because he had never disclosed his potential conflict of interest or obtained his clients’ written consent to the actual conflicts that arose in the course of their business dealings.  Id. at 1135.  As a result of the attorney’s rule violation, the trial court denied the attorney the ability to recover his outstanding fees on a quantum meruit theory."
  • Though not referenced in the Supreme Court’s 2004 Huskinson & Brown opinion, the courts of appeal often cite to Cal Pak Delivery, Inc. v. UPS, Inc. (1997) 52 Cal.App.4th 1, to answer the question of whether an attorney must forfeit all, or only a portion, of the fees earned as a result of a conflict of interest.  In Cal Pak, class counsel "admitted he had offered to sell out his client and the class which the client was seeking to represent for a payment to himself personally of approximately $8 to $10 million dollars." Despite the admittedly egregious conflict between the attorney and his clients, the court of appeal acknowledged that the attorney may have a 'right to recover fees for services rendered before his breach of duties to his client.'"
  • "Regardless of the eventual Supreme Court ruling in Sheppard Mullin, attorneys practicing in California would do well to examine their fee agreements, as well as their active litigation and transactional matters, to ensure there are no underlying potential or actual conflicts which have not been properly disclosed or documented with the clients’ written consent.  Precedent teaches a powerful lesson:  Failure to diligently follow the rules for disclosing such conflicts can be costly."

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