Thursday, August 6, 2009
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C.A.: Attorney Denied Due Process in Firm Dissolution
By a MetNews Staff Writer
The Fourth District Court of Appeal yesterday threw out a $19,400 judgment against a former Tustin attorney for the dissolution litigation expenses of his former law firm.
Reversing the order of Orange Superior Court Judge Frederick P. Horn, Div. Three clarified that the administrative procedures for judicial management of a corporate winding up do not displace the right to due process.
Although the panel criticized John M. Heurlin for “taking some improper and ill-advised actions” in connection with the dissolution of FairWageLaw, the justices said he was still entitled to notice and an opportunity to be heard regarding competing claims amongst shareholders and against the corporation.
Heurlin formed FairWage with fellow attorneys David J. Fuller and Henry P. Schrenker. Each was a one-third shareholder in the firm, which prosecuted wage and hour class actions.
In February 2005 the State Bar suspended Heurlin for five years, stayed, and placed him on five years of probation with a two-year actual suspension after the attorney stipulated to three acts of misconduct stemming from a lengthy fee dispute with a former counsel and his successor counsel.
According to State Bar records, Heurlin admitted to having withheld money from settlement proceeds as “collection costs,” an act that amounted to charging an unconscionable fee, and failed to maintain client funds in trust. He also filed and pursued an unjust appeal for motives that included trying to delay the effects of an adverse judgment and cover up his mishandling of funds.
It was Heurlin’s third run-in with the State Bar, as he had been privately reproved in 1998 and 2001 for similar misconduct.
Upon learning of Heurlin’s suspension, Fuller and Schrenker voted to voluntarily dissolve their practice. Heurlin then filed notices of attorney liens in two of FairWage’s class actions, claiming an interest in any attorney fee payments to the firm.
FairWage subsequently petitioned the court to take jurisdiction over the voluntary dissolution. Heurlin was served with a copy of the petition and later served with the order granting the petition and the order directing the firm to publish notice to creditors and claimants that they would have six months to present their claims.
Heurlin attempted to obtain discovery in the voluntary dissolution proceeding and served written discovery requests on Schrenker and Fuller, which he followed by filing motions to compel responses.
Schrenker and Fuller opposed the motions, arguing Heurlin lacked standing because he was not a named party to the voluntary dissolution proceeding and had not intervened. The trial court apparently agreed and denied Heurlin’s motions.
In March 2006, Heurlin submitted a claim for over $1,091,200 against FairWage in the voluntary dissolution proceeding and a separate civil action asserting various direct and derivative claims against Schrenker, Fuller and FairWage. Litigation in the separate action was stayed.
On Heurlin’s motion, his separate action was later consolidated with the voluntary dissolution but the stay was continued.
A bench trial was held on the voluntary dissolution in April 2008 in which Horn granted Schrenker and Fuller’s motion in limine to exclude Heurlin from the proceeding. After these rulings, Heurlin left the courtroom and the trial proceeded without him.
Horn entered a “Judgment of Dissolution” later that month. He found that Heurlin was entitled to one-third of FairWage’s assets as of the date of his suspension, but against this assessed approximately $160,000 in litigation expenses FairWage incurred in prosecuting the voluntary dissolution and defending against Heurlin’s still-pending civil action.
Writing for the appellate court, Justice Raymond J. Ikola explained that Heurlin was a “party aggrieved” with standing to appeal Horn’s order because the judgment adversely affected his pecuniary interests, but that he was not a party to the dissolution proceeding because he was not a named defendant or an intervenor in the action.
However, because Heurlin was not a party to the voluntary dissolution proceeding, Ikola said the trial court violated Heurlin’s right to due process by adjudicating FairWage’s claim against him without affording him adequate notice or an opportunity to be heard.
Even though Heurlin had no right to serve discovery in the dissolution proceeding, Ikola noted he “had every right to participate in his separate civil action” and “did exactly as he should have done to pursue his claims against the corporation.”
As the claims procedure set out in the Corporations Code for winding up a corporation only allows undisputed claims to be presented and allowed without litigation, Ikola, joined by Justices William F. Rylaarsdam and Kathleen O’Leary, concluded that both Heurlin and FairWage were required to litigate their competing claims “in the normal adversary fashion” with each entitled to all of the protections of due process.
The case is In re FairWageLaw, 09 S.O.S. 4712.
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