McIntosh v. Mills (121 Cal. App. 4th 333, 2004)

Opinion

RUVOLO, J.

L

INTRODUCTION

Appellant J. Nicholas McIntosh appeals from a summary judgment entered in favor of respondent Robert W. Mills (Mills). The trial court granted Mills’s summary judgment after concluding, as a matter of law, that an alleged agreement to share a legal fee (the fee-sharing agreement) entered into between Mills, a member of the State Bar of California, and McIntosh, a nonattomey, was unenforceable. In reviewing the matter de novo, we agree that the fee-sharing agreement was unenforceable under the doctrine of illegality of contract. Further, we conclude that no exception to the general rule of unenforceability applies in that the parties were in pari delicto as a matter of law because (1) McIntosh was represented by counsel, Attorney David Anton, who also negotiated and entered into the fee-sharing agreement on McIntosh’s behalf, and (2) McIntosh is equally as blameworthy as Mills.

II.

PROCEDURAL BACKGROUND

In the underlying complaint, McIntosh filed a single cause of action against Mills for breach of contract, alleging that Mills failed and refused to honor an agreement to share attorney fees with McIntosh. No other legal or equitable causes of action were pleaded. The fee-sharing agreement arose out of McIntosh’s oral agreement to assist Mills in preparing civil actions against Bank of America in two cases, Carol F. Nickel et al. v. Bank of America National Trust & Savings Association et al. (the Nickel action), and Fisher et al. v. Bank of America National Trust & Savings Association et al. (the Fisher action). In return for his consulting services, McIntosh was to receive 15 percent of all attorney fees Mills earned as a result of the prosecution of either or both actions. The consulting agreement was allegedly entered into in 1994.

The complaint further alleged that the Fisher action was settled in 1999, and Mills received total attorney fees of approximately $7 million. The Nickel action was allegedly settled in 2001, and Mills received total attorney fees of approximately $14.7 million. McIntosh demanded payment under the fee-sharing agreement, but Mills refused to make payment.

Mills filed a motion for summary judgment in October 2002, claiming the fee-sharing agreement was unenforceable as a matter of law because it was illegal. Mills also claimed that McIntosh was barred from seeking relief for the breach of the parties’ agreement by the equitable doctrines of unclean hands and judicial estoppel. McIntosh opposed the motion.

On November 27, 2002, the trial court held that Mills was not entitled to summary judgment on the alternative grounds of unclean hands and judicial estoppel. However, the court granted Mills’s motion for summary judgment on the ground that the alleged agreement to share attorney fees with McIntosh was illegal, and thus, unenforceable. Judgment was entered on December 16, 2002, and this appeal followed.

HI.

DISCUSSION

A. Standard of Review

On appeal from a summary judgment we undertake a de novo review of the proceedings below, and independently examine the record to determine whether triable issues of material fact exist. (Saelzler v. Advanced Group 400 (2001) 25 Cal.4th 763, 767 [107 Cal.Rptr.2d 617, 23 P.3d 1143]; Kids’ Universe v. In2Labs (2002) 95 Cal.App.4th 870, 878 [116 Cal.Rptr.2d 158] (Kids’ Universe).) We review the trial court’s ruling, not its rationale; thus, we are not bound by the trial court’s stated reasons for granting summary judgment. (Kids’ Universe, supra, 95 Cal.App.4th at p. 878.)

The Supreme Court has described our duty as follows: “In ruling on the motion, the court must ‘consider all of the evidence’ and ‘all’ of the ‘inferences’ reasonably drawn therefrom ([Code Civ. Proc.,] § 437c, subd. (c)), and must view such evidence [citations] and such inferences [citations], in the light most favorable to the opposing party.” (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 843 [107 Cal.Rptr.2d 841, 24 P.3d 493].) “All doubts as to whether there are any triable issues of fact are to be resolved in favor of the party opposing summary judgment. [Citation.]” (Ingham v. Luxor Cab Co. (2001) 93 Cal.App.4th 1045, 1049 [113 Cal.Rptr.2d 587].)

“Therefore, if a plaintiff in response to a defendant’s summary judgment request demonstrates the existence of a triable dispute with ‘specific facts’ (§ 437c, subd. (o)(2)) by making a prima facie showing of the merit of the complaint, the motion must be denied. There is to be no weighing of evidence. [Citations.]” (Kids’ Universe, supra, 95 Cal.App.4th at p. 880.) Moreover, equally conflicting evidence requires denial of a summary judgment motion and a trial to resolve the dispute. (Ibid.; see also Lugtu v. California Highway Patrol (2001) 26 Cal.4th 703, 724 [110 Cal.Rptr.2d 528, 28 P.3d 249]; Livingston v. Marie Callenders, Inc. (1999) 72 Cal.App.4th 830, 839-840 [85 Cal.Rptr.2d 528].)

B. Summary Judgment Was Properly Granted on the Ground the Subject Agreement to Share Fees Was Illegal and Unenforceable

1. The Facts Adduced on Summary Judgment Concerning the Fee-sharing Agreement Between McIntosh and Mills

In the late 1980’s, McIntosh worked in the Northern California investment group for Security Pacific, which later was merged into Bank of America. The merger became final in 1992, and McIntosh was then terminated for the ostensible reason that he had been recruiting Bank of America accounts (specifically, the “widows and orphans fund”) for a new company he was forming. During the years he worked at the bank, McIntosh noticed “several indiscretions” about which he complained.

In early 1994, McIntosh employed Attorney David Anton (Anton) as his agent for the purpose of reaching an agreement with Mills by which McIntosh would provide services assisting Mills in banking-related legal matters Mills either was handling or was going to handle. McIntosh gave Anton “complete power and authority” to negotiate an agreement with Mills relating to McIntosh’s work. McIntosh had given Anton “carte blanche” to negotiate with Mills on his behalf because he did not know “how these things worked.”

Likewise, Anton told Mills that the financial arrangements were to be negotiated with Anton alone, and that Anton had authority to accept the arrangement without communicating the specifics to McIntosh so that McIntosh, if asked, would be in a position to state he did not know what arrangements existed. This agency relationship between Anton and McIntosh was not in writing.

Mills had first broached the possibility of compensation casually during a meeting at Anton’s law office on February 22, 1994. In addition to Mills and Anton, McIntosh and another attorney in The Mills Law Firm were present. Mills mentioned it was apparent that McIntosh had valuable information about what was going on at the bank, and some thought should be given to retaining him.

In his deposition, Anton explained that an agreement to pay McIntosh compensation was reached with Mills as of April 27, 1994, subject to the contingency that Mills’s reputation, through references, would reflect that he was the type of person with whom McIntosh should work. At the April 27th meeting, Mills confirmed that he thought McIntosh could be of invaluable assistance in pursuing litigation against Bank of America; however, Mills was unwilling to consider hourly compensation. Mills opposed an hourly arrangement because he did not want a paper trail of payments from him to McIntosh while the cases were pending, and because Mills wanted the rate structure to be contingent on how well Mills did in the litigation. Anton and Mills then discussed Mills’s desire that if only a lodestar fee recovery was achieved, McIntosh would receive only 7 percent of the fee.

Anton claimed that the need to keep the agreement secret was first raised by Mills. Mills also did not want the issue of the agreement discussed with anyone else in The Mills Law Firm. He told Anton that because McIntosh was a potentially important witness, it was best that other lawyers in his firm not know about the arrangement. Mills also did not want either side to keep any writings about the agreement, for fear that counsel for the bank might “[g]et wind of something” and subpoena their records. For this reason, neither attorney made any writings about their discussions.

In 1996, Mills reemphasized it was critical that the arrangement be kept secret because his firm might be removed as counsel if the terms of the agreement with McIntosh came to light. His concern stemmed from his belief that the agreement could be viewed as “inappropriate.”

Anton had been a practicing attorney in California since 1980. When asked during his deposition if he was aware that sharing a contingency fee between an attorney and a nonattomey might be illegal, Anton stated that he “was aware that something like that existed, but [he] didn’t know what the parameters were.” He did not research the ethics of, the arrangement, although he was aware there were “rules of professional conduct” governing the conduct of attorneys. He really was not concerned since it was Mills’s fee that Mills wanted to share, not Anton’s fee. Therefore, if there was any cause for apprehension, it was Mills’s concern.

From his discussions with Mills, Anton stated there was a “clear meeting of the minds” as to the terms of the fee-sharing agreement. He felt uncomfortable not being able to tell McIntosh what the terms were, but he had no doubt that an agreement had been reached. What he did tell McIntosh was “cryptic." He told him that “things were set and he was to cooperate fully in any way he could with [Mills’s] requests [in the bank cases], . . .” What he intended to communicate to McIntosh was that an agreement had been reached, that there was no way Anton was going to tell McIntosh the terms, but that McIntosh had to cooperate in order to meet his end of the bargain. Based on his interactions with McIntosh, Anton concluded that McIntosh had an expectation or belief that an arrangement had been made but he did not know the specifics of that arrangement.

Prior to being deposed in any of the bank cases, Anton discussed the areas of expected questioning with McIntosh. He considered possible questions about whether McIntosh had authorized anyone to negotiate any form of compensation with Mills. Anton told McIntosh that if that type of question were asked, McIntosh would have to “fess up.”

McIntosh testified in his deposition in this case that he knew an agreement had been reached between Anton and Mills in either 1994 or 1995 but he “was never really told the precise details of the agreement.” Anton was asked to handle the arrangements since he was an attorney, and he negotiated as McIntosh’s agent or representative. At the time Anton was meeting with Mills in 1994 about the agreement, McIntosh was told that the case could be a big one. In response, he told Anton that he was willing to help Mills on the case “but I want a fair piece.” From this discussion with Anton, McIntosh knew his “return would be fair and it would be substantial.” He figured from internal discussions that the bank’s overcharging could be as much as a $100 million, and attorneys get paid anywhere from 25-35 percent out of recovery. Therefore, McIntosh concluded that in light of the potential recovery, he expected to receive a “fair percentage out of it.” He knew that the harder he worked on the cases, the more the attorneys would get, and the better off he would be; if they did well, he would do well.

McIntosh also testified in this case that in 1994 he did not expect to assist Mills (other than as compelled through legal process) without an agreement for compensation. It was only after he understood that Anton had reached an agreement with Mills that McIntosh began assisting Mills in the cases. The work McIntosh did for Mills included providing Mills’s law firm with open access to his own files; fielding “an infinite number” of questions from members of the firm about documents, bank practices, and employee records; and consulting about how to depose bank employees, including what questions to ask.

McIntosh learned of the specific terms of the fee-sharing agreement when he and Anton discussed Anton’s May 25, 1999 letter to Mills requesting payment. However, in the years after 1994, McIntosh sought confirmation periodically from Anton that he still had an agreement in place with Mills.

In January 30, 1998, McIntosh was deposed in the bank case entitled Fluty v. Bank of America, during which the following exchange took place:

“Q: Did you ever ask for any compensation for the time that you spent talking with people from the Mills Firm?

“A: I think they bought me lunch once or maybe twice.

“Q: Did you ever ask for any other compensation?

“A: No.”

Several days later, McIntosh was deposed in the Fisher action. In attendance were both Anton and a member of The Mills Law Firm. During that deposition, the following exchange took place:

“Q: Have you been promised any payment in connection with this litigation?

“A: No

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“Q: Have you been told that there’s any possibility that you’ll receive any money whatsoever as a result of this lawsuit?

“A: No. Am I missing something?

“Q: I’m just trying to distinguish between being compensated for your time testifying as opposed to any other money you might receive arising out of this lawsuit.

“A: No.”

Anton sat in as counsel when Bank of America deposed McIntosh. He heard McIntosh deny there was any possibility he would receive any money whatsoever as a result of that lawsuit. Anton was feeling “very uncomfortable” during this line of questioning, but he did not know what to do. His discomfort stemmed from the fact that he and Mills had worked hard to make this “weird” arrangement, they knew the day would come when they would be confronted with these precise questions to McIntosh, and “damn, they were getting close.” When asked during his deposition if he thought McIntosh testified truthfully in the Fisher action, Anton said, “I don’t know what I thought about that.” The following exchange then took place:

“Q: You didn’t think by answering ‘no’ to that question Mr. McIntosh was perjuring himself?

“A: I didn’t think about that at the time that way.

“Q: Why not?

“A: Because he was being asked about his thoughts. I don’t know. I knew I felt very uncomfortable because I thought he should have expected it to be a ‘yes.’ ”

McIntosh filed a supplemental declaration in opposition to the motion for summary judgment below. In it McIntosh stated that at the time of the Fisher deposition he knew only that “some sort of agreement” had been reached between Mills and Anton, but he denied having any “specific information that I was to be compensated at all, much less the manner and extent of that compensation.”

In May 1999, McIntosh was informed by Anton that Mills had settled the Fisher action, and that Anton and Mills had discussed compensation for McIntosh. In a letter dated May 25, 1999, requesting payment, Anton “confirmed] that the Real Estate Partnership cases against Bank of America were cases in which there was an agreement with your firm and Mr. McIntosh for a fee, call it a referral fee.” Anton further stated that the terms of the “referral” were for McIntosh to receive 15 percent of the gross attorney fees recovered, and that Anton understood that Mills had settled the class action. Anton concluded the letter by requesting Mills to call him “so that we may review this situation.” Mills rejected the demand. Two years later, McIntosh filed this action for breach of contract.

2. The Doctrine of Illegality Applies to the Agreement Between McIntosh and Mills to Divide the Nickels and Fisher Fees

To analyze McIntosh’s assignment of error, we must first determine if the doctrine of illegality applies to the fee-sharing agreement between McIntosh and Mills. This is a question of law that we decide de novo. (Bovard v. American Horse Enterprises, Inc. (1988) 201 Cal.App.3d 832, 838 [247 Cal.Rptr. 340]; see also Russell v. Soldinger (1976) 59 Cal.App.3d 633, 642 [131 Cal.Rptr. 145].)

“The illegality of contracts constitutes a vast, confusing and rather mysterious area of the law.” (Strong, The Enforceability of Illegal Contracts (1961) 12 Hastings L.J. 347 (Strong).) Nevertheless, enacted as part of the original Field Codes, the contractual doctrine of illegality has been codified in this state since 1872, and appears as Civil Code section 1608: “If any part of a single consideration for one or more objects, or of several considerations for a single object, is unlawful, the entire contract is void.” Thus, where the illegal consideration goes to the whole of the promise, the entire contract is illegal. (1 Witkin, Summary of Cal. Law (9th ed. 1987) Contracts, § 429, p. 386.)

In turning to the question of whether the fee-sharing agreement in the instant case was illegal, we initially determine whether the agreement’s subject matter violates a professional ethics rule enacted to govern the conduct of members of the State Bar. (Chambers v. Kay (2002) 29 Cal.4th 142, 148 [126 Cal.Rptr.2d 536, 56 P.3d 645].) Subject to exceptions manifestly inapplicable here, current rule 1-320(A) of the CPRC* admonishes with stark brevity: “Neither a member [of the State Bar] nor a law firm shall directly or indirectly share legal fees with a person who is not a lawyer, . . .” This is not an ethics rule of recent vintage, for the State Bar’s general prohibition against sharing fees with nonmembers was adopted by the California Supreme Court as part of former rule 3 on December 1, 1944, and was later reenacted as rule 3-102(A), as part of the 1975 CPRC.

While certain legal commentators have criticized perpetuating the ban on most lawyer/layperson fee-sharing agreements, courts have consistently upheld the prohibition based on a number of legitimate concerns. As summarized by the court in Emmons, Williams, Mires & Leech v. State Bar (1970) 6 Cal.App.3d 565 [86 Cal.Rptr. 367] (Emmons): “Prohibited fee-splitting between lawyer and layman carries with it the danger of competitive solicitation (Crawford v. State Bar [1960] 54 Cal.2d 659, 666 [7 Cal.Rptr. 746, 355 P.2d 490]); poses the possibility of control by the lay person, interested in his own profit rather than the client’s fate (Utz v. State Bar [1942] 21 Cal.2d 100, 108 [130 P.2d 377]); facilitates the lay intermediary’s tendency to select the most generous, not the most competent, attorney (Linnick v. State Bar [1964] 62 Cal.2d 17, 21 [41 Cal.Rptr. 1, 396 P.2d 33]; Hildebrand v. State Bar [1950] 36 Cal.2d 504, 523 [225 P.2d 508], separate opinion of Traynor, J.). Rule 3’s prohibition against lay intermediaries seeks to bar both solicitation and the presence of a party demanding allegiance the lawyer owes his client. (People v. Merchants Protective Corp. (1922) 189 Cal. 531, 539 [209 P. 363].)” (Emmons, supra, 6 Cal.App.3d at pp. 573-574.)

Attorney ethics panels, both in and out of state, have been moved to embrace rules against fee sharing with nonattomeys out of concern for interference with the attorney’s professional judgment, the creation of conflicts of interest, and the unwholesome spectre of attorneys soliciting professional liaisons with laypersons. (See State Bar Compendium on Prof. Responsibility, Bar Assn, of S.F., Ethics Opns. of the Legal Ethics Com., Formal Op. No. 1976-2, pp. HB-79-86; ABA/BNA Lawyers’ Manual on Prof. Conduct [Lawyers’ Manual], ABA Formal Ethics Opn. No. 95-392 (Apr. 24, 1995) [applying Model Rule 5.4]; Lawyers’ Manual, State Bar of Montana Ethics Opn. No. 950411 (Apr. 11, 1995) [same].) One authority has also suggested that fee sharing tends to increase the total fees charged to clients, presumably in an effort by the attorney to “make up” that portion being paid to the third party. (Vapnek et al., Cal. Practice Guide: Professional Responsibility (The Rutter Group 2003)