Twin Cities Business Litigation Blog : Minneapolis Business Litigation Lawyer & Attorney : Gavin P. Craig Law Firm : St. Paul, Twin Cities, Minnesota MN

In a very unusual circumstance - I hope - the McGuire Woods law firm lost $12 million in fees for creating a conflict of interest.

The short version of the story is that the firm brought a class action against West Publishing, the parent Company of BAR/BRI, and Kaplan. BAR/BRI provided bar exam preparation services, and Kaplan provided LSAT preparation services. The two companies allegedly agreed that BAR/BRI would not provide LSAT exam services, and Kaplan would not enter the Bar Exam preparation business.

In 2007, the parties reached a settlement, whereby the Defendants would pay $49 million. However, it was discovered that 5 of the 7 named class representatives for the plaintiff class had entered into a separate agreement with the lawyers at the firm to receive a special incentive payment once any settlement or judgment was approved. Apparently the agreement was on a sliding scale and the more the case settled for the more the five would receive, up to $10,000.

Attorneys for other plaintiff's objected to the arrangement. The judge, US District Court Judge Real agreed with the objectors, and voided the incentive payments. He also denied attorney fees for the attorneys of the objecting plaintiffs. The case went to the 9th circuit, where the court approved the settlement but refused to approve the attorney fees of $12 million, and returned the case to the trial court to consider the impact of the conflict of interest.

When the case returned to Judge Real, he denied all attorney fees. He held in part:

5. Attorney's Fees

McGuireWoods, LLP (the law firm) entered into incentive agreements with five of the named plaintiffs, obligating the firm to seek payment for each of the five in amounts that hinged on the size of the settlement or a verdict secured on behalf of the Class. This arrangement was not disclosed to the Class, nor did McGuireWoods inform the Court of its existence during the class certification stage.

Upon learning of the agreements this Court found them to run afoul of the California Rules of Professional Conduct. Moreover, the agreements gave rise to a conflict of interest that tainted the McGuire Woods representation. That a fair settlement was ultimately reached does not bear upon the seriousness of the ethical violation. This is all according to, at least, the Ninth Circuit. Under California law in the absence of informed written consent, the simultaneous representation of clients with conflicting interest constitutes an automatic ethics violation that results in the forfeiture of attorneys’ fees. Image Technical Service, Inc. v. Eastman Kodak, 136 F.3d 1354 (9th Cir. 1998). Moreover, quantum meruit recovery is barred where an attorney has violated an ethical rule that proscribed the very conduct for which compensation was sought. Huskinson & Brown, LLP v. Wolfe, 32 Cal.4th 453 (2004).

Accordingly, McGuireWoods LLP Accordingly, McGuireWoods LLP is not entitled to any fees for its representation in this matter. However, because the forfeiture is predicated upon a theory that payment is not due for services not properly performed, McGuireWoods LLP may be reimbursed for the expenses it incurred during the course of its representation given that such expenses would be unaffected by any conflict.

The WSJ LawBlog finds this to be a strange result. I don't. The firm's lawyers should have known better. If they were going to do this it should have informed the class participants in the retainer. Disclosure and agreement solves most conflicts. The right to fees when there is a conflict does not depend on whether the result was a good one for the class, or the clients. Undisclosed conflicts disqualify the firm from receiving any fees for their work. This proposition is, I believe, the same in most states. It is a little hard to feel sorry for the firm, because they created their own problem and they should have known better.

The attorneys who objected, are now asking the court to approve placing the unpaid attorney fees into the amount to be paid to the plaintiff class. I am confident that the case is headed back to the 9th circuit. But the McGuire Woods law firm is not in a very good position on this one.

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Contracts are funny things. They require an offer, acceptance and consideration. That seems simple enough, except that many people conducting business don't appreciate the necessary formalities. It is rare to see a valid claim of no consideration, but they arise every once in awhile. One client I had received a claim from a company in Texas, for a breach of contract. I looked at the written document and surprisingly, there was no consideration. I pointed out this problem to the Texas attorney, who proceeded to tell me that consideration wasn't required any more. He was wrong.

Marc Ward is reporting on a similar case. The parties agreed on a price for the sale of a franchise. Later the parties apparently amended the agreement to require the Defendant to pay more. Contract amendments require separate consideration, and there was none. When the defendant refused to pay the extra money, the Plaintiff sued. The defendant claimed there was no consideration for the amendment, and the court agreed. Presumably the defendant would be entitled to the return of any payment made in excess of the original purchase price.

One argument would be that the parties didn't really have a contract in the first instance, and the parties were still negotiating. I don't know if the parties argued this point, but sometimes it is hard to tell when the parties have an agreement (contract.)

Consideration doesn't need to be much - anything of value will do.  The important thing to remember is that when negotiating or amending contracts, the parties need to exchange something of value.  The values do not need to be equal, but they must be present - and preferably the consideration is recited in the agreement or amendment. 

Gavin Craig

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The Minneapolis Star Tribune is reporting that in the 16 months since the Petters was arrested, the lawyers and accountants have billed $12,000,000. Not bad for a few months work.

Apparently Petters criminal defense costs were paid by insurance, (I didn't realize that insurance coverage would cover criminal defense!) and that bill was $3.3 million. The remaining money was spent for accounting and searches in attempts to locate the money stolen by Petters and his crew. According to the article, the money was also used for the defense costs of the officers and others that turned states evidence.

Of the $3.65 Billion Ponzi scheme run by Petters and others, I understand that most of the money is still unaccounted for, so this effort has not been a tremendous success. What has been recovered is used in part to pay for the lawyers and accountants. The bottom line is that the victims are paying for the cost to try to recover what assets can be found. The last I heard, is that Petters is not talking.
 

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One of my favorite bloggers, Victoria Pynchon, is publishing a new book, Titled "A is for Assholes, The ABC's of Conflict resolution." Those of us that litigate cases understand the title - perfectly.

I haven't read it, but I read Victoria's blog, and I recommend this book if it is anything like her blog - and it is sure to be that.  Watch for it!

Gavin Craig

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