CUNNINGHAM v. ABBOTT, NO. 2007-CA-001971-MR

CourtCourt of Appeals of Kentucky
Writing for the CourtNICKELL, JUDGE:
PartiesSHIRLEY A. CUNNINGHAM, ET AL., APPELLANTS v. MILDRED ABBOTT, ET AL., APPELLEES MELBOURNE1 MILLS, JR., APPELLANT v. MILDRED ABBOTT, ET AL., APPELLEES CHARLOTTE BAKER, ET AL, APPELLANTS v. STANLEY M. CHESLEY, ET AL., APPELLEES AND MILDRED ABBOTT, ET AL., CROSS-APPELLANTS v. STANLEY M. CHESLEY, ET AL., CROSS-APPELLEES
Decision Date04 February 2011
Docket NumberNO. 2007-CA-001971-MR,ACTION NO. 05-CI-00436,NO. 2007-CA-001981-MR,NO. 2007-CA-002173-MR,NO. 2007-CA-2174-MR

SHIRLEY A. CUNNINGHAM, ET AL., APPELLANTS
v.
MILDRED ABBOTT, ET AL., APPELLEES
MELBOURNE1 MILLS, JR., APPELLANT
v.
MILDRED ABBOTT, ET AL., APPELLEES
CHARLOTTE BAKER, ET AL, APPELLANTS
v.
STANLEY M. CHESLEY, ET AL., APPELLEES
AND
MILDRED ABBOTT, ET AL., CROSS-APPELLANTS
v.
STANLEY M. CHESLEY, ET AL., CROSS-APPELLEES

NO. 2007-CA-001971-MR
NO. 2007-CA-001981-MR
NO. 2007-CA-002173-MR
NO. 2007-CA-2174-MR
ACTION NO. 05-CI-00436

Court of Appeals of Kentucky

RENDERED: FEBRUARY 4, 2011


TO BE PUBLISHED

APPEAL FROM BOONE CIRCUIT COURT
HONORABLE WILLIAM WEHR, JUDGE
ACTION NO. 05-CI-00436

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OPINION
AFFIRMING IN PART, VACATING IN PART, REVERSING IN PART
AND REMANDING

BEFORE: NICKELL, STUMBO, AND WINE, JUDGES.

NICKELL, JUDGE:

BACKGROUND

THE GUARD ACTION

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This appeal flows from the mediated settlement of 431 claims against American Home Products (AHP), the manufacturer of fenfluramine and phentermine, commonly referred to as "Fen-Phen," a drug combination used for weight loss that was ultimately removed from the market in the 1990's after numerous users suffered heart damage. As a result, class action lawsuits were filed across the nation. At least one such action was filed in Kentucky, Darla S. Guard, et al. (or Jonetta Moore, et al.) vs. American Home Products Company, Inc. et al., Boone Circuit Court Case No. 98-CI-795.

The 431 plaintiffs in the Guard action were represented by one of three attorneys, Shirley A. Cunningham, Jr., William J. Gallion, or Melbourne Mills, Jr. (collectively referred to as GMC).2 Their representation was based upon contingency fee agreements allowing reasonable attorney fees not to exceed between thirty and thirty-three and one-third percent of the recovery. A fourth attorney, Stanley M. Chesley, negotiated a $200,000,000.00 settlement on behalf of the class in May of 2001. Chesley did not have a contingency fee agreement with any of the 431 plaintiffs, but he did have a fee-splitting agreement with GMC whereby he was to receive twenty-one percent of the gross fees and GMC was to

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receive seventy-four percent of the gross fees. A fifth attorney, Richard D. Lawrence, received the remaining five percent under the fee-splitting agreement.

One requirement of the settlement was that the class be decertified which then-Judge Joseph F. Bamberger3 did by order entered on May 16, 2001. That same order dismissed the action but authorized the parties to continue filing motions with the court pertaining to enforcement of the settlement. Bamberger entered orders in the case through December 30, 2003.

Another clause in the settlement agreement stated in relevant part:

15. The Settling Attorneys will maintain in absolute confidence the terms of this Letter Agreement and will not directly or indirectly communicate the Settlement Amounts to any person other than the Settling Claimants.

GMC withheld the terms of the ultimate settlement agreement from the plaintiffs (the settling claimants) and did not reveal to them how their individual payouts were calculated. GMC threatened the plaintiffs with jailtime or forfeiture of their recovery if they discussed receiving a settlement with anyone.

Pursuant to their fee agreements with the plaintiffs, as alleged by plaintiffs in their sixth amended complaint, GMC was to receive $60,798,783.14, of which Chesley's portion was to be $12,767,744.46. However, GMC paid itself and others $126,793,551.22, well over half of the $200,000,000.00 settlement fund.

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Once the class was decertified, GMC met with their individual clients and began dispersing checks to the 431 plaintiffs, all of whom signed a release and a statement of satisfaction with the amount of compensation received. A significant amount of money was withheld by GMC in the event other claimants came forward. About nine months later, Bamberger entered an order authorizing a second round of checks, equal to fifty percent of the residue, to be paid to the plaintiffs. Again, each recipient signed a release and a statement of satisfaction. The remaining fifty percent of the residue was to be retained by GMC for "indemnification or contingent liabilities." GMC never told their clients the class had been decertified,4 the total amount of the settlement, how each plaintiff's recovery had been calculated, nor the full amount of fees and expenses GMC was receiving. The clients did receive a letter informing them that if funds remained after all disbursements had been made from the gross settlement, the court was considering donating the remaining funds to charity.

$20,000,000.00 was ultimately set aside by court order to establish a non-profit corporation named The Kentucky Fund for Healthy Living, Inc. (KFHL)5 with GMC being named as directors. The clients were not told a charitable organization was being created with the remaining funds nor the amount of funds being used for this purpose.

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Despite many opportunities to submit proof of expenses, Cunningham and Gallion never did. Mills tendered expenses including salaries, daily office operation and maintenance, advertising, rent, utilities, phones, supplies, a legal publication and postage. Mills also claimed a lump sum of $1,303,831.81 for services from Business Securities Solutions/Litigation Consultant, but submitted no invoice or detailed explanation for said services and no proof it related exclusively to the Guard litigation. While the record does not contain an accounting of attorney's fees and expenses charged to the plaintiffs, nor an accounting of settlement funds and dispersals, the order Bamberger entered on June 6, 2002, states that the court approved an accounting of settlement proceeds, including attorney's fees and expenses. In an order entered on July 31, 2002, Bamberger again stated he had received an accounting of funds and had been "advised of the consent of the individual plaintiffs who received settlements for use of the remaining funds for charitable purposes." Contrary to this order, the plaintiffs assert they were never told a charity was being created to receive and disburse the excess funds and they were misled into believing the amount given to charity was "miniscule."

THE ABBOTT ACTION

The appeal currently under review flows from, but is independent of, the Guard action in that the defendants are different, the issues are different, and the orders being appealed from were not entered in the Guard action. Guard was a products liability action against a drug manufacturer whereas the current litigation

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focuses on the conduct, and alleged misconduct, of the attorneys who represented the settling claimants in the Guard action. The current allegations were not brought in the settlement of the plaintiffs' claims against AHP and there has been no attempt to re-open the Guard action to set aside orders entered in that litigation. The goal of the Abbott action is to retrieve misallocated monies and to receive damages for breaches of professional duty that may amount to legal malpractice.

At GMC's request, on December 30, 2003, Bamberger entered an order relinquishing jurisdiction over KFHL. One year later, on December 30, 2004, suit was filed under CR 23 in Fayette County6 by several plaintiffs from the Guard action (collectively referred to as Abbott)7 against GMC, Chesley and KFHL. In count one of the amended complaint, Abbott alleged breach of fiduciary duty based on GMC and Chesley putting "themselves in a unique position of trust and confidence with" Abbott and Abbott having confidence in GMC and Chesley "to faithfully and honestly perform their duties," thereby creating a fiduciary relationship. Abbott further alleged GMC and Chesley:

have failed to disclose material information related to [Abbott's] settlement and have refused to provide other basic information to which they are entitled, including

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copies of settlement agreements, information related to expenses deducted from settlement funds and information related to settlement funds diverted into a corporation established, owned and controlled by [GMC and Chesley].

Count two of the amended complaint alleged fraudulent misrepresentation against GMC and Chesley based upon claims that they:

themselves or through their agents intentionally misrepresented or failed to disclose material facts regarding the amount of settlement funds set aside for purported charitable contributions in that [Abbott was] either never told that settlement funds were set aside or were expressly or implicitly told that only a small amount of funds was going to be donated to charity when, in truth, millions of dollars were set aside and transferred to a corporation owned and operated by [GMC and Chesley.] [GMC and Chesley] owed a duty as fiduciaries to give full and complete disclosure to [Abbott] and to refrain from misrepresenting or failing to disclose material information regarding the settlement funds.

142. [Abbott] relied on the material misrepresentations of [GMC and Chesley] and had they known that all settlement funds had not been distributed they would have acted differently with respect to the settlement. [GMC and Chesley's] failure to disclose to [Abbott] the true amount of settlement funds set aside to fund a corporation established by them was intentional, misleading and constitutes fraudulent and deceitful conduct for which [Abbott is] entitled to recover compensatory and punitive damages in excess of the minimum jurisdictional limits of this Court.

Counts three, four and five of the amended complaint sought a declaratory judgment for GMC and Chesley's "breach of their contractual, ethical, fiduciary and professional duties"; an accounting of all settlement funds received by GMC and Chesley, including those transferred to KFHL; disgorgement of any

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and all fees earned; and imposition of a constructive trust on all settlement funds currently held by or under the control of the defendants, specifically including those funds held by KFHL. Abbott did not ask...

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