Buechel v. Bain

• Decision Date: 28 September 2000
• Citation: 275 A.D.2d 65,713 N.Y.S.2d 332
• Parties: FREDERICK F. BUECHEL et al., Individually and as Trustees of Trusts Entitled Biomedical Engineering Trust, Respondents,<BR>v.<BR>JOHN N. BAIN et al., Appellants, et al., Defendants.
• Court: New York Supreme Court — Appellate Division

275 A.D.2d 65

713 N.Y.S.2d 332

FREDERICK 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.

RUBIN, J.

September 28, 2000.

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

Robert F. Cusumano of counsel, New York City (Simpson Thacher & Bartlett, attorneys), for John N. Bain, appellant.

Thomas W. Hyland of counsel, New York City (Steven Verveniotis and Brett A. Scher on the brief; Wilson Elser Moskowitz Edelman & Dicker, L. L. P., attorneys), for John G. Gilfillan, III, appellant.

ELLERIN, J.P., SAXE and BUCKLEY, JJ., concur.

OPINION OF THE COURT

RUBIN, J.

This matter involves the propriety of an agreement to compensate defendants for legal services rendered to plaintiffs Frederick F. Buechel, M.D. and Michael J. Pappas, Ph.D. in connection with the patenting of certain prosthetic devices plaintiffs had developed. At issue is the preclusive effect to be given to a decision rendered in a lawsuit brought by R. Gale Rhodes, Jr., a former law partner of defendants John N. Bain and John G. Gilfillan, III, in which the same Court (Richard Lowe, III, J.) ruled that the fee agreement was improper and limited the amount due Rhodes to the value of the services he had rendered to the two inventors (Rhodes v Buechel, Sup Ct, NY County, Apr. 30, 1998, index No. 8055/87). This Court affirmed the judgment, finding that "neither the initial arrangement nor its subsequent incarnations were entered into upon adequate disclosure to defendants [plaintiffs herein] of other possible fee arrangements and potential conflicts of interest, or with the aid of independent counsel retained for the purpose of safeguarding [their] interests. Rescission of the parties' arrangements ab initio, with payment to [Rhodes] in quantum meruit for his services, is an equitable result (see, Howard v Murray, 43 NY2d 417, 421; Matter of Cooperman, 83 NY2d 465, 473; Schlanger v Flaton, 218 AD2d 597, lv denied 87 NY2d 812)" (Rhodes v Buechel, 258 AD2d 274, 275). No further appeal was taken from this order.

In the present action, in which plaintiffs seek to terminate any interest defendants might have in a certain trust, defendant attorneys raise contentions that were not advanced by their former partner. First, they note that the fee arrangement found to be void in Rhodes v Buechel (supra) is specifically permitted by a Federal regulation (37 CFR 10.64). Second, they argue that the Federal courts have exclusive jurisdiction over this issue, which they construe as a matter of patent law, and that the Rhodes decision is therefore void for lack of subject matter jurisdiction.

The essential facts are not in dispute. Plaintiff Buechel, a resident in orthopedic surgery, and plaintiff Pappas, a mechanical engineer, developed a prosthetic shoulder device (the floating center prosthetic joint) which they sought to protect with a patent. 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 subject fee agreement entered into by the two inventors on September 12, 1974 provides that the law firm will contribute capital to finance research and marketing of the device and that "any or all monies, profits or other income or benefits received, whether by way of royalties or otherwise, shall be shared proportionately between the parties hereto on a one-third (1/3) basis."

The gravamen of the dispute is the extent of the disclosure made by the members of the law firm concerning the potential conflict of interest arising from the attorneys' stake in the devices they had undertaken to protect against infringement. Affidavits submitted, respectively, by defendants Bain and Gilfillan state that, on the suggestion of their former partner, R. Gale Rhodes, the parties subsequently agreed to form a corporation, both for tax considerations and to insulate the entrepreneurs from personal liability. With respect to the propriety of the fee agreement, it is averred that, preliminary to the formation of the corporation, defendant Bain specifically advised plaintiffs of the potential conflict of interest inherent in the arrangement. It is further alleged that the plaintiffs were advised to obtain independent counsel, but elected not to do so. Plaintiffs Buechel and Pappas, however, take the position that at no time were they were advised either of the potential conflict of interest or of their right to discharge the firm as their counsel at any time.

Biomedical Engineering Corporation was incorporated in New Jersey on July 16, 1975. The corporation took title to the prosthetic shoulder device and to other prosthetic devices developed by plaintiffs in the interim. In accordance with the fee agreement, Buechel and Pappas each held one third of the shares of the corporation, while the remaining one-third interest was divided equally among the three attorneys. A dispute subsequently arose among the law partners, culminating in the departure of Rhodes in December 1981. Bain and Gilfillan continued to perform legal work for plaintiffs, and their responsibilities were expanded to include litigation and patent maintenance. Gilfillan alleges, however, that following his departure from the firm, Rhodes covertly formed a corporation in Florida with plaintiffs, also known as Biomedical Engineering Corporation, to hold any future patents Buechel and Pappas might obtain.

In late 1982 or early 1983, an attorney named John Power was retained by plaintiffs to assess the feasibility of dissolving the original Biomedical Engineering Corporation. The decision was made to dissolve the New Jersey corporation and transfer its assets to a newly formed entity, the Biomedical Engineering Trust (Trust I), with Pappas and Buechel as trustees. The shareholders of the dissolved corporation, including the three attorneys, received equivalent equity interests in the trust, which thereupon received royalty payments from the sale of some of the prosthetic devices. At the trial in Rhodes v Buechel (supra), John Power testified to conversations with Buechel and Pappas, in which he "told them what they already knew * * * that they had to rely upon the advice of the attorney partner of theirs who possibly might have a financial disincentive to give them advice that perhaps they should be receiving."

In 1984, a second trust was formed, again with Pappas and Buechel as trustees, designated the Biomedical Engineering Trust II (Trust II), which held the marketing rights to a self-centering hip device. While neither defendant held any interest in Trust II, their former partner, R. Gale Rhodes, undertook to provide legal patent protection services to this entity. In 1987, a dispute arose over trust distributions, and Rhodes commenced his action against Buechel and Pappas to recover millions of dollars which the trustees were alleged to have improperly paid to themselves (Rhodes v Buechel, supra). The ensuing judgment duly recites that his former partners, Bain and Gilfillan, were joined as defendants in their capacity as trust beneficiaries and that they were represented by counsel in the Rhodes action.

Four years after Rhodes commenced the action, Buechel and Pappas asserted counterclaims for breach of fiduciary duty and malpractice, asserting that Rhodes had acted in violation of his ethical responsibilities as a lawyer. They did not, at that time, assert any claims against Bain and Gilfillan, who apparently continued to provide legal services to Trust I. It was not until 1995 that Buechel and Pappas sought to expand their counterclaims to seek relief against Bain and Gilfillan. Supreme Court denied their motion to amend the counterclaims, noting that the attorneys had been counterclaim defendants for seven years and that Buechel and Pappas had brought their motion to amend some five months after the filing of a note of issue, following protracted discovery and without the proffer of any excuse for the delay.

Pappas and Buechel commenced the instant action in March 1995, naming Bain and Gilfillan as defendants. The complaint contains five causes of action, alleging breach of fiduciary and ethical obligations and legal malpractice. This action, which seeks termination of trust payments to Bain and Gilfillan and turnover of trust files maintained by the attorneys, was stayed by Supreme Court pending resolution of the Rhodes matter.

The Rhodes litigation produced over 5,000 pages of trial transcript and resulted in a 42-page decision, invalidating the fee arrangement between plaintiffs and their original counsel, the firm of Bain, Gilfillan & Rhodes. As Supreme Court's opinion states at the inception, the complaint was brought against Buechel and Pappas, both individually and as trustees of the two Biomedical Engineering Trusts. It charged them with making improper payments to themselves from the trusts and sought to remove them as trustees and compel payment to Rhodes of his share of trust income alleged to have been withheld since 1987. However, Supreme Court found that the fee agreement from which Rhodes derived his interest in the trusts was unethical. The judgment recites the court's finding that the complaint's allegation of a breach of fiduciary duty by the trustees was without merit and, in any event, rendered moot by the rescission, ab initio, of any interest Rhodes might have acquired in either Trust I or Trust II under the fee agreement. The court 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" (Code of Professional Responsibility DR 5-104 [a] [22 NYCRR 1200.23 [a]).

On this appeal, the...