The opinion of the court was delivered by: EDUARDO C. ROBRENO
Presently before the Court is plaintiff Sharon Eagan's Motion for Approval of the Settlement Agreement and Counsel Fees, filed on her behalf by Eugene Keith, her brother and court-appointed guardian, as well as a Rule to Show Cause issued by the Court. Though approval of the settlement in this case at first appeared to be a relatively uncomplicated exercise, with the plaintiff represented by experienced trial counsel, and with an able guardian in the person of her brother, a licensed, practicing attorney, this case proved once again that things are not always what they seem. The Court will approve the settlement reached by the parties to this action, but not in the form originally proposed, and not without first examining the lapses of both counsel for plaintiff and the guardian and enforcing the Rule to Show Cause. The Court concludes that: 1) the guardian breached his fiduciary duty of loyalty and, therefore, has forfeited any compensation to which he was entitled under the referral fee agreement between him and counsel for plaintiff, and 2) counsel for the plaintiff breached his duty of candor to the Court and, therefore, his pro hac vice admission will be revoked. The Court will set the maximum appropriate amount of legal fees to which counsel for plaintiff is entitled under New Jersey law and pursuant to the contingency fee agreement between the estate and counsel, but will refer the matter to the New Jersey court with general superintendency over the administration of the estate of Sharon Eagan to consider whether counsel's conduct in: 1) initially entering into an oral contingent fee agreement, 2) promising to pay the guardian a referral fee, and 3) appearing before the New Jersey court and undertaking the representation of the estate in this litigation without disclosing to that court the existence of the referral fee agreement, breached the New Jersey Court Rules and/or the New Jersey Rules of Professional Conduct and, if so, to determine in light of counsel's conduct what fee, if any, counsel should receive in this case, up to the maximum allowed as an appropriate fee by this Court, and whether counsel should be referred to the New Jersey Supreme Court Office of Attorney Ethics. Mr. Keith shall also be referred to the New Jersey court for substantially the same reasons, i.e., his conduct as an attorney prior to the institution of this case.
Sharon Eagan was seriously injured in a motor vehicle accident that occurred in Guatemala City, Guatemala, on September 6, 1990.
The motor vehicle was owned by defendant Cooperative for American Relief Everywhere ("C.A.R.E."), a New York corporation with its principal place of business in New York, and operated by defendant Barbara Jackson, allegedly a citizen of Pennsylvania.
Ms. Eagan suffered severe trauma to her head, resulting in significant cognitive sequelae and some difficulty with physical activities. Her brother, Eugene Keith, traveled to Guatemala to care for her, and accompanied her back to New Jersey, where she and Mr. Keith resided at the time. In New Jersey, Mr. Keith arranged for her medical care and handled her affairs, in consultation with their mother and their brother. Mr. Keith, an attorney licensed by the states of New Jersey and Colorado with over thirty years in practice, had previously represented Ms. Eagan in various legal matters, including motor vehicle cases, landlord-tenant matters, and tax questions. Based on these episodic representations, Mr. Keith believed after Ms. Eagan's accident that he was authorized to act initially as her attorney even prior to formal court appointment of a guardian.
In November or December of 1990, Mr. Keith met with Sheldon Bross, a lawyer licensed to practice in New Jersey and a member of the firm of the New Jersey law firm of Bross, Strickland, Cary & Grossman, P.A. ("Bross, Strickland"), whose practice concentrated in personal injury litigation and who had been an acquaintance of Mr. Keith's for over thirty years since they had attended law school together. Though it is unclear in what capacity Mr. Keith was acting, i.e., lawyer, guardian, or family member, the result of this initial meeting was that Mr. Bross was orally "retained" to represent Ms. Eagan's interests in connection with the personal injury action arising from the events in Guatemala.
Mr. Bross and Mr. Eagan agreed that Mr. Bross would be recompensed on a contingency basis, based upon the permissible fee percentages authorized by New Jersey Court Rule 1:21-7.
No written fee agreement was executed by Mr. Bross or Mr. Eagan at that time. See id. 1:21-7(g) (requiring a signed fee agreement when the maximum fee percentages outlined in the Rule are used); N.J. R. Prof. Conduct 1.5(c) (requiring that a contingent fee agreement be in writing) [hereinafter N.J. R.P.C.].
Shortly after the oral agreement retaining Mr. Bross was entered into, Mr. Keith received an unsolicited letter from Bross, Strickland, signed by Mr. Bross and dated January 2, 1991, informing Mr. Keith that as a result of having referred the case to Bross, Strickland, he was to receive a referral fee:
Thank you for the referral of [Sharon Eagan]. As certified civil trial attorneys, we are permitted to forward a one-third referral fee to you upon conclusion of this matter. If at any time you would like to know the status of the case, or have any questions, please feel free to call.
Again, thank you for your kind referral.
BROSS, STRICKLAND, CARY & GROSSMAN, P.A.
Response of Sheldon Bross and Bross, Strickland to the Court's Order to Show Cause exhibit 4 [hereinafter "Bross Response"].
While both Mr. Keith and Mr. Bross have certified that there was no discussion of a referral fee at their initial meeting, both acknowledge that the initial meeting was in the manner of a referral. See Bross Response exhibit 1, P 5 (Affidavit of Eugene Keith) (the "Third Keith Aff.") ("When I initially referred the case to Mr. Bross there was no discussion of a referral fee."); Bross Response exhibit 2, P 7 (Affidavit of Sheldon Bross) (the "Second Bross Aff.") ("As a Certified Civil Trial Attorney, I am authorized to pay a 33-1/3% referral fee when a case is referred to me by an attorney. Mr. Keith did not ask for a referral fee."). In short, the result of the initial meeting and subsequent letter between Mr. Bross and Mr. Keith was that Mr. Bross was to receive the fee percentages allowed under New Jersey Court Rule, and Mr. Keith, the referring attorney and apparent de facto guardian, would receive one-third of the fees earned by Mr. Bross.
In October of 1991, nearly a year after the initial Bross-Keith meeting, and as required under New Jersey law, an application for guardianship was filed by Mr. Bross in the Chancery Division of the Superior Court of New Jersey, seeking to have Mr. Keith appointed as Ms. Eagan's guardian. See Third Keith Aff. PP 6-7 (describing Mr. Bross's involvement in the guardianship application process); Second Bross Aff. P 8 (same). The court appointed Joseph Bottitta, Esq., to represent Ms. Eagan in the incompetency proceedings as guardian ad litem. On October 29, 1991, after a hearing at which Mr. Keith did not personally appear, the New Jersey Superior Court declared Sharon Eagan to be an incompetent, and appointed Mr. Keith as guardian of her person and property. The court retained jurisdiction over the estate, ordering that Mr. Keith apply for a bond, with notice to Mr. Bottitta, upon an increase or decrease of the estate's assets. See Bross Response exhibit 5 (Judgment for Appointment of Guardian entered by the New Jersey Superior Court). Neither Mr. Keith nor Mr. Bross, who represented Mr. Keith at the hearing, disclosed to the New Jersey court or to Mr. Bottitta the pre-existing referral fee arrangement. Both Messrs. Bross and Keith have explained that at the time, they thought there was no need to make a disclosure of their referral fee arrangements because they assumed that the New Jersey court would review any fees at the conclusion of the litigation before the disbursal of any funds, and that the arrangement could be disclosed at that time. See Second Bross Aff. P 8; Third Keith Aff. P 8; see also id. P 7 ("The guardian ad litem, then appointed by the New Jersey Superior Court, never raised any issues regarding my compensation."). On November 25, 1991, Mr. Keith signed a written contingent fee agreement memorializing the initial oral agreement retaining Bross, Strickland to represent Sharon Eagan in the current personal injury action. See Bross Response exhibit 3.
The instant case was filed in this Court in January of 1992. Over the ensuing twenty months, Mr. Bross dutifully pursued the litigation, eventually spending approximately 300 hours on the litigation. Mr. Keith also performed legal tasks on behalf of the estate.
After some discovery was taken, a settlement in the amount of $ 1.2 million was reached between Mr. Keith and C.A.R.E. in the summer of 1993. Mr. Bross has now submitted to the Court as an uncontested matter the instant motion, seeking approval of the settlement agreement and the planned disbursement of the $ 1.2 million lump sum.
As outlined in the certification of Robert R. Cary, Esq., a member of Bross, Strickland, the agreement reached by the parties specified the following disbursements:
$600,000 Purchase of an annuity ($3,333.72 per mo. for 30
years certain and life)
$16,482 Litigation Disbursements
$253,403.60 Attorney's fees n8
$330,114.40 Medical Bills, remainder to the estate
A hearing on the merits of the proposed settlement was held on October 28, 1993. In attendance were Messrs. Bross and Keith, as well as Mr. R. Michael Mori, Esq., from Mr. Bross's office. Defendant C.A.R.E. received notice of the hearing but chose not to be present.
At the hearing, the Court discussed with counsel the apparent discrepancy between the fee requested and the fee calculations produced by using the percentages contained in the fee agreement. See Tr. of Hrg. on 10/28/93, at 7-16. Mr. Mori described the method used by Bross, Strickland in reaching the figure of $ 253,403.60, and represented that the fee petition was in essence a request for a fee on that portion of the net settlement exceeding $ 1 million, see id. at 14, a request that the Court must rule on under the New Jersey rules governing the contingent fee agreement entered into between Mr. Keith and Bross, Strickland, see N.J. Ct. R. 1:21-7(f). Counsel proposed to supplement the record with a memorandum on the proper method of calculating the fees under the contingent fee agreement and New Jersey law, as well as information on any outstanding medical bills and on the financial stability of The Prudential Insurance Company of America, the proposed annuity provider.
See id. at 6, 29-30.
The Court also questioned Mr. Keith under oath concerning his sister's condition and her prognosis, the status of the New Jersey court's order appointing him guardian, and the situation regarding the unpaid medical bills. See id. at 20-27. During the discussion, the Court, believing Mr. Keith's role in the litigation to be no more than that of Ms. Eagan's disinterested guardian, sought his opinion as to the terms of the proposed settlement agreement:
THE COURT: Mr. Keith, do you want to say anything about any of the items which have been requested here and do you have any views or do you think they are fair and reasonable?
Mr. KEITH: Yes. I think they're fair and reasonable.
Id. at 25. At no point during the hearing was the financial interest Mr. Keith held in Bross, Strickland's fee disclosed to the Court.
Bross, Strickland filed a letter brief on November 19, 1993, addressing the issues raised during the hearing. As a follow up to the hearing and the letter brief, the Court sent Mr. Bross, with a copy to defense counsel, a letter on December 1, 1993:
The Court requires one final item before it can issue its ruling on the proposed settlement in the above matter. Please file a certification with the Clerk describing what, if any, referral fees are to be paid from the attorney's fees that your law firm will receive as part of the settlement.
This prompted both Mr. Bross and Mr. Keith to file affidavits (respectively, the "First Bross Aff." and the "Second Keith Aff."), discussing for the first time the interest Mr. Keith held in Bross, Strickland's fee in this case. Mr. Bross averred that the case had been referred to him by Mr. Keith on January 2, 1991, and that he had agreed to pay him a one-third referral fee, as is his prerogative under New Jersey law. See First Bross Aff. PP 3-4. He also averred that Mr. Keith had "agreed to serve as [Ms. Eagan's] guardian in this case without compensation in light of the referral fee he would eventually receive," id. P 6, that Mr. Keith had been actively involved in the case and had not asked for reimbursement for travel expenses or for his expended time, see id. P 7, and that he and Mr. Keith had concluded that their agreement would ultimately benefit Ms. Eagan, reasoning that "had Mr. Keith requested a fee and costs as the guardian, those monies would have to be paid from Sharon Eagan's settlement monies and would constitute an amount over and above the counsel fees," id. P 8.
Mr. Keith averred, inter alia, that he was the lawfully appointed guardian of Sharon Eagan, see Second Keith Aff. P 3, that he had decided that a settlement in the amount of $ 1.2 million was in Ms. Eagan's best interests, see id. P 6, and that he was "very satisfied with Mr. Bross's representation . . . and the results obtained," id. P 8. He requested that the Court approve the settlement as well as the attorney's fees. See id. P 9.
In response to the revelation of Mr. Keith's theretofore undisclosed interest in Bross, Strickland's fee, and concerned that the previous representations made to the Court might have been tainted by the now disclosed financial arrangements of Bross, Strickland and Messrs. Bross and Keith inter se, the Court issued a Rule on Mr. Bross, Mr. Keith, and Bross, Strickland, to show cause why: 1) the fees claimed by Bross, Strickland, should not be reduced to the quantum meruit values of the services rendered; 2) Mr. Keith should not be denied any recovery from his fee agreement with Mr. Bross; and 3) this matter should not be referred to the New Jersey Superior Court presiding over Sharon Eagan's estate and the New Jersey Supreme Court Office of Attorney Ethics. The Rule raised the issue of the validity of the referral fee arrangement between Mr. Keith and Bross, Strickland and the propriety of Mr. Keith's representation of the estate in this litigation, as well as the issue of whether Mr. Bross and/or Mr. Keith had violated the duty of candor to this Court. See Pa. R. Prof. Conduct 3.3 (Candor Toward the Tribunal) [hereinafter Pa. R.P.C.].
Mr. Bross and Bross, Strickland filed a response to the Court's Rule to Show Cause, opposing the referral of the matter to the Office of Attorney Ethics and any reduction in the firm's fee or in Mr. Keith's referral fee. No objection was made to referring the matter to the court presiding over Ms. Eagan's estate. A hearing on the Rule was held on February 15, 1994, with Mr. Bross and Bross, Strickland represented by counsel, and with Mr. Keith representing himself.
The issues the Court must decide are whether the proposed settlement is fair and reasonable, what attorney's fee is appropriate in this case, whether Mr. Keith and Bross, Strickland, respectively, are entitled to any portion thereof, and whether the conduct of Messrs. Bross and Keith, respectively, requires that the matter be referred to the appropriate disciplinary bodies and to the New Jersey Superior Court presiding over the estate and/or otherwise requires disciplinary sanction by this Court. The case is properly before the Court pursuant to its diversity jurisdiction. See 28 U.S.C. § 1332(a).
A. The Court's jurisdiction to approve the settlement agreement
1. The Source of the Court's Authority
As a threshold matter, the Court must determine whether it has the authority to grant plaintiff
the requested relief, approval of the settlement. Normally, parties to a civil dispute can reach a money settlement among themselves, bringing a case to an end without a court's approval or intervention. See Fed. R. Civ. P. 41(a)(1); see, e.g., In re Masters Mates & Pilots Pension Plan & IRAP Litig., 957 F.2d 1020, 1025 (2d Cir. 1992); Gardiner v. A.H. Robins Co., 747 F.2d 1180, 1188-89 (8th Cir. 1984). In making his motion, plaintiff relied on the provisions of Federal Rule of Civil Procedure 17(c), which requires, inter alia, that this Court appoint a guardian ad litem or "make such other order as it deems proper for the protection of the infant or incompetent person."
Fed. R. Civ. P. 17(c); see Gardner by Gardner v. Parson, 874 F.2d 131, 138 (3d Cir. 1989) (holding that the Rule empowers a court to appoint a guardian ad litem where the interests of the incompetent and the general representative conflict). Plaintiff reads the language of 17(c) as granting this Court broad license to issue an order intended to protect Ms. Eagan's interests, including an order approving the proposed settlement. See Pl.'s Mem. of Law in Support of Mot. to Approve Settlement at 10-11 [hereinafter Pl.'s Mem. in Support].
Though the Court at first accepted this broad reading of 17(c), upon reflection it appears that this interpretation is incorrect, the thrust of Rule 17 being the acquisition of a proper representative for an incompetent.
See 6A Charles A. Wright et al., Federal Practice and Procedure: Civil 2d § 1571, at 511 (2d ed. 1990) [hereinafter Federal Practice and Procedure ] (noting that the objectives of the Rule are "to afford an infant or incompetent person a representative in federal court and to provide the district judge with authority to make certain that disabled persons are adequately protected"); see also 3A James W. Moore & Jo D. Lucas, Moore's Federal Practice P 17.26 at 17-219 (1993) ("Rule 17(c) deals only with the protection of incompetents in their status as parties, and gives no general powers over their persons or property."). Instead, the more certain sources for the Court's authority to approve the settlement of the case is the state law that this Court must apply, as well as the Court's inherent duty to protect the interests of minors and incompetents that come before it.
As stated by the Ninth Circuit, in discussing the scope of a guardian ad litem's authority to compromise a minor's claim:
It is an ancient precept of Anglo-American jurisprudence that infant and other incompetent parties are wards of any court called upon to measure and weigh their interests. The guardian ad litem is but an officer of the court. While the infant sues or is defended by a guardian ad litem or next friend, every step in the proceeding occurs under the aegis of the court.
As an officer of the court, the guardian ad litem traditionally lacks any personal authority whatsoever to prejudice the substantial rights of the minor litigant. . . . Indeed, from the time of the early courts of chancery a guardian ad litem has been unable to bind a minor litigant to a settlement agreement absent an independent investigation by the court and a concurring decision that ...