Wednesday, August 4, 2004
Fee-Sharing Agreement With Non-Lawyer Held Unenforceable by Court of Appeal
By KENNETH OFGANG, Staff Writer/Appellate Courts
An attorney’s alleged agreement to pay a percentage of his fees from certain matters to a nonlawyer consultant is unenforceable, the First District Court of Appeal ruled yesterday.
Rejecting the contention that the State Bar’s rules against fee-splitting cannot be enforced against the nonlawyer, along with other arguments, Div. Two affirmed a summary judgment in favor of San Rafael attorney Robert W. Mills in a suit brought by J. Nicholas McIntosh.
McIntosh was a witness in two actions brought by Mills against Bank of America. When deposed in those cases, McIntosh denied receiving or asking for compensation from Mills for his work.
McIntosh had worked in the Northern California investment group of Security Pacific Bank, but was terminated when the merger of Security Pacific into B of A became final in 1992.
According to his breach-of-oral-contract complaint against Mills, McIntosh learned in 1994 that Mills was planning to bring class action litigation against the bank, claiming it overcharged for certain services.
McIntosh, who claimed to be aware of certain “indiscretions” at the bank, said he retained attorney David C. Anton to negotiate a consulting agreement with Mills, but asked not to be told the details lest he be forced to answer questions about it. He acknowledged in his deposition that he thought the cases to be worth about $100 million—they actually settled for $21.7 million—and expected Mills to collect between 25 and 35 percent of the recovery.
McIntosh asserted that the agreement Anton negotiated was that McIntosh would receive 15 percent of Mills’ fees. There was no written record of either the alleged agreement or of McIntosh’s agreement to have Anton represent him in the negotiations.
Anton testified at his deposition that Mills insisted that any compensation to McIntosh be paid on a contingency, rather than an hourly, basis, in part to avoid a paper trail while the cases were pending. It was Mills who insisted that the agreement be kept secret and that no written record be made, Anton testified.
Anton also testified that he “was aware that something like” a rule against fee-splitting existed, but “didn’t know what the parameters were.” He did not research the issue, he explained, because it was Mills’ fee, not his, that was at issue.
While he did not tell McIntosh what the agreement was, he testified, he did tell him to cooperate fully.
McIntosh said in his deposition that he did not learn the terms of the agreement until 1999, when Anton sent a letter to Mills requesting payment after the first of the two actions had settled.
Marin Superior Court Judge Vernon F. Smith granted the defense motion for summary judgment, and the appellate panel agreed.
Justice Ignacio Ruvolo explained that under the doctrine of illegality, a contract that has an illegal object is unenforceable by any party. It is settled law, he added, that a contract has an illegal object if one of the parties to the agreement is a State Bar member and the contract violates a provision of the Rules of Professional Conduct that serves the public interest.
The rule against fee-splitting with non-lawyers, the justice noted, dates back to 1944 and is based on concerns that such arrangements may create conflicts of interest, cloud lawyers’ professional judgment, and cause fees to become inflated.
The justice also concluded that an exception to the doctrine—that an illegal contract may be enforced if the alternative would be to give one of the parties an unfair windfall—does not apply under the facts.
The exception does not apply, Ruvolo explained, when the plaintiff is “in pari delicto”—at least as morally blameworthy as the defendant.
In assessing blame, the jurist explained, Anton’s conduct must be imputed to his client. And as a member of the State Bar, Ruvolo said, Anton is chargeable with notice that fee-splitting is prohibited and that a lawyer may not assist another person in violating ethics rules.
“Anton’s deposition testimony that his concern over the arrangement was ameliorated by his belief that it was only a concern for Mills, whose fee was being shared, was patently incorrect,” Ruvolo said, both under the Rules of Professional Conduct and under agency principles.
The justice went on to state:
“If true, the entire affair surrounding the alleged sharing of Mills’s attorney fee, based on the testimony of at least McIntosh and Anton, is nothing less than an appalling abuse of this state’s civil justice system by all three principals: Mills, Anton, and McIntosh. The summary judgment record reveals that the parties jointly planned a scheme by which McIntosh would illegally share in the potential financial benefits of class action litigation. Special efforts were taken by all to shield McIntosh, not from the fact that he would be compensated for his work in assisting Mills prepare the litigation, but only from the precise details of the fee-sharing arrangement. The purpose of the parties’ machinations was a deliberate effort to keep the existence of the fee-sharing agreement, and the details of the deal, from Bank of America and its counsel, and even from Mills’s own law partners....
“As if this were not enough, McIntosh’s dogged determination to stop the existence of the agreement from being revealed to Bank of America apparently led him to lie in his deposition.”
McIntosh is not entitled, the justice explained, to have a jury determine whether he and Anton were more blameworthy than Mills.
“[T]he level and degree of McIntosh’s own complicity in his admitted pernicious plot of deception to hide the fact that he was a party to a fee-sharing agreement demands a finding of in pari delicto as a matter of law,” the jurist wrote. “Having denied under oath an expectation of receiving compensation from Mills, the law will not countenance McIntosh’s reversal of position, and reward his own malfeasance by recognizing a contractual right to compensation now.”
The case is McIntosh v. Mills, A101673.
Copyright 2004, Metropolitan News Company