("Courts are charged under the law with the duty and obligation of caring for infants and incompetents upon the theory that they are wards of the court."). Called on to adjudicate a claim brought on behalf of an incompetent, this Court must treat the incompetent as its ward, and must ensure that she is treated fairly and justly.
Judicial approval of the compromise of an incompetent's claim is also compelled by statute in New Jersey, the state in which Ms. Eagan's estate is administered, see N.J. Ct. R. 4:44-3; Ramos, 547 A.2d at 343, and Pennsylvania, the state in which the Court is situated, see Pa. R. Civ. P. 2064. Though both of these are "procedural" rules, they are binding on this Court, since they affect the substantive rights of the litigants--by their operation, the authority to compromise an incompetent's claim is vested in the court, rather than in the incompetent's guardian.
Therefore, the Court must apply these rules under the precepts established in Erie Railroad v. Tompkins, 304 U.S. 64, 82 L. Ed. 1188, 58 S. Ct. 817 (1938), requiring the application of substantive state law in diversity actions. See also Sosenke v. Norwood, 1993 U.S. Dist. LEXIS 18449, Civ. A. No. 91-2623, 1993 WL 512824 (E.D. Pa. Dec. 6, 1993) (applying Pennsylvania Rule of Civil Procedure 2039, compromise of a minor's claims, in reviewing a proposed settlement of a diversity action).
2. The Standard for Approval
A related question is what standard the Court must apply in reviewing the proposed settlement. A federal court sitting in a diversity case is required to apply the same substantive law as would be applied by a state court of its forum, i.e., the Commonwealth of Pennsylvania, see Erie, 304 U.S. at 78, including the choice of law rules, see Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496-97, 85 L. Ed. 1477, 61 S. Ct. 1020 (1941); Blumenfeld Dev. Corp. v. Carnival Cruise Lines, Inc., 669 F. Supp. 1297, 1321 (E.D. Pa. 1987). Under Pennsylvania law, in choosing the appropriate law, the Court must apply a "flexible rule which permits analysis of the policies and interests underlying the particular issue before the court." Griffith v. United Air Lines, Inc., 416 Pa. 1, 203 A.2d 796, 805 (Pa. 1964); see also Carrick v. Zurich-American Ins. Group, 14 F.3d 907, 909 (3d Cir. 1994) (citing Griffith as the controlling precedent). As described by the Third Circuit Court of Appeals, the choice of law analysis entails "a hybrid approach that 'combines the approaches of both Restatement II (contacts establishing significant relationships) and "interest analysis" (qualitative appraisal of the relevant States' policies with respect to the controversy).'" Lacey v. Cessna Aircraft Co., 932 F.2d 170, 187 (3d Cir. 1991) (quoting Melville v. American Home Assurance Co., 584 F.2d 1306, 1311 (3d Cir. 1978)). The present issue, approval of the settlement, presents a choice between the law of Pennsylvania, where the suit was filed and where Barbara Jackson allegedly resides, and the law of New Jersey, where the incompetent is domiciled,
where the estate is being administered, and where the contingent fee and referral agreements were entered into.
Before engaging in this analysis, however, the Court must consider whether the case presents a so-called "false conflict" between the law of the two states. "A false conflict exists if only one jurisdiction's governmental interests would be impaired by the application of the other jurisdiction's law. In such a situation, the court must apply the law of the state whose interests would be harmed if its law were not applied." Id. (citing Cipolla v. Shaposka, 439 Pa. 563, 267 A.2d 854, 855 (Pa. 1970) and Kuchinic v. McCrory, 422 Pa. 620, 222 A.2d 897, 899-900 (Pa. 1966)); see also Zygmuntowicz v. Hospitality Invs., Inc., 828 F. Supp. 346, 349-50 (E.D. Pa. 1993) (applying the Lacey false conflict analysis). A review of the applicable New Jersey and Pennsylvania law demonstrates that the instant situation presents such a false conflict, requiring that the Court apply New Jersey law.
Both New Jersey and Pennsylvania require that a court review any proposed settlement of an incompetent's claim to confirm that the settlement is fair and reasonable. See N.J. Ct. R. 4:44-3; Pa. R. Civ. P. 2064;
cf. Bauer by Bauer v. Griffin, 108 N.J. Super. 414, 261 A.2d 667, 669 (N.J. Super. Ct. App. Div.) (per curiam) (denying infant plaintiff's motion to vacate judgment where the lower court had approved a settlement), certif. denied, 265 A.2d 701 (N.J. 1970). Both rules seek to protect the interests of an incompetent plaintiff by guaranteeing that a court will review the actions taken by the incompetent's representative. The essential difference between the two is that New Jersey requires that a reviewing court make factual findings concerning the fiscal stability of any provider of a structured settlement. See N.J. Ct. R. 4:44-3. Although requiring the Court to make findings concerning the fiscal stability of a structured-settlement provider would not impinge on Pennsylvania's interests as expressed in Rule 2064, not applying the standard would, on the other hand, fail to promote New Jersey's interest in ensuring that there is a reasonable probability that structured settlements will actually be paid in the future. Thus, the two rules present a false conflict that the Court will resolve by applying New Jersey's rule. Doing so will not prejudice Pennsylvania's interest in protecting incompetent plaintiffs, while failure to do so would prejudice New Jersey's interest in ensuring the reliability of structured settlements. See Lacey, 932 F.2d at 187.
The other issue that must be resolved is the law the Court must apply in examining the request for fees made by plaintiff's counsel. Both New Jersey and Pennsylvania permit the Court to review the fees requested by counsel who has reached a settlement of an incompetent's claim, see N.J. Ct. R. 4:44-3 (allowing reviewing court to examine counsel's fees where, as here, a request is made for court approval of requested fees); Pa. R. Civ. P. 2064(b) (same), and the importance of such scrutiny cannot be understated. Resolution of this issue will also necessarily involve interpretation of the contingent fee agreement entered into between Mr. Keith, on behalf of the estate, and Bross, Strickland. While contingent fee agreements in Pennsylvania are subject to the general requirements of the rules of professional conduct, see Pa. R.P.C. 1.8(j)(2) (allowing a lawyer in a civil case to enter into an agreement for a "reasonable contingent fee"); id. R. 1.5 (stating general rules on fee agreements), New Jersey has a comprehensive set of rules addressing the issue of contingent fee agreements.
Court Rule 1:21-7 establishes fairly strict requirements for contingent fee agreements, including a sliding cap on fees, a limit on fees to the first $ 1 million recovered (barring application to the court), and a 25% cap on fees earned in actions settled on the behalf of infants and incompetents. See N.J. Ct. R. 1:21-7(c), (f).
The structure evinces a strong interest on the part of New Jersey in regulating the fees that are charged by the attorneys practicing law within its confines, and in regulating the contracts by which they set those fees. See Bernick v. Frost, 210 N.J. Super. 397, 510 A.2d 56, 60-61 (N.J. Super. Ct. App. Div.), certif. denied, 523 A.2d 158 (N.J. 1986). As recently addressed by the District Court of New Jersey, in determining whether to interpret a contingency fee agreement under Pennsylvania law or New Jersey law,
New Jersey has a strong interest in regulating the economic relationship between New Jersey attorneys and their clients in tort cases. . . . Although Pennsylvania has an interest equal to New Jersey's in protecting its citizens from the overreaching of attorneys in contingent fee cases, Pennsylvania's interest does not apply where the client involved is a New Jersey citizen injured in New Jersey who negotiated his contingent fee contract in New Jersey with a New Jersey-licensed attorney.
Newcomb v. Daniels, Saltz, Mongeluzzi & Barrett, Ltd., 847 F. Supp. 1244, 1994 U.S. Dist. LEXIS 4236, 1994 WL 114894, at *5 (D.N.J. 1994); see also Elder v. Metropolitan Freight Carriers, Inc., 543 F.2d 513, 519 (3d Cir. 1976) ("In the exercise of its paramount concern with its courts, New Jersey is free to provide that no party may be required to pay an excessive contingent fee to utilize its legal processes."). In the instant case, no Pennsylvania interest would be harmed by applying New Jersey law in interpreting a fee agreement entered into in New Jersey between a New Jersey client, injured in Guatemala, and a New Jersey-licensed lawyer. In contrast, the strong interest New Jersey has in regulating the attorney-client relationship, as expressed in Court Rule 1:21-7, would be stymied if Pennsylvania law is applied. The Court will therefore interpret the contingent fee agreement under New Jersey law.
B. The Court Will Approve the Settlement Agreement
It is beyond peradventure that a guardian may not place himself or herself in a position where his or her interests conflict with those of the ward. As the New Jersey Supreme Court held in analyzing the similar fiduciary relationship that exists between a trustee and a beneficiary, "the most fundamental duty owed by the trustee to the beneficiaries of the trust is the duty of loyalty and he is not permitted to place himself in a position where it would be for his own benefit to violate that duty." In re Koretzky's Estate, 8 N.J. 506, 86 A.2d 238, 249 (N.J. 1951); see also IIA Austin W. Scott & William F. Fratcher, The Law of Trusts § 170 (4th ed. 1987). The duty of loyalty operates as a prophylactic, irrespective of good or bad faith on the part of the guardian. See N.J. Stat. Ann. 3B:14-36 (West 1983) (rendering any undisclosed transaction affected by a substantial conflict of interest voidable); Magruder v. Drury, 235 U.S. 106, 119, 59 L. Ed. 151, 35 S. Ct. 77 (1914) ("The intention is to provide against any possible selfish interest exercising an influence which can interfere with the faithful discharge of the duty which is owing in a fiduciary capacity."); Fulton Nat'l Bank v. Tate, 363 F.2d 562, 572 (5th Cir. 1966) ("It is unnecessary to show that the fiduciary succumbed to this temptation, that he acted in bad faith, that he gained an advantage, fair or unfair, that the beneficiary was harmed. . . . The fiduciary is punished for allowing himself to be placed in a position of conflicting interests in order to discourage such conduct in the future."); In re Kline, 142 N.J. Eq. 20, 59 A.2d 14, 14 (N.J. 1948) (per curiam). Faithful adherence to the duty is required to keep a trustee from ever being in a position where his loyalties might be divided:
"Reasons behind the establishment of the loyalty rule by equity are that it is generally, if not always, humanly impossible for the same person to act fairly in two capacities and on behalf of two interests in the same transaction. Consciously or unconsciously he will favor one side as against the other, where there is or may be a conflict of interest. If one of the interests involved is that of the trustee personally, selfishness is apt to lead him to give himself an advantage. If permitted to represent antagonistic interests the trustee is placed under temptation and is apt in many cases to yield to the natural prompting to give himself the benefit of all doubts."