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Roberts v. Packard, Packard & Johnson

California Court of Appeals, Second District, First Division

July 3, 2013

NEAL A. ROBERTS et al., Plaintiffs and Appellants,
v.
PACKARD, PACKARD & JOHNSON, Defendant and Respondent.

APPEAL from orders of the Superior Court of Los Angeles County, No. BC459259 Ronald M. Sohigian, Judge.

Mayer Brown, Neil M. Soltman, Matthew H. Marmolejo and Ruth Zadikany for Plaintiffs and Appellants.

Hinshaw & Culbertson, Ronald E. Mallen, Kendra L. Basner and Daniel Sanchez-Behar for Defendant and Respondent.

MALLANO, P. J.

Plaintiffs filed this lawsuit against their former attorneys, alleging causes of action for breach of fiduciary duty, conversion, and declaratory relief. In essence, plaintiffs alleged that their former attorneys had settled several prior lawsuits brought on their behalf and did not allocate a sufficient amount of the settlement funds to the costs of suit, making plaintiffs liable to the former attorneys for costs that were actually recovered as part of the settlements. In the lawsuit, the former attorneys filed a petition to compel arbitration of plaintiffs’ causes of action pursuant to an arbitration provision in the parties’ contingency fee agreement. The trial court granted the petition.

The question on appeal is whether the trial court properly awarded attorney fees to the former attorneys as the prevailing parties on the petition to compel arbitration, which was filed in the pending lawsuit, even though the resolution of the underlying causes of action are to be determined through arbitration, and the prevailing party on those claims will not be known until arbitration is completed.

We conclude that because only one side—plaintiffs or their former attorneys—can prevail in enforcing the contingency fee agreement, the determination of the prevailing parties must await the resolution of the underlying claims by an arbitrator. Attorney fees can be awarded only to the parties that prevail in the “action.” (See Civ. Code, § 1717, subds. (a), (b)(1).) It follows that the trial court erred in awarding interim attorney fees to the former attorneys for filing a successful petition to compel arbitration.

I

BACKGROUND

Plaintiffs’ underlying causes of action are succinctly described in the opening brief and do not affect whether the trial court erred in awarding attorney fees to plaintiffs’ former attorneys. We therefore rely on plaintiffs’ description of their claims.

“Until 2011, [the law firm of Packard, Packard & Johnson (PPJ)] acted as counsel to Plaintiffs[, Neal Roberts and Norman Rille, ] in a series of cases brought in the United States District Court for the Eastern District of Arkansas on behalf of the United States under the False Claims Act, 31 U.S.C. § 3729 et seq. (‘FCA’), against a number of technology companies (the ‘FCA Cases’).... PPJ’s contingency fee agreement (the ‘Fee Agreement’) contained a broad arbitration clause covering ‘[a]ny dispute or controversy to enforce or interpret any term or provision of this Agreement, to recover any sum due pursuant to this Agreement, in connection with the services rendered by [PPJ], ... and/or in connection with any dispute, in law or equity, between the Parties.’... According to the Fee Agreement, PPJ’s compensation was to be 43.5% of Plaintiffs’ recoveries in the FCA cases plus 100% of all statutory attorney’s fees, and costs and expenses awarded to Plaintiffs from the FCA defendants under 31 U.S.C. § 3730(d).... The Fee Agreement separately provided that PPJ would be reimbursed for all costs and expenses incurred in connection with all FCA Cases.... Plaintiffs thus remained responsible for all costs not sought and recovered by PPJ from the FCA defendants.

“In 2009 and 2010, the United States and certain FCA defendants settled several [of] the first FCA Cases instituted by Plaintiffs on behalf of the United States.... Following these settlements, Plaintiffs negotiated with the United States to determine their statutory share of the amounts received by the United States in settlement. See 31 U.S.C. § 3730(d). Upon resolution of Plaintiffs’ statutory share, Plaintiffs had the right to recover their attorneys’ fees, costs and expenses from the FCA defendants. See id.... PPJ then negotiated settlements of statutory fees, costs and expenses.[1]... These statutory fees and costs settlements totaled approximately $2.6 million.... But PPJ settled with each defendant in the settling cases for single, undifferentiated lump sum amounts, which did not identify the portions that were for attorneys’ fees, and those that were attributable to costs and expenses.... PPJ then allocated to its attorneys’ fees over 95% of the $2.6 million in fees, costs and expenses received in the settlements; it consequently attributed less than 5% of the settled amounts to costs and expenses.... That... allocation... was to the economic detriment of Plaintiffs because any attorneys’ fees received were claimed to be solely to PPJ’s benefit (since they claimed the right to 100% of statutory fees), while recovered costs and expenses were to Plaintiffs’ benefit (since they were obligated to pay all costs out of the underlying merits settlements, whether or not recovered from the settling defendants).[2]... Thus, the greater the allocation of the lump sum settlements to PPJ’s fees, the greater would be Plaintiffs’ remaining obligation to pay unreimbursed costs.

“After making these... allocations, PPJ demanded that Plaintiffs reimburse it an additional $1.338 million for ‘unpaid’ and ‘unrecovered’ costs out of the Relators’ Share of a particular settlement.... When Plaintiffs refused, ... PPJ refused to disburse to Plaintiffs $1.338 million from Plaintiffs’ portion of the Relators Share....

“After PPJ repeatedly refused, over a six-month period, to release the $1.338 million, Plaintiffs filed [this lawsuit] in April 2011.” In May 2011, plaintiffs filed a first amended complaint (complaint). It contained causes of action for breach of fiduciary duty, conversion, and declaratory relief. The complaint prayed for an order directing Packard, Packard & Johnson (PPJ) to pay plaintiffs $1.338 million and for declaratory relief to the same effect.

In June 2011, PPJ filed a petition in this lawsuit, seeking to compel arbitration pursuant to the arbitration provision in the parties’ contingency fee agreement. Plaintiffs filed an opposition, contending the agreement, including the arbitration provision, was void because the agreement did not describe “how disbursements and costs incurred in connection with the prosecution or settlement of the claim will affect the contingency fee and the client’s recovery.” (Bus. & Prof. Code, § 6147, subd. (a)(2).) Plaintiffs argued in the alternative that PPJ had waived the right to arbitration by failing to initiate arbitration within a reasonable time.

By order dated November 15, 2011, the trial court determined that plaintiffs’ claims arose under the contingency fee agreement, more specifically, the provisions of the agreement describing PPJ’s compensation and allocating the Relators’ Share and the statutory attorney fees and statutory costs recovered. The trial court also concluded that plaintiffs’ claims fell within the scope of the arbitration provision and rejected plaintiffs’ contentions that the agreement was void and that PPJ had waived the right to arbitration. The trial court granted the petition to compel arbitration, stayed the lawsuit, scheduled a status conference for February 16, 2012, and retained jurisdiction over the suit.[3]

On December 16, 2011, PPJ filed a motion for attorney fees and costs, arguing that it was entitled to an award of $67, 292 under the contingency fee agreement because it had prevailed on the petition to compel arbitration. The contingency fee agreement stated: “If any action arising out of this Agreement is instituted by any Party against another Party, the prevailing Party shall be entitled to recover from the non-prevailing Party reasonable attorneys’ fees and costs.” (Italics added.) In its motion, PPJ asserted that the petition to compel arbitration was an “action” to enforce the contingency fee agreement, and PPJ was the “prevailing party” in that action.

Plaintiffs filed an opposition, asserting that the petition to compel arbitration was not an “action” because the petition was filed in the existing lawsuit. According to plaintiffs, the trial court could not determine which parties, if any, had prevailed until after the arbitrator had resolved their causes of action.

In a reply, PPJ increased the amount of its request for attorney fees and costs to $67, 930.50, which reflected additional work ...


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