Tuesday, August 12, 2008
Court: Disgorgement Not Required for Attorney Misconduct
By STEVEN M. ELLIS, Staff Writer
An attorney’s alleged misconduct towards clients did not require disgorgement of fees that were reasonable in light of the result obtained, the Ninth U.S. Circuit Court of Appeals ruled yesterday.
In an opinion by Judge Carlos T. Bea, a divided panel held 2-1 that a district court’s equitable determination not to require an Oregon attorney to repay fees to his Washington clients was not error where the clients obtained a favorable result and made no claim that the purported misconduct caused them any damages.
But Judge Milan D. Smith Jr. accused the majority of making light of the plaintiffs’ assertions, and argued that remand was required to consider what remedy was appropriate in light of the attorney’s “egregious” misconduct.
Plaintiffs Jeffrey Bertelsen, his wife Amy, and his parents, Richard and Janis Jo Bertelsen, sued attorney Roger K. Harris and Harris’ law firm in 2004 seeking disgorgement of $142,500 in attorneys’ fees for Harris’ alleged violations of ethical duties imposed by the Washington Rules of Professional Conduct.
Jeffrey and Amy Bertelsen had paid Harris the funds pursuant to a contingent agreement after the attorney successfully negotiated a lease deal allowing the Bertelsens and their corporation to retain ownership of their six gas stations and avoid bankruptcy after supplier ARCO notified the Bertelsens in 2001 that it intended to terminate their franchise agreements.
When it later became clear that ARCO had no interest in continuing the business relationship, Harris—working first on a contingency agreement entitlting him to one percent of the gross value of any transactions with third parties, and later on a modified agreement increasing the fee to 1.5 percent—secured a deal by which Tesoro Petroleum agreed to lease the gas stations for 10 years at over $60,000 per month, and paid $1 million for an option, which it never exercised, to purchase the stations for $8.5 million.
Harris then sent the Bertelsens an invoice that simply stated “$142,500” with no further explanation, representing $72,500 in fees for Harris and $70,000 for a non-attorney consultant with expertise in the gasoline franchise industry.
The Bertelsens paid Harris his portion of the fee without objection, but after ARCO sued them for defaulting on loan agreements and sued Jeffrey Bertelsen’s parents as alleged personal guarantors, and the clients began taking conflicting positions, Harris—after consultation with the Oregon State Bar Association and ethics counsel—withdrew and advised the clients to seek new counsel.
After the ARCO litigation was settled, Harris’ former clients sought disgorgement of the fees they paid. Although they made no claim that they had suffered an injury because of Harris’ actions, they claimed that Harris breached fiduciary duties by sharing fees with a non-lawyer, modifying the earlier fee agreement without complying with applicable state requirements, improperly calculating the amount of fees owed without offering adequate explanation, and representing clients with conflicting interests without obtaining the requisite written consent.
But U.S. District Judge Lonny R. Suko of the Eastern District of Washington denied the plaintiffs’ request, writing that Harris’ conduct was not “so egregious as to justify disgorgement,” that the fee was reasonable in light of testimony by Harris and the consultant as to the services provided, and that there was no showing that independent advice would have affected the ultimate outcome.
On appeal, Bea—joined by Senior U.S. District Judge Joseph M. Hood of the Eastern District of Kentucky, sitting by designation—agreed, opining that Suko’s conclusion that the equities did not justify disgorgement was not an abuse of discretion, but, “after all righteous furor is vented…eminently reasonable for the result produced.”
However, Smith wrote in dissent that the favorable result could not excuse Harris’ breach of his fiduciary duties.
“Harris’ breaches…and his fiduciary duties are plain, and the majority’s conception of attorneys’ fiduciary duties is the legal equivalent of holding that a trustee who misappropriates money from a trust and gambles those funds at the racetrack is excused from his breach of fiduciary duty, and is entitled to his trustee fees, so long as he wins enough at the track to permit him to timely return the misappropriated money to the corpus of the trust,” he wrote. “Washington law does not support such a legal theory of relativity concerning an attorney’s breach of his fiduciary duties.”
The case is Bertelsen v. Harris, 06-36020.
Copyright 2008, Metropolitan News Company