Shopoff & Cavallo LLP v. Hyon, 167 Cal.App.4th 1489, 2008 WL 4757304
(Cal.App. 1st Dist., 2008)
Brief Summary
The California First District Court of Appeal affirmed a judgment in favor of a law firm that obtained a $7.6 million judgment for its clients and was then forced to interplead the recovery when the clients gave conflicting instructions and the five other entities (four other law firms and a non-lawyer litigation consultant) claimed interests in the recovery. In addition to litigating and confirming its entitlement to its own contingent fee interest, the law firm also successfully defeated cross-complaints alleging conversion, legal malpractice and related claims.
Complete Summary
In the early 1990s, Hyon and his former business partner, Colangelo, entered into an oral agreement with the owner of Decker Island, a 600-acre island in the Sacramento River, to assist the owner in finding a buyer for the island. The owner of the island eventually sold it to a buyer who had been located by Hyon and Colangelo, but he failed to pay Hyon and Colangelo the agreed finder's fee.
Hyon and Colangelo sued the buyer and seller for breach of oral contract. Their suit was dismissed at the pleading stage by the trial court, and they retained a new attorney to appeal the dismissal in exchange for a contingent interest in the endeavor. Thereafter, Hyon and Colangelo retained a series of attorneys to represent them in various aspects of the case in exchange for various contingent interests. They also retained the services of Selten, a non-lawyer litigation consultant, to assist in hiring attorneys and overseeing the litigation in exchange for a contingent fee.
Ultimately, Shopoff & Cavallo LLP was retained to try the case in exchange for a contingency fee and obtained a $7.6 million judgment. In October 2003, in the final hours before a fraudulent transfer trial to enforce the judgment against the underlying defendants, Shopoff & Cavallo negotiated a Global Settlement Agreement ("GSA") between Hyon, Colangelo and the defendants. Under the GSA, Hyon & Colangelo became the owners of the "Recovery," which consisted of a number of items, the most significant of which were Decker Island itself and the common stock of two corporations, which, in turn, owned a sand mining operation on Decker Island and related permits and equipment. The GSA also required Hyon and Colangelo to pay the defendants in the Decker Island litigation a total of $2.6 million in annual payments of $450,000. The $2.6 million was secured by a deed of trust encumbering the Recovery. At the time of the GSA, Hyon and Colangelo had pledged contingency interests in the Recovery to Selten and a total of five law firms, including Shopoff & Cavallo.
Pursuant to a previously executed agreement between Hyon and Colangelo, Shopoff (as an individual) became the trustee of the Recovery. Hyon, Colangelo and, eventually, Selten executed a series of agreements contemplating their joint operation of a business on Decker Island. In mid 2004, however, Hyon disavowed all of his agreements with Colangelo and Selten and instructed Shopoff, as trustee, to transfer all corporate stock to him. Colangelo (Shopoff & Cavallo's other client) advised Shopoff not to turn over the stock to Hyon.
Faced with conflicting instructions and various assorted claims from Selten and other attorneys, Shopoff filed a complaint in interpleader in September 2004 to resolve the conflicting claims ("the Interpleader Action"). Hyon, Colangelo, Selten and the attorneys all filed answers to the complaint in the Interpleader Action.
Hyon's answer in the Interpleader Action alleged that the claims of all of the other claimants were unenforceable for several reasons, including unclean hands, Selten's allegedly unlawful provision of attorney referral services and unauthorized practice of law, and the failure of the attorneys to adhere to Rule of Professional Conduct 3-300. Hyon also filed a cross-complaint against Shopoff and the firm Shopoff & Cavallo for conversion, legal malpractice and related claims. After an extensive motion practice, the case was tried to the court over a period of several weeks. In its statement of decision, the trial court found that none of the attorney retainer agreements violated Rule 3-300; that Selten had not operated an illegal referral service or engaged in the unauthorized practice of law; and that none of the claimants' shares was subject to diminution other than that of one firm whose percentage was reduced from 10 percent to 3 percent. The remaining claimants were awarded the full shares they claimed.
The Court of Appeal was confronted with many issues, only some of which are discussed here.
The Court of Appeal held that Hyon had failed to allege the essential elements that Shopoff exercised dominion over the Recovery proceeds and converted them to his own use, and that the act of filing the interpleader was specifically intended to avoid potential liability for conversion. The filing of the interpleader precluded a finding that he had exercised dominion over the Recovery. Moreover, there was no reasonable possibility that an amendment could cure this defect.
With regard to the legal malpractice and breach of fiduciary duty claims, the Court of Appeal agreed with the trial court that Hyon's damage allegations were legally insufficient. All of the claims were premised upon allegations of damages that might occur in the future but had not yet occurred. The court observed that all of Hyon's claims were improperly predicated on the idea that the ultimate liquidation of the Recovery would result in less compensation than Hyon would have received if the fraudulent transfer actions had been tried rather than settled. Relying on long-standing precedent that the threat of future harm is insufficient to create a cause of action, the court stated that no viable claim had been pleaded and noted that Hyon had been given an opportunity to amend but did not do so.
Hyon also argued that the finding in a related action that Selten had operated an illegal referral service precluded Selten and the attorneys who received referrals through him from receiving any portion of the proceeds of the Recovery. The court in this case held that since the attorney claimants had not been parties in the other action, they were not bound by it. The court also held that any illegality of the referral service would not, in any event, taint the rights of the contingent fee attorneys to the fees that they had earned for the work they had done.
Finally, the court addressed Hyon's claim that the attorney claimants had failed to comply with Rule 3-300, which requires an attorney to (1) advise a client in writing of his or her right to independent counsel when the attorney acquires an interest adverse to the client and (2) obtain the client's written consent to the adverse interest. Specifically, Hyon argued that the attorneys violated Rule 3-300 by acquiring liens in the proceeds of the Recovery without providing Rule 3-300 disclosures. In 2004, the California Supreme Court determined in Fletcher v. Davis (2004) 33 Cal.4th 61, that attorney charging liens are adverse interests under Rule 3-300 when an attorney seeks to secure payment of an hourly fee. Fletcher expressly did not resolve "whether rule 3-300 applies to a contingency-fee arrangement coupled on the client's prospective recovery in the same proceeding." Fletcher, at 70, fn. 3.
The court in the present case held that, even if Fletcher applied to contingency fee agreements, it would only make unenforceable the lien asserted by an attorney and not, as in this case, the underlying fee agreements themselves. Thus, the claims of the attorney claimants were not made unenforceable by Rule 3-300.
Significance of Opinion
This wide-ranging opinion is most significant for its clarification of the requirements for legal malpractice damage claims; its holding that interpleading a client's funds is not conversion; its holding that the acceptance of a referral from an unauthorized referral service does not justify a denial of fees; and its holding that an attorney’s improper assertion of a lien does not preclude a recovery of fees earned.
(The case was tried by Hinshaw attorneys Ronald E. Mallen and David L. Winnett)
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