Monday, November 3, 2008
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Illegal Referral No Automatic Bar to Enforcing Fee Pact—C.A.
Lawyer Not Subject to Penalty Absent Complicity in Unlawful Arrangement, Court Says
By SHERRI M. OKAMOTO, Staff Writer
An attorney who accepts business from an illegal attorney referral service is not automatically barred from enforcing a fee agreement with the referred client, the Court of Appeal for this district ruled Friday.
Although Business and Professions Code Sec. 6155 provides that “no attorney shall accept” an unlawful referral of potential clients, Div. One explained that attorneys must be aware of the illegality of the referral to be in violation of the law. Sec. 6155 provides, among other things, that a lawyer referral service must register with the State Bar and must open its membership to all attorneys who are qualified.
Friday, the panel upheld the validity of contingency agreements entered into by various attorneys and Junho Hyon which resulted from an initial illegal referral.
While Hyon and his business associate, Laurence Colangelo, were engaged in litigation regarding their rights in a sand-mining operation on Decker Island in the Sacramento River, Hyon and Colangelo began looking for a replacement attorney.
They entered into a contract with National Legal Network, engaging National to act as Hyon and Colangelo’s “agent, consultant, and case manager with regard to” the Decker Island litigation. The contract also authorized National to retain counsel for Hyon and Colangelo and to provide other litigation support services in exchange for a contingent fee of 10 percent of any recovery in the Decker Island litigation.
National’s then-president Eric Selten recruited Beverly Hills attorney Eliot Disner of Ervin, Cohen & Jessup to represent Hyon and Colangelo in the Decker Island litigation. Disner’s firm in turn hired Walnut Creek attorney Jeffrey Kirk as local counsel to assist with the case.
A jury eventually returned a $42 million verdict in favor of Hyon and Colangelo, but the trial court granted a defense motion for a judgment notwithstanding the verdict, leading to an appeal.
To pursue the appeal, Hyon and Colangelo retained Novato appellate attorney Elliot Bien, upon Disner’s recommendation. The appeal was successful, but Disner declined to handle the retrial.
Hyon and Colangelo then hired San Francisco attorney Jeffrey Shopoff, who represented Hyon and Colangelo through the trial and obtained a $7.6 million verdict in his clients’ favor.
Hyon and Colangelo later became embroiled in a dispute over their relative ownership interests in the Decker Island litigation recovery, and several other attorneys who had performed legal services for the duo during the Decker Island litigation claimed shares of the recovery and lien interests pursuant to contingent fee agreements with Hyon and Colangelo.
According to the terms of a pre-existing agreement between Hyon and Colangelo, the disputed amount of the recovery was placed in a trust, and Shopoff was appointed trustee. As the relationship between Hyon and Colangelo deteriorated, each made conflicting demands of Shopoff regarding the trust proceeds.
Shopoff eventually filed a complaint in interpleader in the San Francisco Superior Court. Hyon also filed a complaint in the Los Angeles Superior Court against Colangelo and Selten for breach of contract, breach of fiduciary duty, and fraud.
Los Angeles Superior Court Judge John Shepard Wiley Jr. granted summary judgment in favor of Hyon, finding that Selten had provided unlawful attorney referral services to Hyon and Colangelo. Wiley also determined that the unlawful portions of the contract could not be severed so the contract was unenforceable in its entirety.
Meanwhile, San Francisco Superior Court Judge Curtis E. A. Karnow found that Selten did not operate an illegal referral service, and awarded percentage shares to Selten and the attorneys who had provided services to Hyon and Colangelo.
This district’s Court of Appeal subsequently affirmed the Los Angeles Superior Court’s decision in Hyon v. Selten, 152 Cal. App. 4th 463 (2007).
Writing for the Court of Appeal, Justice Douglas E. Swager explained that Hyon had not lost his right to appeal the interpleader action by accepting distributions of a portion of the Decker Island litigation recovery proceeds because he had consistently objected to the trial court’s allocation ruling. But Swager concluded Hyon had no right to demand a jury trial because interpleader actions are equitable proceedings.
Turning to Hyon’s claim that Selten unlawfully provided attorney referral services, Swager reasoned that the Second District’s final determination in Hyon was binding under collateral estoppel principles and that Selten could not recover on his illegal and unenforceable contract with Hyon and Colangelo.
He explained that the judgment in favor of Selten had to be reversed and remanded for the trial court to determine the amount of compensation due to Selten for the lawful services Selten had provided.
Noting that none of the other parties in the interpleader action were parties to the Hyon action or in privity with Selten, Swager concluded the Hyon decision did not prevent them from recovering percentage shares of the Decker Island litigation recovery proceeds pursuant to their separate contingent fee agreements.
Swager added that Selten’s operation of an illegal referral service did not establish acceptance of an illegal referral by any of the attorneys in the interpleader action. An attorney does not accept an illegal referral “merely because he or she was retained by someone who was operating an illegal referral service,” Swager wrote.
Reasoning that the Legislature did not intend to punish attorneys who had no knowledge or complicity in the illegality of a referral, and finding nothing in the record indicating that any of the attorneys had any knowledge of the nature of Selten’s business operations or the contract with Hyon and Colangelo, Swager concluded that the attorneys’ retainer agreements were lawful.
“The object of the contingent fee agreements—that is, to compensate respondents with specified percentages of the Recovery proceeds—remains entirely lawful,” Swager wrote. Even if the attorneys had failed to comply with the disclosure and consent requirements of the Rules of Professional Conduct as Hyon alleged, Swager explained that any such violations may prevent the attorneys from later enforcing their claims to the Decker Island litigation recovery proceeds, but would not taint or preclude recovery under the contingent fee agreements.
Swager added that the trial court did not err in sustaining Shopoff’s demurrer to Hyon’s legal malpractice and breach of fiduciary duty claims because any damages Hyon claimed were contingent upon the amount of the eventual liquidation of the Decker Island litigation recovery proceeds.
The trial court also did not err in sustaining Shopoff’s demurrer to Hyon’s claim of conversion because Shopoff, as trustee, did not exercise dominion over the Decker Island litigation recovery proceeds and had no legal obligation to resolve the conflicting claims made of him, Swager wrote.
Presiding Justice James J. Marchiano and Justice Sandra L. Margulies joined Swager in his opinion.
The case is Shopoff & Cavallo LLP v. Hyon, 08 S.O.S. 6006.
Copyright 2008, Metropolitan News Company