Knox v. Herman Gerel, LLP

• Decision Date: 24 June 2014
• Docket Number: CIVIL ACTION NO. 12-2238
• Parties: THOMAS J. KNOX v. HERMAN GEREL, LLP, ET AL.
• Court: U.S. District Court — Eastern District of Pennsylvania

THOMAS J. KNOX v. HERMAN GEREL, LLP, ET AL.

CIVIL ACTION NO. 12-2238

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA

JUNE 24, 2014

SURRICK, J.

MEMORANDUM

Presently before the Court is Defendant United Healthcare Inc.'s Motion to Dismiss Plaintiff's Complaint (ECF No. 8), Defendant United Healthcare Inc.'s Motion to Dismiss Plaintiff's Cross-Claim (ECF No. 26), and Defendant United Healthcare Inc.'s Motion to Dismiss Defendant Herman Gerel's First Amended Cross-Claim (ECF No. 33). For the following reasons, Defendant United Healthcare Inc.'s Motions will be granted in part and denied in part.

I. BACKGROUND

A. Factual Background

1. The Parties

This lawsuit arises out of a dispute over the alleged obligations of Plaintiff Thomas J. Knox to pay Defendant, the law firm of Herman Gerel, LLP ("Herman Gerel"),¹ a contingent fee and costs in connection with legal services provided by Herman Gerel in defending a counterclaim filed against Fidelity Insurance Co. ("Fidelity Insurance") and Fidelity BenefitAdministrator's, Inc. ("Fidelity Benefit"), (collectively "Fidelity"). (Compl. ¶ 9, ECF No. 1.)² Plaintiff is a citizen of Pennsylvania, and was formerly a majority shareholder of Fidelity, with 80.39 percent of the shares. (Compl. ¶¶ 1, 12, 29.) Herman Gerel is a limited liability partnership with its principal place of business in Georgia. (Id. at ¶ 2.) Defendant UnitedHealthcare, Inc. ("UHI") is a Delaware corporation with its principal place of business in Edina, Minnesota. (Id. at ¶ 3.) UHI acquired Fidelity in March 2004. (Id. at ¶ 8.)

2. 2004 Retainer Agreement

Plaintiff retained the services of Herman Gerel to represent Fidelity in the matter of Fidelity Insurance Co. v. Express Scripts, Inc., No. 03-1521 (E.D. Mo.) (hereinafter "the ESI Litigation")—a 2003 class action lawsuit filed by Fidelity against Express Scripts, Inc. ("ESI"), a Missouri based pharmacy benefit management company. (Id. at ¶¶ 12, 16.)³ On November 4, 2003, Herman Gerel's managing partner sent Fidelity a letter memorializing the terms of Herman Gerel's future representation of Fidelity. (Compl. ¶ 17.) Herman Gerel had agreed to represent Fidelity for a 26.5 percent contingency fee. (Id. (citing Nov. 4, 2003 Letter, Compl. Ex. B).)⁴

On February 26, 2004, ESI filed counterclaims against Fidelity alleging that Fidelity had failed to make payments on invoices billed by ESI. (Compl. ¶ 18.) ESI demanded $1.5 million, plus interest for its counterclaim. (See Settlement Letter, Compl. Ex. I.) On July 21, 2004, following the filing of the counterclaim, Herman Gerel and Fidelity re-negotiated the terms of the retainer agreement; implementing a sliding contingency fee scale of 28 to 33 percentdepending on the "amount recovered" on behalf of Fidelity. (Compl. ¶ 22 (citing July 21, 2004 Retainer Agreement ¶ 4 ("2004 Retainer Agreement"), Compl. Ex. C).)

Paragraph 1 of the 2004 Retainer Agreement defined the scope of Herman Gerel's representation of Fidelity as follows:

1. REPRESENTATION . . . The Lawsuit involves both (1) affirmative claims asserted by Fidelity against [ESI], Fidelity's former pharmacy benefits manager or PBM ("PBM") (the Claims); and (2) counterclaims asserted by ESI against Fidelity Benefit Administrators, Inc. (the Counterclaims). Subject to the representations and warranties made herein and to the other provision of this Retainer Agreement, [Herman Gerel] agrees to represent Fidelity both in the prosecution of Claims and in defense of Counterclaims. [Herman Gerel] will take all reasonable actions that are reasonably required to prosecute the Claims, to defend the Counterclaims, and otherwise to advance the interests of Fidelity. [Herman Gerel] will take reasonable steps to keep Fidelity informed of the Claims, Counterclaims, defenses, rulings and negotiations that materially affect the interest of Fidelity in this matter, and/or otherwise as the court may prescribe.

(2004 Retainer Agreement ¶ 1.)

In turn, the "Amount Recovered" was defined as:

[T]he gross amount of any recovery relating to the Claims before the deduction of any advanced or incurred litigation costs, whether such sums are established by settlement or judgment. Amount recovered includes debt reduction, debt relief, and cancellation of any alleged indebtness [sic] of Fidelity. The Amount Recovered shall be based solely on the recovery relating to the Claims and shall not be reduced by any (1) setoff or offset taken by Fidelity, (2) judgment, settlement, or reduction in recovery caused by or relating to the Counterclaims, (3) claim or lien asserted by any past, current, or future auditor of Fidelity, or (4) any other reduction of damages caused by the conduct of Fidelity (or any affiliated person or entity) that does not relate directly to the Claims. . . . If there is no Amount Recovered, no contingency or attorney's fees shall be due.

(Id. at ¶ 4.)

Plaintiff signed the 2004 Retainer Agreement on behalf of Fidelity in his capacity as Fidelity's Vice President. (Compl. ¶ 28 (citing 2004 Retainer Agreement).) The 2004 Retainer Agreement says it was "[e]xecuted this 21^st day of July, 2004." (2004 Retainer Agreement.)

3. Acquisition of Fidelity Insurance Group, Inc. by UnitedHealthcare

In the midst of the then ongoing ESI Litigation, in March of 2004, Plaintiff and other Fidelity Insurance Group, Inc. ("Fidelity Group") stockholders ("Fidelity Stockholders"), pursuant to a Stock Purchase Agreement ("SPA"), sold their shares of Fidelity Group to UHI. (Compl. ¶ 32 (citing SPA, Compl. Ex. D).)⁵ After the sale of Fidelity Group's shares to UHI, both Fidelity Insurance, and Fidelity Benefit continued in business as fully-owned operating subsidiaries of UHI. (Compl. ¶ 35.) Concurrent with the execution of the SPA, Plaintiff entered into an employment agreement with UnitedHealthcare Services, Inc. (See SPA 1.)⁶

Pursuant to the SPA, the Fidelity Stockholders were to receive all proceeds from the ESI Litigation. (Id. at § 1.02(a).) The "ESI Proceeds" were defined as "the proceeds (it being acknowledged that the Stockholders or the Stockholders' Representative shall fund all related defense costs and expenses directly, and not out of the Escrow Funds) recovered by [Fidelity Group] in connection with the pending litigation between [Fidelity Group] and Express Scripts, Inc." (Id. § 1.02(a)(iii).)⁷ The SPA further provided that:

Promptly following the final nonappealable disposition of all claims and counterclaims between ESI and [Fidelity Group] and any of the Subsidiaries, and the receipt by [Fidelity Group] and the Subsidiaries of all amounts owing to them relating to such claims and counterclaims, [UHI] shall cause [Fidelity Group] to deliver the ESI Proceeds to the Stockholders by wire transfer of immediately available funds to the Stockholders' Representative for distribution to the Stockholders . . . .

(SPA § 1.08.)

In addition, the Fidelity Stockholders agreed to "indemnify [UHI] . . . and hold them harmless against any claim, loss, liability, deficiency, damages, amount paid in settlement, expense or costs (including reasonable costs of investigation, defense and legal fees and expenses)" arising from the ESI Litigation. (Id. § 9.02; Schedule § 9.02(d).) Plaintiff, as the Stockholders' Representative, had the authority to "contest, concede, settle, or compromise any claim relating to [Fidelity Group's] pending litigation with ESI (including any related claims or counterclaims) without the consent of [UHI] . . . ." (Compl. ¶ 33 (citing SPA § 1.08).) However, if

(a) the claim seeks relief other than the payment of monetary damages, (b) the subject matter of the claim relates to the ongoing business of [Fidelity], which claim, if decided against [Fidelity], would adversely affect the ongoing business or reputation of [Fidelity] or (c) [UHI] would not be fully indemnified with respect to such claim, then, in each such case, [UHI] and the Stockholder Representative shall jointly participate in all decisions regarding such claim . . . .

(SPA § 1.08.)

Subsequent to the execution of the SPA, Herman Gerel and Plaintiff entered into the aforementioned 2004 Retainer Agreement. The 2004 Retainer Agreement addressed the acquisition of Fidelity by UHI, stating that:

Fidelity was acquired by UHI on May 11, 2004 and is a wholly-owned subsidiary of UHI. By letter dated June 24, 2004 (attached), [Herman Gerel] disclosed to Fidelity all known potential conflicts of interest relating to its (or its members firms' or attorneys') litigation adverse to UHI. As part of UHI's acquisition of Fidelity, the Fidelity shareholders retained all interest in the Claims and agree to indemnify UHI for any liability relating to issues alleged in the Counterclaims. Accordingly, UHI has no direct financial interest in the outcome of the Lawsuit.

(2004 Retainer Agreement ¶ 2(B) (emphasis added).) Plaintiff signed the 2004 Retainer agreement in his capacity as Vice-President of Fidelity, and executed the agreement on behalf of"himself and as the Stockholders' Representative;" thereby giving the Fidelity Stockholders' consent to the agreement. (2004 Retainer Agreement; Compl. ¶ 29.)

4. ESI's Third-Party Claims Against Fidelity Group and UHI

On April 23, 2007, the district court granted ESI leave to file a second amended counterclaim against Fidelity, and a third-party claim against Fidelity Group and UHI. (Compl. ¶ 37.)⁸ ESI alleged that UHI was liable for any amount owed by Fidelity as a result of the litigation. (Compl. ¶ 38.) On July 1, 2007, as a result of the filing of the third-party claim, Herman Gerel and Fidelity entered into an Addendum to Retainer Agreement for Legal Services ("2007 Addendum"). (Id. at ¶ 39.) The 2007 Addendum stated that "[a]ll terms of the July 21, 2004 Retainer shall remain in full force and effect unless otherwise provided below." (2007 Addendum 1, Compl. Ex. E.) The 2007 Addendum reiterated the terms of the SPA, stating that the "Stockholders have agreed to defend and hold...