Buechel v. Bain

Decision Date20 December 2001
Citation766 N.E.2d 914,740 N.Y.S.2d 252,97 N.Y.2d 295
PartiesFREDERICK F. BUECHEL et al., Individually and as Trustees of Trusts Entitled BIOMEDICAL ENGINEERING TRUST, Respondents, v. JOHN N. BAIN et al., Appellants, et al., Defendants.
CourtNew York Court of Appeals Court of Appeals

Simpson Thacher & Bartlett, New York City (Robert F. Cusumano, Roy L. Reardon, David E. Vann, Jr., Bryce L. Friedman and George S. Wang of counsel), and Wilson, Elser, Moskowitz, Edelman & Dicker, L. L. P. (Thomas W. Hyland and Richard E. Lerner of counsel), for appellants.

Solomon, Zauderer, Ellenhorn, Frischer & Sharp, New York City (David N. Ellenhorn and Emily Stern of counsel), for respondents.

Chief Judge KAYE and Judges CIPARICK, WESLEY, ROSENBLATT and GRAFFEO concur with Judge SMITH; Judge LEVINE dissents and votes to reverse in a separate opinion.

OPINION OF THE COURT

SMITH, J.

The primary issue before this Court is whether parties should be precluded from relitigating the validity of fee arrangements determined to be illegal in an earlier action, when they were in privity with the person against whom the issue was decided. We conclude that collateral estoppel bars relitigation.

Plaintiffs, Frederick F. Buechel, an orthopedic doctor and Michael J. Pappas, a mechanical engineer, are the inventors of a prosthetic shoulder device called the floating center prosthetic joint. They retained the firm of Bain, Gilfillan & Rhodes, P. C. "to undertake the preparation and prosecution of a patent application covering the invention on a contingency basis." The fee agreement, executed on November 12, 1974, provided that the law firm would receive a one-third interest in monies, profits or income resulting from the invention.

In July 1975, the parties formalized their relationship and incorporated Biomedical Engineering Corporation (BEC) in New Jersey. The attorneys' interests in the corporation mirrored their fee agreement. Plaintiffs each held one third of the shares of the corporation, with the remaining one-third interest divided equally among Bain, Gilfillan and Rhodes. Plaintiffs, who had continued to collaborate on development of prosthetic devices, assigned to BEC their interests in the floating center prosthetic joint and any future prosthetic devices invented by them. Significantly, Rhodes failed to advise plaintiffs of the potential for conflicts of interest that could result from converting the one-third interest in a single invention into a one-third equity interest in a corporation that would exploit all future inventions. A dispute subsequently arose among the attorneys, resulting in Rhodes' departure from the firm in December 1981. Defendants Bain and Gilfillan, however, continued to render legal services to plaintiffs on BEC matters.

In 1983, for tax purposes, BEC was dissolved, and its assets were transferred to a newly formed entity, the Biomedical Engineering Trust (Trust I), also with plaintiffs as trustees. Again, the trust agreement continued the parties' prior arrangement. The three attorneys, as shareholders of the dissolved corporation, received equivalent equity interests in the trust. In 1984, a second trust, the Biomedical Engineering Trust II (Trust II) was created, again with plaintiffs as trustees, and it held the marketing rights to a self-centering hip device. While neither Bain nor Gilfillan held an interest in Trust II, their former partner, Rhodes, provided patent protection services to the entity.

In 1987, after a dispute arose over trust distributions, Rhodes commenced an action against plaintiffs as trustees to recover monies that the trustees allegedly improperly paid themselves. In response to plaintiffs' motion to dismiss for failure to join all the trustees, Rhodes amended his complaint, adding defendants Bain and Gilfillan in their capacity as trust beneficiaries. In 1991, four years after Rhodes commenced the action, plaintiffs asserted counterclaims against Rhodes for breach of fiduciary duty and malpractice, alleging among other things that "the [a]greements were unfair" and that Rhodes "while acting as their attorney, induced [plaintiffs] to enter into the unfair [a]greements by taking unfair advantage of his fiduciary capacity and superior knowledge * * * by deceiving [plaintiffs] as to the value of his and/or the [l]aw [f]irm's [s]ervices and by failing to disclose * * * the value of the approximate one-third interest relinquished by [the inventors]." Plaintiffs additionally asserted malpractice on the part of Rhodes in that he represented that he and his law firm were qualified, competent and experienced in patent and business affairs, which representations were false. Plaintiffs did not, at that time, name defendants as adverse parties. In a later letter sent to defendants, Rhodes' attorney made clear that if the counterclaims were established, recovery for the counterclaims "[would] be subject to contribution by [defendants,] [Rhodes'] former partners."

Recognizing their unity with Rhodes in regard to the validity of the challenged fee arrangement, on March 12, 1992, Bain wrote plaintiffs that he was unclear as to how the counterclaims could be narrowly construed solely against Rhodes. Bain wrote that he and Gilfillan were "concerned that the counterclaims could be interpreted broadly to assert overreaching either by the law firms in which Rhodes, Gilfillan and I were involved or, at the least by Rhodes as a partner or agent of those law firms, thereby potentially extending the consequences of the alleged wrongdoing by Rhodes to Gilfillan and myself." On January 5, 1995, after a number of disputes, Gilfillan wrote plaintiffs:

"[W]ith the trial date apparently becoming imminent, you have placed John [Bain] and I [sic] in a position where we have to deal with the question of whether or not we must become active in the Rhodes' litigation to protect our rights, vis-à-vis the position of the Trustees regarding legal fees. I would certainly not like to have to do that. However, I will not waive any rights. We are gravely concerned that if we do not raise the issue in this litigation or otherwise provide for preservation rights, we will be estopped in the future from challenging the Trustees on this highly improper conduct. Needless to say, we cannot let this happen."

On January 10, 1995, plaintiffs fired Bain and Gilfillan and moved to amend their counterclaims in the Rhodes action to assert specific claims against them. Defendants opposed the motion. Supreme Court denied plaintiffs' motion because they failed to offer an acceptable excuse for the delay.

Plaintiffs then commenced the present action against defendants Bain and Gilfillan, alleging breach of fiduciary and ethical obligations and legal malpractice. Plaintiffs sought the termination of trust payments to defendants and the turnover of trust files. At defendants' request, Supreme Court stayed the action pending resolution of the Rhodes action. In support of their request for a stay, defendants submitted an affidavit to the court arguing:

"Because of the similarity of the underlying facts and transactions in both the Rhodes action and this one, proceeding with this action at this time would be duplicative and a waste of judicial resources. Indeed, a decision in the Rhodes case may estop or bar certain claims in this action."

In 1998, following a bench trial, Supreme Court determined in the Rhodes action that the fee arrangement between plaintiffs and their original counsel, the firm of Bain, Gilfillan & Rhodes, was invalid. The court found that, from the outset of the attorney-client relationship, there had not been full disclosure regarding the possibility of the firm's conflict of interest. The court further found that plaintiffs were never advised to seek independent counsel before entering into a business relationship with their attorneys, and that Rhodes had "exploited his clients through affirmatively pursuing a business relationship with them absent full disclosure." The court noted that Rhodes' extensive ethical violations constituted serious breaches of his fiduciary obligation "not [to] take advantage of his superior knowledge and position," and that he failed to inform his clients that he could be discharged as their attorney at any time. Consequently, Supreme Court held that the fee agreement, from which Rhodes derived his interest in the trusts, was unethical and unenforceable, and in its decision the court ordered that "the trust agreements are rescinded."

The Appellate Division affirmed, concluding "neither the initial arrangement nor its subsequent incarnations were entered into upon adequate disclosure * * * of other possible fee arrangements and potential conflicts of interest, or with the aid of independent counsel * * *. Rescission of the parties' arrangements ab initio, with payment to plaintiff in quantum meruit for his services, is an equitable result * * *" (258 AD2d 274 [1999] [citations omitted]). This Court declined to hear the appeal (93 NY2d 806 [1999]).

By order dated February 5, 1998, Supreme Court lifted the stay in the present suit, and on March 23, 1998, defendants Bain and Gilfillan answered the complaint and asserted counterclaims, seeking their reinstatement as beneficiaries of the trust. Defendants alleged that plaintiffs "repudiated their agreements with Bain and Gilfillan and now contend that all such agreements are void ab initio." Both parties moved for summary judgment. Supreme Court granted plaintiffs' motion for partial summary judgment, rescinding and terminating defendants' equity interests in Trust I and ruled the fee agreements between plaintiffs and defendants unenforceable, ab initio, "because they were entered into in violation of the ethical duties owed to plaintiffs." The court directed defendants to return to plaintiffs all monies distributed less reasonable attorneys' fees.

The court explained that the issue of...

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