Dardovitch v. Haltzman

• Decision Date: 28 January 1999
• Docket Number: No. 98-1422,No. 98-1421,No. 98-1452,98-1421,98-1422,98-1452
• Citation: 190 F.3d 125
• Parties: (3rd Cir. 1999) NICK DARDOVITCH, v. MARK S. HALTZMAN, ESQUIRE; CATHERINE A. BACKOS, as trustees of GLENN EAGLE SQUARE EQUITY ASSOC. TRUST; GLENN EAGLE SQUARE EQUITY ASSOCIATES, INC., Mark S. Haltzman, Appellant in NICK DARDOVITCH, v. MARK S. HALTZMAN, ESQUIRE; CATHERINE A. BACKOS, as trustees of GLENN EAGLE SQUARE EQUITY ASSOC. TRUST; GLENN EAGLE SQUARE EQUITY ASSOCIATES, INC., Mark S. Haltzman, Appellant in NICK DARDOVITCH Appellant inv. MARK S. HALTZMAN, ESQUIRE; CATHERINE A. BACKOS, as trustees of GLENN EAGLE SQUARE EQUITY ASSOC. TRUST; GLENN EAGLE SQUARE EQUITY ASSOCIATES, INC. NOS. 98-1421, 98-1422, and 98-1452 Argued:
• Court: U.S. Court of Appeals — Third Circuit

Page 125

190 F.3d 125 (3rd Cir. 1999)

NICK DARDOVITCH, v. MARK S. HALTZMAN, ESQUIRE; CATHERINE A. BACKOS, as trustees of GLENN EAGLE SQUARE EQUITY ASSOC. TRUST; GLENN EAGLE SQUARE EQUITY ASSOCIATES, INC.,

Mark S. Haltzman, Appellant in No. 98-1421

NICK DARDOVITCH, v. MARK S. HALTZMAN, ESQUIRE; CATHERINE A. BACKOS, as trustees of GLENN EAGLE SQUARE EQUITY ASSOC. TRUST; GLENN EAGLE SQUARE EQUITY ASSOCIATES, INC.,

Mark S. Haltzman, Appellant in No. 98-1422

NICK DARDOVITCH Appellant in No. 98-1452 v. MARK S. HALTZMAN, ESQUIRE; CATHERINE A. BACKOS, as trustees of GLENN EAGLE SQUARE EQUITY ASSOC. TRUST; GLENN EAGLE SQUARE EQUITY ASSOCIATES, INC.

NOS. 98-1421, 98-1422, and 98-1452

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

Argued: January 28, 1999

Filed September 7, 1999

On Appeal From the United States District Court, For the Eastern District of Pennsylvania, (D.C. Civ. No. 97-cv-00052), District Judge: Honorable Stewart Dalzell

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JOSEPH M. DONLEY, ESQUIRE, (ARGUED), PATRICK W. KITTREDGE, ESQUIRE, GLENN E. DAVIS, ESQUIRE, Kittredge, Donley, Elson, Fullem, & Embrick, 421 Chestnut Street, 5th Floor, Philadelphia, PA 19106, Counsel for Mark S. Haltzman

CLETUS P. LYMAN, ESQUIRE, (ARGUED), MICHAEL S. FETTNER, ESQUIRE, Lyman & Ash, 1612 Latimer Street, Philadelphia, PA 19103, Counsel for Nick Dardovitch

STEVEN R. SPARKS, ESQUIRE, (ARGUED), Eckell, Sparks, Levy, Auerbach, & Monte, A Professional Corporation, 344 West Front Street, Media, PA 19063, Counsel for Catherine A. Backos, as trustees of Glenn Eagle Square Equity Associates Trust and Glenn Eagle Square Equity Associates, Inc.

Before: BECKER, Chief Judge, SCIRICA and ROSENN Circuit Judges.

OPINION OF THE COURT

BECKER, Chief Judge.

These cross-appeals present interesting questions concerning the amount-in-controversy requirement for diversity jurisdiction, the extent to which an attorney holding a contingent-fee agreement may charge additional fees for collecting the proceeds of a settlement or judgment, and the proper administration of trusts by trustees and the beneficiaries' remedies for errors therein under Pennsylvania law. The principal appellant is defendant Mark S. Haltzman, a member of the Pennsylvania bar and a trustee of the Glen Eagle Square Equity Associates Trust (the "Trust"). Haltzman successfully represented Catherine A. Backos, a codefendant and co trustee, in a separate civil RICO claim brought by her and Glen Eagle Square Equity Associates ("GESEA"), in which she was a major shareholder, on a contingent fee basis. In order to administer and distribute the proceeds of settlement of the RICO claim, Haltzman and Backos established the Trust, naming themselves as trustees. There were numerous beneficiaries, including two shareholders and creditors of GESEA -- Nick Dardovitch, the plaintiff and cross- appellant, and Backos -- and also Haltzman himself, whose interest sprang from his contingent fee. As part of his efforts in administering the Trust, Haltzman took steps to collect on the notes that constituted the trust corpus. He paid himself an attorney's fee for this action out of the Trust's funds, and this case centers on the propriety of Haltzman's acceptance of these additional fees.

As always, the threshold question is one of jurisdiction. Dardovitch alleged, and the District Court found, that his claim fell within the District Court's diversity jurisdiction. Haltzman argues that this subject-matter jurisdiction is lacking because Dardovitch's claim fails to meet the amount-in-controversy requirement. Haltzman contends that the amount in controversy is determined by payments presently due. That is ordinarily the case. But where, as here, the plaintiff had good cause to believe that he needed to bring suit to establish his right to receive any funds under the trust, the entire amount of the plaintiff 's interest in the trust can become the amount in controversy. Since this amount substantially exceeded the jurisdictional amount, the District Court had subject-matter jurisdiction.

Both Haltzman and Dardovitch raise numerous issues relating to the District Court's decision on the merits. The central issue is whether an attorney who enters into a contingent-fee agreement that is not specific on the point is entitled to additional fees for collecting the proceeds of the settlement or judgment. The District Court concluded that Haltzman's fee under the original contingent fee agreement included both his actions in securing a settlement and any steps necessary to collect the proceeds of the settlement, and that he was therefore not entitled to additional fees for the collection actions. The District Court thus held that Haltzman had breached his fiduciary duty to the Trust by accepting legal fees for collecting on the notes that were the Trust's sole assets.

Haltzman challenges this reading of the Trust and contingent fee agreement, arguing that they were limited to his prosecution of the action to judgment, and did not include his collection efforts. In analyzing the fee agreement, the District Court looked at a variety of factors, including the fact that Haltzman himself drafted the agreement; the terms of the agreement; and the general understanding of contingent-fee agreements. It also considered, but rejected as self-serving, Backos's testimony concerning her intent in entering into the agreement. We conclude that the District Court's findings of fact and conclusions of law as to the meaning of the retainer agreement and the Trust must be upheld.

Haltzman also challenges the District Court's award of attorney's fees to Dardovitch. The court ordered Haltzman to pay part of Dardovitch's attorney's fees based on general equitable principles applicable in trust cases. Without holding a hearing, the court ordered Haltzman to pay most of Dardovitch's accrued fees from the beginning of the suit until the court granted Dardovitch partial summary judgment and ordered an accounting. This award was based on the conclusion that most of this work was necessitated by Haltzman's continued refusal to admit that Dardovitch was a beneficiary of the Trust. The court also ordered Haltzman to pay one-quarter of the fees Dardovitch had paid for his attorneys' work subsequent to the accounting. This latter award was based on the fact that some of Dardovitch's objections to Haltzman and Backos's accounting were sustained, although many were not.

We agree with the general propriety of directing Haltzman to pay Dardovitch's fees. However, because the District Court held no hearing, did not adequately explain the basis of its fee calculation, and in particular did not sufficiently tie the award to the factors warranting the award, we will vacate the district court's order and remand with instructions to hold a hearing to recalculate the attorney's fee award based on the reasonableness of the claimed fees. On remand, the court should examine the claims carefully to ensure that the claimed fees are sufficiently related to the justifications for the fee award.

In his cross-appeal, Dardovitch challenges the District Court's conclusion that Backos should not be jointly liable for Haltzman's breach of his fiduciary duty. The District Court relieved Backos of liability because it concluded that she relied on Haltzman to such an extent in legal matters that his breach cannot fairly be attributed to her. Under Pennsylvania law, a trustee is obligated to exercise reasonable care to ensure that her co-trustees do not breach their fiduciary duties. A trustee who breaches this duty may become jointly liable for the breaches of the co- trustee. Furthermore, reliance on the advice of counsel is only one factor to be considered in determining whether a trustee acted reasonably, and even then the reliance itself must be reasonable. The Court's decision, which seems to have applied at most a subjective reasonableness standard, appears to be contrary to the objective reasonableness standard of Pennsylvania law. Accordingly, we will vacate the District Court's order and remand Dardovitch's claim against Backos so that the court can evaluate her liability under the correct standard, i.e., whether she exercised reasonable care to ensure that Haltzman did not breach his fiduciary duty. The orders of the District Court will thus be affirmed in part and vacated in part, and the case remanded for further proceedings consistent with this opinion.

I. Facts and Procedural History

This case originated in the settlement of a civil RICO suit brought by Backos and GESEA. GESEA was organized to purchase and operate a shopping center. Its shareholders included Backos (55%), Dardovitch (15%) and two of Backos's siblings (15% each). GESEA obtained commitments from various financing companies, but these firms backed away from their commitments. As a result, the shopping center was sold to another entity, and in 1993 Backos and GESEA filed a civil RICO suit against the various financing companies. This suit was the sole business of GESEA at that time and subsequently. Backos retained Haltzman to represent her and GESEA. Haltzman initially proposed that he would do the work for a 30% contingent fee plus expenses to be paid promptly, with a retainer which was paid up front. See App. at 1774-77. In May 1993, GESEA adopted a shareholder resolution providing that Haltzman's fee, including expenses, would be capped at 30% of the recovery. See App. at 1530-34. This shareholder resolution was subsequently amended in August 1993 to reflect that the fee was to be a 30% contingent fee, not including expenses.

In January 1994, when Backos was unable to keep current with her payments to Haltzman for litigation expenses, the representation agreement was again amended to provide a priority for Haltzman in the proceeds of the litigation. See App. at 1778-79. Under the...