Cotchett v. Siller

• Decision Date: 09 May 2012
• Docket Number: No. CIV S-10-0780 KJM,No. CIV S-10-0779 KJM,CIV S-10-0779 KJM,CIV S-10-0780 KJM
• Court: U.S. District Court — Eastern District of California
• Parties: COTCHETT, PITRE & McCARTHY and SPILLER • McPROUD, Appellants, v. CHARLES W. SILLER, Appellee, COTCHETT, PITRE & McCARTHY and SPILLER • McPROUD, Appellants, v. CWS ENTERPRISES, INC., a California Corporation, Appellee,

COTCHETT, PITRE & McCARTHY and SPILLER • McPROUD, Appellants,

v.CHARLES W. SILLER, Appellee,COTCHETT, PITRE & McCARTHY and SPILLER • McPROUD, Appellants,

v.CWS ENTERPRISES, INC., a California Corporation, Appellee,

No. CIV S-10-0779 KJM

No. CIV S-10-0780 KJM

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF CALIFORNIA

DATED: May 9, 2012

On April 6, 2011, the court heard argument on appellant Spiller • McProud's¹ appeal from the decision of the Bankruptcy Court denying its motion for summary judgment. Walter Dahl, Dahl & Dahl, and Steven Spiller appeared for appellant; Brad Benbrook, Stevens,O'Connell & Jacobs LLP,² appeared for the Chapter 11 Trustee, David Flemmer; and Andrea Porter appeared telephonically for appellees Charles Siller and CWS Enterprises, Inc.

The court's jurisdiction to hear this interlocutory appeal is addressed in a separate order, filed concurrently with this one. 28 U.S.C. § 158(a); Fed. R. Bankr. P. 8001(b).

The issue presented by the appeal is whether and to what extent a state court judgment affirming an arbitrator's award of attorneys' fees is entitled to preclusive effect in bankruptcy proceedings in light of 11 U.S.C. § 502(b)(4), which provides that a bankruptcy court may allow a claim for attorneys' fees except to the extent that it exceeds the reasonable value of those services. The bankruptcy court concluded that the fact of the judgment was entitled to full faith and credit but that the amount of that judgment was subject to the bankruptcy court's determination of the reasonableness of those fees. This court reverses and remands this case for further proceedings, as explained below.

I. Background

A. Initial State Litigation By Appellee

In 1994, appellee Siller engaged the Friedburg Law Corporation to pursue litigation against Siller Brothers, Inc., a company owned by Siller and his brothers. Eventually Siller substituted attorneys Randy E. Thomas and Dennis Hauser. In 2000, Hauser and Thomas filed an unsuccessful shareholder derivative suit on Siller's behalf. In 2001, Hauser and Thomas filed an action to dissolve Siller Brothers. Excerpt of Record (ER) 202-203. In addition, in 2001, Siller filed a malpractice action against the Friedburg Law Corporation.

In December 2001, Siller entered into a contingent fee contract with Cotchett, Pitre & McCarthy (CPM) to pursue litigation concerning the corporate dissolution action against his brothers and against the Friedburg Law Corporation and "to resolve any monies due Thomasor Hauser." ER³ 202-215. At that time, there were outstanding judgments of approximately $10 million against Siller. ER 205. The contract between Siller and CPM contained an arbitration clause, nominating as arbiter the Judicial Arbitration Mediation Services (JAMS). ER 213-214.

In May 2004, Siller entered into a contingent fee contract with Spiller • McProud (Spiller) "to act as [Siller's] general counsel to communicate to the Cotchett firm your ideas, suggestions, and requests concerning trial strategy, trial preparation and conduct of the trial [against Siller Brothers, Inc.] itself." ER 217. Spiller agreed to represent Siller "for a contingency fee of eight percent (8%) of the 'Net Amounts' recovered by settlement, compromise or trial under the same definition you have agreed with the Cotchett firm. . . ." The parties also agreed "to incorporate the terms of the Cotchett fee agreement into this agreement except that the legal services that I have agreed to provide are as described in this letter agreement." ER 218.

In July 2004, CPM and Spiller filed an ultimately unsuccessful action in Sutter County Superior Court seeking to enforce a buy/sell agreement so that Siller could purchase his deceased brother's shares in Siller Brothers. ER 238.

In addition, CPM and Spiller negotiated a settlement of Siller's fee dispute with attorneys Hauser and Thomas and undertook a defense of appellee when he failed to pay the negotiated settlement. ER 239. They were terminated before the motion for summary judgment was filed in the Hauser/Thomas case. ER 239.

Finally, CPM and Spiller represented Siller during pretrial proceedings and a two week trial on the dissolution action. When Siller Brothers filed a notice of appeal, CPM and Spiller filed a cross-appeal and finally settled the case during mediation in the Court of Appeal. The settlement provided for $10 million in cash plus $20.5 million in real estate in exchange for Siller's shares in the corporation. ER 188, 237. Siller created the entity CWS Enterprises, Inc. (CWS) based on the tax-related provisions of the settlement. ER 238. B. Arbitration

After Siller refused to pay the attorneys' fees, CPM and Spiller initiated arbitration with JAMS. Declaration of Ara Jabagchorian, ER 264 ¶ 2. During an initial telephonic conference call with the JAMS arbitrator, Siller and CWS, through counsel George Wass, contended that the matter was not properly before JAMS. ER 265 ¶ 3. In May, Siller filed a motion in Sutter County Superior Court to enjoin the arbitration. ER 186-193 (opposition to motion). The Sutter County Superior Court denied the motion. ER 265 ¶ 4.

The arbitration hearing began on May 29, 2008. Attorney George Wass again appeared on behalf of Siller and CWS. Wass submitted several motions in limine and cross-examined Frank Pitre of CPM. ER 265 ¶¶ 5-6.

The arbitrator held a second session on July 7, 2008. ER 265 ¶ 7. Siller and CWS were again represented by George Wass, with the assistance at that point of Lawrence Ecoff. The arbitrator took additional testimony from Frank Pitre, Steven Spiller and Charles Siller and heard further arguments on the motions in limine. ER 265 ¶¶ 7-8. After the close of the evidence, the parties submitted closing briefs. ER 265 ¶ 9.

On January 15, 2009, the arbitrator issued a lengthy written ruling. Before turning to the merits of the action, the arbitrator addressed the objections of Siller and CWS to the arbitration, the joining of CWS as a party to the arbitration and the arbitrability of the claims. ER 222-233.

As a backdrop to his ultimate conclusion, the arbitrator reviewed the course of the litigation undertaken by the CPM and Spiller firms on Siller's behalf. After reviewing this litigation history, the arbitrator noted that "[t]he matter having settled as contemplated in Agreement ¶ IV, D, the Arbitrator must resolve a dispute which exists over the fair market value or present value of the assets upon which the attorneys' percentage fees shall be computed."ER 240. He outlined the parties' contentions and noted that Siller's estimate that the settleme was worth only $10 million was not supported by any appraisals or other evidence apart from Siller's testimony. The arbitrator then observed:

Mr. Wass devoted most of his cross-examination to a detailed attack on how Mr. Pitre and Mr. Spiller spent their time on the case, on the theory that the Arbitrator might find the contract to be unconscionable (it is not) and that quantum meruit would be relevant. Over objection, he was permitted to do so. But this has and always has been a breach of contract case; and no counterclaim for legal malpractice was ever made by respondent.

ER 241. He continued:

The Fee Agreement made the attorneys fee and costs contingent upon recovery by Respondent. . . .The contingency was placed in writing and explained when and how such disbursements would be made. . . . The contingency in this case occurred, both in the form of a $45.7 million judgment and the receipt of properties and cash by Respondent Charles Siller.

The contingency fee agreement percentage for both Petitioners was reasonable based not only on the amount of work put into the case but also the economic risks associated with the case, such as up front costs by counsel (Ketchum v. Moses, (2001) 24 Cal.4th 1122, 1132). This form of deferred payment came with much labor, expense and risk to Petitioners. Petitioner Pitre's office expended over 4800 attorney hours and 2700 paralegal hours working on Respondent's matters. Petitioners financed the litigation out of their own pockets in an amount exceeding $400,000.

In addition, Petitioners took great economic risk in that they would not have obtained any recovery for themselves unless the recovery exceeded the judgment lien Siller Brothers, Inc., had against Charles Siller which accumulated to $13,770,000 at the time the judgment was obtained.

The attorneys fees were to be paid upon the receipt of the monies, properties or other assets. Despite all this, Respondents continue to refuse to pay Petitioners despite their clear obligation to do so.

ER 242. The arbitrator calculated the fee due to Spiller as $2,284,519.16 with prejudgment interest of $212,118.01, for a total of $2,497,325.07. He added:

Respondents attack Spiller's contingency fee of 8% as "unconscionable." Respondents fail to cite to any case that directly or indirectly holds such a position. The law is quite thecontrary. (See Ketchum v. Moses (2001) 24 Cal.4th 1122, 1132 (holding a contingent fee contract may properly provide for a greater compensation than would otherwise be reasonable); Rader v. Thrasher (1962) 57 Cal.2d 244, 253; Estate v. Guerin (1961) 194 Cal.App.2d 566, 575 (holding a 50% contingency fee unconscionable).)

In support of their contention that the 8% fee is unconscionable, Respondents rely upon Fergus v. Songer (2007) 150 Cal.App.4th 552 as "the standard in computing attorneys fees." . . . Respondents simply misapply Fergus. The factors used to determine reasonable attorneys fees in Fergus are only applicable when there is no enforceable fee agreement. In Fergus, the court held that the jury was required to consider nine factors to consider reasonable attorney's fees, since the contingency fee agreements at issue were unenforceable due to a violation of the Business and Professions Code. (Fergus v. Songer, supra, 150 Cal. App.4th at 560.) But there is an enforceable fee agreement here. Respondents have failed to

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