First District Also Discusses Impact of Unenforceable Attorney Lien Provision in a Contingency Fee Agreement.
The First District, Division One—in a convoluted set of facts—recently decided a case involving charges of illegal retainer agreements (because tainted by prohibited legal referral actions) and unenforceable attorney lien provisions. The case is Shopoff & Cavallo LLP v. Hyon, Case Nos. A114918 & A116182 (1st Dist., Div. 1 Oct. 31, 2008) (certified for publication). You know that this was going to be an interesting one when the appellate court indicates early on that “[w]e have before us another appeal in this contentious and long-running dispute between parties claiming various interests in the assets (hereafter the Recovery) obtained from litigation known as the ‘Decker Island litigation.’” So, put on your seat belts and here we go.
Boiled down to the essentials, coplaintiffs (one of them being appellant Hyon) engaged several attorneys through two trials—assisted by respondent Selten (a non-attorney), who was president of a legal referral company—by which co-plaintiffs obtained a $7.6 million verdict in a trial headed by respondent attorney Shopoff. A global settlement agreement was then negotiated due to obstacles in enforcing the multi-million dollar judgment. Various attorneys involved in the matter and respondent Selten sought pieces of the Recovery, which totaled between 48.5%-60.5% of the Recovery. Coplaintiffs and Selten then tried to enter into partnerships or joint ventures to manage the affairs of the Decker Island business, which had been transferred to coplaintiffs under the global settlement agreement. Relationships soured, prompting Shopoff to file a San Francisco interpleader action to resolve the conflicting claims between coplaintiffs, the various attorneys, and Selten. Hyon filed a Los Angeles action against the other coplaintiff and Selten, and Selten then cross-complained for contractual/tort breaches, fraud, and recovery of the reasonable value of the legal referral and business work that he rendered. Various other pleadings were filed in both actions, with Hyon moving for summary judgment on Selten’s Los Angeles cross-complaint on the grounds that his claims were based on an illegal/unenforceable contract based on Selten’s engagement in the unauthorized practice of law and provision of unlawful attorney referral services (Bus. & Prof, sec. 6155). The trial court granted summary judgment on the basis that Selten provided unlawful attorney referral services to coplaintiffs, meaning the entire contractual arrangement was unenforceable. A receiver was appointed in the interpleader action. Hyon lost most parts of his Los Angeles action, and Selten appealed the adverse summary judgment ruling.
The trial court in the interpleader action found that the attorneys’ retainer agreements were enforceable and that Selten did not operate an illegal referral service or engage in the unauthorized practice of law. Except to reduce the percentage share awarded to one law firm, the court awarded respondents the full amounts they claimed from the Recovery, along with costs advanced and attorney’s fees as the prevailing parties under Civil Code section 1717.
In June 2007, the Second District issued its opinion in Selten v. Hyon, 152 Cal.App.4th 463, 465, 473 (2007), agreeing with the trial court’s conclusion that Selten’s agreement was illegal in part but then remanded so that Selten could be permitted to pursue his common count for the reasonable value of any lawful services rendered (most likely, the business work rather than the illegal attorney referral work). Hyon appealed.
On appeal, most of the interpleader judgment was affirmed as to the percentage amounts and attorney’s fees awarded to the various attorneys. The First District, Division One, in a 3-0 decision authored by Justice Swager—reversed the judgment in favor of Selten and remanded so that his proper compensation should be calculated, as well as overturning the fee award in favor of Selten.
Hyon tried to nullify the Recovery awards to Selten and the various attorneys based on Business and Professions Code section 6155, which prohibits unlawful attorney referral services—arguing that the prohibition tainted Selten and also rendered unenforceable the contingent fee agreements with the various attorneys. Justice Swager found that the Second District’s Hyon decision had collateral estoppel effect on Selten, Hyon, as well as the First District. This meant that the interpleader trial judge erred in awarding Selten his Recovery share, with Selten only being entitled to recover in quantum meruit for his lawful, nonlegal work. However, nothing in the earlier Hyon decision impacted the other respondents, who were not parties to the appeal. Beyond that, the Court of Appeal independently examined the various retainer agreements and found that there was no substantial evidence to establish that any of the respondents accepted an illegal referral. “An attorney does not accept an illegal referral pursuant to section 6155 merely because he or she was retained by someone who was operating an illegal referral service. As we interpret section 6155, acceptance of an illegal referral by an attorney must be with knowledge of at least the nature of the referral business that violates the statute—that is, a business that operates ‘for the direct or indirect purpose, in whole or in part, of referring potential clients to attorneys.’ (sec. 6155(a).) Otherwise, attorneys who have accepted employment in good faith and without any awareness of an association with an illegal operation would fall within the proscription of the statute just by agreeing to represent clients. We are persuaded that the Legislature did not intend to punish those who have no knowledge of or complicity in the illegality.” (Slip Opn., at p. 32.) Furthermore, none of the attorneys paid any referral fees to Selten, and section 6155 “does not make the ‘commonplace uncompensated attorney referrals’ illegal.” (Id. at 33, quoting Hyon, supra, 152 Cal.App.4th at 471.)
Hyon’s next attack was to argue that the respondent attorneys violated rule 3-300 of the Rules of Professional Conduct by acquiring attorney’s liens on their Recovery proceeds in their retainer agreements without complying with the disclosure and consent requirements specified in rule 3-300. (See our “Cases: Liens for Attorney Fees” category for prior posts discussing these requirements and Fletcher v. Davis under our “Leading Cases,” Case No. 7.) The First District did note that Fletcher v. Davis, 33 Cal.4th 61, 70 n. 3 (2004) did not decide whether rule 3-300 applies to attorney’s charging liens in contingency fee cases. (See our post of May 26, 2008 for a discussion on the issue.) After noting that a Los Angeles County Bar Association opinion held the requirements did not apply in the contingency fee context (L.A. County Bar Assn. Formal Opn. No. 496), the appellate panel decided it did not have to reach the issue. Instead, even assuming that Fletcher applied, only the asserted liens would be unenforceable—but that did not mean t
hat the underlying contingency fee agreement was nullified or that an attorney was precluded from recouping the specified contractual fee. (Slip Opn., at pp. 34-35.) Beyond that, however, the First District found support for its reasoning in the law of contract severability; the charging lien violations were severable from the contingent fee agreements which were neither illegal nor infringed public policy considerations. “The sole illegality, if any, arises, instead, from the provision of a charging lien without the required disclosures. Any violations of rule 3-300 may prevent respondents from enforcing the liens, but those violations do not taint or preclude recovery under the valid contingent fee agreements.” (Slip Opn., at p. 36.) Respondent attorneys’ awarded shares from the Recovery remained intact.
Because Selten’s contingent fee agreement with appellant was unenforceable in entirety, the fee award in his favor was reversed. However, the respondent attorneys were properly awarded fees because their contingent fee agreements were valid and enforceable.
This case is good news for attorneys entangled in unlawful referral service chains and with respect to the severability of infirm charging lien provisions from retainer fee agreements.