What Is Wrong With This Picture? A law firm already engaged in a dispute over fees with a former client takes on the representation of a third party in an action against the same former client. The former client moves, successfully, to disqualify the law firm from representing the third party on the ground that the law firm possesses confidential information acquired in the prior attorney-client relationship, and therefore has an actual conflict of interest. Later, the third party settles with the law firm’s former client, and the law firm seeks to recover a percentage of that settlement as fees for pursuit of the claim from which it was disqualified. Do the attorneys get paid? They do not, in the opinion of California’s First District Court of Appeal.
The firm of Aguilar & Sebastinelli represented Richard Peterson in connection with a number of matters involving his business and professional interests through the early 1990s. (The appellate court makes oblique references to several insurance-related enterprises and a condominium in the Cayman Islands, but is otherwise discrete.) The Aguilar firm collected over $1.5 Million in fees for its services, but the relationship ultimately broke down, with the Aguilar firm suing for Peterson for additional fees. Meanwhile, A.I. Credit Corp., Inc. (AICCI), represented by another firm, had obtained a judgment against Peterson for some $675,000.
An attorney at the Aguilar firm knew an attorney representing AICCI, and through that connection the Aguilar firm was ultimately retained by AICCI, on a contingent fee basis, to pursue enforcement of AICCI’s judgment against the Aguilar firm’s former client, Peterson. Peterson, through new counsel, moved successfully to have the Aguilar firm disqualified from representing AICCI against him, on the relatively obvious ground that the Aguilar firm had acquired confidential information, and thus had a conflict of interest, arising from its former representation of Peterson. AICCI returned to its original attorneys and was able to reach a settlement under which Peterson would pay the $675,000 judgment against him. The Aguilar firm then filed a claim for 30+% of the settlement, on the ground that it was entitled to recover under its contingent fee agreement with AICCI. The trial court and the Court of Appeal disagreed, and spurned the Aguilar firm’s attempt to obtain a benefit from a representation in which it possessed a clear, adjudicated conflict of interest.
The Court of Appeal in its opinion evinces no patience at all with the Aguilar firm’s arguments, which it characterizes as “riddled with errors.” It notes that the firm did not appeal -- and hence cannot now contest -- the original disqualification order, so it is conclusively deemed to have had an actual conflict of interest in taking on AICCI’s representation against Peterson. The rule is clear that a law firm in that position has no entitlement to fees following its breach of its professional obligations. (Any other rule would result in their being no consequence at all for a patent dereliction of ethical duty.)
The Aguilar firm also argued, in effect, that AICCI should not be relieved of any obligation pay fees to the firm because AICCI was itself seeking to take advantage of the firm’s access to private information about Peterson. Be that as it may, the Court of Appeal concludes, the firm must still bear the loss for its own straying from the straight and narrow path of professional responsibility. To the extent the contract with AICCI specifically contemplated taking advantage of the firm’s conflict of interest, it was an illegal contract, and ““the law is not to be subsidized to overthrow itself. . . .’”
None of the participants emerges from the Court’s opinion smelling like an ethical rose, but the Court reserves its particular scorn for the attorneys involved, who are by their calling presumed to know better. Once again, what we might call the “Nixon rule” -- that a professional should listen closely to that little voice that says “We could do it, but it would be wrong” -- plays out for all to see.
The decision in A.I. Credit Corp., Inc. v. Aguilar & Sebastinelli (Dec. 1, 2003), Case No. A101841, is available at these links in PDF
and Word formats.
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