Sexton Law Firm, P.A. v. Milligan

• Decision Date: 30 June 1997
• Docket Number: No. 97-52,97-52
• Parties: , 134 Lab.Cas. P 58,293 SEXTON LAW FIRM, P.A., and Sam Sexton, Jr., Appellants, v. Phillip J. MILLIGAN, Appellee.
• Court: Arkansas Supreme Court

Page 388

948 S.W.2d 388

329 Ark. 285, 134 Lab.Cas. P 58,293

SEXTON LAW FIRM, P.A., and Sam Sexton, Jr., Appellants, v. Phillip J. MILLIGAN, Appellee.

No. 97-52.

Supreme Court of Arkansas.

June 30, 1997.

Matthew Horan, Fort Smith, for appellant.

John Everett, Fayetteville, for appellee.

BROWN, Justice.

Appellants Sexton Law Firm, P.A., and Sam Sexton, Jr. (Sexton), appeal a judgment in favor of appellee Phillip J. Milligan on Sexton's claim of breach of contract, claiming error by the trial court in excluding certain evidence. Sexton further claims that the trial court erred in directing a verdict in favor of Milligan on his claims of fraud and breach of fiduciary duty. We agree that the trial court erred in excluding evidence of the Firm Handbook as well as evidence of the arrangements with other attorneys associated with the Sexton Law Firm. We further agree that the trial court erred in directing a verdict on the fraud and breach-of-fiduciary-duty counts. We reverse the trial court on these points and remand the matter for further proceedings.

This litigation arose out of the arrangement struck between Sexton and Milligan relating to Milligan's practice of law between April 1, 1992, and November 1, 1995. Certain facets of that arrangement are not in dispute. Sexton was to provide Milligan with office space, utilities, telephone services, advertising, library facilities, stationery, clerical and secretarial services, and other expenses necessary to the practice of law. Milligan would receive 50 percent of all attorney fees generated by cases assigned to him minus expenses incurred in the preparation and trial of such cases. For cases that were either dismissed or unsuccessfully tried, Milligan and Sexton would equally divide the costs incurred during representation. Milligan would be assigned cases based on a rotation system set up by Sexton for all attorneys working at the law firm with similar arrangements.

On Saturday night, November 1, 1995, Sam Sexton was advised that Milligan was loading case files from the law firm into his Ford Explorer. Sexton called Milligan and was assured that he was merely moving closed files that were taking up space in his office to storage. The following Monday Sexton learned that Milligan had cleared out his office and had removed multiple closed and open case files from the law firm premises. Milligan does not deny taking the files but has contended throughout that the clients involved were his clients--not Sexton's.

On February 27, 1996, Sam Sexton and the professional association of which he was sole shareholder filed an amended complaint against Milligan and alleged that Milligan, an independent contractor, had breached his agreement with the law firm. Sexton further alleged that commencing in February 1995, Milligan devised a scheme where Sexton would incur substantial expense for the preparation of certain cases assigned to Milligan only to have Milligan leave and open his own law firm with the intent to keep all fees generated. Sexton sought an accounting for moneys owed and injunctive relief to prevent the destruction of files taken and to require their return based on claims of breach of fiduciary duty and interference with contractual relations. He also asserted a claim for fraud and deceit and asked for both compensatory and punitive damages.

Milligan answered and admitted that he entered into an oral contract with Sexton that established his relationship as an independent contractor. He denied that the agreement encompassed the terms of the law firm's handbook on procedure ("Firm Handbook"). He asserted that his relationship with the law firm was one of independent contractor and that he had formed a professional association known as "Phillip J. Milligan, Inc."

Sexton moved for a jury trial on the fraud count. He urged that the chancery court decide the issues of equitable relief (the accounting and the restraining order) but empanel a jury and accept its recommendation for the claims for compensatory and punitive damages. Both sides agreed to this, and the trial court approved submission of the breach of fiduciary duty and fraud counts for a binding verdict. Sexton then filed a second amended complaint that added a claim for breach of contract, which was also agreed to be submitted to the jury.

At trial, Milligan was called by Sexton as a witness and testified about his arrangement with Sexton, as already described. He testified that this arrangement remained the same throughout his experience with Sexton, and that the agreement was the same as that for the other attorneys who were with the firm when he joined. Because Milligan was new to the practice of law and had yet to achieve a client base, part of the agreement included a six-month probationary period, where Sexton agreed to advance Milligan $2,000 per month for living expenses. According to Milligan, the agreement was waived after three months because 50 percent of the fees he had generated at that time exceeded the $2,000 per month advance. He testified that he received assistance from members of the firm on cases and offered assistance to other attorneys in return. He testified about occasional meetings of attorneys headed by Sexton for the discussion of cases and admitted that on at least one occasion attorneys were required to submit a memorandum on the number of open cases and possible fees to be recovered. He testified about several forms used in the firm and particularly about the attorney-client form, which listed individual attorneys like Milligan as well as "Sexton Law Firm, P.A."

Three case files taken by Milligan were focal points in this litigation. First, there was the Watson case. Milligan testified that he met John Watson on March 1, 1993, in the firm's offices and represented him on an IRS matter. During the course of this representation, Watson and his wife were involved in an automobile accident and suffered serious physical injury. Milligan testified that, per Watson's request, he entered into an attorney-client agreement naming himself individually as the attorney on the personal-injury claim and reduced his contingency fee from 33 1/3 percent, which was the customary amount at the Sexton Law Firm, to 25 percent. He admitted that he did not inform Sexton that he signed the attorney-client agreement in his individual name because he did not believe it was necessary to do so. Milligan testified that, at the time he entered into the agreement, he was still bound to share 50 percent of his fees with the Sexton Law Firm. He testified, however, that if his client received a recovery after he left the firm, the law firm had no claim to a share of his fees. Milligan admitted that he started making plans to leave the Sexton Law Firm in the late summer or early fall of 1995. He settled the Watson case in July 1996 for $1,314,000.

Milligan also discussed the Mary Jane Wood case, which was assigned to him by Sexton after the departure of another attorney from the law firm. He admitted that on September 19, 1995, while he was still associated with the firm, he caused a letter to be sent to opposing counsel offering a settlement for $150,000 that was written on the letterhead of "Milligan Law Offices." That letterhead contained the address of a Fort Smith post-office box. On October 5, 1995, Milligan sent a letter recognizing a $140,000 settlement of the case, which stated: "PLEASE TAKE NOTE OF MY NEW ADDRESS AND FIRM NAME." Subsequently, the settlement payment was sent to Milligan's post-office box address. Both the September 19 and October 5, 1995 letters were prepared by a secretary provided by the Sexton Law Firm, with the use of firm stationery and postage. Milligan agreed that the Mary Jane Wood settlement sheet, dated November 9, 1995, reflected that he received attorney fees in the amount of $46,666.20 but disagreed that the Sexton Law Firm had any entitlement to 50 percent of that amount. The funds from the settlement were distributed eight days after his departure from the firm.

Milligan settled another case involving Bonnie Scandrett. Using his personal letterhead, a settlement was effected during his association with the Sexton Law Firm. The Scandrett settlement sheet, dated November 15, 1995, reflected an attorney fee of $18,750. Milligan acknowledged that the Sexton Law Firm paid some of the expenses associated with the case but admitted that none of these funds were paid to the law firm. Milligan admitted that the settlements from the Mary Jane Wood and Scandrett cases allowed him to spend approximately $30,000 in expenses associated with the Watson case.

Milligan testified that he departed from the Sexton Law Firm at approximately 10:00 p.m. on Saturday night, November 1, 1995, with the files and told Sam Sexton that he was moving closed files. He did not inform Sexton at that time that he was leaving the firm. Eventually, Milligan removed all of his files and ordered his secretary to download associated information from the firm's computer onto floppy disks.

On cross-examination by his own counsel, Milligan stated that he believed his status with the Sexton Law Firm to have been that of an independent contractor. He pointed to the allegations in Sexton's own complaint and to the fact that Sexton treated him as an independent contractor for income-tax purposes. He denied that his oral contract was governed by the Firm Handbook but admitted that other attorneys, who joined the firm after he did, signed a written contract and were likely subject to the handbook's provisions.

Milligan also believed that Sexton was not performing pursuant to contractual obligations. At the time he left the firm, he had only been reimbursed for $800 of the $2,000 worth of expenses he had incurred during his work on the Watson case. He also explained that he was not receiving his equal share of cases under the firm's rotation system.

He testified that although he received...