APPEALS from a judgment of the Superior Court of the County of Los Angeles, Judith C. Chirlin, Judge. (Los Angeles County Super. Ct. No. BC378124, BC369561)
The opinion of the court was delivered by: Mosk, J.
CERTIFIED FOR PARTIAL PUBLICATION*fn1
Affirmed in part, reversed in part.
For the following three reasons, the trial court refused to enforce a fee-sharing agreement between lawyers--plaintiff James Brown and defendant Milton Grimes--arising out of cases they handled in Texas: Brown had not performed his contractual responsibility to pay Paul Ross, a third party; Brown had unclean hands because he had unethically agreed to share his fees with Ross, a former lawyer who had resigned from the Bar; and the fee-sharing agreement violated applicable Texas law because the clients did not consent to the arrangement at the outset of the litigation. The trial court also ordered Brown to return fees he had already received from Grimes under the fee-sharing agreement less an amount for the reasonable value of Brown's services. Brown does not challenge the sufficiency of the evidence supporting the trial court's factual conclusions.
We hold as follows: the trial court did not commit legal error in excusing Grimes from any further obligation to Brown under a fee-sharing agreement because of Brown's failure to perform one of his contractual obligations; the trial court erred in requiring Brown to repay moneys already paid to him because there was not a total failure of consideration; the trial court erred in denying enforcement of the fee-sharing agreement under the unclean hands doctrine because Brown's offending conduct did not affect the fee-sharing agreement, was not inequitable as to Grimes, and did not prejudice Grimes; even if unclean hands applied, Grimes was not entitled to any affirmative relief; and a violation of the laws of either California or Texas governing fee-sharing agreements did not require Brown to repay money received from Grimes under the fee-sharing agreement.
Ross, a former California attorney (who resigned as a result of State Bar proceedings against him), had been doing investigative work for a California attorney, Brown. Ross referred Brown cases of individuals injured by the 2005 British Petroleum (BP) refinery explosion in Texas City, Texas. As a result, Brown obtained signed retainer agreements with some of those individuals. But Brown told Ross that he, Brown, could not handle those cases as lead counsel because of other responsibilities.
Ross and Brown ultimately contacted Grimes, a California attorney, who agreed to act as lead counsel on the cases referred by Ross arising out of the BP explosion. Brown and Grimes entered into a written fee-sharing agreement, which provided as follows: "THIS CONSTITUES THE AGREEMENT OF THE UNDERSIGNED REGARDING ASSOCIATION OF ATTORNEYS AND DIVISION OF ATTORNEYS' FEES pertaining to the British Petroleum ("BP") explosion cases, arising from the March 23, 2005 explosion at the BP facilities at or near Texas City, Texas. [Grimes], the lead litigation Attorney will receive fifty percent (50%) of all net attorneys' fees, and [Brown], the referring and associate attorney, will receive fifty percent (50%) of all net attorneys' fees. This fee division will not in any way increase the total fees agreed upon by Clients in the Retainer Agreement and full disclosure of the attorney fee division has been made to Clients." There were spaces in the agreement for the clients to sign their consents, but no indication that they acknowledged or signed the agreement.
Brown referred a group of nine clients to Grimes. Ross referred the other clients directly to Grimes. Grimes ended up with a total of 52 BP explosion clients.
Brown testified at one point he was being compensated for his referrals and did not have to perform any legal services, but later added he was also to perform legal services. After first testifying that he was to be compensated for all the cases as the referring attorney, Brown later claimed he was the referring attorney on the first nine cases and was an associated attorney on the rest of them. Grimes testified he agreed to the 50/50 split with Brown of the contingency instead of agreeing to the customary 25 or 30 percent referral fee, because as part of the fee-sharing agreement, Brown orally agreed to pay Ross, the "project coordinator," out of Brown's 50 percent of the fees. Brown denied Grimes's account.
Grimes and Brown both were admitted to practice law in Texas pro hac vice as to the BP cases. Grimes promptly began working on the cases, and filed cases in Texas prior to obtaining from the clients signed consents to the fee-sharing agreement. Grimes had the clients sign a contingent fee agreement providing that he was to be paid a percentage of the recovery. Thereafter, clients signed an addendum acknowledging that Grimes was the lead attorney and that there would be a fee division with Brown, but the percentages of the division were not specified. Grimes said he did not consider the application of Texas requirements in connection with the fee-sharing agreement.
Grimes, with Brown's consent, brought in a Texas law firm, The Ammons Law Firm (Ammons firm), to act as local counsel in the cases. Grimes and Brown then agreed to modify the fee-sharing agreement to provide that Brown and Grimes would each be entitled to 40 percent of the fees and the Ammons firm would be entitled to 20 percent of the fees. This modification did not purport to affect Brown's obligation to pay Ross. Grimes advised the clients of the involvement of the Ammons firm, and at some point, the clients signed documents reflecting that association and that the Ammons firm would receive 20 percent of the fee. Again, there was no breakdown as to the percentages of the contingency fee between Brown and Grimes. Brown did not participate in obtaining these consents.
As the arrangement developed, it was contemplated that Grimes would have the primary responsibility in dealing with the clients and trying the cases and would be paid the fees. Grimes would then pay certain expenses and have the contractual obligation to send Brown and the Ammons firm the amounts owed them. Brown was to compensate Ross out of the amount Brown received from Grimes. Brown's compensation was in large part for his referral of the clients, but also, in part, for whatever legal services he performed.
The relationship between Grimes and Ross deteriorated, precipitated in part by the association of the Ammons firm. In addition, according to Grimes, Ross was holding himself out as a lawyer. As a result, Grimes would no longer communicate with Ross. Grimes performed most of the legal services and considered Brown as essentially a referrer of clients.
Brown did perform what was described as some, but few, legal services and did not keep time records. According to Grimes, Ross acted as the "project coordinator," who performed "a lot of hours in these cases" in obtaining treating doctors for the clients, interviewing witnesses, and retaining experts.
Ross believed at the outset that Brown was to act for him in collecting Ross's share of the fees from Grimes, but Brown denied this assertion. Ross ultimately alleged that both Brown and Grimes agreed to pay Ross's compensation.
The BP cases began to settle. The first 13 settlements were funded, and Grimes, without Brown, met in Texas with each client whose case had settled to have the client sign papers reflecting the distributions to each of the attorneys and the client, and to give the settlement check to the client. As contemplated by the parties, Grimes, after receiving the distributions, sent Brown his 40 percent share of the fees--$1,342,000--for the cases then settled. Ultimately, Grimes had 27 of the 53 the clients sign distribution breakdowns that showed the percentages received by each of the attorneys. At some point, after commencement of the Brown-Grimes dispute, Grimes had the remaining 26 clients sign consents and distribution sheets that did not include any reference to a distribution to Brown or even to Brown's name.
Grimes expected Brown to pay Ross out of the monies Brown received. Brown testified he thought Grimes was to pay Ross, and denied that he, Brown, had an agreement with Grimes to pay Ross. Grimes testified notwithstanding his agreement with Brown that Brown pay Ross, Brown said he would not pay Ross. Grimes attempted to have Brown and Ross work out whatever amounts Brown should pay Ross. Ross rejected proposals from Grimes and Brown.
Ross first looked to Brown for payment, and when Brown failed to pay him, Ross claimed against both Brown and Grimes. Although denying that he could share attorney fees with Ross, Brown indicated he would pay Ross amounts owing to him upon submission of detailed invoices. When attempting to resolve the dispute between Ross and Brown, Grimes was informed that Brown had an agreement with Ross to give Ross 90 percent of the fees Brown received. Brown adamantly denied that any such agreement existed. Ross confirmed that he had an agreement with Brown that he, Ross, would be entitled to 90 percent of whatever Brown received from Grimes, and further asserted that Brown was to act for Ross in collecting Ross's fees, keeping 10 percent of them; but Ross also claimed his compensation was based on hours worked.
Ultimately, the settlements of the BP cases resulted in recoveries totaling approximately $38 million. Grimes offered to put Brown's remaining share of the fees from the settlements in Grimes's security account until Brown and Ross resolved their differences. But Brown demanded immediate payment of his share of the fees.
Ross had sent a letter to Grimes and Brown demanding $11,965,170, over twice the amount Grimes had received in fees at that point. Ross said he had performed 8,785 hours of work and that Grimes agreed to pay him $850 per hour for his work as a consultant. Ross ultimately claimed an amount in quantum meruit based on an hourly rate of $1,362. Ross did not receive any monies from Brown. Grimes believed that Brown, by not paying Ross, breached the agreement Grimes had with Brown, and that explains why Grimes, for the second group of settlements, ceased including Brown's name on the list for distribution of fees and did not pay any further fees to Brown. Before litigation commenced, Brown had not satisfied or compensated Ross.
Brown sued Ross for declaratory relief seeking a declaration as to Brown's responsibilities to Ross. Brown later dismissed that action. Brown also sued Grimes for fees (with causes of action for breach of contract, conversion, breach of fiduciary duty, and accounting). Grimes cross-complained against Brown for rescission of their agreement and for the money previously paid Brown. Brown filed a petition for a writ of attachment. Pursuant to a stipulation, Grimes agreed to deposit $3,791,605.69--the 40 percent contingency amount claimed by Brown--plus interest, in a segregated account, and the amount was to be subject to an agreed writ of attachment in favor of Brown pending resolution of the litigation. In a separate action, Ross sued both Grimes and Brown, for, inter alia, services at the rate of $850 per hour, and Grimes and Brown cross-complained against each other for indemnity for the claims by Ross. The trial court consolidated the pending cases. During the proceedings, Ross and Grimes entered into a settlement under which Grimes would pay Ross an amount up to $2.5 million out of the segregated account established by Grimes; the amount to be paid Ross was dependent on the outcome of the action between Grimes and Brown. If it was determined in the action that Grimes owed nothing to Brown, Ross would be entitled to the entire $2.5 million. If Brown had a recovery, Ross would recover a lesser percentage of, or nothing at all, out of the $2.5 million, which percentage would be based upon Brown's recovery.
In a pretrial in limine motion, the trial court ruled that Texas law governed the fee-sharing agreement between Grimes and Brown. Brown ultimately claimed $5,252,000 in damages for Grimes's alleged breach of contract. Following a bench trial, the trial court found Grimes's account of events more credible than Brown's and determined that the fee-sharing agreement between Grimes and Brown was unenforceable (and that Brown could not prevail on any of his claims) for three separate reasons. First, the trial court concluded that Grimes and Brown, as part of their fee-sharing agreement, agreed that Brown was obligated to pay Ross, that Brown and Ross had agreed Ross would receive 90 percent of whatever Brown received, and as Brown did not perform his obligation to Grimes to pay Ross, Brown could not enforce his fee-sharing agreement with Grimes. Second, the trial court found that Brown had unclean hands as a result of his fee-splitting agreement with Ross--a non-lawyer--which agreement the trial court said violated the California Rules of Professional Conduct and the Texas Disciplinary Rules. Thus, because of the unclean hands doctrine, the trial court determined that Brown could not enforce his agreement with Grimes. Third, the trial court held the fee-sharing agreement between Brown and Grimes unenforceable under Texas law because the terms of the agreement had not been disclosed properly to the clients as required by the ...