Monday, January 31, 2011
C.A. Says Fee-Sharing Arrangement in BP Litigation Invalid
By SHERRI M. OKAMOTO, Staff Writer
The district’s Court of Appeal has upheld a decision denying enforcement of a fee-sharing agreement between two Los Angeles lawyers, arising out of a multi-million dollar case they had handled in Texas.
Div. Five, in its decision Thursday, concluded Milton C. Grimes was excused from performance under the agreement because James L. Brown had failed to perform his contractual obligation to pay referral fees to Paul Ross, a former California attorney who resigned as a result of State Bar proceedings against him.
Ross had worked as an investigator for Brown and referred cases of individuals injured by a 2005 British Petroleum refinery explosion in Texas. Ross and Brown later contacted Grimes, who agreed to act as lead counsel on the cases referred by Ross.
Grimes ended up with a total of 52 BP explosion clients.
Grimes testified that he agreed to split attorney fees 50/50 with Brown, as opposed to the customary 25 or 30 percent referral fee, because as part of the fee-sharing agreement, Brown orally agreed to pay Ross out of his share of the fees. Brown denied Grimes’s account.
Ross claimed that he had an agreement with Brown which entitled him to 90 percent of whatever Brown received from Grimes.
They later agreed to modify the fee-sharing agreement to provide that each of them would be entitled to 40 percent of the fees and the Texas firm they involved as local counsel would be entitled to 20 percent of the fees. This modification did not purport to affect Brown’s obligation to pay Ross.
Ultimately, the settlements of the BP cases resulted in recoveries totaling approximately $38 million, but Ross did not receive any money from Brown and Grimes stopped paying fees to Brown.
Brown then sued Grimes for his share of the fees, asserting causes of action for breach of contract, conversion, breach of fiduciary duty, and accounting. Grimes cross-complained against Brown for rescission of their agreement and for the money previously paid Brown.
Following a bench trial, Los Angeles Superior Court Judge Judith C. Chirlin—who has since retired—found Grimes’ account of events more credible than Brown’s and determined that the fee-sharing agreement between the attorneys was unenforceable.
She found Brown was obligated to pay Ross, that Brown and Ross had agreed
Ross would receive 90 percent of whatever Brown received, and as Brown did not perform his obligation to Grimes to pay Ross, Brown could not enforce his fee-sharing agreement with Grimes.
As a separate basis for her ruling, Chirlin said Brown could not enforce the agreement because he had unclean hands as a result of his fee-splitting agreement with Ross, which violated the California Rules of Professional Conduct and the Texas Disciplinary Rules.
Chirlin ordered Brown to return to Grimes the $1.4 million Grimes had already paid Brown under the fee-sharing agreement, less $400,000 in quantum meruit—the stipulated value of Brown’s services.
On appeal, Brown contended that he did not breach any obligation to pay Ross because there was no showing as to the amount that was owed Ross, and any fee-sharing agreement between Brown and Ross, a non-lawyer, would be invalid.
Writing for the appellate court, Justice Richard M. Mosk said substantial evidence supported Chirlin’s implied finding that the promises by Brown and Grimes were not independent, noting that Brown did not challenge the sufficiency of the evidence to support this finding.
But even though Brown could not enforce the fee-sharing agreement because of his failure to perform, Mosk said, the attorney was not necessarily required to return the money he had received from Grimes under the agreement.
Grimes, Mosk noted, had received consideration in the form of the referrals of cases from which he earned millions of dollars. Although Brown had breached the agreement by not paying Ross, Mosk said, Chirlin had not found any breach of the agreement in connection with the referral of clients or legal services rendered by Brown.
As Brown’s nonperformance, did not “go to the essence of the contract—the referral of cases,” and restitution “would bear no relationship to restoring Grimes to his position before the contract was made,” Mosk reasoned there was “no basis to conclude that Brown completely or substantially failed to perform the contract so that Grimes could recover the amount he already paid Brown.”
Mosk also said the doctrine of unclean hands was inapplicable to the dispute because the improper payment agreement between Brown and Ross “did not directly affect or infect the relationship between Grimes and Brown and, most importantly, was not inequitable conduct towards Grimes.”
He further posited “it would not be inequitable to enforce the Grimes-Brown agreement notwithstanding the Brown-Ross agreement” since Grimes knew of Ross’ activities and that Ross was to be compensated.
“Indeed, Grimes is a beneficiary of whatever arrangement existed between Brown and Ross, because, but for the Ross-Brown relationship, Grimes likely would not have had the opportunity to handle the referred cases and reap millions of dollars in contingent fees,” Mosk said.
Justice Sandy R. Kriegler joined Mosk in his opinion, but Justice Orville A. Armstrong concurred separately.
Armstrong said Brown’s failure to pay Ross did not discharge Grimes from his duty to perform. The justice said funds left in Grimes’ trust account after payment was made to Ross to resolve his claims against the attorneys should have been released to Brown as a matter of contract law.
John N. Quisenberry of The Quisenberry Law Firm and Stuart B. Esner of Esner, Chang & Ellis represented Brown. Paul J. Watford and Jenny M. Jiang of Munger, Tolles & Olson represented Grimes.
The case is Brown v. Grimes, 11 S.O.S. 555.
Copyright 2011, Metropolitan News Company