McProud v. Siller (In re CWS Enters., Inc.)

• Decision Date: 14 September 2017
• Docket Number: Nos. 14-17045, 14-17046.,s. 14-17045, 14-17046.
• Citation: 870 F.3d 1106
• Parties: IN RE CWS ENTERPRISES, INC., Debtor, Spiller McProud, Plaintiff–Appellee, v. Charles W. Siller, Defendant–Appellant, and David D. Flemmer, Chapter 11 Trustee; CWS Enterprises, Inc., Defendants. In Re CWS Enterprises, Inc., Debtor, Spiller Mcproud, Plaintiff–Appellee, v. CWS Enterprises, Inc.; Charles W. Siller, Defendants, and David D. Flemmer, Chapter 11 Trustee, Defendant–Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

870 F.3d 1106

IN RE CWS ENTERPRISES, INC., Debtor,

Spiller McProud, Plaintiff–Appellee,

v.Charles W. Siller, Defendant–Appellant,andDavid D. Flemmer, Chapter 11 Trustee; CWS Enterprises, Inc., Defendants.

In Re CWS Enterprises, Inc., Debtor,

Spiller Mcproud, Plaintiff–Appellee,

v.CWS Enterprises, Inc.; Charles W. Siller, Defendants,andDavid D. Flemmer, Chapter 11 Trustee, Defendant–Appellant.

Nos. 14-17045, 14-17046.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted October 21, 2016—San Francisco, California

Filed September 14, 2017

Bradley A. Benbrook (argued) and Stephen M. Duvernay, Benbrook Law Group PC, Sacramento, California; David A. Cheit, DLA Piper LLP (US), Sacramento, California; for Defendant–Appellant David D. Flemmer.

Randy Michelson (argued), Michelson Law Group, San Francisco, California, for Defendant–Appellant Charles W. Siller.

Steven T. Spiller (argued), Spiller McProud, Nevada City, California; Walter R. Dahl, Dahl Law, Sacramento, California, for Plaintiff–Appellee Spiller McProud.

Before: Andrew J. Kleinfeld and Milan D. Smith, Jr., Circuit Judges, and Edward R. Korman,^* District Judge.

OPINION

KLEINFELD, Senior Circuit Judge:

We address the bankruptcy code's provision on claims for pre-petition attorneys' fees, 11 U.S.C. § 502(b)(4).

FACTS

Charles Siller has been litigating with his brothers over his interest in the family business since 1982. The family business, Siller Brothers, Inc., held among its assets some 500 pieces of real estate, and Siller owned 40% of the stock. By 2001, Siller Brothers, Inc. had obtained a $10 million judgment against Siller, and it was threatening to execute on his shares. To fight this litigation, Siller retained several law firms at various times.

In 2001, Charles Siller hired the law firm Cotchett, Pitre & Simon¹ to represent him both in his lawsuit with his brothers and a legal malpractice dispute with some of his former lawyers. The Cotchett firm agreed to a contingent fee of 28% of the net settlement or trial award after subtraction of a $10 million judgment against Siller in favor of his brothers. The engagement agreement said that Siller was "without funds to pay hourly fees." The arbitration provision, initialed by Siller when he signed it, stated that "any dispute" relating to the fee agreement or the Cotchett firm's performance of services would be submitted to arbitration.

Two and a half years later, Siller retained the Spiller • McProud law firm. Siller hired the Spiller firm "not as additional trial attorneys, but to assist, advise and discuss these legal matters personally" with Siller, and to act as "an interface" for Siller "with the attorneys at the Cotchett law firm." The Spiller firm was to work to ensure that Siller could "fully understand and [be] in agreement with the Cotchett law firm's trial strategy, trial preparation (including selection of experts), and conduct of the trial itself." The Spiller firm was to serve as Siller's "general counsel" and "to communicate to the Cotchett law firm [Siller's] ideas, suggestions, and requests."

Siller wanted Spiller • McProud to convince the Cotchett firm to pursue a theory that Siller's brother's death entitled Siller to purchase his brother's shares for a small fraction of what they were worth, under a separate contract Siller had with his deceased brother. The Spiller firm agreed, but Siller and the Spiller firm expressly agreed that the contingent fee would not depend on the success of this theory. The Spiller firm was to get 8% of the same net amount from which the Cotchett firm's 28% contingent fee was to be calculated. Siller and the Spiller firm also incorporated the other terms of Siller's agreement with the Cotchett firm, including the arbitration provision.

The Cotchett firm, consulting with the Spiller firm, won Siller's case against Siller Brothers, Inc. After a failed mediation and a stay of execution on Siller Brothers, Inc.'s $10 million judgment against Siller, the case went to trial in California Superior Court. The judge issued a proposed judgment valuing Siller's shares at over $56 million. Pending appeal and cross appeal, the parties settled for $10 million cash to Siller and $20.5 million worth of real estate in exchange for Siller's shares. Consistent with Siller's fee agreements with the firms, the contingent fees were to be based upon the $30.5 million value of the settlement. Documentation was delayed while Siller's counsel, working with tax experts, created for Siller a new corporate spinoff, CWS Enterprises, Inc., so that Siller could mitigate the tax impact of his lawyers' victory.

The firms also tried other cases that Siller insisted on. While the dissolution case was ongoing, the Cotchett and Spiller firms filed a separate action against Siller Brothers, Inc. and pursued Siller's preferred theory (that Siller had acquired a right to buy his deceased brothers' shares cheaply under a separate contract). They lost that case. The two firms also lost a malpractice case Siller brought against one of his previous lawyers, and they negotiated a $41,000 settlement in another case where Siller had refused to pay a different set of previous lawyers. (Siller then refused to pay even the $41,000 settlement, so those disputes remained pending after he moved on from the Cotchett and Spiller firms.)

Nor would Siller pay the 28% and 8% fees he had agreed to pay the Cotchett and Spiller firms, respectively. Siller's failure to pay the Spiller firm its 8% contingent fee is the subject of the appeal before us. Siller and the two firms arbitrated the fee dispute before a retired state judge acting as arbitrator, presenting two days of testimony and extensive argument.

Every aspect of the arbitration, including whether it should take place, was hotly contested. Despite his agreement to arbitrate "any dispute," Siller refused to do so until the Superior Court denied his ex parte application to prevent such arbitration. Siller then continued his attempt to evade arbitration by way of unsuccessful motions in limine before the arbitrator.

During the arbitration, Siller's counsel led off his cross examination of the attorneys' lead witness, Mr. Pitre of Cotchett, Pitre, by asking what his and his associates' hourly rates were. Siller's lawyer then asked why they had contracted for a contingent fee. Pitre replied, "Because Mr. Siller didn't have any money," so the attorneys would have to be paid "[o]ut of a recovery, hopefully." The lawyers advanced about $400,000 in expenses, as well as their time and effort. Pitre was initially reluctant to pursue the case against Siller's deceased brother under the buy-sell agreement (the theory under which Siller would buy his brother's shares for a valuation price that was a small fraction of what the shares were worth) because he doubted that agreement's enforceability. But, as Spiller had agreed to do in his retainer agreement, he consulted with Pitre and came up with a theory that the two firms could advance with a straight face. (They lost that portion of the case, as they did the malpractice case Siller had started against one of his previous lawyers.)

As Siller's attorney presented his case during the arbitration, (1) the real estate accounting for two thirds of the settlement had declined in value since the settlement, so if a contingent fee applied at all, it should be against much less than the $30.5 million; (2) the value of the legal services was far less than the contingent fee would yield; (3) much of the work, including the failed lawsuits against the deceased brother's estate and the failed lawsuit against one of Siller's previous attorneys, produced no value, so the attorneys should not be compensated for it; (4) Spiller had participated actively in the successful trial, but had only been retained as "general counsel" to consult, so he ought not to be compensated for any of that time; and (5) the money went to the spinoff created for Siller to avoid taxes, not to Siller, and the spinoff had not signed the fee agreement, so no fees were due.

Siller's case focused largely on the reasonable value of the Cotchett and Spiller firms' respective services, both as an alternative to the contingent fee agreement and as justification for not holding him to his contingent fee agreement. Siller's attorney urged the arbitrator to limit compensation to "the reasonable value of the services rendered" because the Cotchett and Spiller firms had "failed to fulfill" their contracts. He argued that "[i]f you have a breach of contract then the answer's in quantum meruit." "And even if it's a contract, the law says you must prove reasonable value of the services, and that goes to the performance." Siller's attorney argued that the hours were also relevant to "the issue of conscionability." "[T]he conscionability of this fee will be determined also based upon ... [the] hours they devoted to matters that they failed to bring to conclusion through their own errors," referring to the unsuccessful malpractice case against one of Siller's prior lawyers.

The Cotchett and Spiller firms objected to all this evidence, which was the bulk of Siller's case, on the theory that evidence as to quantum meruit was not necessary in a breach of contract action. But they conceded that Siller could "inquire about the amount of time put into the matters ... the time for their quantum meruit," because it was an issue the arbitrator could reach if he deemed the contract void.

Siller's attorney pointed out that the arbitrator had not yet ruled on whether the contingent fee agreement was binding, so "quantum meruit is still an issue." He argued that if the contract was not deemed to be binding, then quantum meruit would determine the proper amount of the fee, and even if the contract were binding, counsel would still have to show a reasonable effort to justify the amount of the fee under state bar rules. So "[u]ltimately this comes down to hours," Siller's attorney argued, which apparently...