Sheller v. Superior Court

• Decision Date: 17 January 2008
• Docket Number: No. B190479.,B190479.
• Citation: 158 Cal.App.4th 1697,71 Cal.Rptr.3d 207
• Court: California Court of Appeals Court of Appeals
• Parties: David L. SHELLER, Petitioner, v. The SUPERIOR COURT of Los Angeles County, Respondent; Farmers New World Life Insurance Company et al., Real Parties in Interest.

71 Cal.Rptr.3d 207

158 Cal.App.4th 1697

David L. SHELLER, Petitioner, v. The SUPERIOR COURT of Los Angeles County, Respondent Farmers New World Life Insurance Company et al., Real Parties in Interest.

No. B190479.

Court of Appeal, Second District, Division 3.

January 17, 2008.

As Modified on Denial of Rehearing February 6, 2008.

Robert S. Gerstein, Los Angeles, for Petitioner.

Fulbright & Jaworski, Richard R. Mainland, Peter H. Mason, Joshua D. Lichtman and Eric A. Herzog, Los Angeles, for Real Parties in Interest.

CROSKEY, Acting P.J.

A Texas attorney appearing pro hac vice for plaintiffs in a class action sent a communication to prospective class members which contained at least one misrepresentation. The trial court issued an order to show cause why the attorney's pro hac vice status should not be revoked. After a hearing, the trial court declined to revoke the attorney's pro hac vice status, and instead ordered the attorney to reimburse the defendant for substantial attorney's fees, as a condition of retaining his pro hac vice status. The trial court also formally reprimanded the Texas attorney. The attorney appeals. We conclude the trial court lacked authority to impose attorney's fees as a sanction and also lacked authority to issue the formal reprimand. We therefore reverse the trial court's order.¹ However, we also conclude that the trial court has the authority to revoke an attorney's pro hac vice status in certain circumstances, and therefore remand for further proceedings.

FACTUAL AND PROCEDURAL BACKGROUND

The challenged order arises in the context of a class action against Farmers New-World Life Insurance Company and Farmers Group, Inc. (collectively "Farmers"). The action alleges Farmers committed unfair business practices in connection with Farmers's Universal Life and Flexible Premium Universal Life insurance policies. Specifically, the action alleges that the insurance policies were set up so that Farmers would collect premiums from policyholders that were insufficient to keep the policies in force — resulting in either an untimely lapse of the policies or a substantial increase in premiums. The initial complaint was filed on November 5, 2003. The named plaintiff, Pauline Fairbanks, was not only a Farmers insured, but also a Farmers agent. At the time the complaint was filed, Fairbanks was represented by Attorney Scott A. Marks, who is a California attorney.

At the same time, Attorney David L. Sheller, who is admitted to practice in Texas,² was pursuing a similar class action against Farmers in Texas. On February 2, 2004, Attorney Sheller filed an application to appear pro hac vice as lead counsel on behalf of Fairbanks in the instant action.³ The application was granted.

From as early as November 1, 2004, the trial court suggested that Fairbanks might not be an ideal class representative for the insureds, as she had also been a Farmers agent. In June 2005, Attorney Sheller, but not Attorney Marks, sent a written communication to some 350 Farmers policyholders, seeking additional class representatives. The letter was in the form of a flyer,⁴ boldly captioned, "Attention Farmers Insurance Group Policy Holders!!!" The flyer began, "A potential class action lawsuit has been filed against [Farmers] in the State Court of Los Angeles County. We are concerned Farmers may have given you misleading information about this lawsuit. Our intention is to help policyholders and give them accurate information."⁵ The flyer went on to state, "If you have purchased such a policy, we may be able to help you. We are looking for other people who have purchased such Farmers policies. If you have, you may be accepted as a `class representative.' If accepted, you are paid for your time in an amount set by the judge." (Emphasis in original.)

Upon learning of this flyer, Farmers filed an ex parte motion for a temporary restraining order preventing plaintiffs' counsel from sending further pre-certification communications to potential members of the class, or, in the alternative, to prevent any such communications without prior court approval. Farmers's motion was based not only on the June 2005 flyer, but also on two other communications which allegedly contained factual misrepresentations about the insurance policies at issue: a September 2003 letter and a telephone survey of 500 Farmers policyholders Attorney Sheller had commissioned.⁶ Farmers supported its motion with an expert declaration to the effect that both the September 2003 letter and the June 2005 flyer violated the California Rules of Professional Conduct. As to the statement in the June 2005 flyer indicating that Farmers "may have given [policyholders] misleading information about this lawsuit," Farmers submitted a declaration that it had never made a general mailing to its policyholders, much less a misleading one.⁷

A hearing on Farmers's ex parte motion was held on July 28, 2005. Attorney Sheller was present. At the hearing, the trial court expressed concern that "there seems to be some hucksterism going on here by plaintiffs." While the trial court believed that the September 23, 2003 letter did not comply with the Rules of Professional Conduct,⁸ the court was most concerned by the June 2005 flyer. Specifically, the court found the statement, "If accepted, you are paid for your time in an amount set by the judge" to be both inappropriate and simply untrue. Not only are class representatives not always entitled to recover, they may in fact be liable for court costs if the defendant prevails. Attorney Sheller responded, "As far as the [issue] of whether or not the class representative] is going to be paid or not, our contract specifically states that if we lose, they can be liable for costs of court. And without divulging any attorney communications, it is my standard practice to tell people that they can lose." The court responded that Attorney Sheller "just admitted a bait and switch to me," in that Attorney Sheller initially represented to prospective class members that they would be "paid for [their] time," but when the class members signed Attorney Shelter's agreement, they were then told that they could be responsible for costs in the event of a loss. The court believed the misrepresentation to be intentional. Attorney Sheller stated that he had no intention to mislead, and added, "I think now it will be changed. It won't happen again." The trial court restrained plaintiffs' counsel from any further pre-certification communications with potential class members without court pre-approval. Finding the June 2005 flyer particularly violative of the ethical rules, the trial court, on its own motion, set an order to show cause why Attorney Sheller's pro hac vice status should not be revoked.

There followed substantial discovery and briefing.⁹ Farmers submitted a supplemental declaration from its expert, confirming her opinion that the June 2005 flyer constituted an ethics violation. Farmers also submitted the declaration of a Texas ethics expert, who concluded the flyer violated Texas rules as well.

In response to the order to show cause, plaintiff¹⁰ argued that the 2005 flyer was accurate "with one minor exception." Plaintiff stated her counsel now realized the statement indicating class representatives would be paid for their time was' "oversimplified and incorrect." According to plaintiffs response, "[Attorney] Sheller concedes that this was in error and that he is responsible for this mistake, and he wishes to correct it immediately by a further letter to the potential class, upon the [c]ourt's approval." Plaintiff explained that the "mistake arose because several lay people looked at the notice in an effort to make it simpler and easier to understand for the average person. [Attorney] Sheller was involved with the review and should have looked at it again and given it more thought before it went out the door to 350 people. However, in the usual press of time and because he did not give extra thought to a letter before it was sent out, [Attorney] Sheller made a human mistake." As to the representation in the flyer that Farmers may have given misleading information about the lawsuit, plaintiff stated, "This sentence was placed in the letter because [Attorney] Sheller has twelve (12) years of experience in life insurance sales fraud cases. It has been [Attorney] Sheller's experience that when people learn of an alleged problem with their policy, by whatever means, most of the time they contact their agent or the home office. Many times when they call their agent or the home office, they are given inaccurate or misleading information that there is not really a problem at all. [Attorney] Sheller has experienced this in this case with policy holders who received the notice in question. This happens so frequently in these cases that it is [Attorney] Sheller's opinion that this is a general business practice in the life insurance industry."¹¹

A draft "Corrective Notice and Apology" was attached, which repeated the bulk of the text of the flyer, including the sentence, "If accepted, you are paid for your time in an amount set by the judge." However, the next paragraph, written in bold type, states, "The sentence `If accepted, you are paid for your time in an amount set by the Judge' is inaccurate. The Court finds that sentence is an ethical violation by Plaintiffs counsel, David L. Sheller. In actuality, you might not be paid at all and could be personally liable for court costs, if the Plaintiff loses." The draft corrective notice did not restate Attorney Sheller's concern that "Farmers may have given you misleading information about this lawsuit," nor did it retract that statement as ethically improper or otherwise inaccurate.

Attorney Sheller submitted the declaration of his own ethics expert opining that there is "nothing materially misleading" about the original flyer. As to the assertion in the flyer that class representatives...