In re Bianco v. Erkins

Citation243 F.3d 599
Decision Date01 August 2000
Docket NumberDocket No. 00-5039
Parties(2nd Cir. 2001) In Re: GASTON & SNOW, Debtor, ALFRED J. BIANCO, As Plan Administrator to the Estate of Gaston & Snow, Plaintiff-Appellee, v. ROBERT A. ERKINS & BERNADINE ERKINS, Defendants-Appellants
CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Appeal from a judgment of the United States District Court for the Southern District of New York (Rakoff, J.) which awarded plaintiff $1,800,841.41 for defendants' breach of an oral contract to pay attorney's fees and $2,114,364.94 in prejudgment interest.

Affirmed.

[Copyrighted Material Omitted] JAMES A. MOSS, Herrick, Feinstein LLP, New York, N.Y. for Defendants-Appellants.

NEAL H. KLAUSNER, Davis & Gilbert LLP, New York, N.Y. (Guy R. Cohen, Amy S. Bennett, on the brief), for Plaintiff-Appellee.

Before: VAN GRAAFEILAND, WINTER & CALABRESI, Circuit Judges

VAN GRAAFEILAND, Senior Circuit Judge:

Robert and Bernadine Erkins, an Idaho couple, appeal from a final judgment of the United States District Court for the Southern District of New York (Rakoff, J.) The judgment entered following a jury trial. The jury found that the Erkins1 breached an oral contract to pay their attorneys, the now defunct and bankrupt law firm of Gaston & Snow ("G&S"), on an hourly basis. The jury awarded G&S's trustee in bankruptcy, plaintiff-appellee Alfred J. Bianco, $1,800,841.41 for breach of contract damages. Following the jury verdict, the district judge determined that, under the law of Idaho, an award of $2,114,364.94 in prejudgment interest was proper. For the reasons that follow, we affirm.

In deciding this appeal, we are required to resolve an issue that has divided the federal courts. The issue is whether a bankruptcy court hearing claims that are based upon state law and do not implicate federal policy should apply federal choice of law rules or whether the rule of Klaxon Co. v. Stentor Electric Manufacturing Co., 313 U.S. 487 (1941), that federal courts exercising diversity jurisdiction must apply the choice of law rules of the forum state, should be extended. Because federal choice of law rules are a type of federal common law, which federal courts have only a narrow power to create, we decide that bankruptcy courts confronting state law claims that do not implicate federal policy concerns should apply the choice of law rules of the forum state.

BACKGROUND

Defendant-appellant Robert Erkins is a businessman who owned one of the largest trout farming companies in the world. He and his wife, Bernadine also ran an international seafood conference.

In 1984, the Erkins started a new venture raising and marketing oyster mushrooms. They incorporated in the name of Bliss Valley Foods, Inc. They solicited investors--mainly Idaho doctors--and secured a loan from Idaho First National Bank ("First National"). The loan amount was $3,150,000, which the Erkins personally guaranteed and pledged a $5.5 million ranch to secure.

The mushroom operation was unsuccessful; Bliss Valley filed for bankruptcy, and litigation ensued. The Erkins were sued by First National and the investors in Idaho state court. At first the Erkins were represented by an Idaho law firm. However, the Erkins soon came to believe they needed to bring in a firm with "hard hitting" litigators. They found such a firm in G&S. They knew of G&S, a Boston-based firm with a satellite office in New York City, because G&S bankruptcy partner Charles Vihon represented Bliss Valley.

The lead litigator for G&S in the Bliss Valley litigation was Edwin McCabe. McCabe convinced the Erkins that the best defense was a good offense, and therefore that filing a lender liability counterclaim against First National was prudent. The counterclaim alleged First National deliberately sabotaged the mushroom operation and forced Bliss Valley into insolvency. McCabe managed to convince the investors to drop their suit against the Erkins and join in the counterclaim against First National.

The case went to trial and the jury found in favor of the Erkins and Bliss Valley on the lender liability counterclaim. The jury awarded the Erkins $2,001,000 and Bliss Valley $3,100,000. After the verdict was returned, the trial court determined that it should award attorney's fees to the Erkins and Bliss Valley. In doing so, it concluded that G&S had taken the case on an hourly fee basis.

First National appealed. By the time of the appeal, the relationship between the Erkins and G&S had become acrimonious due to disagreements over billing. Thus, the Erkins did not retain G&S to handle the appeal. First National won a reversal in the Idaho Supreme Court. Idaho First National Bank v. Bliss Valley Foods, Inc., 824 P.2d 841 (Idaho 1991) (issued on denial of rehearing). Upon remand, the Erkins settled with First National and agreed to pay the bank $400,000.

In 1991, an involuntary chapter 11 petition was filed against G&S in the United States Bankruptcy Court for the Southern District of New York. In 1993, plaintiff-appellee Alfred J. Bianco, Plan Administrator to the Estate of G&S, filed an adversary proceeding against the Erkins seeking to recover $1.7 million for legal services allegedly rendered by G&S to the Erkins.

The Erkins had little, if any, connection to New York. Although G&S had a satellite office in New York, the G&S attorneys who represented the Erkins were based in Boston. Nonetheless, the Erkins did not challenge the New York bankruptcy court's exercise of personal jurisdiction over them. On appeal, the Erkins explain that they did not attempt to dismiss the complaint on personal jurisdiction grounds because they interpreted Bankruptcy Rule 7004 to require minimum contacts with the United States as a whole rather than with the forum state. C.f., Diamond Mortgage Corp. v. Sugar, 913 F.2d 1233, 1244 (7th Cir. 1990); Texas Trading & Milling Corp. v. Federal Republic of Nigeria, 647 F.2d 300, 314 (2d Cir. 1981); In re Outlet Dep't Stores, Inc., 82 B.R. 694, 699 (Bankr. S.D.N.Y. 1988).

The Erkins counterclaimed against G&S and moved to transfer the proceedings to the United States District Court for the District of Idaho. After a hearing, Bankruptcy Judge Cornelius Blackshear denied the transfer motion. Thereafter, the proceedings were transferred to the United States District Court for the Southern District of New York for a jury trial.

At trial, the parties presented sharply different versions of the fee arrangement between G&S and the Erkins. The trustee claimed that the Erkins orally agreed to pay G&S's customary hourly rate. Defendants claimed that G&S undertook the representation on a contingency basis. Given that the lawsuit against First National did not yield any recovery for the Erkins, they argued that they owed G&S nothing.

Vihon testified on behalf of defendants that G&S undertook the representation on a contingency fee basis. However, Vihon also testified that G&S and the Erkins never discussed the terms of the contingency agreement. Specifically, Vihon testified that they never agreed upon a percentage of the recovery that would go to G&S. Although Vihon never drafted a written contingency agreement, some of G&S's internal documents indicate that G&S treated its representation of the Erkins as taken on a contingency basis.

Robert Erkins also testified that the case was taken on a contingency basis. However, he was unable to produce any documents demonstrating the terms of the alleged contingency arrangement. Mr. Erkins initially testified that he and Vihon agreed that the percentage was 33%, but later retracted his testimony. Mr. Erkins ultimately testified that he and Vihon never discussed a specific percentage term.

The district court found the lack of a percentage term fatal to defendants' theory that they were under no obligation to pay G&S because the case was taken on a contingency basis. Although courts sometimes may supply a percentage term according to custom, the district court ruled that custom cannot provide a missing term when the representation is far removed from the normal type of case in which contingency agreements are used. The district court ruled that G&S's representation of the Erkins was not a typical contingency fee situation because, as Robert Erkins recognized, a favorable result for the Erkins would not have required a monetary recovery against First National. Rather, if the Erkins merely escaped liability for their guarantee of the loan, that would have been an excellent result. The district judge therefore instructed the jury that the Erkins' defense of a contingency agreement should not be considered.

In support of the view that G&S billed defendants on an hourly basis, Bianco pointed to several documents which evidenced an oral agreement to pay hourly fees. First, Bianco introduced an agreement executed by the Erkins on the eve of the Idaho trial. In the document, the Erkins agreed to pay a premium--an amount above and beyond whatever was owed to G&S prior to the execution of the agreement--in the event the counterclaim against First National yielded a significant monetary recovery. The district court thought this agreement suffered from lack of consideration because McCabe presented the agreement to the Erkins as the price of G&S's continuing representation.2 In response, Bianco decided not to seek to have the jury award damages based upon the premium agreement, but continued to rely on the premium agreement as evidence that an oral contract to pay hourly fees had existed prior to the agreement. Specifically, a sentence in the premium agreement noted that "[t]he existing fee arrangements provide G&S...shall render professional services to Erkins and shall be paid by the hour and shall be reimbursed for all expenses." Second, the fee application submitted to the Idaho trial court indicated that the Erkins had been billed on an hourly basis. Third, the Idaho trial court found ...

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