Opinion
No. 10–P–1687.
2013-06-6
Thomas LANDRY v. Elizabeth HAARTZ & others.
Those “informed decisions” would naturally include whether to proceed with representation on the basis of a proffered fee arrangement. The rule was a legal standard relevant to the evidence here. In light of the evidence, the judge properly employed the rule as the basis for a special verdict question and his oral instructions. See Malonis v. Harrington, 442 Mass. 692, 700 (2004).
By the Court (VUONO, SIKORA & HANLON, JJ.).
MEMORANDUM AND ORDER PURSUANT TO RULE 1:28
This case concerns an attorney's use of a contingent fee agreement. Attorney Thomas A. Landry sued his clients, Elizabeth Haartz and Walter E. Davis, II (sometimes collectively referred to as clients), to recover fees allegedly owed under a contingent fee contract. Haartz and Davis had paid Landry $121,689.07; by his complaint, Landry claimed a breach of contract and eventually sought $186,116.94 in additional fees.
Haartz and Davis answered the complaint and counterclaimed. They alleged that Landry had charged them an excessive fee and sought a refund. Among several causes of action, they asserted breach of contract, and unfair or deceptive conduct in violation of G.L. c. 93A, §§ 2 & 9, by his inducement of their agreement to the contingent fee arrangement and by his collection of fees pursuant to it.
In answer to special verdict questions at the conclusion of a six-day trial, a Superior Court jury found that Landry had not “explain[ed] the contingent fee agreement to the extent reasonably necessary to permit [Haartz and Davis] to make informed decisions regarding his representation” and had charged them “a clearly excessive fee.” They found the “total fair and reasonable compensation” for his rendered services to be $50,000. Upon that finding, the judge awarded compensatory damages of $71,689.07
We omit the counterclaims ultimately excluded by the trial judge and playing no part in the judgment and appeal.
to Haartz and Davis on their common law counterclaim for breach of contract.
The difference between the fair and reasonable compensation found by the jury ($50,000) and the amount paid by Haartz and Davis ($121,689.07).
The judge reserved to himself the counterclaim for c. 93A liability.
By detailed findings and rulings, he concluded that Landry, from a position of trust, had misled the clients into an improper contingent fee agreement in violation of G.L. c. 93A, § 2( a ); he trebled the compensatory damages pursuant to G.L. c. 93A, § 9(3), to a sum of $215,067.21; awarded fees and costs pursuant to G.L. c. 93A, § 9(4), in the amount of $250,000; and computed statutory interest on the compensatory damages figure ($71,689.07) at $37,689.07.
As authorized by the case law. See, e.g., Linkage Corp. v. Trustees of Boston Univ., 425 Mass. 1, 22 n. 31, cert. denied, 522 U.S. 1015 (1997); Wyler v. Bonnel Motors, Inc., 35 Mass.App.Ct. 563, 566 (1993); Bank of America, N.A. v. Prestige Imports, Inc., 75 Mass.App.Ct. 741, 769 (2009).
On appeal Landry attributes prejudicial error to several rulings of law and evidence by the judge: (1) the allocation to Landry of the burden of disproving the clients' counterclaims; (2) the allowance of a lay witness, the clients' accountant, to testify to his communicated opinion of the inappropriateness of the contingent fee; (3) the allowance of expert testimony in support of the clients' position by an attorney then employed as a staff attorney by the Massachusetts Appeals Court; and (4) the judge's use of Mass.R.Prof.C. 1.4(b), 426 Mass. 1314 (1998), as a standard of liability for his conduct.
For the following reasons, we affirm the judgment.
Landry challenges also a pretrial ruling precluding his discovery of the Federal income tax returns of Haartz and Davis. The remoteness of such information from the main issues of the case justified the motion judge's ruling. The contents of the returns enjoyed a conditional privilege; disclosure required a substantial need by the applicant. He did not substantiate such a need. See Town Taxi Inc. v. Police Commr. of Boston, 377 Mass. 576, 586–588 (1979); A.C. Vaccaro, Inc. v. Vaccaro, 80 Mass.App.Ct. 635, 639 (2011).
Background. 1. Attorney-client relationship. The evidence permitted the jury and judge to find as follows. See Linkage Corp. v. Trustees of Boston Univ., 425 Mass. 1, 4, cert. denied, 522 U.S. 1015 (1997) (prevailing party entitled to a favorable view of the evidence and its reasonable inferences). Landry became a member of the Massachusetts bar in 1981. As of 2001, he was a sole practitioner engaged in matters of criminal law, personal injury claims, taxation, estate planning, and domestic relations.
The clients have been married since 1986. Haartz is one of three siblings. She maintained a friendly relationship with her two brothers, Eric and Christopher. Each of them had inherited from their father approximately one-third of the ownership (450 shares each) of the Haartz Corporation (company), a closely held family business founded by their grandfather. The company designed and produced automotive parts. Haartz and Christopher served on the board of directors. Eric served as chief executive officer and managed the operations of the company. The Elizabeth Haartz Revocable Trust held her ownership shares; Haartz and her husband served as cotrustees.
In the mid–1990's, the three siblings expected to sell the business in about ten years. They had earlier executed a shareholder agreement governing a sale or transfer of stock by any of them. The agreement provided the company a right of first refusal to purchase any shares on defined terms and methods of valuation. One element of valuation required a thirty-five percent discount of the book value of the shares.
During the year 2000, Eric reported that he now wanted to retain his ownership interest and to continue to manage the company indefinitely rather than to sell it. Haartz still wished to liquidate her interest as planned. In February of 2001, the three siblings agreed that the company would buy her shares at a price to be determined. She would receive installment payments spread over a period of years.
As of 2001, Landry had represented Haartz and Davis in various matters for about fifteen years, including the formation of a nonprofit corporation by Haartz and the creation of their estate plans. The estate plans nominated him as executor of Davis's estate and as substitute executor of Haartz's estate. He had always billed them by the hour at rates of $120 to $200. They received modest incomes from Davis's florist business and Haartz's equestrian business, and from dividends from the company. Over the years Haartz had told Landry of her wish to sell her interest in the company.
By letter of February 17, 2001, Haartz informed Landry of the general buy-out agreement. She believed her shares to be worth thirty to forty million dollars. She wished to expedite the sale in order to receive some installment payments in 2002. Both Haartz and Davis wanted Landry to represent them in the transaction. He proposed a meeting at his office.
2. Fee agreement. At a meeting on March 26, 2001, Landry presented Haartz and Davis with a contingent fee agreement containing typewritten language in a preprinted form. It defined the legal services to be performed as “[v]aluation, negotiation and contract for purchase and sale of all stock shares held in Haartz Corporation held by or on behalf of Elizabeth Haartz.” The contingency-generating events would be “[f]ull payment for shares held, payable proportionately as the payments are received by client .” The agreement called for a down payment of $10,000 for preliminary work to be applied to the first installment fee payment. It set the contingent percentage: “Reasonable compensation on the foregoing contingency ... is not to exceed the following maximum percentage of the ... amount collected: 1.5%.” The clients were liable for reasonable expenses and disbursements.
Davis asked Landry why he was not charging an hourly rate as in the past. Landry responded in substance that “this is the way” of charging for the present services. Davis asked also whether other lawyers would employ a contingent fee of one and one-half percent for such work. Landry answered that they would. Haartz and Davis signed the agreement and made the down payment.
3. Services rendered. As objectives, Haartz instructed Landry to negotiate for (1) the highest reasonable repurchase price, (2) a discount rate of less than thirty-five percent, (3) a favorable rate of interest on the deferred installment payments, and (4) her retention of control over the shares in her trust until completion of all installment payments.
In April of 2001, Landry employed a business appraiser, Howard Gordon, to examine the financial records of the company and to provide a valuation of Haartz's shares. Gordon concluded that Haartz could achieve a price resulting in a total payout of $19.5 million to $21.2 million for her 450 shares.
He reported his valuation to Landry, Haartz, and Davis in August and September of 2001.
Gordon's opinion included the premise of the thirty-five percent discount rate of book value.
As the result of direct private conversations between Haartz and Eric in November of 2001, the book value discount rate was reduced from thirty-five to twenty-five percent. Meanwhile Landry did not achieve any of the remaining negotiation goals. The evidence does not show any negotiating or drafting efforts by him toward those objectives. In his initial correspondence with the company's outside counsel on November 17, 2001, he accepted their valuation of shares, which largely formed the basis of the final repurchase price of $17,882,100, a figure approximately $2.5 million less than the median number resulting from Gordon's analysis. The interest rate applied to the deferred installment payments remained unchanged at four and three-quarter percent. The company successfully demanded that Haartz surrender all shares at the time of the execution of the repurchase agreement.
The company's law firm, Bingham Dana, prepared all documents for the closing. Landry reviewed the draft in December of 2001. He added to the repurchase agreement a “look back” clause providing that, in the event of the sale of the company within the ensuing forty-eight months, Haartz would share in any premium amount paid for the firm. The closing went to completion on January 9, 2002. Landry attended. The company was to pay the principal of $17,882,100 plus interest by nine installments extending through 2008.
4. Fee dispute. Throughout 2002 and 2003, Haartz and Davis paid Landry at the rate of one and one-half percent of the principal amount of the four installment payments received. In 2004 Davis asked their accountant, Jay Webber, whether the clients also owed Landry one and one-half percent of the interest increment accompanying each installment principal amount. Webber examined the fee agreement and informed Davis that the fee arrangement for the stock sale legal work was extraordinary and the resulting fee amount of more than $300,000 “way out of line.” Webber estimated an appropriate fee at about $30,000. Haartz and Davis questioned Landry about the agreement and then ceased payments.
In November of 2004, Landry began the underlying action in Superior Court. At a trial following substantial discovery disputes and motion practice, several elements of evidence became salient. First, neither Landry himself, nor his expert witness (attorney Saul Benowitz), nor the clients' expert (attorney Lea Pendleton), nor the company's counsel (attorney John Concannon of Bingham Dana) had previously seen the application of a contingent fee agreement to a client's ordinary sale of corporate shares. Second, Landry had not created any contemporaneous records of his services and time expended in behalf of the clients. Aside from the “look back” clause, he did not identify any written or negotiated work products initiated by him.
Analysis. 1. Allocation of the burden of proof on the clients' counterclaim. Landry contends that the judge improperly shifted onto him the burden of proof on the clients' counterclaim that his contingent fee was “unreasonable and clearly excessive.” We read that argument broadly to include the clients' counterclaims that his charge and collection of one and one-half percent of the sale payments constituted a breach of the reasonable compensation language of the fee contract and that the charge and collection constituted an unfair or deceptive practice within the meaning of G.L. c. 93A, §§ 2 & 9.
Strong authority and policy support the transposed allocation of the burden of proof in the present circumstance. Preliminarily, the practical effect of the shift seems negligible. As to the c. 93A counterclaim, the judge concluded that either placement of the burden would have led to the same result. Under Massachusetts law, a lawyer must carry the burden of proof of an entitlement to a fee as either a plaintiff seeking recovery or as a defendant resisting a claim for a refund. See First Natl. Bank v. Brink, 372 Mass. 257, 264–265 (1977); Smith v. Binder, 20 Mass.App.Ct. 21, 24 (1985). See also Sears, Roebuck & Co. v. Goldstone & Sudalter, P.C., 128 F.3d 10, 17 (1st Cir.1997).
More fundamentally, lawyers “are fiduciaries who owe their clients greater duties than are owed under the general law of contracts.” Malonis v. Harrington, 442 Mass. 692, 702 (2004), quoting from Beatty v. NP Corp., 31 Mass.App.Ct. 606, 612 (1991). See generally Restatement (Third) of the Law Governing Lawyers § 16 comment b (2000).
Aside from the usual nature of attorney-client representation, here both Haartz and Davis testified to their deep trust of Landry accrued from a fifteen-year relationship. The fiduciary who benefits in a transaction with the person for whom he serves as a fiduciary bears the burden of proof that his actions did not violate his duty of undivided loyalty. See Cleary v. Cleary, 427 Mass. 286, 295 (1998); Rempelakis v. Russell, 65 Mass.App.Ct. 557, 563 (2006); Estate of Moretti, 69 Mass.App.Ct. 642, 652–653 (2007). The judge properly transposed the burden of proof.
The attorney-client relationship is “highly fiduciary” in nature. Dunne v. Cunningham, 234 Mass. 332, 335 (1920). Berman v. Coakley, 243 Mass. 348, 355 (1923). Hendrickson v. Sears, 365 Mass. 83, 90 (1974). See Pollock v. Marshall, 391 Mass. 543, 555 (1984).
2. Admission of the accountant's opinion. Over Landry's objection, the judge permitted accountant Jay Webber to testify that in March of 2004 he had informed Haartz and Davis of his view of the contingent fee arrangement as highly unusual and excessive. Landry argues that Webber as a nonlawyer was unqualified to communicate that opinion to the jury for its truth and that its admission amounted to prejudicial error. At the time of the testimony, the judge instructed the jury, without objection, that the opinion served only as evidence of the clients' state of mind and not as evidence of its truth. For several reasons, the testimony did not cause prejudicial error.
Webber's account of the communication was relevant to the issue of the clients' awareness and acceptance of the fee agreement. Counsel for Landry in his opening statement had argued that Haartz and Davis had intelligently and willingly accepted the agreement and later, during the installment payment period, had decided to renege on their obligation. Toward the close of trial, he requested and received from the judge an instruction that the clients' payment of the first four installment fees to Landry could constitute evidence of the informed consent to the fee plan. This theme created the issue of the clients' sophistication and good faith. It made relevant Webber's communication of his view as a possible revelation to the clients and explanation of their refusal to continue payments.
In addition, the judge's limiting instruction confined the testimony to the question of the clients' state of mind. We must, as usual, assume that the jury obeyed the instruction. See, e.g., Commonwealth v. Jackson, 384 Mass. 572, 579 (1981); Commonwealth v. Rosa, 412 Mass. 147, 160 (1992).
Finally, prejudice was unlikely. Independently, Haartz and Davis testified permissibly about Webber's communication. Multiple other witnesses testified to the unusual nature of the agreement (Landry's expert, attorney Benowitz; Bingham Dana attorney Concannon), and its seeming excess (the clients' expert, attorney Pendleton). Webber's testimony would have been marginally cumulative, at most, if the jury accepted its truth despite the judge's instruction. The judge's allowance of the testimony was neither abuse of discretion nor “plainly wrong.” Horowitz v. Bokron, 337 Mass. 739, 742–743 (1958).
3. Testimony of Appeals Court employee. Landry contends that the testimony of attorney Roger Michel as a retained and compensated expert witness for the clients caused prejudicial error. His attorney objected to the expected testimony of Michel by pretrial motion and by a further motion in limine. Trial counsel did not object to the testimony as it came in. Michel presented as an expert by virtue of four credentials: a teacher of professional ethics at a law school; a hearing officer for the Massachusetts Board of Bar Overseers; a hearing officer for the fee arbitration board of the Massachusetts Bar Association; and a senior staff attorney of the Massachusetts Appeals Court. He offered opinion testimony critical of Landry's use of a contingent fee contract and the amount of the fee.
Landry contends that Michel lacked the experience in private practice to qualify as an expert on the use of contingent fee agreements; and that “by virtue of his position as an employee of the Appeals Court, [he] conveyed to the jury the subtle imprimatur of judicial favoritism on behalf of the party who hired him.” Although trial counsel did not properly preserve the issue, we exercise our discretion to address the validity of Michel's testimony. See Scannell v. Ed. Ferreirinha & Irmao, Lda, 401 Mass. 155, 163 (1987) ( “Appellate courts have discretion to consider issues not argued below where injustice might otherwise result”). We are satisfied that Michel's two roles as a hearing officer qualified him to submit opinion testimony. We are satisfied also that his employment as a staff attorney at the Appeals Court did not, in this instance, give the jury the impression of judicial approval of his testimony. That role comprised only one of four positions reported to the jury; he referred to it only at the outset of his testimony of more than seventy pages.
His testimony was partially cumulative of evidence from multiple other witnesses concerning the exceptional nature and high rate of compensation of the fee arrangement.
Before trial, counsel for Haartz and Davis agreed to avoid questions concerning Michel's position and duties at the Appeals Court.
Michel moved from the Appeals Court to other professional work in 2009.
While Michel's testimony did not cause prejudicial error in the circumstances here, the appearance of an employee of the Appeals Court as a retained expert for a litigant may create an improper impression that this court approves the views of the witness.
4. Application of Mass.R.Prof.C. 1.4(b). The judge properly admitted evidence concerning Landry's alleged violation of rule 1.4(b) and correctly instructed the jury on its meaning. The rule is straightforward and had been in effect for more than three years as of the time of the formation of the parties' contract on March 26, 2001:
“A lawyer shall explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation.”
Those “informed decisions” would naturally include whether to proceed with representation on the basis of a proffered fee arrangement. The rule was a legal standard relevant to the evidence here. In light of the evidence, the judge properly employed the rule as the basis for a special verdict question and his oral instructions. See Malonis v. Harrington, 442 Mass. 692, 700 (2004).
5. Hypothetical questions. We have examined Landry's contentions that the judge permitted counsel for the clients to put defective hypothetical questions to Landry and to his expert witness, attorney Benowitz. Several questions are argumentative, but none is the cause of prejudicial error.
6. Final matters. (a) General Laws c. 93A, § 9(4), fee award. The judge awarded the clients $250,000 as a reimbursement for (a) attorney's fees, (b) experts' fees, and (c) related litigation expenses. In the circumstances, the amount was reasonable. Haartz and Davis had calculated and requested the amount of $406,919.57 for those purposes. The judge made subtractions for work which “may not have been worthwhile” and for an expert's fee which appeared excessive. We respect his firsthand knowledge and inspection.
(b) Appellate fees and costs. In compliance with the procedure prescribed by Fabre v. Walton, 441 Mass. 9, 10–11 (2004), Haartz and Davis have requested reimbursement of their appellate fees and expenses. G.L. c. 93A, § 9(4). See Yorke Mgt. v. Castro, 406 Mass. 17, 19 (1989); Quinton v. Gavin, 64 Mass.App.Ct. 792, 801 (2005). Within fourteen days of the issuance of the rescript, they may submit a request for those fees and expenses supported by verified itemizations and, wherever possible, documentation of expenditures. Counsel for Landry shall have twenty-one days for submission of opposing papers.
(c) Dicta. The disapproval of the contingent fee arrangement in this instance is a determination of reasonableness in the circumstances. It is not a categorical prohibition against the use of a contingent fee mechanism in transactions for the sale of corporate shares or other goods, services, or values. Attorneys and clients remain free upon full disclosure and fair dealing to fashion their fee arrangements in accordance with their wishes and with the standards of Mass.R.Prof.C. 1.5, as appearing in 459 Mass. 1301 (2011).
Judgment affirmed.