In Which Fourth District, Division Three Rules That Feud Among Three Attorneys Results in Lack of Due Process.
Because the next case is such an outlier, we were hard-pressed to find a pre-existing category on our blawg to label the case. One label might be “Due Process”, but somehow that principle just hasn’t come up before in our discussions of attorney’s fees awards. In the 3-0 opinion authored by Justice Ikola, the Court of Appeal concluded that a nasty feud among three attorneys, shareholders in a professional corporation, resulted in a lack of due process. In re FairWageLaw, In Voluntary Dissolution, Case No. G040506 (4th Dist., Div. 3, August 4, 2009) (certified for publication). Or perhaps the proper label is res ipsa loquitur (“the thing speaks for itself”, or in this case, “I could have told you so”).
Attorney and appellant John M. Heurlin, and two other attorneys, David J. Fuller and Henry P. Schrenker, formed FairWage as one-third shareholders to prosecute wage and hour class actions. Fuller and Schrenker voted to voluntarily dissolve FairWage. As is generally the case with shareholders, Heurlin was not a party to the dissolution proceeding. Therein lay the seed of the problem.
Heurlin appealed from the judgment entered in the voluntary dissolution of FairWage, challenging the court’s finding he was not a party to the voluntary dissolution. Because Heurlin was not a party, the trial court denied his efforts to secure discovery, obtain summary judgment, and call witnesses. However, the fact that Heurlin was not a party did not prevent the trial court from assessing litigation expenses against his shareholder interest. Because Heurlin’s shareholder interest was assessed at $140,000, and the trial court assessed him approximately $160,000 in FairWage’s litigation expenses incurred in prosecuting the voluntary dissolution, as well as defending against Heurlin’s pending civil action, Heurlin actually got stuck with the deficiency amount of $19,422. That’s why this case appears in our blawg on attorney’s fees.
Justice Ikola explained:
“The consequences of proceeding without an adversary are apparent. FairWage’s entire offset against Heurlin’s shareholder interest consisted of attorney fees and related litigation costs incurred in the dissolution proceeding and in defending Heurlin’s separate (stayed) action. We have found no authority, and none has been provided, allowing attorney fees to be shifted in this manner in this case. ‘California follows what is commonly referred to as the American rule, which provides that each party to a lawsuit must ordinarily pay his own attorney fees.’ . . . . The statutes providing for court supervision over the winding up of a voluntary corporate dissolution do not ‘specifically provide [] for’ recovery of attorney fees incurred in the court proceedings from one shareholder at the expense of another. Whether such authority can be found in some other corner of the law, we leave to the trial court to decide in an adversary process on retrial.”
In other words, the Court of Appeal concluded that the application of the fee-shifting “English Rule”, combined with the lack of due process, was un-American.