Holmes v. Loveless

• Decision Date: 12 July 2004
• Docket Number: No. 52634-1-I.,52634-1-I.
• Citation: 94 P.3d 338,122 Wash.App. 470
• Parties: Joseph D. HOLMES, Jr., an individual, and John F. Kruger, an individual, Respondents, v. C.E. LOVELESS, an individual, and Margaret Loveless, his Spouse, and the marital community composed thereof, and Barclay Tollefson, an individual, and Joan Tollefson, his Spouse, and the marital community composed thereof, and the Joint Venture Composed of C.E. Loveless and Barclay Tollefson, d/b/a, Loveless/Tollefson Properties and/or the Nugget Mall, Appellants.
• Court: Washington Court of Appeals

94 P.3d 338

122 Wash.App. 470

Joseph D. HOLMES, Jr., an individual, and John F. Kruger, an individual, Respondents, v. C.E. LOVELESS, an individual, and Margaret Loveless, his Spouse, and the marital community composed thereof, and Barclay Tollefson, an individual, and Joan Tollefson, his Spouse, and the marital community composed thereof, and the Joint Venture Composed of C.E. Loveless and Barclay Tollefson, d/b/a, Loveless/Tollefson Properties and/or the Nugget Mall, Appellants.

No. 52634-1-I.

Court of Appeals of Washington, Division 1.

July 12, 2004.

David J. Lawyer, Bellevue, WA, for Appellants.

Edwin S. Budge, Erik J. Heipt, Budge & Heipt, PLLC, Seattle, WA, for Respondents.

COLEMAN, J.

The fee a lawyer collects for legal services must be reasonable. Attorney fee agreements are subject to continued review for reasonableness over the course of the agreement. We conclude that the trial court erred in enforcing a contingent fee agreement under which a law firm received 5 percent of the cash distributions from a joint venture in exchange for rendering legal services at a discount. That discount was valued at $8 000 off regular rates; the cash distributions over thirty years have exceeded $380,000. Further enforcement of this agreement cannot be justified on any principled basis. We reverse.

FACTS

Joseph D. Holmes, Jr. and John F. Kruger are retired attorneys and former partners in the Seattle law firm that is now known as Karr Tuttle Campbell. In 1970, Holmes and his law firm began providing legal services to C.E. Loveless, a real estate developer. In 1972, Loveless and Barclay Tollefson, another real estate developer, started a joint venture called "Loveless/Tollefson Properties" to develop The Nugget Mall, a shopping center in Juneau, Alaska.

In a fee agreement dated January 15, 1972, Holmes' law firm agreed to provide legal services to the Loveless/Tollefson joint venture at a discounted rate until June 30, 1974. The discounted rate was intended to cover the law firm's overhead expenses. Thereafter, legal fees would be charged at the full rate. In exchange, Karr Tuttle would receive 5 percent of any cash distributions produced by the joint venture. The agreement contained a conflict of interest provision advising Loveless and Tollefson that their individual interests could be different and that, due to the law firm's prior representation of Loveless, Tollefson should have the agreement reviewed by other counsel. Loveless had entered into several other similar agreements with Karr Tuttle, each pertaining to different joint ventures with different business partners. Loveless initially proposed that Karr Tuttle obtain a 7 percent ownership interest in the joint venture, but Karr Tuttle declined this offer and countered with the 5 percent cash distribution idea. Tollefson had not been a party to such an agreement before the Loveless/Tollefson Properties joint venture was formed. The agreement contained no provision allowing the joint venture to unilaterally terminate the agreement.

The joint venture began making distributions in the early 1980's. Gradually, the shopping center became more successful and it underwent several phases of expansion. In 1986, Loveless and Tollefson raised concerns about the effect of the expansions on the method of calculating cash distributions. When they raised their concerns, Holmes asked another Karr Tuttle partner to assist with the negotiations as a more neutral facilitator. The parties resolved the dispute by entering into a written addendum to the 1972 agreement in which the parties agreed that the joint venture would pay Loveless and Tollefson certain development fees and leasing commissions before the cash distributions were calculated.

The law firm subsequently assigned its interest in the agreement to Holmes and Kruger. By 2001, the joint venture had distributed approximately $380,000 to the law firm and its assignees. At that time, the joint venture notified Holmes that the agreement was no longer enforceable and it terminated payments. Shortly thereafter, it made a large distribution to Loveless and Tollefson. Holmes and Kruger (hereinafter collectively referred to as "Holmes") filed a lawsuit to enforce the agreement and recoup their share of the distribution. On cross-motions for summary judgment, the trial court ruled in Holmes' favor.

ANALYSIS

Appellate review of a trial court's order granting summary judgment is de novo. Ski Acres, Inc. v. Kittitas County, 118 Wash.2d 852, 854, 827 P.2d 1000 (1992). Summary judgment is proper if the pleadings, affidavits, depositions, or admissions on file show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. Meissner v. Simpson Timber Co., 69 Wash.2d 949, 951, 421 P.2d 674 (1966).

A fee agreement that violates the Rules of Professional Conduct (RPC) is against public policy and unenforceable. Simburg, Ketter, Sheppard & Purdy, L.L.P. v. Olshan, 97 Wash.App. 901, 909, 988 P.2d 467 (1999). Deciding whether "an attorneys conduct violates the relevant Rules of Professional Conduct is a question of law." Eriks v. Denver, 118 Wash.2d 451, 457-58, 824 P.2d 1207 (1992). Professional misconduct may also be a basis for denying or disgorging fees. Eriks, 118 Wash.2d at 462,824 P.2d 1207.

The joint venture's challenge to the fee agreement is premised upon two ethical rules: one governing attorney-client business transactions and another prohibiting excessive fees. Before September 1,1985, the Code of Professional Responsibility (CPR) governed attorney conduct in Washington. Since September 1, 1985, the RPC have regulated lawyer conduct. Thus, both the CPR, which was in effect when the 1972 agreement was made, and the RPC, effective now and when the 1986 addendum was made, are involved in this dispute.

As an initial matter, we conclude that it is appropriate to review the 1972 agreement and the 1986 addendum under the provisions governing business transactions, as well as the provisions for fee agreements. Holmes asserts that the 1972 agreement is not a "business transaction," but this conclusion is not supported by the evidence. Although the law firm declined to obtain an ownership interest in the joint venture, its compensation was directly linked to the joint venture's profits. This is sufficient evidence to conclude that the fee agreement falls within the scope of the business transaction rule.

RPC 1.8 provides:

A lawyer who is representing a client in a matter:

a) Shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security or other pecuniary interest adverse to a client unless:

(1) The transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner which can be reasonably understood by the client;

(2) The client is given a reasonable opportunity to seek the advice of independent counsel in the transaction; and

(3) The client consents thereto.

RPC 1.5(a) provides:

(a) A lawyer's fee shall be reasonable. The factors to be considered in determining the reasonableness of a fee include the following:

(1) The time and labor required, the novelty and difficulty of the questions involved, the skill requisite to perform the legal service properly and the terms of the fee agreement between the lawyer and client;

(2) The likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;

(3) The fee customarily charged in the locality for similar legal services;

(4) The amount involved in the matter on which legal services are rendered and the results obtained;

(5) The time limitations imposed by the client or by the circumstances;

(6) The nature and length of the professional relationship with the client;

(7) The experience, reputation, and ability of the lawyer or lawyers performing the services; and

(8) Whether the fee agreement or confirming writing demonstrates that the client had received a reasonable and fair disclosure of material elements of the fee agreement and of the lawyer's billing practices.

To some degree, the excessive fee and business transaction provisions overlap when attorneys and clients use business transactions as compensation for legal services. When the fee generated by a business transaction is not fair and reasonable, the business transaction is not fair and reasonable. This is demonstrated in this court's decision in Cotton v. Kronenberg, 111 Wash.App. 258, 44 P.3d 878 (2002),review denied, 148 Wash.2d 1011, 62 P.3d 890 (2003), which analyzed a fee agreement involving the exchange of real property for legal services under RPC 1.8. In Cotton, the attorney agreed to defend a client from criminal charges in exchange for a nonrefundable transfer of real property and a mobile home. This court concluded that the attorney violated the business transaction provision, RPC 1.8, when he was disqualified from the case, but refused to refund the value of the property received.¹ Focusing on the "fair and reasonable" language of RPC 1.8(a)(1), this court held that the attorney's failure to fulfill his obligation to his client, as well as the disparity between the $42,000 value of the real estate and the $10,000 to $30,000 estimate for legal fees based upon hourly rates, rendered the agreement unenforceable. Cotton, 111 Wash.App. at 270-71,44 P.3d 878.

The Cotton court also noted that the time frame for evaluating the reasonableness of a fee is not restricted to the time of entry into the agreement. It explained:

As Professor Hazard explains in his work on ethics, a fee agreement that may seem fair to a client at the time that the agreement is signed must be reevaluated under the applicable rules when subsequent events alter the circumstances of the relationship. For example, if a client offers an

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