Opinion
A16-1539
05-08-2017
Faricy Law Firm, P.A., Appellant, v. API, Inc. Asbestos Settlement Trust, Respondent.
Vadim Trifel, John H. Faricy, Jr., Faricy Law Firm, P.A., Minneapolis, Minnesota (for appellant) Justin P. Weinberg, Michael M. Sawers, Briggs and Morgan, P.A., Minneapolis, Minnesota (for respondent)
This opinion will be unpublished and may not be cited except as provided by Minn . Stat. § 480A.08, subd. 3 (2016). Affirmed in part, reversed in part, and remanded
Smith, John, Judge Ramsey County District Court
File No. 62-CV-15-4245 Vadim Trifel, John H. Faricy, Jr., Faricy Law Firm, P.A., Minneapolis, Minnesota (for appellant) Justin P. Weinberg, Michael M. Sawers, Briggs and Morgan, P.A., Minneapolis, Minnesota (for respondent) Considered and decided by Hooten, Presiding Judge; Reilly, Judge; and Smith, John, Judge.
Retired judge of the Minnesota Court of Appeals, serving by appointment pursuant to Minn. Const. art. VI, § 10.
UNPUBLISHED OPINION
SMITH, JOHN, Judge
We reverse the district court's order extinguishing appellant's attorney's lien and remand because the district court did not properly analyze the value of appellant's attorney's fees based on quantum meruit. We affirm the district court's denial of recovery based on the doctrine of account stated and the implied covenant of good faith and fair dealing because appellant did not prove it is entitled to recover on those grounds. We also affirm the district court's conclusion that the legal services at issue fell within the scope of appellant's retainer agreement with respondent.
FACTS
Beginning in 2002, A.P.I., Inc. (API) retained appellant Faricy Law Firm, P.A. (Faricy), formerly Faricy & Roen, P.A., to represent API in litigation against insurance carriers for asbestos-related claims after API's insurers refused to indemnify API following asbestos-related verdicts and settlements. Faricy's work for API under the 2002 retainer included submitting a claim to Home Liquidator on API's behalf in June 2004.
API paid Faricy hourly for its work pursuant to the 2002 retainer. API and Faricy entered another retainer agreement in 2004, under which API paid Faricy a reduced hourly rate plus a 14% contingent fee in the event of any recovery.
In 2005, API initiated bankruptcy proceedings that led to the creation of the API, Inc. Asbestos Settlement Trust (API Trust), which is the respondent in this case. API Trust was the successor to API's asbestos-related liability and insurance-coverage rights.
In January 2009, under a new retainer agreement, API Trust retained Faricy to bring lawsuits against Zurich American Insurance Co. (Zurich) and Atlantic Mutual Insurance Co. (Atlantic Mutual). The 2009 retainer described the scope of services as follows:
Until termination of this Agreement . . . the Firm will advise the Trust regarding the policies and any and all rights of the Trust with respect thereto and otherwise in connection with coverage litigation. The Firm will also represent API in coverage litigation to defend and enforce any and all rights under the policies or otherwise, including any appeals, as well as regarding settlement payment of the Trust's claims under and in connection with any policies of insurance.The 2009 retainer provided that Faricy would be entitled to a contingent fee of one-third of any recovery against the insurers, with some exceptions. Over the next several years, Faricy advised API Trust regarding the Zurich and Atlantic Mutual claims, the Home Liquidator claim, and other potential litigation. Faricy did not keep case-specific time records for its work on the Home Liquidator claim, but some activities related to the Home Liquidator claim were included in time records for the Zurich litigation.
On August 31, 2012, API Trust sent Faricy a letter terminating its retention of Faricy for legal work and requesting a bill for any unpaid services. In response, on September 27, 2012, Faricy sent an invoice stating that it expected "33-1/3% of any Insurance Recovery against Home Insurance Co. and the Home Liquidator," reflecting the contingent-fee arrangement in the 2009 retainer.
On October 8, 2012, the API Trust trustee wrote to the trust's advisor and representative regarding the bill, "I do not think John Faricy deserves such a fee with respect to the Home Liquidator . . . . I think he is entitled to a quantum meruit fee for time spent. Once funds are received from the Home Liquidator, we will need to deal with this." The API Trust advisor responded by asking the trustee to "send [Faricy] a letter declining to pay his 'bill,' remind him that he was long ago terminated, and invite him to submit a[n] hourly bill specifying in detail exactly what work he performed." The trustee replied, "I will discuss fee issue with [Faricy] after funds are received by the Trust to avoid the potential of a lien." API Trust did not respond to Faricy's letter and invoice at that time.
API Trust's trustee continued negotiations without Faricy and, on November 7, 2012, reached a settlement agreement with Home Liquidator for $21,500,000. Home Liquidator announced its intention to make its first 15% payment to API Trust in late 2014. On November 19, 2014, after learning of the payment, Faricy sent a bill to API Trust asking for $1,075,000, equal to one-third of the announced payment from Home Liquidator. On December 12, 2014, API Trust replied with a letter refusing to pay Faricy, arguing that the 2009 retainer was terminated before the settlement; API Trust did not hire Faricy to work on the Home Liquidator claim; Faricy had already been paid for any work on the Home Liquidator claim; and the requested fee would be unreasonable in violation of the Minnesota Rules of Professional Conduct.
In June 2015, Faricy commenced this proceeding by filing a petition for an attorney's lien pursuant to Minn. Stat. § 481.13 (2016) and asking the district court to determine that Faricy has a lien against the trust in the amount of $1,075,000 plus one-third of any additional amounts the Trust is entitled to receive from Home Liquidator. In subsequent briefing, Faricy asserted alternative claims for compensation based on the doctrine of account stated and the implied covenant of good faith and fair dealing.
An evidentiary hearing was held on May 5, 2016. The district court concluded that Faricy's work on the Home Liquidator claim was within the scope of the 2009 retainer but released API Trust of any obligation to pay Faricy for work on the Home Liquidator claim because Faricy had not met its burden of proving the reasonable value of its services. The district court also rejected Faricy's claims based on account stated and the implied covenant of good faith and fair dealing. Faricy moved for amended findings or for a new trial. After a hearing, the district court denied both motions.
DECISION
I. The district court erred by releasing API Trust of any obligation to pay Faricy for work on the Home Liquidator claim despite finding that Faricy performed some uncompensated work on that claim.
Faricy argues that the district court erred in releasing API Trust from any obligation to pay Faricy on the ground that Faricy failed to prove the reasonable value of its services. Whether a district court employed the proper legal method to calculate the amount of an attorney lien is a legal question that this court reviews de novo. In re L-tryptophan Cases, 518 N.W.2d 616, 619 (Minn. App. 1994). However, "the reasonable value of attorneys' fees is a question of fact, and the findings of a [district] court must be upheld by a reviewing court unless clearly erroneous." Amerman v. Lakeland Dev. Corp., 295 Minn. 536, 537, 203 N.W.2d 400, 400-01 (1973).
When a client terminates a contract with its attorney, "the compensation terms of the contract become unenforceable." Trenti, Saxhaug, Berger, Roche, Stephenson, Richards & Aluni, Ltd. v. Nartnik, 439 N.W.2d 418, 421 (Minn. App. 1989), review denied (Minn. July 12, 1989). "An attorney on a contingent fee arrangement who is discharged by his client is entitled to compensation for the reasonable value of his services, based on quantum meruit, not on the contingent fee contract." Stall v. First Nat'l Bank of Buhl, 375 N.W.2d 841, 845 (Minn. App. 1985). To prove a quantum-meruit claim, the discharged attorney must prove "(1) that the services were rendered; (2) under circumstances from which a promise to pay for them should be implied; and (3) their value." High v. Supreme Lodge of World, Loyal Order of Moose, 210 Minn. 471, 473-74, 298 N.W. 723, 725 (1941) (quoting Ertsgaard v. Bowen, 183 Minn. 339, 339, 237 N.W. 1, 1 (1931)).
The district court correctly concluded that quantum meruit is the proper legal method to calculate Faricy's attorney's lien amount. But it found that "Faricy failed to carry its burden of proving the reasonable value of its work in connection with the Home Liquidator claim." Because Faricy made no attempt to estimate the amount of work done or suggest an hourly rate and the only numbers Faricy requested were entirely derived from the contingent-fee agreement in the terminated 2009 retainer, the district court found "no basis for the court to arrive at a non-arbitrary or non-speculative reasonable value." The district court therefore released API Trust of any obligation to pay Faricy for work on the Home Liquidator claim, extinguished Faricy's lien, and dismissed the petition without awarding Faricy any compensation for its work.
The reasonable value of services is often calculated based on the amount of hours the attorney worked and the attorney's hourly rate or a typical hourly rate. See Minn. R. Gen. Pract. 119. But "[t]he concept of quantum meruit does not require that attorneys be paid on an hourly basis." Ashford v. Interstate Trucking Corp., 524 N.W.2d 500, 503 (Minn. App. 1994). Instead, courts may consider "the relevant circumstances surrounding either a discharge or a withdrawal," as appropriate. Id. One method courts have used to determine quantum meruit without relying on hourly rates is by weighing the factors outlined in L-tryptophan and Ashford.
L-tryptophan held that in a dispute between two law firms over the allocation of fees from a case in which attorneys left the first firm and brought a pending case with them to their new firm, courts should consider the following eight factors: (1) the length of time each firm spent on the case, (2) the proportion of funds invested by each firm, (3) the quality of representation, (4) the result of each firm's efforts, (5) the reason the client changed firms, (6) the viability of the claim at transfer, (7) the amount of recovery realized, and (8) any preexisting partnership agreements. L-tryptophan, 518 N.W.2d at 621.
Ashford upheld a district court's use of some of the L-tryptophan factors as a proper method for allocating attorney fees in an attorney's lien case filed against a client's recovery. Ashford, 524 N.W.2d at 501. In Ashford, an attorney working on a case pursuant to a contingent-fee agreement withdrew from representation and the client hired another firm, which ultimately reached a settlement. Id. at 501-02. The first attorney filed an attorney's lien on the client's recovery. Id. The district court determined that the second firm's one-third contingent fee was a reasonable fee for the legal services provided and then allocated that fee among the two firms using six of the L-tryptophan factors. Id. at 503 (citing L-tryptophan, 518 N.W.2d at 621). After finding based on the relevant factors that each firm contributed equally to the final result, the district court awarded the first attorney half of the second firm's contingent fee. Id. The court of appeals affirmed the lien amount because the district court's analysis of the factors was a proper method for determining the reasonable value of the firm's services in that case. Id. at 503-04.
Faricy maintains that an evaluation of the L-tryptophan and Ashford factors supports a finding that the reasonable value of its services is one-third of the Home Liquidator settlement amount, or "at the very minimum a one-third contingency of the 11 million that was offered to the Trust while Faricy was its counsel." But we foreclosed the possibility that quantum meruit could be based on an unenforceable, terminated contingent-fee agreement in Ashford. See id. at 503 ("[T]he district court should not have referred to appellant's [terminated] contingency fee contract as a basis for the award."). Ashford established that a discharged attorney may be awarded part of the contingent fee secured by a subsequently-hired attorney, based on a non-terminated contract between the client and second attorney. Id. But API Trust compensated the trustee who completed the settlement negotiations based on his hourly rate rather than a contingent fee, so there is no enforceable contingent-fee agreement the court could partially allocate to Faricy in this case following the Ashford analysis.
However, it was erroneous for the district court to effectively rule that Faricy is entitled to nothing, despite correctly finding that Faricy performed some uncompensated work on the Home Liquidator claim for which a promise to pay was implied.
We therefore reverse the dismissal of Faricy's petition and remand for the district court to engage in a quantum-meruit analysis to determine the reasonable value of the services Faricy provided. While we understand the district court's frustration with Faricy, the findings of the district court and the evidence do not support a decision that results in no compensation.
In its order, the district court expressed its frustration with Faricy's legal argument and evidentiary submissions: "At the close of evidence, the court implored Faricy to include in its post-trial submission a contingent-fee alternative based upon quantum meruit. Despite the court's specific request for information permitting a calculation of the value of Faricy's services on a non-contingent basis, Faricy provided no evidence and no alternative—only a vigorous argument in favor of a contingent fee and a contingent fee alone. Accordingly, the court has a grossly inadequate basis for an award of quantum meruit fees." --------
The district court found that the trustee billed API Trust about $41,000 for his work leading to the Home Liquidator settlement. Although the trustee felt a contingent-fee amount was excessive, the trustee admitted in correspondence that Faricy was entitled to quantum meruit. We leave it to the district court, based on its findings and review of the evidence, to determine the quantum meruit considering the extent to which the following factors were proven:
(1) Length and amount of time spent on the case;
(2) Faricy's quality and level of expertise;
(3) Results obtained by Faricy's efforts;
(4) Contribution of others;
(5) Risks undertaken in accepting employment on the case; and
(6) The relevant circumstances surrounding the discharge. See Ashford, 524 N.W.2d at 503. We emphasize the wide discretion given to the district court in determining the extent to which these factors have been proven.
To quantify factors such as the length of time Faricy spent on the case, the district court should make findings based on the evidence in the record. For example, the district court should review trial exhibit 18, which documents time spent on several activities related to the Home Liquidator claim on May 18 and 19, 2009, and includes the hourly rate of the attorney who performed that work. The district court should also evaluate whether any other exhibits showing communications between Faricy and API Trust are evidence of additional work on the Home Liquidator claim requiring compensation. The district court must make its findings based on the work proven by the existing record and may not reopen the record to receive supplemental evidence.
II. The district court did not err in dismissing Faricy's account-stated claim.
Faricy asserts that the district court erred in finding that Faricy is not entitled to recover based on the doctrine of account stated. API Trust argues that Faricy is barred from making this account-stated argument because Faricy did not raise this argument in its complaint. A party may not recover under a theory it did not plead unless the other party voluntarily litigated the issue. Reese Design, Inc. v. I-94 Highway 61 Eastview Ctr. P'ship, 428 N.W.2d 441, 445 (Minn. App. 1988). Where the pleadings are not amended, a party's "timely objection" is sufficient to preclude litigation of an issue outside the pleadings. Id. Faricy first raised its account-stated claim in its April 21, 2016 pretrial brief. API Trust objected for the first time in its posttrial brief on May 20, 2016. The district court decided the issue. We conclude that API Trust consented to litigating the account-stated claim because it could have objected at trial but failed to do so.
An account stated is "a manifestation of assent by a debtor and creditor to a stated sum as an accurate computation of an amount due to the creditor." Cherne Contracting Corp. v. Wausau Ins. Cos., 572 N.W.2d 339, 345 (Minn. App. 1997) (quotation omitted), review denied (Minn. 1998). Under the doctrine of account stated, "if one party renders a statement of account to the other party, and that other party retains the accounting for an unreasonably long time without objecting to it, then the party is deemed to have assented to that accounting." Toyota-Lift of Minn., Inc. v. Am. Warehouse Sys., L.L.C., 868 N.W.2d 689, 698 (Minn. App. 2015), aff'd, 886 N.W.2d 208 (Minn. 2016). For the doctrine of account stated to apply, "both parties must have mutually examined each other's claims and reached a mutual agreement as to the correctness of the balance." Id. Whether to apply the doctrine of account stated is a factual question that this court reviews for clear error. Id.
On September 27, 2012, before a settlement was reached, Faricy sent API Trust an invoice for "33-1/3% of any Insurance Recovery against Home Insurance Co. and the Home Liquidator," to be paid "upon receipt of any settlement proceeds." The district court found that this was not an account stated. The district court reasoned that, at that time, API Trust would not have been obligated to pay under the invoice because it had not yet received payment from Home Liquidator and the hypothetical invoice "was really nothing more than a restatement of the API Trust's potential payment obligation under the 2009 retainer," which was unenforceable because it had been terminated. We conclude that the district court did not clearly err in finding that the 2012 invoice was not an account stated. See id. ("[W]hether to apply the doctrine of account stated is a factual question.").
A second possible account stated occurred in 2014. Home Liquidator announced its intention to make a 15% payment to API Trust in late 2014. On November 19, 2014, after learning of the payment, Faricy submitted a new bill for one-third of API Trust's recovery from Home Liquidator. On December 12, 2014, within a month of receiving this bill, API Trust disputed Faricy's entitlement to the contingent fee. The district court found that Faricy was not entitled to the requested amount based on the account-stated doctrine because API Trust specifically objected to that statement of account within a reasonable amount of time after Faricy had a colorable claim to a fee. We conclude that the district court's refusal to apply the doctrine of account stated to the 2014 bill was not clearly erroneous. Id.
III. The district court did not err in dismissing Faricy's claim for breach of the implied covenant of good faith and fair dealing.
Faricy asserts that API Trust breached the implied covenant of good faith and fair dealing under the 2009 retainer. API Trust asserts that Faricy is barred from making this argument because it raised this issue for the first time in its posttrial brief and API Trust objected in its appellate brief. See Reese Design, 428 N.W.2d at 445. API Trust did not take advantage of earlier opportunities to object in its memorandum opposing Faricy's posttrial motion, in a posttrial motion of its own, or during the posttrial motion hearing. We therefore conclude that API Trust consented to litigate this issue by failing to timely object. See id.
Even though Faricy did not forfeit this claim, it fails on the merits. Minnesota law imposes on every non-sales contract an implied covenant of good faith and fair dealing, which precludes one party from "unjustifiably hindering the other party's performance of the contract." Sterling Capital Advisors, Inc. v. Herzog, 575 N.W.2d 121, 125 (Minn. App. 1998). To prove a breach of the implied covenant of good faith and fair dealing, a party must prove that the other party acted in bad faith. Id. "'Bad faith' is defined as a party's refusal to fulfill some duty or contractual obligation based on an ulterior motive." Id. "A party to a contract does not act in bad faith by asserting or enforcing its legal and contractual rights." Id. (quotation omitted).
It is well settled that a client has a right "to discharge his attorney at his election, with or without cause." Lawler v. Dunn, 145 Minn. 281, 284, 176 N.W. 989 (1920). Furthermore, the 2009 retainer itself allowed API Trust to terminate the agreement "for any reason." Therefore, API Trust cannot be said to have "refus[ed] to fulfill some duty or contractual obligation" by terminating the 2009 retainer. See Sterling Capital Advisors, 575 N.W.2d at 125.
Faricy suggests that API Trust acted in bad faith through the combination of "avail[ing] itself of Faricy's reputation, work and work-product, terminat[ing] Faricy just weeks before a deal was finalized, and then falsely den[ying] the fact of Faricy's efforts and even the attorney-client relationship." Faricy cites evidence of internal communications indicating that API Trust intended not to pay Faricy for certain work and was not forthcoming with Faricy about its intentions. But Faricy does not explain how the conduct complained of "unjustifiably hinder[ed] [Faricy's] performance of the contract." See id. We therefore conclude that Faricy has not established a claim for a breach of the implied covenant of good faith and fair dealing. See id.
IV. The district court did not err in concluding that work on the Home Liquidator settlement was within the scope of the 2009 retainer.
API Trust asserts in its cross-appeal that the district court erred when it concluded that the scope of the 2009 retainer included providing advice regarding the Home Liquidator claim, which was settled without initiating a lawsuit. API Trust argues that Faricy is not entitled to an attorney's lien for work on the Home Liquidator settlement negotiation because such work was not "in connection with coverage litigation" and therefore was outside the scope of the 2009 retainer. The parties dispute the meaning of the scope-of-services provision stating that "the Firm will advise the Trust regarding the policies and any and all rights of the Trust with respect thereto and otherwise in connection with coverage litigation."
Faricy argues, and the district court agreed, that the disputed provision refers to three categories of advice: (1) advice regarding the policies, (2) advice regarding API Trust's rights with respect to those policies, and (3) other advice in connection with coverage litigation. API trust argues that only two categories of advice are listed—advice regarding the policies and advice regarding rights—and that the phrase "in connection with coverage litigation" limits both of those categories.
Because both parties' interpretations are reasonable, the language is ambiguous. In re Hennepin Cty. 1986 Recycling Bond Litigation, 540 N.W.2d 494, 498 (Minn. 1995). Where a written agreement is ambiguous, parol evidence is admissible to establish the intent of the parties. Alpha Real Estate Co. v. Delta Dental Plan of Minn., 664 N.W.2d 303, 312 (Minn. 2003). Based on parol evidence regarding "the course of dealing between the parties and the communications between the API Trust and the Home Liquidator," the district court concluded that the parties intended for the 2009 retainer to include work on the Home Liquidator settlement negotiations, consistent with Faricy's interpretation of the contract language.
Evidence in the record shows that API Trust consistently represented to Home Liquidator that Faricy was its counsel and included Faricy in correspondence regarding the Home Liquidator claim. API Trust did not inform Faricy that it did not believe the Home Liquidator claim was within the scope of the 2009 retainer until December 12, 2014, after API Trust received a payment from the Home Liquidator settlement and nearly two years after the representation was terminated. This evidence indicates that the parties understood the Home Liquidator claim to be within the scope services API Trust hired Faricy to perform. We therefore conclude that the district court did not err by finding Faricy's work on the Home Liquidator settlement negotiation was within the scope of the 2009 retainer.
Affirmed in part, reversed in part, and remanded.