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Attorney-Client Fee Conflicts Seem Likely to Rise in July

Daily Journal Extra - Copyright 2004 Daily Journal Corp. - January 26, 2004

Over the last few years, state appellate courts have indicated that attorney fees can be reduced or eliminated for serious or per se ethical violations. With the July 1, 2004, amendment to the Business & Professions Code, the new model rule 1.13 of the American Bar Association and the advent of Sarbanes-Oxley reporting, more attorney-client conflicts are highly likely.

Lawyers defending themselves against such a charge should be ready to waive the claim for fees after a serious violation, but they may be able to collect reasonable charges up to the time of the breach and avoid a reduction if the violation was minor, technical and not in conflict with certain rules of professional conduct.

Four opinions summarize the law on this issue. Cal Pak Delivery Inc. v. United Parcel Service Inc., 52 Cal.App.4th 1 (1997), relates to an extremely egregious violation. It arose out of an attorney's offering to "sell out" his client and the entire class of plaintiffs for $8 million to $10 million (the class would get nothing). After rejecting this proposal, the opposing litigant moved to disqualify the lawyer and got an order barring the lawyer from receiving any fees.

The 1st District Court of Appeal upheld the disqualification, because the violation of duty "shakes the foundations of the judicial process." While the opinion does not refer specifically to any rule of professional conduct, it based its holding on the breach of the duty of loyalty, the conflict of interest over the payment of fees and the breach of the fiduciary duty to the client.

The panel denied fees for work done after violation: "It is the general rule in conflict of interest cases that where an attorney violates his or her ethical duties to the client, the attorney is not entitled to a fee for his or her services."

Since the underlying class action was not resolved at that point, the panel reversed as premature the part of the trial court's order precluding the lawyer from fees for three years of work done before the violation.

A.I. Credit Corp. Inc. v. Aguilar & Sebastinelli, 113 Cal.App.4th 1072 (2003), is the most recent opinion. A.I. Credit stems from an earlier case in which the lawyers accepted a collection case on a contingency-fee basis against a former client, and the client moved to have the firm disqualified because of a conflict of interest, because the lawyers possessed confidential information on the client's assets.

There were two theories for the disqualification: Rule of Professional Conduct 3-310(E), which states that "A member shall not .accept employment adverse to the client or former client" and Business & Professions Code Section 6068(g), based on the presence of a "corrupt motive of passion or interest."

The trial court in the prior proceeding granted the disqualification motion.
After this ruling, the client and the creditor settled the dispute for $675,000. The disqualified lawyers then sought their fee of one-third ($213,000) from the client and this was litigated in A.I. Credit Corp. The client's summary-judgment motion was granted on the grounds that an attorney disqualified because of a conflict of interest is not entitled to any fees after the breach.

The opinion held that counsel should have raised the ethical breach in the prior lawsuit and therefore had waived their right to do so.

The third case, Pringle v. La Chapelle, 73 Cal.App.4th 1000 (1999), is based on a claim for attorney fees by counsel to a corporation and two of its officers. The counsel asserting this claim had the chief executive officer sign off on a "conflicts waiver" as an individual (so counsel could represent both the individual and the corporation) and was suing the officer for fees. The waiver for the corporation was challenged as being counter to ethical rules but was found acceptable for the company officer by a jury, which awarded fees against the individual.

Affirming the award, the Pringle panel reviewed the seminal case of Clark v. Millsap, 197 Cal. 765 (1926), and found no case law holding that a violation of a rule of professional conduct automatically precludes an attorney from obtaining fees. Rather, a serious rule violation must occur before fees are forfeited, and that had not been shown here.

The basis for all these opinions is the early case of Millsap, which arose from a "hide the assets" case where the attorney took an assignment of assets and then refused to return the client's property after the threat to levy on those assets had passed.

Under Millsap, "a court may refuse to allow an attorney any sum as an attorney's fee if his relations with his client are tainted with fraud. 'Fraud or unfairness on the part of any attorney will prevent him from recovering for services rendered; as will acts in violation or excess of authority, and acts of impropriety inconsistent with the character of the profession, and incompatible with the faithful discharge of its duties.'"

The old rules, however, are changing. Business & Profession Code Section 6068 has been amended effective July 1, 2004, to read in part that an attorney must "maintain inviolate the confidence, and at every peril to himself or herself to preserve the secrets, of his or her client ... [and] an attorney may, but is not required to, reveal confidential information relating to the representation of a client to the extent that the attorney reasonably believes the disclosure is necessary to prevent a criminal act that the attorney reasonably believes is likely to result in death of, or substantial bodily harm to, an individual."

This revision and the revised ABA model rule on disclosure has generated considerable debate and probably will produce a number of conflict claims, which will lead to disputes over legal fees.

The state Rules Of Professional Conduct are binding on counsel and, although they do not create new causes of action, they often affect the right to fees. Of the 43 rules, some are so fundamental to the practice of law that they automatically cause a forfeiture of fees.
For example, Chambers v. Kay, 29 Cal.4th 142 (2002), interpreted state Rule
of Professional Conduct 2-200 to bar fees when two lawyers entered into a written, fee-sharing agreement that was not signed by the client. That the client would not pay any of the fees and knew about the division agreement was deemed irrelevant.
All of this case and statutory law points to the seriousness of the violation as the deciding factor. If the ethical violation is deemed de minimus, it should not be a bar to fees. Even serious violations should bar fees only from the date of the breach, at least as a matter of law. Per se violations of ethical rules appear to bar all fees within the scope of the rule.

Gerald G. Knapton is a partner in the Los Angeles office of Ropers, Majeski,Kohn & Bentley and specializes in litigation costmanagement and ethical issues.

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