Thursday, October 7, 2010
Court of Appeal Says Lawyer Must Repay Firm’s Costs of Defending His Conduct
By KENNETH OFGANG, Staff Writer
An Orange County attorney whose ethical misconduct led to a lawsuit against his former firm must reimburse more than $200,000 the firm spent to defend itself, the Fourth District Court of Appeal has ruled.
Div. Three Tuesday affirmed a $236,900 judgment in favor of Rutan & Tucker against former partner Robert D. Fish, a patent lawyer who now heads Fish & Associates in Irvine.
Fish was a Rutan partner from 2002 to 2007. A few months after leaving, he sued Alex Bobarykin, alleging that the entrepreneur had breached three loan agreements and owed him more than $200,000.
Bobarykin had retained Fish to obtain a patent for a water purification device.
The loan agreements—which included security provisions—were made during a period that Fish, as a Rutan partner, had represented VIP Technologies, Inc., and during which a Rutan corporate lawyer, at Rutan’s suggestion, had formed SupraCarbonic, LLC. Bobaryakin owned a half-interest in both companies.
Bobarykin cross-complained against Fish and Rutan, alleging that Fish committed malpractice and that the loan arrangements violated rules of professional conduct restricting financial relationships between lawyers and their clients. Rutan cross-complained against Fish for contractual and equitable indemnity, and Fish cross-complained against his former firm for indemnification as well.
Bobarykin settled with Rutan, apparently for a dismissal with no money changing hands, and later settled with Fish, agreeing to pay the attorney $40,000 over two years. Rutan’s and Fish’s claims against each other went to bench trial before Orange Superior Court Judge William Monroe.
Monroe ruled that Rutan was entitled to indemnification from Fish and Fish was not entitled to anything from Rutan. The judge said that Fish violated rules of conduct by failing to obtain the client’s informed consent to the loan agreements, because they gave the attorney security interests and pecuniary interests adverse to those of the client, and that he misused confidential information.
Monroe also concluded that Fish violated Rutan’s partnership agreement and his fiduciary duties to the firm by not disclosing that he had become a creditor of companies he was representing and was seeking an ownership interest in SupraCarbonic, and that the attorney acted with actual malice, noting that before leaving the firm, he told Bobaraykin not to pay the more than $100,000 he owed the firm.
The judge also upheld the validity of a provision in the partnership agreement defining the circumstances under which a partner who left the firm before a professional liability claim was resolved would still be considered a “Covered Partner” and thus entitled to be indemnified by the firm.
Under the challenged provision, a partner would not be covered if he or she left the firm and practiced within 100 miles of the firm’s Costa Mesa base within two years.
This “toll” or “tax on competition” was reasonable, Monroe said, at least as to Fish, who the judge said was able to earn substantially more from his new Irvine-based practice than he would have had he stayed at Rutan. Not only does a departing partner cost the firm money in terms of lost clientele, costs of recruiting a replacement, and the need to continue paying staff members even though their workload has diminished, but the ex-partner who practices in the area can make money as a result of business from former clients of the firm and the prestige of being a former member of the firm, the judge reasoned.
Justice Raymond Ikola, in an unpublished opinion for the Court of Appeal, said the trial judge reached the correct result, but was overly complex in his reasoning.
The simplest way to resolve the case, the appellate jurist reasoned, was to hold that under the partnership agreement, the subject of Bobarykin’s suit was not a “Covered Act” entitling Fish to indemnity because it constituted willful misconduct or a material violation of the partnership agreement or firm policy.
Ikola, who practiced with firms in Orange County for more than 20 years prior to being appointed to the Orange Superior Court in 1995, agreed with the trial judge that the “toll” was reasonable.
The firm was justified in treating some ex-partners differently than others, the justice reasoned, explaining:
“The readily-apparent justification for this discrimination is that partners who decide to redirect the rewards of their practice to themselves (by leaving and continuing to practice law) and away from Rutan (by competing within 100 miles) should not be entitled to the benefit of risk-pooling with the remainder of the Rutan partners for any missteps or alleged missteps committed by the departing partner while practicing at Rutan. Given that Fish would no longer be around to help offset claims against other Rutan partners, but would instead be reducing Rutan’s profits by making money elsewhere, this is a reasonable provision when viewed ex ante, that is, as of the time Fish agreed to the provision by joining Rutan. Viewed ex post, the provision is reasonable in that, according to the court’s unchallenged findings, Fish earned substantially more by leaving Rutan than he suffered in attorney fees to defend professional liability claims.”
Fish’s attorney, Robert W. Keaster of Encino’s Chamberlin, Keaster & Brockman, said he would likely petition for rehearing, and if unsuccessful, for review in the Supreme Court.
Ikola’s “Covered Act analysis” was “stunning,” Keaster said, because the firm’s management committee never determined that Fish—who insisted that he had no duty to advise the firm he had loaned money to a client if he did not intend to foreclose on his security interest and did not take an equity interest in the client’s business—intentionally violated firm policy. Nor did the firm argue in the trial court or the appellate court that Fish’s representation did not involve acts covered by the indemnity provisions, Keaster said.
The attorney added that the ruling leaves partners at Rutan in a precarious position with result to professional liability claims.
“I doubt that the partners....other than those on the management committee, realize that if they leave the firm and take one client with them and get sued for malpractice, they have to pay the first $500,000 [the amount of the self-insured retention under the firm’s professional liability insurance policy] of any defense.”
Stuart P. Jasper of Jasper & Jasper represented Rutan.
The case is Fish v. Rutan & Tucker LLP, G042057.
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