Tuesday, November 25, 2003
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Fees Barred Where Firm Withdrew in Face of Client’s Questions
Fourth District Rules It Inequitable to Permit Attorneys to Capitalize on Own Voluntary Action
By KENNETH OFGANG, Staff Writer/Appellate Courts
An Irvine law firm that withdrew as plaintiff’s counsel in an insurance bad faith suit after its client raised questions as to what the lawyers actually believed the defendants had done wrong is not entitled to obtain its fees out of the settlement negotiated by successor counsel, the Fourth District Court of Appeal has ruled.
“Taking umbrage at being asked facially legitimate questions by one’s client about the basis for a lawsuit is not justifiable cause warranting recovery in quantum merit,” Presiding Justice David Sills wrote Friday for Div. Three.
The ruling rejects a claim for more than $800,000 in fees by the firm of Rus, Miliband & Smith. It affirms an Orange Superior Court judgment in favor of the Long Beach accounting firm of Goodrich, Goodyear & Hinds and its successor counsel, Conkle & Oleston of Santa Monica.
The unusual ruling arose from a series of lawsuits that followed the 1990s collapse of the Hill Williams real estate empire. Federal prosecutors claimed that when Williams’ investments began to fail, he converted his financial operations into a Ponzi scheme, maintaining confidence by using new money to pay earlier investors.
Collapsed Empire
Williams eventually pled guilty, was sentenced to prison, and agreed to pay over $30 million in restitution to 2,500 investors.
The collapse of the Williams empire led to a number of lawsuits, including four naming the Goodrich firm, Williams’ accountants, as a defendant. The accountants tendered their defenses to their malpractice carrier, Cal Accountants Mutual Insurance Company.
The insurer, commonly referred to as CAMICO, concluded that all of the events sued upon arose out of a single occurrence, and that only the firm’s 1993 coverage was available. Since the policy was self-liquidating, that left a limit of $1 million to cover all claims and defense costs.
Three suits were settled with a total of $700,000, including defense costs, expended. The remaining suit was by the Williams bankruptcy trustee, represented by the Rus firm.
After another $50,000 was spent in defense costs, a complex settlement was agreed upon. The accountants—who had been represented by insurance counsel and by their independent counsel, Conkle & Oleston—stipulated to a judgment of $40 million; the trustee gave a covenant not to execute and agreed to limit its recovery to the remaining $250,000 in coverage plus 90 percent of anything the accountants might net in a bad faith suit against the insurer.
Assignment Not Taken
The trustee did not take an assignment of the accountants’ rights against CAMICO, as is usually done in settlements of that type. But it was agreed that the Rus firm would represent the accountants on a contingency basis in the bad faith suit, an arrangement that necessitated the signing of conflict waivers by the trustee and the accounting firm.
The events that led to the attorney’s fee suit began in January 1999, when the accounting firm sent a letter to Randall Smith of the Rus firm after the accountants had received a copy of the amended complaint in the bad faith suit. The accountants expressed concern about the bad faith allegations, explaining that they thought CAMICO had been fair with them and wanted to know why the lawyers believed otherwise.
They assured Smith that they had “an open mind about the subject” and could “be persuaded by information you might provide.”
Smith faxed a response the same day. He told his clients he was “shocked and disappointed” with their letter; explained that because Williams’ operations had crumbled over a period of time, there might be coverage available for other years, increasing the potential limits to $3 million; and said he hoped he and the clients would work cooperatively in the future.
The next day, however, Smith’s partner Ronald Rus wrote to the accountants. Although there had been no response to Smith’s letter, Rus told the accountants that they had made “false claims and inferences” that the lawyers were seeking to have them give false responses to discovery, that there was “an actual and irreconcilable conflict” between them as a result, and that they would need to obtain new counsel and would face a $40 million liability under the settlement with the trustee if they did not prosecute the bad faith case.
The accountants then telephoned Smith and wrote to Rus, giving assurances that they wanted the attorneys to continue representing them, did not want to sign a substitution of counsel, and were prepared to cooperate based on the theories outlined in Smith’s letter.
The Rus firm, however, moved to withdraw. The judge found that there was “good cause” for them to do so, but did not make specific findings as to what constituted good cause.
The accountants then retained the Conkle firm on an hourly basis. After the judge in the bad faith concluded, on motion for summary adjudication, that coverage was available for at least one year besides 1993, the case settled for $1.875 million, of which $819,000 was set aside for attorney fees and about 90 percent of the rest paid out to the bankruptcy trustee as agreed.
The Rus firm asserted that it was entitled to 43 percent of the settlement, as per its contingency agreement and the principles of quantum meruit. But Sills said it was entitled to nothing.
While the firm’s withdrawal as counsel may have been justified on the principle that “[t]he trial court will not force unwilling lawyers to work for willing clients,” the right to be paid despite withdrawal is more limited, the presiding justice reasoned.
The Rus firm was not ethically required to withdraw, Sills declared. Nor could its withdrawal be deemed justified under the permissive withdrawal provisions of the Rules of Professional Code, he said.
Attorneys who withdraw without justification, Sills declared, cannot recover fees.
“The reason fees are barred,” he explained, “...is the inequity of allowing lawyers to capitalize on their own voluntary actions in leaving clients lawyerless.”
The case is Rus, Miliband & Smith v. Conkle & Oleston, 03 S.O.S. 5960.
Copyright 2003, Metropolitan News Company