• Denial of Fee Disgorgement Held Appropriate Exercise of Discretion Where Client Was Unharmed
  • November 19, 2008
  • Law Firm: Hinshaw & Culbertson LLP - Chicago Office
  • Bertelsen v. Harris, __ F.3d __, 2008 WL 3271088 (9th Cir. 2008)

    Brief Summary
    Clients sought disgorgement of attorney fees because attorney allegedly violated several Rules of Professional Conduct (RPCs) during representation, but the Ninth Circuit held that the district court’s refusal to disgorge fees due to a lack of harm to the clients was not an abuse of discretion.

    Complete Summary
    Attorney Roger Harris helped his clients, the Bertelsens — owners of a number of Arco franchises — avoid bankruptcy. Because Harris allegedly violated the Washington RPCs in doing so, the Bertelsens sought disgorgement of his fees.

    Harris agreed to represent the Bertelsens for a 1.5 percent contingency fee, and he separately agreed to split this fee with a non-lawyer expert whom Harris retained for the matter. When a third party purchased for $1 million an option to buy the franchises for $8.5 million, Harris added these two numbers together to calculate his contingency fee (i.e. 1.5 percent of $9.5 million = $142,500). The third party, however, never exercised the option.

    In a separate matter, Arco sued to collect unpaid debt held by the Bertelsens’ company and guaranteed by the Bertelsens personally and, allegedly, by their parents. Harris agreed to represent the Bertelsens and the parents. He discussed the potential for conflicts, advised the parents to seek independent counsel, and at various times had each client waive any potential conflicts. Harris opined that no conflicts existed at outset of representation, but he eventually withdrew when the parties became clearly conflicted.

    The District Court for the Eastern District of Washington declined to award the Bertelsens disgorgement of fees because, even assuming that Harris breached his fiduciary duties, the contingency fee was “reasonable[] given the testimony of all concerned,” and because, despite any conflicts of interest, “[t]here [was] no showing that the giving of independent advice . . . would have changed the strategic positions taken by [the clients] or the ultimate outcome of [the matters].” Id. at *8.

    On appeal, the Ninth Circuit upheld the district court under an abuse of discretion standard. The court noted that under Washington law, the remedy of disgorgement is discretionary even when a breach of fiduciary duty is proven. Therefore “[w]hether the district court made an error of law in its assessment of the merits of [the Bertelsens’] breach of fiduciary duty claims . . . is of no moment to our determination whether the court abused its discretion . . . .”  Id. at *10. Given the lack of harm to the Bertelsens, the Ninth Circuit found the district court’s ruling to be reasonable.

    A dissenting opinion argued that the district court committed a clear error in judgment by overlooking Harris’ egregious violations of the RPCs. First, Harris effectively overcharged his clients by $127,500 when he factored the $8.5 million option strike price into his calculation, because under RPC 1.5(c)(4), only amounts received by the client can be the basis for a contingency fee calculation. The dissent also highlighted the fact that Harris shared fees with a non-lawyer and argued that Harris violated the conflicts rule (RPC 1.7) by using inadequate and untimely conflicts waivers. The dissent sought a remand for determination of the appropriate remedy for Harris’ conduct.

    Significance of Opinion
    This opinion exhibits both the wide discretion of a district court in awarding fee disgorgement and the deference an appellate court may give to the lower court in reviewing such decisions.