IN THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA
January 25, 2010
RONALD L. HUBER; WILLIAM J. AIRGOOD; ANTHONY DEFABBO; JOHN DINIO; ERNEST GISHNOCK; JOHN BIDLENCSIK; HILMA MULLINS AND WILLIAM DEEM, INDIVIDUALLY AND ON BEHALF OF THOSE SIMILARLY SITUATED PLAINTIFFS,
ROBERT G. TAYLOR, II; ROBERT G. TAYLOR, P.C.; R.G. TAYLOR II, P.C.; ESTATE OF ROBERT A. PRITCHARD; PRITCHARD LAW FIRM, PLLC; JOSEPH B. COX, JR.; JOSEPH B. COX, JR. LTD; AND COX AND COX, LLP DEFENDANTS.
The opinion of the court was delivered by: Magistrate Judge Lisa Pupo Lenihan
Doc. No. 372
OPINION AND MEMORANDUM ORDER ON MOTION FOR LEAVE TO FILE THIRD AMENDED COMPLAINT
This 2002 action involves claims related to Defendants' representation of the eight (8) above-named Plaintiffs (the "Named Plaintiffs"), and of others similarly situated, in consolidated individual personal injury actions for exposure to asbestos, in the State Court of Mississippi (the "Mississippi Asbestos Exposure Consolidated Litigation" or "Mississippi AECL").
After many years of discovery and litigation before several different Judges in this Court, and multiple appeals to the Court of Appeals for the Third Circuit, the Named Plaintiffs' surviving claims are, at bottom, that in representing them in the Mississippi AECL, Defendants
(a) breached their fiduciary duties of candor/disclosure and loyalty under Texas law by (i) covertly allocating settlement funds disproportionately/inequitably in favor of other asbestos litigation clients in other states (to maximize the Defendants' revenue from the cases) and (ii) imposing and receiving excessive expenses; but
(b) caused them no actual harm as they failed to show they would have achieved a better outcome in the underlying actions but for counsel's conduct.*fn1
Pending before the Court is a Motion to File a Third Amended Complaint requesting class certification, extensive injunctive relief, accounting, disgorgement of fees, imposition of a constructive trust, and punitive damages. See Third Amended Complaint at 7. For the reasons set forth herein, the Court will grant Plaintiffs' Motion in part and deny it in part. More specifically, they will be granted leave to amend their Complaint in a manner consistent with the law of the case, as discussed below.
II. FACTUAL AND PROCEDURAL HISTORY
Plaintiffs' Complaint was filed in February, 2002. Their last filed, Second Amended, Complaint alleged that the Defendant lawyers and law firms "defrauded" Plaintiffs and other Pennsylvania, Ohio and Indiana clients (the "Northern Clients") in their asbestos exposure litigation in Mississippi by obtaining "colossal, aggregate settlements" and "sacrific[ing] their clients' rights and interests to the [Defendants'] greed". See Second Amended Complaint at 2. Named Plaintiffs are former steel mill workers now between 58 and 76 years old, who were exposed to asbestos-containing products during their employment and allege that they have been "diagnosed with an asbestos-related disease." Id. But compare Huber v. Taylor ("Huber I"), 469 F.3d 67 (3d Cir. 2006) (stating that "[n]one [of the eight Named Plaintiffs] have developed malignant asbestos-related disease" and that "[a]ll the Plaintiffs except Huber are or were smokers"); June 19, 2009 Memorandum Order at 1-2.
In 1995, Defendant Robert Pritchard, an asbestos lawyer practicing in Mississippi, commenced an asbestos personal injury case captioned Cosey v. E.D.Bullard Co. ("Cosey") in Mississippi State Court. Over the next four years, thousands of "asbestos personal injury plaintiffs were joined in Cosey, along with more than two hundred defendants."*fn2 A 1998 trial in Cosey for the cases of twelve (12) Plaintiffs with malignant asbestosis diseases resulted in an award of approximately $48.5 million. As a result, many companies "with potential asbestos liablity [explored] settlement" and in 1999 Pritchard brought a second asbestos personal injury action in Mississippi State Court captioned Rankin v. A-Bex Corp ("Rankin"), "in which the Plaintiffs in this suit were joined."*fn3
While the Mississippi cases were proceeding Plaintiffs herein (and other Northern Clients) had "retained counsel in their home states (Local Counsel) to prosecute their asbestos claims for a 40% retainer fee." Huber I, 469 F.3d at 69-70.*fn4 Their Local Counsel had "entered into co-counsel agreements with [Defendant Taylor], a Texas attorney involved in Cosey," who agreed to serve as co-counsel for the asbestos clients in exchange for receiving between 95%-97.5% of Local Counsel's fee if suit were brought outside of the Local Counsel's home state. See id. Taylor, in turn, had an "upstream co-counsel agreement" with Pritchard, who had one with Cox (a North Carolina lawyer). Under his agreement, Cox negotiated, and received four (4%) percent of, all group settlements. See Huber I, 469 F.3d at 70; June 19, 2009 Memorandum Order at 2.
Cox negotiated settlements with asbestos defendants W.R. Grace, Owens Corning, Fiberboard, and the Center for Claims Resolution (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.
Huber I, 469 F.3d at 70 (emphasis added).*fn5 See also Second Amended Complaint at 16-17, 19-20 (discussing settlement reached in November, 1999, and noting that Defendants have also reached other settlements with other Mississippi AECL Defendants).*fn6
When settlements were negotiated, the Northern Clients "received various disclosures . . . made by Local Counsel and . . . a paralegal service associated with Taylor." Huber I at 71-72. They were provided a release (which was explained orally by the paralegal service), a check and a disbursement sheet. "The disclosures did not reveal the settlements' material terms or the nature of Defendants' involvement in the cases. The written disclosures stated that further information about the settlements was available on request." Id. at 72.
The Named Plaintiffs brought this action in 2002, seeking compensatory damages, disgorgement of attorneys' fees and punitive damages. Following discovery and the filing of two Amended Complaints,*fn7 Judge Arthur J. Schwab, before whom the case was then pending, denied Plaintiffs' request for class certification and granted Defendants' Motion for Summary Judgment, concluding that "Plaintiffs failed to show actual harm, namely, that Plaintiffs would have achieved a better outcome in the Mississippi litigation but for Defendants' conduct" and that "actual harm was a required element of all of Plaintiffs' claims." Huber v. Taylor ("Huber II"), 532 F.3d 237, 242-43 (3d Cir. 2008). See also id. at 246 (discussing District Court's holding that relief was limited to disgorgement of fees, compensatory damages that were likely to be de minimis (as "the most a single plaintiff could recover in non-punitive damages was $13,000, representing the amount of fees subject to disgorgement"), and punitive damages).
Plaintiffs appealed only the denial of class certification and grant of summary judgment as to breach of fiduciary duty.*fn8 Those aspects of the District Court's Opinion were vacated on appeal, as the Third Circuit held that the District Court should have applied Texas law which does not require a showing of actual injury in order to maintain a claim for breach of fiduciary duty when the remedy sought is disgorgement of attorneys' fees rather than damages for actual harm. See Huber I, 469 F.3d at 77 (citing Burrow v. Arce, 997 S.W.2d 229, 240 (Tex. 1999) and rules in accord); id. (explaining that this is so because disloyalty itself "violates the fiduciary relationship and thus impairs the basis for compensation" because "[a]n agent's compensation is not only for specific results but also for loyalty") (quoting Burrow, 997 S.W.2d at 238).
On remand, this Court denied Plaintiffs leave to file a proposed Third Amended Complaint "asserting breach of fiduciary duty claims under Texas law and again seeking" class certification. It also dismissed Plaintiffs' claims for lack of jurisdiction, concluding that (a) no plaintiff could satisfy the statutory minimum amount in controversy and (b) local counsel were necessary and indispensable parties under Rule 19. See April 27, 2007 Memorandum Opinion; Huber II, 532 F.3d at 243. In concluding, on further appeal, that Plaintiffs' subsequent litigation failures did "not oust the court of subject matter jurisdiction",*fn9 the Third Circuit held that
(a) "Plaintiffs' original complaint was [not] so patently deficient as to reflect to a legal certainty that no Plaintiff could recover the jurisdictional amount", and "subsequent revelations" did not require dismissal, because: (i) Texas courts have permitted recovery of punitive damages based on an intentional breach of fiduciary duty,*fn10 (ii) there is no set rule or ratio regarding the "reasonable proportion" of punitive to actual damages, and (iii) Texas case law suggests that Texas may allow an award of punitive damages supported by relief in the form of disgorgement of fees;*fn11 and
(b) Rule 19 did not require joinder of Local Counsel.*fn12
Following remand, Judge Schwab granted Plaintiffs' Motion for Recusal and denied their request to set aside previous rulings. The case was reassigned to the undersigned, and the parties consented to jurisdiction. In the interest of advancing this almost eight (8) year old case, the Court has taken the time to consider, and attempt to provide guidance to counsel regarding its impressions of, the many issues implicated by the pending pleadings.
A. Third Amended Complaint's Requests for Injunctive Relief
The Named Plaintiffs now wish to amend their Complaint not only to restate/reform their breach of fiduciary duty claims in light of prior proceedings/decisions, but also to reframe this action as principally one for injunctive relief. See generally Third Amended Complaint (seeking to enjoin Defendants "from seeking to bind plaintiffs and other members of the proposed class to 'settlements' of their personal injury asbestos claims without their respective informed consent"). The Court sees no reason to prohibit such amendment.*fn13
The Court notes, however, its initial impression that the entertainment of relief sought in the proposed Third Amended Complaint, in the face of other ongoing actions in other Courts, would raise serious prudential concerns. In particular, the proposed Complaint's request for injunctive relief encompassing, essentially, this Court's governance of the relations between Defendants and their clients in ongoing State Court actions, as under the proposed amendments, could be problematic given the provisions of federal statutes such as the Anti-Injunction Act, 28 U.S.C. § 2283. For although this Court would not be asked to directly enjoin a State Court, it would be asked to direct the lawyers' conduct of State Court litigation/trial and to enjoin them from settlement.*fn14 It is, therefore, far from clear to this Court that it could appropriately give the injunctive relief which the Third Amended Complaint requests.
In addition, Plaintiffs' modification of this action to one seeking the injunctive relief proposed would certainly alter the interests implicated from those previously considered by the Court of Appeals and, more particularly, would significantly implicate the interests of the State of Mississippi. As the Court of Appeals observed, Mississippi has elected liberal joinder rules in lieu of class actions,*fn15 and it has an interest in managing those consolidated cases akin to the interest of other Courts in managing their class actions.*fn16 Accordingly, although the Court of Appeals did not previously consider Mississippi in its assessment of the interested forums in itsx choice of law analysis,*fn17 amendment of this action from one seeking recovery for breach to one seeking injunctive relief constraining ongoing Mississippi State Court litigation could make consideration of those interests appropriate, if not requisite.*fn18
The Court has further concerns regarding the appropriateness of the injunctive relief sought by the Named Plaintiffs in the Third Amended Complaint. For example, it observes that a client dissatisfied with a terminable-at-will agent, such as legal counsel, typically discharges that agent. One who believes that legal counsel recommending a negotiated settlement in her personal injury action has withheld information or failed to fairly represent her interests typically declines the proffered settlement and/or terminates that representation. She does not generally ask the Federal Court to enjoin the agent from acts which she herself has the power to prevent (e.g., the settlement of State Court litigation). Cf. Grider, 500 F.3d at 332 (observing that injunction against settlement may not be issued if adequate remedies at law are available and noting general rule that if a party will have opportunity to raise its objections in proceeding sought to be enjoined, there is deemed to be an "adequate remedy at law").
That said, Plaintiffs will be granted leave to amend their Complaint to request (in language consistent with the law of the case) injunctive relief, if they so choose.
B. Third Amended Complaint's "Class Action Allegations"
This Court has similar reservations regarding the appropriateness of the action framed in the Third Amended Complaint for class certification. See generally Fed. R. Civ. P. 23. For example, the Named Plaintiffs' claims for injunctive relief now proposed appear to reflect marked divergence of interests between those plaintiffs and the putative class of more than 2,600 other individuals represented by Defendants in the Mississippi AECL.
Although it is not entirely clear from the pleadings whether the Plaintiffs regard themselves as current or former dissatisfied clients of the Defendants,*fn19 they certainly have effectively terminated their attorney-client relationship, i.e., their relationship of trust is irretrievably broken. Cf. Huber II, 532 F.3d at 242 (observing that Plaintiffs "were previously represented by Defendants in asbestos personal injury actions in Mississippi state court").
Moreover, Plaintiffs' proposed choice of remedy - to enjoin the consummation of other clients' future settlements - could cause, at a minimum, significant deferral (and perhaps, given related bankruptcy proceedings, permanent loss) of the settlement monies current clients are presumptively content to pursue.*fn20 Although the Third Amended Complaint asserts that Plaintiffs claims "do not conflict with the interests of any other members of the class because all have suffered from the same wrongful acts and omissions",*fn21 under the law of the case, those "wrongful acts" did not actually harm the class, whereas it is far from clear that the relief now proposed by Plaintiffs would not result in tangible harm to the putative class members' pecuniary interest.*fn22
Nonetheless, as Plaintiffs note, the time to address class certification is when Plaintiffs' Amended Complaint has been filed in final form, and certification is properly requested and briefed. See Plaintiffs' Reply Memorandum in Support at 6. Amendment is not now so clearly futile as to warrant a denial of leave to include class action allegations in the Complaint.*fn23
C. Third Amended Complaint's Restatement of Claims for Breach of Fiduciary Duty Under Texas Law
Counts I through III of the proposed Third Amended Complaint restate claims related to Defendants' alleged breaches of fiduciary duty. As discussed above, the Court of Appeals held that Plaintiffs claims for breach of fiduciary duty without actual harm - and related claims for conspiracy to breach fiduciary duty and aiding and abetting such breach -- could proceed under Texas law. See supra at 6-8.
First, the Court observes that, Defendants' assertions to the contrary notwithstanding, Plaintiffs' present allegations that Defendants breached their fiduciary duties by (a) misallocating of settlement amounts based on geographic location motivated by conflicting fee incentives and (b) imposing excessive expenses, were each sufficiently within the scope of Plaintiffs' Second Amended Complaint. See supra nn. 5-7; Huber II, 532 F.3d at 242, 245.*fn24
Second, the Court notes that, as the law of the case is that Plaintiffs suffered no actual harm, they will not be granted leave to amend their Complaint in any manner inconsistent therewith.*fn25 See Huber I, 469 F.3d at 72-73 (noting the District Court's holding that Plaintiffs had failed to evidence actual harm and, specifically, failed to present evidence from which a reasonable person could conclude that (1) "'but for' defendant attorneys' conduct, [plaintiffs] could or would have received more favorable offers", or (2) "defendants['] alleged non-disclosures proximately caused any plaintiff to accept settlements they would not have otherwise accepted");*fn26 Compare, e.g., Third Amended Complaint at 5 ("Defendants gained millions of dollars at the expense of plaintiffs and the proposed class by structuring the settlements in this manner . . . ."). Cf. Defendants' Joint Memorandum at 12 ("Allegations of harm . . . pervade the claim.").*fn27
Third, and as also discussed above, there are two aspects to these claims, i.e., breach of a fiduciary duty of loyalty and breach of a fiduciary duty of candor/disclosure. And even as alleged under Texas law in the Third Amended Complaint, Plaintiffs' claims appear both factually problematic and, to some extent, troublingly unspecific.
1. Claim of Settlement Misallocations Owing to Contingency Fee Conflict
a. Breach of a Duty of Loyalty
As the Court of Appeals has observed, the fiduciary duty of loyalty is inherently a non-delegable duty. See Huber I, 469 F.3d at 81-82.
This surviving claim has been understood by the Court to be, and remains, that Defendants breached their fiduciary duty of loyalty because they had conflicting contingency fee interests/incentives which led them to undervalue the Northern Clients' cases when allocating the maximized aggregate settlement amount. See, e.g., Huber I, 469 F.3d at 71 (noting that "Defendants, in settling these cases for Southerners, did not have to share their fees with Local Counsel, as they had to do with Northerners" and that "Plaintiffs allege that the difference in the settlement payouts to Northerners is attributable to [Defendants incentive] to allocate a greater percentage of aggregate settlements to Southerners in order to minimize Local Counsel's percentages").
Markedly to the contrary, however, are Defendants' unrefuted representations, and evidence of record in the form of the co-counsel agreements, that Defendant Taylor's contingency fee interests were aligned with (not against) the Northern Clients, i.e., Taylor would have made more money had he allocated more of the aggregated settlement amount to the Northern Clients (and he was acting against his own pecuniary interests in allocating them less). More particularly, Taylor's contingency fee arrangement for co-counsel representation of Northern Clients entitled him to 95-97.5% of the underlying 40% fee, while his contingency fee arrangement for co-counsel representation of Southern Clients entitled him to 50% of the underlying 40% fee. See Defendants' Joint Memorandum in Support at 16, and Exhibits A-E.*fn28
And Defendant Cox's fee of 4% for all group settlements did not vary by the settling claimant's state of residence. Id. Thus, the documents of record suggest that Defendants collectively made less per $1.00 of settlement monies allocated to clients other than the Northern Clients.*fn29 In short, it appears that Defendants would have retained a substantially larger total fee had they equalized settlements for the Northern and Southern Clients, and thus the Defendants' representation contracts appear to belie Plaintiffs' disloyalty theory.*fn30
Plaintiffs' only response, as set forth in their Reply Memorandum Supporting Motion for Leave to File a Third Amended Complaint, is that Defendants' total compensation from the settlement monies allocated to the Northern Clients' cases was less than their compensation from the settlement monies allocated to the other Mississippi AECL Plaintiffs.*fn31 But a comparison of total compensation is, of course, wholly irrelevant to an alleged misallocation of settlement funds occasioned by Defendants' contingency fee incentives. The inquiry pertinent to that allegation is discussed above, and the Court is troubled by Plaintiffs' failure to provide a more appropriate response.*fn32
That said, Plaintiffs will be granted leave to amend/restate this claim as one under Texas law, and as one which did not cause any actual harm to Plaintiffs, all in accordance with the decisions of the Court of Appeals. And Plaintiffs are encouraged to consider addressing the factual underpinnings of Defendant's cogent defense in their pleading. As to these, and other surviving claims, this Court will consider striking, sua sponte, any portions of the newly filed Third Amended Complaint that remain contrary to the law of this case.*fn33
b. Breach of a Duty to Disclose
As discussed above, the Named Plaintiffs adequately alleged that Defendants breached their duty to disclose when they, e.g., failed to inform them that the settlement was an aggregation of thousands of claims, that they were allocated less than an equal share, and that Defendants were parties to co-counsel agreements. The Court of Appeals held that Plaintiffs were permitted to proceed on a claim for breach of fiduciary duty for failure to disclose.*fn34 In view of the Third Circuit's holding and discussion, Defendant's contention that permitting such a claim would be futile is simply untenable, and amendment to reframe Plaintiffs' claims to accurately reflect those left standing is appropriate.*fn35
2. Claim of Breach of Fiduciary Duties by Excessive Fees/Expenses
Plaintiffs proposed Third Amended Complaint asserts, without elaboration, that Defendants "also breached fiduciary duties . . . by charging and receiving excessive attorneys' fees and expenses without the informed consent and knowledge of their clients " and requests "forfeiture by defendants of fees obtained in violation of duties owed to plaintiffs and the proposed class and an accounting to preclude defendants from retaining excessive fees and expenses from the 'representation' of [same]". See Third Amended Complaint at 2, 6 and 11.
The Third Circuit has recognized Plaintiff's previously-stated claim for excess expenses, and indicated that it could proceed, but only as one for breach of fiduciary duty without actual injury. Accordingly, Plaintiffs will be granted leave to reassert that claim, in language consistent with the law of the case, in their Third Amended Complaint. See generally Huber II and discussions supra; Second Amended Complaint at 21.
Plaintiffs have not, however, previously contended - as they now do in the proposed Third Amended Complaint - that Defendants also imposed "excessive attorneys' fees . . . without the informed consent and knowledge of their clients." Plaintiffs will be given leeway in the Third Amended Complaint's particularization of what requisite disclosures were withheld in breach of Defendants' fiduciary duty.*fn36 However, to the extent Plaintiffs seek to newly challenge the propriety of Defendants' fees, rather than a breach of candor/disclosure of information, this Court cannot permit it and leave to incorporate any such language will be denied.*fn37
First, the Court observes that such an assertion would be a new claim based on actual injury and beyond the scope of the Court of Appeals' remand.*fn38
Second, unlike other of Plaintiffs' proposed restatements or amendments, this one appears clearly futile.*fn39 The underlying contracts for representation - made between Plaintiffs and their Local Counsel*fn40 - provided for a forty percent (40%) contingency fee, and Plaintiffs make no allegation that they were assessed more than that 40%. Nor do they make any allegation that Defendants imposed or received charges in excess of those agreed upon in the co-counsel contracts. Plaintiffs offer no basis for Defendants liability for a breach of fiduciary duty in following the terms of their contracts with other counsel.*fn41
Third, as noted above, Plaintiffs' retainer contracts were with their Local Counsel. It appears, therefore, highly likely that those Counsel would be necessary parties to an action attacking the validity of fees imposed pursuant to those contracts.*fn42 Joinder of local counsel would, in turn, defeat this Court's jurisdiction.
3. Scope of Request for Disgorgement
While Plaintiffs are at liberty to maintain a request for disgorgement in their Third Amended Complaint, the Court notes that it adheres to its previous conclusion that a request for disgorgement of Defendants' fees on other clients' claims*fn43 would be legally unsound. This Court concurs with Judge Schwab's prior holding that "[d]isgorgement is a restitutionary remedy, and it cannot extend beyond plaintiffs' recovery of the amounts of fees defendants derived directly from the current lawsuit's class members." April 27, 2007 Memorandum Opinion at 24 (citing Morgan v. Gay, 471 F.3d 469, 475 (3d Cir. 2006)); id. at 25 (concluding that "Plaintiffs' Texas authority [i.e., Burrows] does not support their position that disgorgement could reach beyond the legal fees they paid out").*fn44
4. Claim for Punitive Damages
The Court is not prepared at this juncture to hold that Plaintiffs' assertion of a claim for punitive damages would be futile, in light of the Court of Appeals' holdings in Huber II. The Court notes, however, that the Third Circuit's discussion of this issue was in the context of a determination of the amount in controversy and, accordingly, applied the highly deferential standard of whether a punitive damages claim would fail to a legal certainty based on the allegations in effect at the time of Plaintiffs' initial filing.
This Court has serious reservations regarding the ultimate viability of such a claim. In particular, the current pleadings and evidence suggest that Defendants' potential liability may ultimately be limited to a "technical" breach of a fiduciary duty to provide further disclosure (i.e., a breach not originating from any bad purpose - such as conflicting pecuniary interests - or disloyalty, and resulting in no actual harm - such as financial/monetary injury).*fn45
As discussed supra at 8, Texas courts have permitted the recovery of punitive damages based on an intentional breach of fiduciary duty.*fn46 But there is some doubt as to whether the conduct that may be alleged in support of Plaintiffs' remaining non-injurious claims rises to the level of culpability necessary to support a punitive award.*fn47 And there is some doubt as to whether Texas law would permit an award of punitive damages in the absence of actual injury. Compare Twin City Fire Ins. Co. v. Davis, 904 S.W.2d 663 (Tex. 1995) (explaining that "actual damages sustained from a tort must be proven before punitive damages are available") (cited in Huber II) with Huber II , 532 F.3d at 245 (discussing cases allowing punitive damages predicated on restitutionary remedy in fiduciary cases). At bottom, Defendants' assertion of futility in response to Plaintiffs' Motion for Leave to Amend is not the procedural posture in which this Court should resolve these questions of Texas law. Accordingly, Plaintiffs will be permitted to include an appropriately worded request for punitive damages in their Third Amended Complaint.
AND NOW, this 25th day of January, 2010, upon review of the pleadings and briefs of record, it is hereby ordered that Plaintiff's Motion for Leave to File a Third Amended Complaint is granted in part and denied in part. More specifically, Plaintiffs are granted leave to file a revised Third Amended Complaint, comporting with the law of the case and the limitations detailed in this Opinion, within twenty (20) days from the date hereof.
Lisa Pupo Lenihan United States Magistrate Judge