Monday, August 25, 2008
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Failure to Disclose Fee-Splitting Plan Bars Enforcement—C.A.
By STEVEN M. ELLIS, Staff Writer
Two plaintiffs’ attorneys’ failure to disclose their fee-splitting arrangement when they moved to approve a class action settlement precluded one from later enforcing it against the other, the Fourth District Court of Appeal ruled Friday.
Recognizing that one of the two attorneys would benefit from violating a California court rule requiring full disclosure of all fee agreements in any class action dismissal or settlement applications, Justice Richard M. Aronson wrote for Div. Three that the aim of the rule to protect class members from potential conflicts of interest with their attorneys would be effectively nullified if an attorney could enforce such an agreement after previously concealing it.
Aronson similarly opined that Laguna Hills attorney Ronald H. Mark’s claims against San Clemente attorney Jeffrey P. Spencer on the 50-50 agreement were barred by res judicata where the trial court in the class action had given Mark fair opportunity to litigate the agreement before individually awarding Spencer $400,000 and Mark $76,000 on their $600,000 fee application.
Agreement Entered
Mark asked Spencer in 2001 to join him as counsel in a class action suit against one of Mark’s client’s former employers, General Nutrition Corporation, after concluding that the client could serve as lead plaintiff. The two then entered into the fee agreement, which provided they were equals and would split fees evenly, even if required to submit individual applications.
They filed suit in 2001, and the parties agreed to settle in 2004 after mediation.
Spencer drafted and filed a motion to approve the settlement and for a $600,000 lump sum award for attorney fees and expenses, supported by separate declarations from both attorneys. However, neither mentioned the fee agreement and the trial court—at a hearing Marks did not attend—made individual fee awards after concluding that Mark’s work was “perhaps…not as significant” as Spencer’s.
Mark asked Spencer to honor the agreement by transferring enough money to make their receipt of fees equal and sued for breach of contract, money had and received, and conversion when Spencer refused on the grounds that Mark was only entitled to what he was awarded.
Res Judicata
Orange Superior Court Judge David McEachen—reasoning that res judicata applied because Mark could not plead compliance with Rule 3.769 of the California Rules of Court prohibiting enforcement of undisclosed fee-splitting agreements in class action suits—entered judgment for Spencer, and Aronson, on appeal, opined that McEachen was correct.
Noting that the presence of absent class members created an increased potential for a conflict of interest, both as to the amount of fees charged and attorneys’ tactical decisions in the litigation, Aronson wrote that oversight to ensure settlements were fair and untainted by conflict was not only the responsibility of the class representative, but also the court.
Applying “the same prophylactic rule the Supreme Court applied for violations” of a rule of professional conduct prohibiting one attorney from dividing fees with another with whom he is otherwise unaffiliated unless the client consents in writing, and the total fees are neither increased by the agreement nor unconscionable, he concluded the failure to disclose the agreement to the class action court barred the agreement’s later enforcement.
“Mark urges us to sanction the concealment of material information from the class action court, even if it harms the absent class members,” Aronson said. “The integrity of the judicial system demands we not do so.”
Court’s Observations
Aronson also determined that Mark’s claims were barred by res judicata based on the class action trial court’s consideration of the attorney’s respective declarations and its own observations of their efforts.
Rejecting Mark’s contention that he had been unaware of the disclosure requirement and had relied on Spencer, a class action expert, Aronson wrote:
“Courts do not excuse nonlawyers for their ignorance of the law…. We see no reason to carve out an exception for attorneys.”
Presiding Justice David G. Sills and Justice Richard D. Fybel joined Aronson in his opinion.
The case is Mark v. Spencer, G038314.
Copyright 2008, Metropolitan News Company