Breach of Fiduciary Duty by Spouse Results in Fee Award

Posted on February 10, 2011 by David J. McMahon

The Second District California Court of Appeal reversed the ruling of the trial court concerning a fee award in a case captioned, In re Marriage of Fossum, 2011 DJDAR 1692 (2011).

In 1994, Edward and Sandra Fossum were married, but agreed to a separation in 2002.  Divorce proceedings commenced in early 2003. Prior to their separation, Sandra misappropriated $24,000 in community property assets and deposited it in her personal bank account. She did not disclose that fact to her former husband.

Based on the surreptitious cash advance taken by Sandra, the trial court found that she violated her statutory fiduciary duties set forth in Family Code Section 721. However, the court ruled her violation did not rise to the level of an award of attorney fees as sanctions. She was ordered to reimburse half the sums which had been misappropriated. The court denied the separate request for attorney fees.

The Court of Appeal reversed. The court noted that spouses owe fiduciary duties to one other, particularly as to community property. Pursuant to Section 721, the statute sets forth mandatory remedies where a spouse breaches their fiduciary duty to the other spouse. The statute requires reimbursement of 50 percent of any undisclosed assets plus attorney fees and costs.

The court specifically concluded that Sandra breached her fiduciary duty to Edward by taking the money. The Court of Appeal concluded that the trial court lacked discretion to deny Edward attorney fees because the statute mandated that the aggrieved spouse be reimbursed the funds plus attorney fees and costs. This was evidenced by the statute’s use of the word “shall,” connoting mandatory action. For these reasons, the court ruled that the trial judge lacked discretion to deny Edward’s fee request.

Breach of Fee Sharing Agreement Excuses Party from Contractual Obligations

Posted on February 9, 2011 by David J. McMahon

In Brown v. Grimes, 2011 DJDAR 1645 (2011), theSecond District California Court of Appeal decided an interesting case concerning enforcement of the terms of a fee sharing agreement. 

The trial court refused to enforce the agreement for three reasons: 

  1. failure to perform material obligations of the contract;
  2. unclean hands due to an unethical arrangement to split fees with a non-lawyer; and,
  3. because the agreement lacked the required consent of the client to split fees.

Paul Ross (“Ross”) was a former California attorney. He resigned from the practice of law as a result of State Bar proceedings which were pending against him. He did investigative work for a California attorney named James Brown (“Brown”). Ross referred cases to Brown arising from a refinery explosion in Texas.

Brown was unable to prosecute the cases as lead counsel. For this reason, Ross and Brown contacted another California attorney, Milton Grimes (“Grimes”), who agreed to act as the lead attorney. 

Brown and Grimes agreed to split the fees on a 50/50 basis. Both Ross and Brown then agreed to bring in yet another law firm to work on the cases, with a further split of any amounts recovered.

After the cases began to resolve, Grimes sent Brown his 40 percent share of fees. When Ross did not receive payment, he asserted a claim against both Brown and Grimes. Later, Grimes learned that Brown had agreed to pay Ross 90 percent of the fees Brown received.

Grimes offered to hold Brown’s remaining share of fees in trust until the dispute was resolved. Brown refused and sued Grimes for declaratory relief seeking a declaration as to Brown’s responsibilities to Ross. 

Grimes pursued a cross-complaint against Brown for rescission and for money previously paid. The lower court concluded that the agreement was not enforceable because Brown failed to perform his obligation to Grimes to pay Ross.

The Court of Appeal affirmed in part, stating that if a party’s failure to perform a contractual obligation constitutes a material breach, the other party may be discharged from his contractual obligations. A material breach with respect to part of a contract generally constitutes a material breach. 

Here, Brown materially breached the fee-sharing agreement by refusing to pay Ross because Brown’s promise to pay Ross was key term of the fee-sharing agreement. As a result of this breach, Grimes’ performance was excused. 

The court found error in the other findings of the trial court.

Is It Becoming Near Impossible for a Prevailing Defendant to Collect Its Fees?

Posted on February 9, 2011 by Gary A. Bresee

Once again, the Ninth Circuit Court of Appeals has reversed a District Court decision granting a prevailing defendant its attorneys' fees and costs. 

In R.P. v. Prescott Unified School District, 09-15651 (9th Cir., Feb. 4, 2011), the parents of an autistic child brought an administrative action under the Individuals with Disabilities Education Act (IDEA) against the School District, alleging the District failed to provide their child with free, appropriate public education. 

When an administrative law judge ruled against them, the parents appealed to the District Court alleging the same IDEA violations, but also included claims under the Americans with Disabilities Act (ADA) and the Rehabilitation Act. 

The District Court not only found for the School District, but also found the parents' action both without foundation and brought for an improper purpose, consquently awarding the District its attorneys' fees and costs. 

While the Ninth Circuit generally affirmed the substantive portion of the lower court's decision, it reversed the fee award.  

The court determined the action was not unfounded, citing to the parents' claim for additional education, which was a remedy available to them under the IDEA statutory scheme. The parents had made plausible arguments; the fact that their arguments did not carry the day did not make those arguments automatically frivolous.

Similary, the court determined the action was not brought for an improper purpose. 

If the claims were not frivolous, then as a matter of law they could not have been filed for an improper purpose. Moreover, the non-IDEA claims were not frivolous either, because the parents would have had plausible claims under the ADA and Rehabilitation Act, but they were not allowed to amend their complaint after the cutoff date for amended pleadings.

While it is not impossible for a prevailing defendant to collect its statutory fees from a plaintiff, the burden of proof can be daunting in most instances.

Court Has No Jurisdiction Over a Fee Claim Appeal When the Appellant Jumps the Gun

Posted on February 2, 2011 by David J. McMahon

  Appellant Files a Notice of Appeal Prior to the Relevant Court Order

In Silver v. Pacific American Fish Co. Inc., 2010 DJDAR 17978 (2010), the Second District California Court of Appeal decided a unique procedural issue in the context of a fee petition. 

Michael Silver (“Silver”) filed a cross‑complaint against Pacific American Fish Co. Inc. after being sued by Pacific American (“Pacific”). The trial court rejected the validity of Silver’s cross‑complaint and ruled in Pacific’s favor. Pacific then filed a motion for its reasonable attorney fees.

Prior to the hearing on the motion to recover fees, Silver filed a notice of appeal, which specified that he was appealing the trial court’s order granting Pacific’s motion for attorney fees. However, the trial court had not yet ruled on the motion. Despite Silver’s filing, the trial court heard and granted Pacific’s motion for attorney fees. Silver appealed the order.

The Court of Appeal affirmed the lower court’s decision in part. The Court of Appeal stated that a notice of appeal which is filed after rendition of a judgment or statement of intended ruling but before entry of the judgment may be timely. The court also noted that a postjudgment order granting a fee request is separately appealable.

The court noted, however, that at the time Silver purported to appeal the order granting fees, there had been no ruling by the trial court on the matter. The court’s ruling was not made until over a month after Silver filed the notice of appeal. The court also noted that the trial court’s ruling in favor of Pacific did not expressly award attorney fees, but rather left the issues open for further determination.

For all of these reasons, the Court of Appeal held that it had no jurisdiction over the purported appeal because the post-judgment order awarding attorney fees was separately appealable and required Silver to file a separate, timely notice of appeal.

Assignee May Pursue Claim for Indemnification for Unreimbursed Counsel Fees

Posted on February 1, 2011 by David J. McMahon

In Searles Valley Minerals Operations Inc. v. Ralph M. Parson Service Co., 2011 DJDAR 1193 (2011), the Fourth District Court of Appeal decided an interesting contract indemnity case dealing with a fee award.

After concluding that there was no case law directly on point, that Court of Appeal concluded that an assignee of contract indemnification rights stands in the shoes of the indemnitee. So, if the indemnitor refuses to pay an indemnitee’s defense costs, the indemnitee can pay the costs and seek reimbursement from the indemnitor.

Kerr‑McGee Chemical Corp. (“KM”) contracted with Ralph M. Parsons Service Co. (“Parsons”) for the construction of a conveyor system. The contract had an indemnity provision in which Parsons agreed to defend and indemnify KM for claims arising from Parson’s negligence relating to the equipment.

Later, another company (“Searles”) bought the equipment and KM assigned its indemnity rights to Searles under the purchase agreement it had with Parsons. In 2001, a Searles employee was killed while operating the conveyor and a wrongful death claim was pursued by his heirs.

KM then tendered its defense to Searles and Parsons under the indemnity agreement. Searles accepted, but Parsons refused the tender. Searles incurred over $800,000 in attorney fees, costs, and expenses in defending KM. Searles then sued Parsons for express indemnity, alleging that as an assignee of KM’s indemnity rights, it was entitled to reimbursement from Parsons. The trial court disagreed and sustained Parson’s demurrer without leave to amend.

The Court of Appeal reversed, noting that an assignee of contract indemnification rights stands in the shoes of the indemnitee. Thus, if the indemnitor declined to pay for the defense of an indemnitee, the assignee can pay the cost of defense and then seek reimbursement from the indemnitor because Searles was KM’s assignee, and stood in KM’s shoes. For these reasons, Searles was entitled under the indemnity agreement to recover the defense costs it paid for KM.