Wednesday, May 25, 2011
No Quantum Meruit Where Fiduciary Duty Breached—C.A.
By SHERRI M. OKAMOTO, Staff Writer
A San Rafael attorney who entered into business agreements with his clients without making the disclosures required by the California Rules of Professional Conduct could not recoup the reasonable value of his services, the First District Court of Appeal ruled yesterday.
Div. One concluded that the conduct of R. Thomas Fair “was so fundamentally at war with rule 3-300 and [Probate Code ]section 16004, that it infected the entire relationship between Fair and his clients, and that Fair’s breach of his fiduciary duties under the statute was therefore sufficiently serious as to warrant the denial of quantum meruit recovery.”
Fair—then a partner at Hoge, Fenton, Jones & Appel Inc.—was retained by Karl E. Bakhtiari, in late 1989 or early 1990. At this time, Bakhtiari had inherited a substantial sum of money and was looking for real estate investment opportunities.
Shortly thereafter, Fair and Bakhtiari went into business together, forming Stonesfair Corporation. They subsequently formed two additional partnerships together: Stonesfair Financial Corporation in 1993 and Stonesfair Management Co. LLC, in 1996
Fair represented each business from its inception and provided all legal services for these entities between 1990 and 2000.
In 1994, Fair left his law firm and began receiving a salary from Stonesfair Financial Corporation. He also negotiated for, claimed entitlement to, and/or received other monetary benefits from all three of the Stonesfair entities based on his specific contributions to their respective businesses.
He ceased receiving compensation from Stonesfair Financial Corporation in 2001, after he filed a complaint against Bakhtiari for personal injuries.
While a pending appeal stayed proceedings in that case, Bakhtiari and the Stonesfair entities filed a complaint against Fair asserting claims for malpractice and breach of fiduciary duty, among others.
Once the two actions were consolidated, Fair moved for leave to amend his complaint to add causes of action for quantum meruit.
Void and Unenforceable
San Mateo Superior Court Judge Carol L. Mittlesteadt denied the motion, and later entered judgments in favor of Bakhtiari and the Stonesfair entities on some of their causes of action, based on her finding that their business agreements with Fair were void and unenforceable.
Mittlesteadt determined that “each of the subject business transactions was fair and reasonable,” but the material terms and conditions of these transactions were not fully explained to and understood by Bakhtiari, as required by rule 3-300 and Sec.16004, since “the evidence…overwhelmingly demonstrates that there were so many material terms on which there was no agreement at all.”
In his opinion for the appellate court, Presiding Justice J. Anthony Kline said Mittlesteadt did not err in declining to allow Fair to add his quantum meruit claim since the California Supreme Court recognizes “a distinction between the type of violations that may render an agreement voidable, but still allow the attorney compensation for the reasonable value of his or her services, and the type of violation that precludes such recovery,” such as Fair’s.
Based on the high court’s 2004 decision in Huskinson & Brown v. Wolf, 32 Cal.4th 453, Kline said, “[a]ttorneys who violate a rule of professional conduct may recover in quantum meruit where they do not act in violation of an express statutory prohibition when providing legal services and where the subject services are not otherwise prohibited,” but “violation of a rule that constitutes a serious breach of fiduciary duty, such as a conflict of interest that goes to the heart of the attorney-client relationship, warrants denial of quantum meruit recovery.”
In Huskinson, the California Supreme Court held that the denial of quantum meruit was appropriate in cases which “involved violations of a rule that proscribed the very conduct for which compensation was sought, i.e., the rule prohibiting attorneys from engaging in conflicting representation or accepting professional employment adverse to the interests of a client or former client without the written consent of both parties,” but not in the situation before it, which involved a law firm’s violation of rule 2-200. That rule bars law firms from fee sharing if the client has not given written consent to the agreed division after a full written disclosure of its terms.
The high court reasoned that, in the case of the rule 2-200 violation before it, the rule did not bar the services the firm rendered on the client’s behalf; but simply prohibited the dividing of the client’s fees.
Kline said the “purpose of rule 3-300 is to prohibit absolutely attorneys from entering into business transactions with clients, absent full written disclosure and written client consent,” and the “underlying concerns of the rule are avoiding the potential and actual conflicts of interest between attorneys and their clients that also animate the rule’s statutory counterpart, section 16004.”
Unlike rule 2-200 at issue in Huskinson, which “did not restrict attorney compensation on any basis other than fee-sharing and which did not suggest that attorneys or law firms were categorically barred from making or accepting client referrals, from agreeing to a division of labor on a client’s case, or from actually working on a case where labor is divided,” Kline reasoned, “rule 3-300 absolutely prohibits a member from entering into a business transaction with a client or knowingly acquiring a pecuniary interest adverse to a client, unless the transaction is fair and the full written disclosure and consent requirements of the rule are met.”
By entering into and conducting business transactions with his clients without making the necessary disclosures, Kline concluded that “Fair breached his fiduciary duties to them and he violated rule 3-300—the ethical rule that ‘proscribed the very conduct for which compensation was sought.’ ”
Justices Paul R. Haerle and James A. Richman joined Kline in his decision.
The case is Fair v. Bakhtiari, 11 S.O.S. 2703.
Copyright 2011, Metropolitan News Company