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August 11, 2008

Bertelsen v. Harris (9th Cir. 2008) 537 F.3d 1047

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The Ninth Circuit holds that alleged breaches of the Washington State Rules of Professional Conduct and fiduciary duties that cause no harm to clients do not warrant fee disgorgement.

Jeffrey and Amy Bertelsen owned six ARCO gas stations, which they operated through Bertelsen Food and Gas, Inc. (“BFG”), a Washington corporation. It ceased operations when it was no longer able to pay ARCO for gasoline and ARCO sent BFG a notice of termination.

Jeffrey and Amy Bertelsen retained Roger Harris, an Oregon attorney with gas franchise industry experience. Harris contacted Ronald McPherson, a non-attorney with expertise in the gasoline franchise industry, and asked him to consult on the matter.

Jeffrey and Amy Bertelsen signed a retainer agreement that covered all legal matters on behalf of BFG and specifically a resolution of the ARCO franchise terminations and related issues. The agreement required hourly fees and a retainer. Jeffrey and Amy Bertelsen received detailed bills describing services rendered, which they paid without objection.

When it became clear ARCO had no interest in continuing a business relationship the Bertelsens decided to sell the six gas stations to avoid bankruptcy and asked Harris and McPherson to seek a buyer. However they could no longer pay attorney fees and the Bertelsens asked Harris and McPherson to work on a contingency fee basis; Harris and McPherson agreed.

Harris drafted a “Terms of Engagement pursuant to Corporate Resolution (Authorization) and Limited Power of Attorney,” which Jeffrey and Amy Bertelsen signed. The resolution stated BFG retained Harris and McPherson for 90 days and that compensation would be 1% of the gross value of any transaction(s) entered into with third parties. If the Bertelsens terminated the agreement, Harris and McPherson would be entitled to compensation at their hourly rates of $195 and $150, respectively. Harris and McPherson agreed to split the contingency fee evenly between themselves.

After 90 days Tesoro expressed interest but no deal was closed. Jeffrey and Amy Bertelsen wanted to sign a new contingency fee agreement with Harris and McPherson to continue to try to sell the gas stations. The revised corporate resolution and limited power of attorney increased the compensation to 1.5% of the gross value of a sale transaction and carried the same terms for early termination.

The day after the revised corporate resolution Harris faxed to Tesoro executed signature pages of the “Tesoro/Bertelsen Agreement to Lease.” The terms included a million dollar payment for an option to purchase. On the same day Harris communicated to McPherson that the Bertelsens had signed the documents authorizing their work and that he could now move ahead with the Tesoro documents.

After the transaction closed Harris calculated the contingency fee due under the agreement which included the sales price under an option to purchase, although Tesoro never exercised the option. The fee was communicated to Jeffrey and Amy Bertelsen prior to the closing, and they did not object. The Bertelsens did not claim they were afraid the Tesoro transaction would not go forward if they did not agree to the contingency fee or if they had not agreed to the terms of either of the corporate resolutions.

Harris sent a fee invoice for the flat amount of the contingency for his and McPherson’s services without showing how the fee was calculated, which the Bertelsens paid. The fee was split approximately equally between Harris and McPherson. Harris did not retain records of the time spent on the matter but testified that on an hourly basis his fee would have exceeded his half of the contingent fee.

ARCO filed an action in Washington state court against BFG, Jeffrey and Amy Bertelsen, and Dr. and Mrs. Bertelsen (Jeffrey Bertelsen’s parents) for default on loan agreements which were personally guaranteed by Jeffrey and Amy Bertelsen, as well as by Dr. and Mrs. Bertelsen. After Dr. Bertelsen contacted Harris, he sent Dr. Bertelsen the documents ARCO contended were his personal guarantee.

Harris met with Dr. Bertelsen, discussed potential conflicts, and suggested to Dr. and Mrs. Bertelsen that they confer with their own counsel to evaluate whether they should be separately represented. Harris explained the conflict that might arise if the Bertelsen family clients did not agree upon a trial strategy or began “finger pointing” at one another. Harris did not recall whether he discussed the potential conflict of interest between Dr. and Mrs. Bertelsen as guarantors, and Jeffrey and Amy Bertelsen as debtors.

After the meeting Harris sent Dr. and Mrs. Bertelsen a letter to confirm that his firm had been retained to defend the interests of Dr. and Mrs. Bertelsen, as well as Jeffrey and Amy Bertelsen and BFG. He further stated that their interests were identical and that Dr. and Mrs. Bertelesen waived any conflict that may arise. Dr. and Mrs. Bertelsen signed and returned Harris’s fee agreement.

A further letter from Harris stated that there was no conflict of interest and that all parties would fully defend against the allegations and the claims made by ARCO and assert all affirmative defenses, offsets, discounts and counterclaims that might be available to any and all parties in that litigation. The letter confirmed that Dr. and Mrs. Bertelsen agreed to assume the attorney fee obligation and that the strategy would be to extricate Dr. and Mrs. Bertelsen from the lawsuit and ensure that all liability would be borne by Jeff and Amy Bertelsen and BFG, which Jeff and Amy Bertelsen had agreed to.

The Harris letter then discussed potential conflicts of interest given that Tesoro required Dr. and Mrs. Bertelsen to give up their secured status by reconveying their title held as security, and agree to keep in place the lease agreement between BFG and Tesoro should ownership of the gas stations eventually fall into Dr. and Mrs. Bertelsen’s hands. Harris explained that Tersoro’s requirements created a conflict between Dr. and Mrs. Bertelsen and Jeff and Amy Bertelsen and recommended that Dr. and Mrs. Bertlesen retain new and separate legal counsel to discuss the Tesoro transaction.

In consideration for Dr. and Mrs. Bertelsen’s compliance with Tesoro’s requirements, Jeffrey and Amy Bertelsen agreed to assume all defense costs in connection with the ongoing ARCO litigation against all Bertelsens, indemnify Dr. and Mrs. Bertelsen against any judgment against them by ARCO, and assume payments on a loan secured by Dr. Bertelsen. Finally Harris required Dr. and Mrs. Bertelsen to sign a waiver of all conflicts of interest. Jeffrey and Amy Bertelsen were not asked to sign the conflict waiver.

Harris sent a letter to all parties summarizing their agreements and strategy going forward and asked each execute the letter. The letter again recommended separate counsel. The letter did not discuss any potential or actual conflict of interest created by Harris’s representation. All parties signed the letter.

Neither Jeffrey Bertelsen nor Dr. Bertelsen thought Harris failed to render effective legal representation. No party challenged the amount of fees and costs billed.

After the litigation commenced Harris learned from Amy Bertelsen that Jeff Bertelsen may have engaged in wrongdoing. Then the Bertelsens began taking conflicting positions with respect to settlement. Harris decided he must withdraw as counsel. Ultimately all four Bertelsens settled with ARCO.

Subsequently all four Bertelsens sued Harris claiming he breached his fiduciary duties and violated various sections of the Washington Rules of Professional Conduct (“RPC”). The Bertlesens sought disgorgement of attorneys fees paid to Harris. The trial court exercised it discretion to deny the Bertlesen’s request for relief.

The Ninth Circuit noted that the Bertlesens did not claim that they suffered any harm from Harris’s representation. Under Washington law, disgorgement of fees is a remedy committed to the discretion of the trial court and can be overturned only for an abuse of discretion. A court is not required to order disgorgement, even where a breach of fiduciary duty is proven. Under Washington state law, a trial court can consider the result achieved and reasonableness of the fee.

The Court held it was not an abuse of discretion to deny disgorgement even if Rules of Professional Conduct had been violated.

In a prior case a court did not order disgorgement even after the client established a breach of fiduciary duty where the attorney had realized personal gain over and above fees earned. In the instant case, there were no damage claims being made by the Bertelsens. The contingency fee was reasonable for the work performed. There was no evidence independent advice would have changed the positions taken by the Bertelsens or affected the outcome of either the ARCO litigation or the Tesoro transaction.

The dissent disagreed, arguing that the breaches of the Rules and fiduciary duties were equivalent to a trustee’s violation of trust obligations. The justice concluded that there was misconduct in the method used to calculate the contingency fee, failure to explain the calculation, and the representation of conflicting interests without obtaining the requisite written consent. The dissenting justice would remand the case to the district court to consider appropriate remedies.

Comment: Harris found a sympathetic trial judge and a sympathetic panel. The California Supreme Court has emphasized in recent years the utmost importance of complying with ethical rules in attorney-client relationships, and a California court may have agreed with the dissenting justice in this case.

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