Opinion ID: 3018799
Heading Depth: 4
Heading Rank: 2

Heading: There are Multiple Conflicts of Laws

Text: Plaintiffs contend that Texas law governs the fiduciary duties. Defendants, on the other hand, assert that, if there is a true conflict, Pennsylvania, Ohio, and Indiana law applies. Thus, the first question in a Pennsylvania choice of law analysis is whether there is a true conflict between Texas, Pennsylvania, Ohio, and Indiana law. The true conflict question is complicated by the fact that some states differentiate actions for breach of fiduciary duty by 21 an attorney from legal malpractice and from violation of state disciplinary rules, while other states equate two or all three causes of action. There is undoubtedly substantial overlap among the three, and state courts have not always been precise in their language when discussing these matters. Nonetheless, there is a conflict of law on each of Plaintiffs’ claims, although the conflict and the result it causes varies from claim to claim.
Under Texas law, “a client need not prove actual damages in order to obtain forfeiture of an attorney’s fee for the attorney’s breach of fiduciary duty to the client.” Burrow v. Arce, 997 S.W.2d 229, 240 (Tex. 1999). Also Yaquinto v. Sergerstrom, (In re Segerstrom, 247 F.3d 218, 226 n.5 (5th Cir. 2001). The Texas rule accords with the rule adopted in several other states, the Restatement (Second) of Trusts § 243, the Restatement (Second) of Agency § 469, and the Restatement (Third) of the Law Governing Lawyers, §§ 37, 55. It also comports with the two circuit level decisions on the issue, Hendry v. Pelland, 73 F.3d 397 (D.C. Cir. 1996) (applying D.C. law), Frank v. Bloom, 634 F.2d 1245, 1257-58 (10th Cir. 1980) (applying Kansas law). Defendants argue that Texas law does require actual damages for a breach of fiduciary duty claim. This is incorrect. Texas requires actual damages only if a plaintiff seeks to recover damages for actual harm. Liberty Mut. Ins. Co. v. Gardere & Wynne L.L.P., 82 Fed. Appx. 116, 118 (5th Cir. 2003) (under Texas law “[n]ot all forms of recovery require a client who is suing his attorney to prove that the attorney’s 22 actions caused the client injury . . ..”); Two Thirty Nine Joint Venture v. Joe, 60 S.W.3d 896, 910 (Tex. App. 2001), rev’d on other grounds, 145 S.W.3d 150 (“Generally, the proper measure of damages in a legal malpractice case is that amount of damages that would have been collectible but for the wrongful act or omission of the attorney.”) (emphasis added). Thus, in Joe v. Two Thirty Nine Joint Venture, 145 S.W.3d 150, 159 (Tex. 2004), the Texas Supreme Court required causation and an injury for a legal malpractice claim based, inter alia, on an alleged breach of fiduciary duty. When only fee forfeiture is at issue, actual harm need not be proven because “[i]t is the agent’s disloyalty, not any resulting harm, that violates the fiduciary relationship and thus impairs the basis for compensation. An agent’s compensation is not only for specific results but also for loyalty.” Burrow, 997 S.W.2d at 238. At first blush, Pennsylvania, Indiana, and Ohio law seem to indicate that claims for breach of fiduciary duty require actual harm. Mullen v. Cogdell, 643 N.E.2d 390, 401 (Ind. App. 1994); McConnell v. Hunt Sports Enter., 725 N.E.2d 1193, 1215 (Ohio App. 1999); Pa. S.S.J. I.13 § 4.15 (1991).14 Whether these states would require a showing of actual harm in a situation in 13 Suggested Sample Jury Instructions. 14 Troublingly, the decisions cited by the District Court for the proposition that the Plaintiffs must show actual injury, Kituskie v. Corbman, 714 A.2d 1027, 1030 (Pa. 1998) and Gilman v. Hohman, 725 N.E.2d 425, 428-29 (Ind. App. 2000), are legal malpractice cases, a form of negligence actions, rather than fiduciary breach actions. 23 which only disgorgement is requested is, however, an open question. The issue has never been resolved by these states’ courts. Arguably, they might adopt the well-considered position of every jurisdiction that has considered the issue, which is to require harm only for damages, not for the equitable remedy of disgorgement. Plaintiffs are currently seeking “disgorgement of Defendants’ legal fees collected with respect to the Cosey and Raken actions, as well as compensatory and punitive damages.”15 Thus, there is not a direct conflict of laws between Texas and Pennsylvania, Ohio, and Indiana, but there is a potential conflict of laws. We have found no authority as to how to treat such a hypothetical conflict of laws, but we will treat it as if there were an actual conflict. The end result is the same, however, whether or not there is a conflict. If Pennsylvania, Ohio, and Indiana should follow Texas law, there would not be a requirement of a showing of actual harm in order to maintain an action for disgorgement for breach of fiduciary duty. On the other hand, if Pennsylvania, Ohio, and Indiana did not follow the Texas rule, there would be a conflict, but, as analyzed below in Section II.A.3, we conclude that Texas law would apply under the Pennsylvania choice of law rules’ “significant relationship” 15 In this case, disgorgement would likely result in a larger recovery for Plaintiffs than compensatory damages. Disgorgement could entail up to 39% of their total recovery (Taylor’s 97.5% of the 40% contingent fee to Local Counsel), whereas compensatory damages could be de minimis. 24 analysis.16 Either way, the same rule applies—no showing of actual harm is required to maintain an action for disgorgement for breach of fiduciary duty. Thus, even if there is a conflict here, it does not affect the outcome.
There might be a conflict of laws regarding the element necessary to prove a civil conspiracy for breach of fiduciary duties. In large part, this conflict depends on how one believes a Texas court would apply Texas civil conspiracy law to Texas’s limited requirements for breach of fiduciary duty when disgorgement is sought. Texas requires both a conspiracy and a breach of fiduciary duty to maintain a claim of civil conspiracy to breach fiduciary duties. Finish Line P’ship. v. Kasmir & Krage, L.L.P., 2000 Tex. App. LEXIS 7744 (Tex. App. 2000). Therefore, Plaintiffs cannot proceed on their civil conspiracy claim under Texas law unless they can also proceed on their breach of fiduciary duty claim, as discussed above. 16 We note that under Pennsylvania choice of law rules’ “significant relationship” analysis, among Pennsylvania, Ohio, and Indiana, there is not a state with a superior relationship to this case. Therefore, if Texas law did not apply, we would still have to determine if there was a conflict among these states’ laws and that seeking certification from three separate state supreme courts, including two that are not within our Circuit, could significantly delay resolution of this case. 25 Texas generally requires actual injury for civil conspiracy claims, Chon Tri v. J.T.T., 162 S.W.3d 552, 556 (Tex. 2005). However, in light of the absence of an injury requirement for breach of fiduciary duty and Texas’ definition of civil conspiracy as “a combination by two or more persons to accomplish an unlawful purpose or to accomplish a lawful purpose by unlawful means,” Triplex Commc’ns v. Riley, 900 S.W.2d 716, 720 (Tex. 1995), we think it an open question whether Texas law requires actual harm for a claim of civil conspiracy to breach fiduciary duty. Pennsylvania law appears to require injury for a civil conspiracy. Goldstein v. Phillip Morris, Inc., 854 A.2d 585, 590 (Pa. Super. Ct. 2004) (listing injury as a necessary element), but cf. Grose v. P&G Paper Prods. (In re Grose), 866 A.2d 437, 440-441 (Pa. Super. Ct. 2005) (not listing injury as a necessary element although injury existed). Ohio requires proof of an underlying claim and actual damages in a claim for civil conspiracy. Williams v. Aetna Fin. Co., 700 N.E.2d 859, 868 (Ohio 1998). Indiana also requires harm for a civil conspiracy. Indianapolis Horse Patrol, Inc. v. Ward, 247 Ind. 519, 522 (Ind. 1966); Winkler v. V.G. Reed & Sons, 638 N.E.2d 1228, 1234 (Ind. 1994). As noted above, though, these states have not addressed the unique situation of a claim for disgorgement for breach of fiduciary duties. This is an area of unsettled law, but we believe it a fair presumption that civil conspiracy to breach fiduciary duties will follow the law for breach of fiduciary duties, so, as explained above, we will presume a conflict of laws on the civil conspiracy claim too.
26 Proof of a breach of fiduciary duty is required to maintain a claim of aiding and abetting a breach of fiduciary duty. Toles v. Toles, 113 S.W.3d 899, 917 (Tex. App. 2003); Kline v. O'Quinn, 874 S.W.2d 776, 786-87 (Tex. App.1994); State v. Galloway, 2005 Ohio App. LEXIS 4861,  (Ohio Ct. App. 2005); Williams v. Aetna Fin. Co., 700 N.E.2d 859, 868 (Ohio 1998); State Bd. of Med. Educ. & Licensure v. Ferry, 94 A.2d 121, 123 (Pa. Super. Ct. 1953). Indiana does not appear to recognize civil aiding and abetting; that term is used only in Indiana criminal law. Comm’r v. RLG, Inc., 755 N.E.2d 556, 560-561 (Ind. 2001). States vary on whether damages are required for such a claim. Pennsylvania appears not to have such a requirement. Thompson v. Glenmede Trust Co., 1993 WL 197031 (E.D. Pa. 1993) (aiding and abetting a breach of fiduciary duty does not require actual harm); but see Koken v. Steinberg, 825 A.2d 723, 732 (Pa. Commw. Ct. 2003) (hesitantly adopting Thompson). Similarly, Texas only requires an underlying breach of fiduciary duty, Toles, 113 S.W.3d at 917, which does not require actual injury. Burrow, 997 S.W.2d at 240. Ohio, however, appears to require an injury. Williams, 700 N.E.2d at 868 (approving of the discussion in Halberstam v. Welch, 705 F.2d 472 (D.C. Cir. 1983) (injury required for aiding and abetting claim). Accordingly, there is a true conflict of laws between Texas and Pennsylvania on the one hand and Ohio (and Indiana) on the other as to aiding and abetting a breach of fiduciary duty.