The opinion of the court was delivered by: Arthur J. Schwab United States District Judge
This breach of fiduciary duty case, which has a protracted procedural and factual history,*fn1 centers around allegations by plaintiffs, who were asbestos litigants from Pennsylvania, Indiana and Ohio, who received settlements in class action litigation pending in Mississippi. All eight plaintiffs were exposed to asbestos during their work, but none have developed malignant asbestos-related disease.
Plaintiffs signed contingent fee agreements with several non-party local attorneys from their respective home states, who had previously entered into a co-counsel agreements with Robert G. Taylor, II, a Texas attorney, who, in turn, entered into "upstream co-counsel arrangements" with several attorneys, the other defendants, who were lead counsel in asbestos class action litigation primarily pending in Texas and Mississippi (collectively referred to as "Lead Counsel" or simply "defendants"). Plaintiffs currently allege that Lead Counsel breached fiduciary duties owed to them by, among other things, the failure of the non-party local attorneys to adequately disclose certain information surrounding settlement of their asbestos claims. All contact with plaintiffs concerning the litigation and settlements were by the local attorneys and ParaPro, a paralegal business affiliated with Taylor's law firm. Significantly, neither defendant Taylor (lead Texas counsel) nor any of his co-defendants had retainer agreements with plaintiffs; rather, while Lead Counsel litigated the claims and negotiated the settlements with the asbestos companies, Local Counsel maintained the traditional attorney-client relationship with the plaintiffs, with whom they had executed contingent fee agreements.
As the United States Court of Appeals for the Third Circuit elucidated in its October 31, 2006 opinion, "Taylor's fee arrangement," i.e., the arrangement between him and other lead counsel ("Lead Counsel" or simply "defendants") and non-party Local Counsel (or simply "Local Counsel"), "is the key to understanding Plaintiffs' case." Huber v. Taylor, 469 F.3d 67, 70 (3d Cir. 2006)). It is against this backdrop that this Court will consider the current pending motions.
A. Background and Memorandum Opinion of United States Court of Appeals for the Third Circuit
Plaintiffs, Ronald Huber, William J. Airgood, Anthony Defabbo, John Dinio, and Ernest Gishnock, are former steelworkers from Western Pennsylvania who signed retainer agreements with current non-party Attorney William Mitchell, of Washington, Pennsylvania in 1999. John Bidlencsik, is a former steelworker from Cleveland, Ohio, who signed a retainer agreement with current non-party Attorney James Tavens, also of Ohio, in 1999. William Deem and Hilma Mullins are former steelworkers from Indiana who signed retainer agreements with the current non-party law firm of Gikas & Sams, also of Indiana, in 1996 and 1997, respectively.
All eight plaintiffs were exposed to asbestos during their work, but none have developed malignant asbestos-related disease. All plaintiffs, other than Huber, are or were smokers. All plaintiffs retained the above mentioned non-party Local Counsel in their home states to prosecute their asbestos claims for a 40% retainer fee.
Rather than reiterate all of the facts from this Court's prior Memorandum Opinion on summary judgment, this Court will quote the following facts (some of which are highlighted for reasons which will be explained later in this opinion), which were aptly summarized by the United States Court of Appeals for the Third Circuit in its recent Opinion:*fn2
Local Counsel had previously entered into co-counsel agreements with Robert G. Taylor II, a Texas attorney involved in Cosey. Taylor had his own client base in Texas but was looking to expand his asbestos client "inventory." Taylor contracted with Local Counsel to serve as co-counsel for any future asbestos plaintiffs that Local Counsel would represent in exchange for Taylor receiving between 95% and 97.5% of Local Counsel's fees if suit were brought outside of Local Counsel's home state, and a smaller amount if suit were brought in the home state. The agreements between Taylor and Local Counsel provided that, if the asbestos suits were filed in a state other than Local Counsel's home states, Texas law would govern the contingent fee contract.
Taylor's fee arrangement is key for understanding Plaintiff's case. First, it meant that employment as Local Counsel could only be profitable as volume, rote work because Local Counsel would keep only one to two percent of any particular case. Since many recoveries were in the range of a few thousand dollars, Local Counsel collected very little from any particular representation. Second, the fee arrangement meant that, all things being equal, co-counsel representations were less profitable to Taylor than representations of direct clients because of the fee-splitting involved. Third, the arrangement meant that the one to two percent local counsel cut, when aggregated among all Local Counsel, as it was from Taylor's perspective, represented a sizeable amount given the hundreds of millions of dollars of recoveries.
Taylor himself had entered into upstream co-counsel agreements with Fitzgerald and Pritchard, who in turn entered into an upstream co-counsel agreement with Joseph B. Cox. Jr. to negotiate settlements, for which Cox would receive four percent of all gross settlements. Plaintiffs allege that they were never informed of the various co-counsel arrangements.
Cox negotiated settlements with asbestos defendants W.R. Grace, Owens Corning, Fiberboard, and the Center for Claims Resolutions (CCR), an organization created by 19 asbestos defendants to settle asbestos claims. Under the terms of all the settlements, the payout varied both by level of injury and by the home state of the claimants. In all the settlements negotiated by Cox, Northerners received payouts that were between 2.5 and 18 times lower than those received by plaintiffs from Mississippi and Texas (Southerners). Northerners, who joined in the Mississippi actions nonetheless received a larger settlement than similar asbestos plaintiffs from Pennsylvania, Ohio, and Indiana usually receive in their home state courts. Defendants, in settling these cases for Southerners, did not have to share their fees with Local Counsel, as they had to do with Northerners. Plaintiffs allege that the difference in the settlement payouts to Northerners is attributable to this incentive of Defendants to allocate a greater percentage of aggregate settlements to Southerners in order to minimize Local Counsel's percentages. This marginal percentage difference becomes significant in light of the scale of the settlements. The record contains the approximate or maximum values of eleven of the nineteen settlement agreements negotiated by Defendants. We calculate these eleven settlement agreements to total some $400 million. Therefore, on just this portion of the total settlements, Defendants stood to gain up to $10 million (2.5% of $400 million) at the expense of Northerners (and Local Counsel), depending on how the settlements were allocated between Northerners and Southerners.
Defendants reply to this allegations by asserting that the settlements were not aggregate settlements that they then allocated as they saw fit. Instead, Defendants claims that the plaintiffs in the settled cases were presented with offers that varied for different individuals based on factors such as the type of injury or asbestos exposure, lifestyle habits like smoking, and geographic origin. Defendants claim that geographic origin is an appropriate factor in determining settlement value because jury verdicts in northern states are traditionally lower than in southern states and because, in southern courts, jury verdicts for Northerners are typically lower than for Southerners in their home state. For purposes of this appeal, we need not resolve whether these settlements were aggregated, but we note that there is language in some of the settlement agreements that strongly supports the contention that they were aggregate settlements. Moreover, the very documents Defendants cite in their brief refer to settlements as aggregates.
After each of the settlement agreements was negotiated, the Northerners received various disclosures. These disclosures were made by Local Counsel and Parapro Enterprises, Inc., a paralegal service associated with Taylor. The Northerners were presented with a release, a check, and a disbursement sheet. The release was explained orally to Northerners by Parapro paralegals. The disclosuresdid not reveal the settlements' material terms or the nature of Defendants' involvement in the cases. The written disclosures states that further information about the settlements was available on request. The record does not state whether any of the Plaintiffs sought to avail themselves of this information. Plaintiffs have introduced evidence that neither the Parapro paralegals nor Local Counsel were themselves aware of the full terms of the settlements or even had access to the complete settlement agreements.
The Plaintiffs brought suit in the Western District of Pennsylvania on behalf of the putative class of Northerners. Plaintiffs have not sued their Local Counsel or Parapro. Plaintiffs allege several counts, including breach of fiduciary duty, aiding and abetting breach of fiduciary duty, and conspiracy to breach fiduciary duty. Plaintiffs allege that Defendants owe them a fiduciary duty as their counsel; that Defendantsengaged in an undisclosed, multiple representation; that Defendants had a conflict of interest regarding their multiple representation because of the fee arrangements that gave Defendants a larger percentage of Southerners' recoveries than of Northerners' and that this created an incentive for Defendants to negotiate settlements that paid more for Southerners' claims than for Northerners'; and that Defendants never gave proper disclosure of this conflict of interest or of the full terms of the settlement offers.
Huber, 469 F.3d at 70-72. (Emphasis added).
B. Local Counsel in Pennsylvania, Ohio and Indiana
In 1995, Attorney James Tavens, an Ohio attorney, entered into a co-counsel agreement with Robert G. Taylor, II, P.C., d/b/a Taylor & Cire, P.C. Also, in or around 1996, Attorneys Linda Sams and Rick Gikas, who practice in Indiana, through their firm, Gikas & Sams, entered into a co-counsel agreement with Robert G. Taylor, II, P.C., d/b/a Taylor & Cire. (Doc. Nos. 276-277, Joint Stipulation of Facts at 13).
In or around 1997, Walter Lonce, the newly-elected president of Local 227 of the United Steel Workers of America (USX-Irvin Works) in Western Pennsylvania, sought counsel to represent his union members in asbestos personal injury cases.
Attorney Mitchell provided legal services to Local 227. Lonce asked Mitchell to locate counsel to represent the union members in asbestos personal injury cases. In 1998, Mitchell contacted defendant Taylor concerning the possibility of representing steel workers from Western Pennsylvania in asbestos personal injury suits. Mitchell subsequently entered into a co-counsel agreement with Robert G. Taylor, II, P.C., d/b/a Taylor & Cire. Defendant Taylor told Mitchell that Pennsylvania offered "very limited" relief for asbestos claimants, and that Taylor would therefore "try to get [the Pennsylvania plaintiffs] involved in the state of Mississippi." Among Local 227 members are plaintiffs Airgood, DeFabbo, Dinio, Gishnock, and Huber. See Joint Stipulation of Facts at 13.
Tavens, Sams, and Mitchell were assisted by paralegals from a litigation management firm called Parapro, Inc. ("Parapro"). Parapro was created in Texas in 1995 and entered into a contract with Taylor & Cire, P.C. to provide paralegal services. See Joint Stipulation of Facts at 14.
Beginning in early 1999, members of Local 227 reported to their union hall for chest x-rays and to provide preliminary information concerning their work history and occupational exposure to asbestos. Id. Those whose x-rays showed asbestos-related injuries, such as asbestosis or asbestos-related pleural disease, were contacted by Attorney Mitchell and/or Parapro. Those with positive test results completed more detailed questionnaires and underwent pulmonary function medical tests. At the direction of Taylor, Parapro transmitted names of prospective plaintiffs to The Law Offices of Robert A. Pritchard for joinder in pending Mississippi actions, including, but not limited to, Cosey and Rankin. Id.
C. Representations to the Pittsburgh Plaintiffs
Significantly, neither defendant Taylor nor any of his co-defendants had retainer agreements with plaintiffs; rather, while Taylor litigated the claims and negotiated the settlements with the asbestos companies, Local Counsel communicated with and maintained the attorney-client relationship with the plaintiffs.
Paralegals from the ParaPro Litigation Management Firm assisted local counsel in communicating with individual clients. See Cummings Tr. at 17; Sams Tr. at 18-23; Colafella Tr. at 42-44. Local Counsel testified that they oversaw the settlement administration process and paralegal activities, and made themselves available to answer plaintiffs' questions. See Taylor 10/8/03 Tr. at 54-55; Sams Tr. at 29, 33, 54-55; Colafella Tr. at 43, 45-47; Tavens Tr. at 44.
The agreements that Taylor negotiated on behalf of plaintiffs were not binding on any claimants; rather, each agreement permitted plaintiffs to choose whether they ultimately wanted to participate. See Taylor 10/8/03 Tr. at 34-35; Hughes Tr. at 126-27; Podesta Tr. at 103-04; Tavens Tr. at 161-62; Sams Tr. at 69-70. Plaintiffs who chose to "opt-out" of a settlement were entitled to pursue their claims individually. See Podesta, Tr. at 105-106; Rooney, Tr, at 86-98; Taylor Tr., 10/8/03 at 34-35.
III. PROCEDURAL BACKGROUND
On February 7, 2002, plaintiffs, who are former asbestos litigants from Pennsylvania, Indiana and Ohio,*fn3 brought a fourteen count complaint against Lead Counsel only, alleging a multitude of tort claims based on claims that defendants engaged in fraud, conversion, deceptive trade practices, civil conspiracy, legal malpractice, aiding and abetting, and otherwise breached their fiduciary duties based on allegedly unauthorized, undisclosed settlement of asbestos personal injury claims in the aggregate and on Lead Counsel's purported misconduct in administering the settlement.
This case was assigned to the Honorable Donald Lee. After extensive briefing, on the issue of class certification as well as numerous other dispositive and nondispositive motions, on January 6, 2003, upon Judge Lee's going on inactive status, this case was reassigned to the undersigned.
On February 12, 2003, this Court entered an order denying class certification without prejudice for plaintiffs to re-file said motion after the parties attempted to reach a consensus on the certification issue (doc. no. 94). The parties were unable to agree on class certification, and after extensive briefing on the issue, on May 3, 2004, this Court entered an order denying class certification on the basis that: (1) individual questions about disclosures, reliance, causation, damages and choice of law predominated over issues common to the class; (2) because of predominance of individual questions, a class action was not the most efficient way to litigate the matter; (3) plaintiffs were not typical of the putative class of Northerners because six of the eight plaintiffs had not qualified for the CCR settlement offer; and, (4) plaintiffs were inadequate class representatives because their interests were no longer aligned with other Northerners because they were no longer represented by defendants in asbestos litigation, unlike other Northerners, such that this fact would create a conflict of interests between them and the putative class (doc. nos. 200-201).
Also, during that time, it is worth noting that plaintiffs filed two amended complaints (doc. nos. 4, 174), and the parties agreed to retain a special master, the Honorable Donald E. Ziegler, former Chief Judge of this Court, who served in this capacity as special master over discovery disputes (see doc. nos. 131, 140, 142, 143, 158, 210).
Then, on November 19, 2004, defendants filed a motion for summary judgment (doc. no. 230) and plaintiffs filed a motion for partial summary judgment (doc. no. 238). After many rounds of briefing, on February 7, 2005, this Court, by memorandum opinion and order, denied plaintiffs' motion for partial summary judgment, granted defendants' motion for summary judgment, entered judgment in favor of defendants and against plaintiffs, and marked the docket closed (doc. nos. 279-280).
This Court denied plaintiffs' motion for partial summary judgment and granted defendants' motion for summary judgment on the basis that under the laws of Ohio, Indiana or Pennsylvania, plaintiffs had failed to present evidence of actual harm or evidence that defendants non-disclosures were the proximate cause of their harm, both of which were required elements in all of plaintiffs' claims. This Court defined the actual harm requirement as a showing of evidence that "'but for' [Lead Counsel's] conduct, [plaintiffs] could or would have received more favorable offers." Huber, 469 F.3d at 72.
On March 7, 2005, plaintiffs filed their notice of appeal to the United States Court of Appeals for the Third Circuit (doc. no. 282). Plaintiffs appealed both the denial of class certification and summary judgment with respect to three claims only: (1) breach of fiduciary duty; (2) aiding and abetting a breach of fiduciary duty; and (3) civil conspiracy to breach of fiduciary duty. Plaintiffs did not appeal the grant of summary judgment with respect to the claims of fraud, conspiracy to defraud and convert, legal malpractice, conversion, and violation of deceptive trade practices laws, and accordingly, the Court will not consider those claims in the context of the current pending motions.
On December 6, 2006, this Court received the mandate from the Court of Appeals for the Third Circuit, vacating this Court's opinion and order on summary judgment and remanding for further proceedings. Huber v. Taylor, 469 F.3d 67 (3d Cir. 2006).
A majority of the panel on appeal found that Texas law was applicable to the instant dispute, despite the fact that the parties did not specifically argue, either before the district court or the Court of Appeals for the Third Circuit, that Texas law should apply. The application of Texas law is crucial, because unlike the laws of Pennsylvania, Ohio and Indiana, Texas law does not require actual injury in order to make a successful claim for breach of fiduciary duty when the remedy sought is disgorgement. The Court of Appeals agreed with this Court's finding that plaintiffs suffered no actual harm or damages, stating that "if Plaintiffs must show causation and actual injury, they lose . . . ." Huber, 467 F.3d at 73. However, because it determined Texas law applied to plaintiffs' claims for breach of fiduciary duty, the Court of Appeals then vacated this Court's grant of summary judgment, vacated the denial of class certification, and remanded this case for further consideration in light of applicable Texas law. (Doc. No. 289-2 at 35).
Following a status conference on December 13, 2006 (doc. no. 299) at which a fifth amended case management order was entered setting forth a detailed briefing schedule (doc. no. 302), the parties have filed numerous motions. Currently pending before the Court are (1) defendants' motion to dismiss for lack of subject matter jurisdiction (doc. no. 310); (2) defendants' motion to dismiss for failure to join necessary and indispensable parties (doc. no. 311); (3) defendant's (Cox and Cox) motion for summary judgment (doc. no. 312); (4) defendant's (estate of Robert Pritchard and Pritchard Law Firm) motion for summary judgment (doc. no. 320); (5) plaintiffs' motion for class certification (doc. no. 323); and, (6) plaintiffs' motion for leave to file a third amended complaint (doc. no. 325).
A. Defendants' Motion to Dismiss for Lack of Subject Matter Jurisdiction Pursuant to Rule 12(b)(1) (doc. no. 310)
A motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(1) challenges the lack of subject matter jurisdiction over a claim. Hedges v. United States, 404 F.3d 744, 750 (3d Cir. 2005) (distinguishing non-jurisdictional issues from jurisdictional issues and holding that only jurisdictional issues should be evaluated under the standard for a Rule 12(b)(1) motion). When a motion to dismiss challenges subject matter jurisdiction, the district court must distinguish between "12(b)(1) motions that attack the complaint on its face and 12(b)(1) motions that attack the existence of subject matter jurisdiction in fact, quite apart from any pleadings." Mortensen v. First Fed. Sav. & Loan Assoc., 549 F.2d 884, 891 (3d Cir. 1977) (explaining that 12(b)(6) motions necessitate a ruling on the merits while other motions to dismiss deal with procedural defects, and 12(b)(1) motions in particular address the trial court's power to hear the case).
In ruling on 12(b)(1 ) motions to dismiss that attack the complaint on its face, "the court must consider the allegations of the complaint as true." Id. Dismissal for a facial challenge is "proper only when the claim 'clearly appears to be immaterial and made solely for the purpose of obtaining jurisdiction or . . . is wholly insubstantial and frivolous.'" Kehr Packages, Inc. v. Fidelcor, Inc., 926 F.2d 1406, 1408-09 (3d Cir. 1991) (quoting Bell v. Hood, 327 U.S. 678, 682 (1946)). Where defendants' challenge to subject matter jurisdiction is a factual one, however, the district court will look beyond the pleadings in deciding the 12(b)(1) motion. See Cestonaro v. United States, 211 F.3d 749 (3d Cir.2000). When defendants make a colorable Rule 12(b)(1) challenge to subject matter jurisdiction, the plaintiff bears the burden of proving that the relevant jurisdictional requirements are satisfied. See Development Fin. Corp. v. Alpha Housing & Health Care, 54 F.3d 156, 158 (3d Cir. 1995).
ii. Federal Court Jurisdiction Generally
The federal courts are courts of limited jurisdiction which is defined strictly by Congress, and so it is a "bedrock principle that federal courts have no jurisdiction without statutory authorization." Exxon Mobile Corp. v. Allapattah Services, Inc., 545 U.S. 546, 543, 553 (2005). As the United States Supreme Court recently explained, the "basic statutory grants of federal court subject matter jurisdiction are contained in 28 U.S.C. §§ 1331 and 1332. Section 1331 provides for '[f]ederal-question' jurisdiction, § 1332 for '[d]iversity of citizenship' jurisdiction. A plaintiff properly invokes § 1331 jurisdiction when she pleads a colorable claim 'arising under' the Constitution or laws of the United States. . . . [and] invokes § 1332 jurisdiction when she presents a claim between parties of diverse citizenship that exceeds the required jurisdictional amount, currently $75,000. See § 1332(a)." Arbaugh v. Y&H Corp., 546 U.S. 500, 126 S.Ct. 1235, 1244 (2006). Federal courts themselves are under "a continuing obligation to investigate their jurisdiction over the matters before them." Golden ex rel. Golden v. Golden, 382 F.3d 348, 354 (3d Cir. 2004). See also Nesbit v. Gears Unlimited, Inc., 347 F.3d 72, 76-77 (3d Cir. 2003) ("courts have an independent obligation to satisfy themselves of jurisdiction if it is in doubt. . . . A necessary corollary is that the court can raise sua sponte subject-matter jurisdiction concerns.")
In this case, plaintiffs claim the jurisdiction of the federal courts pursuant to section 1332, based on diversity of jurisdiction. Section 1332 requires "complete diversity: In a case with multiple plaintiffs and multiple defendants, the presence in the action of a single plaintiff from the same State as a single defendant deprives the district court of original diversity jurisdiction over the entire action." Allapattah Services, 545 U.S. at 553. It also requires that there be a minimum amount in controversy, currently $75,000. Id. at 552. The Supreme Court explained Congress's intent in creating diversity jurisdiction in section 1332 as follows:
To ensure that diversity jurisdiction does not flood the federal courts with minor disputes, § 1332(a) requires that the matter in controversy in a diversity case exceed a specified amount . . . § 1332(a). . . .
[T]he purpose of the diversity [of citizenship] requirement . . . is to provide a federal forum for important disputes where state courts might favor, or be perceived as favoring, home-state litigants. The presence of parties from the same State on both sides of a case dispels this concern, eliminating a principal ...