Naughton v. Pfaff

• Decision Date: 31 March 2016
• Docket Number: No. 2–15–0360.,2–15–0360.
• Citation: 404 Ill.Dec. 744,57 N.E.3d 503
• Court: United States Appellate Court of Illinois
• Parties: Richard P. NAUGHTON, Plaintiff–Appellant, v. Bruce R. PFAFF and Pfaff & Gill, Ltd., Defendants–Appellees.

57 N.E.3d 503

404 Ill.Dec. 744

Richard P. NAUGHTON, Plaintiff–Appellant

v.Bruce R. PFAFF and Pfaff & Gill, Ltd., Defendants–Appellees.

No. 2–15–0360.

Appellate Court of Illinois, Second District.

March 31, 2016.

Robert P. Conlon and Christopher A. Wadley, both of Walker Wilcox Matousek LLP, Chicago, for appellant.

Michael T. Reagan, Ottawa, for appellees.

OPINION

Justice SPENCE delivered the judgment of the court, with opinion.

¶ 1 Plaintiff, Richard P. Naughton, appeals from a grant of summary judgment in favor of defendants, Bruce R. Pfaff and Pfaff & Gill, Ltd. Naughton argues that the trial court erred in ruling that an attorney who refers an individual to another attorney may not prevail on a claim of breach of fiduciary duty against the receiving attorney if the client did not sign a contract complying with Illinois Rules of Professional Conduct Rule 1.5(f) (eff. Aug. 1, 1990). We affirm.

¶ 2 I. BACKGROUND

¶ 3 Naughton filed a complaint on January 19, 2010, alleging as follows. Both he and Pfaff were attorneys. He was a general practitioner focusing on wills and estate planning, business incorporation, and similar matters. Pfaff's field of practice was personal injury. Since about 2003, they had a relationship in which Naughton would refer various individuals who had sustained personal injuries to Pfaff as potential clients. In return, Pfaff agreed to pay a referral fee of one-third of any fee Pfaff received from representing a client. As part of the agreement and under Rule 1.5(f), Pfaff agreed and was obligated to prepare and have the client sign a contract detailing that Naughton, as the referring attorney, would receive one-third of any fee generated by the representation. Further, although the two agreed that Naughton would not exercise control over Pfaff's representation of the client, Naughton agreed to assume the same legal responsibility for the performance of Pfaff's services as would a partner of Pfaff's.

¶ 4 Pursuant to this agreement, Naughton referred several individuals to Pfaff as potential clients. For example, in October 2004, Naughton referred a man named S.A.¹ to Pfaff with respect to injuries that S.A.'s father had sustained in an accident. Pfaff accepted the case, and per the agreement with Naughton and Rule 1.5(f), Pfaff detailed in his written retainer agreement that Naughton, as the referring attorney, would receive one-third of the attorney fees generated by the case and that Naughton had agreed to assume the same legal responsibility that Pfaff & Gill had assumed for the performance of legal services. Pfaff settled the case around August 2006 and subsequently sent Naughton a check for his share of the fees generated by the case.

¶ 5 Similarly, in October 2007 Naughton referred an individual named J.K. to Pfaff with respect to personal injuries sustained by J.K.'s son. Pfaff had J.K. sign the same type of written retainer agreement as in the prior case. Pfaff subsequently filed suit, and to Naughton's knowledge, Pfaff continued to represent J.K. in the case.

¶ 6 Before March 2003, Naughton had represented his friend, Pete Mateljan, in various legal matters. In March 2003, he referred Mateljan to Pfaff regarding personal injuries sustained by Mateljan's daughter, Elizabeth Frankenfield, following a medical procedure. Pfaff declined to accept the case. In 2006, Mateljan asked Naughton to refer a medical malpractice attorney for injuries sustained by Elizabeth's daughter, Julianna Frankenfield, during Julianna's birth. Naughton again referred Mateljan to Pfaff.

¶ 7 Based on that referral, Mateljan and Elizabeth met with Pfaff to discuss the case. At that time, Mateljan told Pfaff that he and Elizabeth had been referred by Naughton. Pfaff accepted the case, but contrary to his agreement with Naughton and in violation of Rule 1.5(f), he failed to disclose in his written retainer agreement with Elizabeth that Naughton would receive one-third of the attorney fees and had agreed to assume the same legal responsibility as Pfaff & Gill. Instead, Pfaff presented Elizabeth with the firm's standard retainer agreement.

¶ 8 In early December 2008, Mateljan called Naughton, thanked him for the referral to Pfaff, and said that Pfaff had settled the case for $7.9 million. Naughton then called Pfaff to confirm the settlement and inquire about the status of the referral fee. Pfaff confirmed the settlement which, upon information and belief, generated attorney fees of $1,422,000. Pfaff said that he was embarrassed by omitting Naughton from the retainer agreement and that he would “ ‘make it right.’ ” He asked Naughton what would be appropriate. Naughton said that he should receive one-third of the attorney fees, as they had previously agreed. Pfaff said that his firm had received only an 18% contingency fee for the case and that the referral fee would therefore have to be 18% of the firm's fee. However, Pfaff later said that Naughton was not entitled to any referral fee, because he was not identified as the referring attorney in Elizabeth's retainer agreement.

¶ 9 Count I of Naughton's complaint alleged breach of contract against defendants for failing to pay him one-third of the attorney fees. Count II alleged breach of fiduciary duty. Specifically, count II alleged that the agreement between Naughton and Pfaff regarding referrals constituted a joint venture and that Pfaff breached his fiduciary duty to Naughton by failing to include Naughton as the referring attorney in the retainer agreement with Elizabeth. Naughton requested damages in an amount equal to one-third of the attorney fees generated by Julianna's case.

¶ 10 Naughton attached to the complaint affidavits from Mateljan and Elizabeth. Mateljan averred as follows, as pertinent here. Naughton had referred him to Pfaff regarding Julianna's injuries, and but for that referral, Elizabeth would not have hired Pfaff. Mateljan was present at Elizabeth's home when she retained Pfaff. At the beginning of that meeting, Mateljan advised Pfaff that Naughton had previously referred him to Pfaff and that they were there because Naughton had again referred them to Pfaff.

¶ 11 Elizabeth averred that she first met with Pfaff when she was referred to him through Mateljan. When she again needed the services of a medical malpractice attorney, Mateljan asked Naughton if they should again speak to Pfaff. Elizabeth would not have hired Pfaff if it had not been for Naughton's referral to her father, both initially and for Julianna's medical malpractice case. The retainer agreement should have included Naughton as the referring attorney, and it should now be amended to indicate this information, as Naughton was the reason she retained Pfaff. She understood that any referral fee paid to Naughton would be paid by Pfaff and would not cost her or Julianna's estate any money.

¶ 12 On April 21, 2010, defendants moved to dismiss the complaint. On July 20, 2010, Naughton voluntarily dismissed count I, and the trial court denied the motion to dismiss as to count II.

¶ 13 Defendants filed an answer to the complaint on October 21, 2010. They admitted that Naughton referred some clients to Pfaff whom Pfaff agreed to represent. They further admitted that they had distributed attorney fees to Naughton in accordance with the fee agreement signed by S.A.'s father and that J.K. had signed a similar fee agreement. They denied that the fee arrangements were per any generalized agreement. Defendants admitted that Mateljan called Pfaff on February 2, 2003, for a potential case regarding Elizabeth, and that Mateljan said that Naughton had referred him to Pfaff. Defendants declined to represent Elizabeth in June 2003. Defendants admitted that they later agreed to represent Julianna. They agreed that after the case settled they received a reduced 18% contingency fee and that Naughton demanded that they pay him one-third of their fee.

They denied that they ever offered any payment to Naughton for the case.

¶ 14 Defendants asserted the following six affirmative defenses: (1) Naughton forfeited any attorney-fee claim by failing to assert the claim during or immediately following the hearing on the order of distribution and dismissal; (2) this same omission estopped Naughton from asserting his claim for fees; (3) in the absence of an attorney-client relationship between Naughton and Elizabeth or her husband, Andrew Frankenfield,² as guardian and/or next friend of Julianna, Naughton was barred from recovering fees; (4) if Naughton had such an attorney-client relationship, he breached his fiduciary duty to his client to fully disclose any fee-sharing arrangement, barring him from recovering such fees; (5) Naughton could not recover fees due to his violations of Rule 1.5 ; and (6) if the court found that there was a joint venture between Pfaff and Naughton, Naughton violated his fiduciary duties to Pfaff by failing to disclose the fee arrangement to the clients and by failing to assert his claim before the order approving the settlement and distributing fees became final.

¶ 15 Naughton testified in his deposition as follows, in relevant part. He met Pfaff playing golf at a country club, and Naughton probably brought up the possibility of referring cases to him. At some later date Pfaff told him that his firm normally provided one-third of the attorney fees to the referring attorney, and Naughton said that this was fine with him. Pfaff indicated that he would prepare the client contracts and take care of all referral issues. Naughton called Pfaff about some cases, including Elizabeth's case.

¶ 16 Regarding Julianna's case, Naughton saw Mateljan in a social setting, and Mateljan said that his granddaughter had a potential medical malpractice issue. He asked if Naughton still recommended Pfaff, and Naughton said that Mateljan should definitely call him. In December 2008, Mateljan called to thank Naughton for the referral and said that the case had been settled. In the meantime, Naughton had had no interaction...