Court Opinion

ID: 4014302
Source: CourtListenerOpinion
Date Created: 2016-07-09 01:11:52.370825+00
Date Added: 2024-06-11T14:30:59.597522
License: Public Domain

J-A11041-16

NON-PRECEDENTIAL DECISION - SEE SUPERIOR COURT I.O.P. 65.37

SCF CONSULTING, LLC                               IN THE SUPERIOR COURT OF
                                                        PENNSYLVANIA
                             Appellant

                      v.

BARRACK, RODOS & BACINE
                                                       No. 1413 EDA 2015

                 Appeal from the Order Entered April 24, 2015
       in the Court of Common Pleas of Philadelphia County Civil Division
                    at No(s): February Term, 2015, No. 1613

BEFORE: SHOGAN, MUNDY, and FITZGERALD,* JJ.

MEMORANDUM BY FITZGERALD, J.:                            FILED JULY 08, 2016

        Appellant, SCF Consulting, LLC, appeals from the order entered in the

Philadelphia County Court of Common Pleas sustaining the preliminary

objections of Appellee, Barrack, Rodos & Bacine. Appellant claims the court

erred in sustaining the preliminary objections based upon its finding that the

Compensation Plan at issue violated Pennsylvania Rule of Professional

Conduct 5.4. We affirm.

        The trial court summarized the facts of this case as follows:

           [Appellant], a non-lawyer, alleges it had an oral consulting
           contract with [Appellee] law firm “regarding [Appellee’s]
           representation of various institutional investors who sought
           to bring class actions alleging securities violations.”
           Pursuant to this contract, [Appellant] claims it was paid a
           yearly consulting fee, plus “a five percent (5%) share of
           the firm’s annual profits attributable to the cases

*
    Former Justice specially assigned to the Superior Court.
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         originated and worked on by [Appellant] and 2.5% of
         cases originated by other members of the firm.”

         “Based on [Appellee’s] promised compensation package,
         [Appellant] quickly became the face of [Appellee] and
         assisted [Appellee] in becoming legal counsel for the class
         representatives in virtually all of its cases.” . . .

         [Appellant] admits that [Appellee] paid [Appellant] its
         fixed annual consulting fee for each of the years it worked,
         but [Appellant] alleges [Appellee] failed to pay the share of
         profits due [Appellant] at the end of 2014.

Trial Ct. Op., 4/24/15, at 1-2 (footnotes omitted).

      Appellant filed a complaint asserting claims for breach of contract,

unjust enrichment and breach of fiduciary duty.1 In the complaint, Appellant

averred the following facts:

         1. [Appellant] is a Pennsylvania limited liability company . .
         . . Scott C. Freda (“Freda”) was the sole member of
         [Appellant] who provided valuable consulting services to
         [Appellee].

         2. [Appellee is] a Pennsylvania corporation and law firm . .
         ..
                                 *    *    *

         7. In or about 2001, [Appellee] initially requested Mr.
         Freda to provide consulting services to [Appellee]

1
  We note that Count II of the complaint asserted a claim for violation of the
Pennsylvania Wage Payment and Collection Law (“WPCL”). R.R. at 9a-10a.
For convenience of the parties, we refer to the reproduced record where
applicable. Appellant averred that “[p]ursuant to the WPCL, . . . Leonard
Barrack, Esq., is individually liable for [Appellant’s] claims as he directed
[Appellee] not to pay [Appellant] the wages due . . . .” Id. at 9a ¶ 34. The
parties stipulated to withdraw Count II of the Complaint with prejudice and
to remove Leonard Barrack, Esq. as a party to this action. See Stipulation,
3/9/15, at 1 (unpaginated).

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       regarding its representation of various institutional
       investors who sought to bring class actions alleging
       securities violations.

       8. Ultimately, Mr. Freda formed [Appellant] in 2006 and
       continued working with [Appellee] up through early 2014,
       when the facts giving rise to this lawsuit arose.

       9. [Appellee] sought to enter into a long term consulting
       agreement with [Appellant] based upon, among other
       things, Mr. Freda’s excellent reputation and experience
       with securities class actions filed on behalf of various State
       and local governments and unions as clients.

       10. [Appellee] induced [Appellant] to act exclusively on its
       behalf assisting with securities class actions filed on behalf
       of these entities in exchange for the promise of both a
       fixed annual consulting fee and an annual profit sharing
       plan at the firm that paid a five percent (5%) share of
       the firm’s annual profits attributable to the cases
       originated and worked on by Mr. Freda . . . .

                                *    *    *

       12. [Appellee] breached the parties’ agreement by
       refusing the make the promised profit share
       payments to [Appellant] for cases that had resolved
       and were both originated and worked on by Mr.
       Freda in breach of [Appellee’s] obligations to [Appellant].

       13. Just prior to his departure, Mr. Freda also reminded
       Mr. [Leonard] Barrack that two large cases that he had
       both originated and worked on were close to resolving so
       he expected his five percent (5%) of the firm’s profits at
       the end of the calendar year. These cases were the State
       of Michigan v. AIG and the PA Retirement System v.
       BOA class actions. . . .

                                *    *    *

       19. In 2014, Mr. Freda provided substantial assistance to
       [Appellees] in prevailing on a very substantial case
       involving the Chicago Police Department and Apollo . . . .

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                                  *    *     *

         21. Much to Mr. Freda’s surprise when he met with Mr.
         Barrack in December of 2014, he was told that [Appellant]
         was not going to be paid its percentage of profits
         previously agreed to . . . .

R.R. at 3a-5a, 7a-8a (emphases added). Appellant avers in the complaint

that he was paid his retainer fee of $210,000.00 per month in the year

2014. R.R. at 5a. Appellee filed preliminary objections, which the trial court

granted. This timely appeal followed.       Appellant was not ordered to file a

Pa.R.A.P. 1925(b) statement of errors complained of on appeal.

      Appellant raises the following issues for our review.

         a. Whether the [t]rial [c]ourt erred in sustaining
         Appellee[’s] demurrer to all [c]ounts of Appellant[’s
         complaint] on the basis that the Compensation Plan
         entered into by [Appellees] and [Appellant] was against
         public policy for violation of Rule of Professional Conduct
         5.4, where the [t]rial [c]ourt failed to apply the well-
         settled standard for resolving preliminary objections and
         accept as true the well-pleaded factual averments of the
         [c]omplaint that the Compensation Plan was an express
         exception to R.P.C. 5.4?

         b. Whether the [t]rial [c]ourt erred in sustaining
         [Appellees’] demurrer to all [c]ounts of [Appellant’s
         c]omplaint on the basis that the Compensation Plan was
         against public policy, where any determination that the
         Compensation Plan was in violation of R.P.C. 5.4 is a fact-
         intensive inquiry and requires a full development of the
         record, as demonstrated by Wishnefsky v. Riley &
         Fanelli, [799 A.2d 827 (Pa. Super. 2002),] and where the
         [t]rial [c]ourt failed to allow a full development of the

                                      -4-
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        record, including    discovery,   prior   to   dismissing   the
        [c]omplaint?[2]

        c. Whether the [t]rial [c]ourt erred in sustaining
        [Appellees’] demurrer to all [c]ounts of [Appellant’s

2
  Given our resolution of the first issue, see infra, we need not reach this
issue. However, we note that Appellant’s argument is meritless. Appellant
avers that

        [t]he [t]rial [c]ourt and [Appellees] both cite Wishnefsky
        v. Riley & Fanelli, [799 A.2d 827 (Pa. Super. 2002),] for
        the proposition that where a compensation plan is violative
        of Rule 5.4, a court cannot enforce such a contract.
        However there is an important procedural distinction
        between Wishnefsky and the instant matter─in
        Wishnefsky the court granted summary judgment for
        the defendant after a full development of the record. Id.
        at 828. Accordingly, Wishnefsky compels a very different
        conclusion than that drawn by the [t]rial [c]ourt─it
        requires that even where the facts egregiously show on
        their face that a non-attorney is complicit in the flouting of
        the ethical rules regarding fee-splitting, the [c]ourt is
        compelled to allow the full-development of the facts,
        including discovery, before dismissing those claims. The
        [t]rial [c]ourt erred by dismissing [Appellant’s c]omplaint
        prior to that full-development of the facts. For that reason
        alone, the [t]rial [c]ourt’s dismissal of [Appellant’s c]
        omplaint must be reversed.

Appellant’s Brief at 19-20 (some emphasis added).         The Court in
Wishnefsky referenced discovery in the context of the procedural posture
of the case. This Court stated:

        Appellee filed preliminary objections to Appellant’s
        complaints and to each of three amendments, then
        unsuccessfully sought judgment on the pleadings. When
        discovery was completed, both parties moved for the entry
        of summary judgment. The trial court granted Appellee’s
        motion, and this appeal followed.

Wishnefsky, 799 A.2d at 828.

                                    -5-
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         c]omplaint on the basis that the Compensation Plan was
         against public policy, where, even assuming arguendo that
         the Compensation Plan was in violation of R.P.C. 5.4,
         Pennsylvania public policy has found that such an
         agreement shall be enforced on the basis that an attorney
         occupies a legally superior position to a non-attorney, and
         therefore may not be financially rewarded for entering into
         a fee-sharing agreement that is in violation of R.P.C. 5.4.
         See John Grigsby v. Rania M. Major and Mark B.
         Frost, Esquire.      1994 WL 1251205 (Phila. Com. Pl.
                [3]
         1994).

3
  Although we do not address this issue given our resolution of the first issue
raised on appeal, we note that the claim was rejected by this Court in
Wishnefsky. This Court opined:

         Assuming, without deciding, that [Appellant] is correct in
         [his] contention that the mere difference in the status of
         the parties suffices to establish that they were not in pari
         delicto, we do not believe that the public interest will be
         served by accepting [his] argument and enforcing the
         contract. Under [Appellant’s] theory, every fee-sharing
         agreement between an attorney and a nonattorney which
         violates [the fee-splitting prohibition] would be enforceable
         by the lay party since, by definition, such agreements will
         always involve an attorney and a nonattorney. Although
         consistent enforcement of such contracts against breaching
         attorneys might deter attorneys from entering fee-sharing
         agreements, presumably most lawyers are already
         deterred from such conduct by the existence of [the
         disciplinary rule] and by the possibility of sanctions that its
         violation carries. By refusing in every case to assist the
         lay party, the courts may deter laypersons as well as
         attorneys from attempting such agreements. We believe
         that, in this way the public will be protected more
         effectively from the potential harms posed by fee-sharing
         agreements.

Wishnefsky, 799 A.2d at 830 (citation omitted and emphasis added).

                                      -6-
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Appellant’s Brief at 4-5.4

      First, Appellant contends the trial court erred in sustaining Appellee’s

preliminary objections in the nature of a demurrer to the complaint because

it “included well-pled allegations that the Compensation Plan at issue was an

express exception to Rule of Professional Conduct 5.4.” Id. at 15. Appellant

avers that it has “sufficiently pled that [Appellees] induced him to enter into

a Compensation Plan that included a profit-sharing component.” Id. at 18.

      Our review is governed by the following principles:

         As a trial court’s decision to grant or deny a demurrer
         involves a matter of law, our standard for reviewing that
         decision is plenary. Preliminary objections in the nature of
         demurrers are proper when the law is clear that a plaintiff
         is not entitled to recovery based on the facts alleged in
         the complaint. Moreover, when considering a motion for
         a demurrer, the trial court must accept as true all well-
         pleaded material facts set forth in the complaint and all
         inferences fairly deducible from those facts.

                                 *    *    *

         Our standard of review of an order of the trial court
         overruling or granting preliminary objections is to
         determine whether the trial court committed an error of
         law. When considering the appropriateness of a ruling on
         preliminary objections, the appellate court must apply the
         same standard as the trial court.

         Preliminary objections in the nature of a demurrer test the
         legal sufficiency of the complaint. . . .      Preliminary

4
  Appellant does not raise any issue regarding his unjust enrichment claim in
Count III of the complaint. Thus, we do not address the unjust enrichment
count.   “It is not the obligation of [an appellate court] to formulate
[a]ppellant’s arguments for him.” Wirth v. Commonwealth, 95 A.3d 822,
837 (Pa. 2014) (citation omitted).

                                     -7-
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        objections which seek the dismissal of a cause of action
        should be sustained only in cases in which it is clear and
        free from doubt that the pleader will be unable to prove
        facts legally sufficient to establish the right to relief. If any
        doubt exists as to whether a demurrer should be
        sustained, it should be resolved in favor of overruling the
        preliminary objections.

Bargo v. Kuhns, 98 A.3d 686, 689 (Pa. Super. 2014) (emphasis added and

citations omitted).    “A demurrer does not, however, admit the pleader’s

conclusions of law.” Hoffman v. Misericordia Hosp. of Phila., 267 A.2d
867, 868 (Pa. 1970).

     Rule of Professional Conduct 5.4 provides as follows.

        (a) A lawyer or law firm shall not share legal fees with a
        nonlawyer, except that:

           (1) an agreement by a lawyer with the lawyer’s firm,
           partner, or associate may provide for the payment of
           money, over a reasonable period of time after the
           lawyer’s death, to the lawyer’s estate or to one or more
           specified persons;

           (2) a lawyer who undertakes to complete unfinished
           legal business of a deceased lawyer may pay to the
           estate of the deceased lawyer that portion of the total
           compensation which fairly represents the services
           rendered by the deceased lawyer;

           (3) a lawyer or law firm may include nonlawyer
           employees in a compensation or retirement plan, even
           though the plan is based in whole or in part on a profit-
           sharing arrangement;

           (4) a lawyer or law firm may purchase the practice of
           another lawyer or law firm from an estate or other
           eligible person or entity consistent with Rule 1.17; and

                                      -8-
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              (5) a lawyer may share court-awarded legal fees with a
              nonprofit organization that employed, retained or
              recommended employment of the lawyer in the matter.
42 Pa.C.S. § 5.4(a)(1)-(5).

      In Office of Disciplinary Counsel v. Jackson, 637 A.2d 615 (Pa.

1994), the Pennsylvania Supreme Court stated:

              Disciplinary Rule 3-102(A) and Rule of Professional
              Conduct 5.4 prohibit the sharing or splitting of fees
              between a lawyer and a non-lawyer. There can be
              no question but that Jackson, as a suspended
              lawyer, is a “non-lawyer” within the meaning of the
              rules.   The purpose of this legal mandate is to
              maintain a lawyer’s independent professional
              judgment, unhampered by monetary obligation to a
              party other than his client. In addition, the purpose
              is to protect the Bar against the unauthorized
              practice of law by persons the system does not
              recognize as presently licensed to practice. The only
              exception to the rule prohibiting sharing fees with
              non-lawyers is the payment by a law firm into a
              profit-sharing plan in which non-lawyer employees of
              the firm share in the profits earned by the lawyers,
              obviously from fees. The exception is sustainable
              because there is no direct link between a specific fee
              and a specific payment to a non-lawyer. In this
              case, that very evil is present.

         Report and Recommendations of the Disciplinary Board of
         the Supreme Court of Pennsylvania, page 17.

Id. at 620.

      In Wishnefsky, the non-lawyer appellant contended he had an oral

contract with the appellee law firm

         governing a fee-splitting arrangement. In his Complaint,
         [the a]ppellant contends that [the a]ppellee agreed to pay
         him a forwarding fee of one third of the compensation
         received from cases he referred, but ceased to do so after

                                      -9-
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         recovering $150,000 in fees from damages in a product
         liability matter.
Wishnefsky, 799 A.2d at 828 (footnote omitted).

      The appellant in Wishnefsky argued that his claim fell within the

exception to fee splitting found in Rule 5.4(a)(3).     Id. at 830. This Court

rejected this contention and opined that

         [w]hat is clearly contemplated by the exception is a
         formalized program to benefit employees based on the
         profitability of the firm.     In [Jackson, supra,] our
         Supreme Court explained that the exception, which
         permits payment of profits earned by lawyers from fees,
         “is sustainable because there is no direct link between
         a specific fee and a specific payment to a non-
         lawyer.”       Id.    The Jackson Court noted that the
         exception did not apply because there, “that very evil,” the
         direct link, “is present.” Id. The same may be said of this
         case.
Id. at 830-31 (emphases added); accord Epstein v. Saul Ewing, LLP, 7
A.3d 303, 312-13 (Pa. Super. 2010).

      In the case sub judice, the trial court opined:

            [Appellant] attempts to cast itself as a beneficiary of
         the exception to Rule 5.4(a), which allows law firms to
         have employee profit sharing plans. However, [Appellant]
         was not an individual employee of [Appellee’s] law firm.
                                 *   *    *

            Since the arrangement [Appellant] claims existed
         between the parties violates public policy, all of
         [Appellant’s] legal claims based on that arrangement fail .
         ...
Trial Ct. Op. at 3.

      Appellant’s argument that his claim fell within the exception to fee

splitting found in Rule 5.4(a)(3) is unsupported by the facts as averred in

the complaint.    See Wishnefsky, 799 A.2d at 830-31.        As the trial court

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accurately noted, Appellant was not an employee of the firm participating in

a formalized program benefiting employees based upon the profitability of

the firm.     See id.     Therefore, the exception in Rule 5.4(a)(3) is

unsustainable in the instant case because there is a direct link between the

specific fees and specific payment to Appellant, a non-lawyer.          See

Jackson, 637 A.2d at 620; Wishnefsky, 799 A.2d at 830-31. Based upon

the facts alleged in the complaint, we discern no error of law in the trial

court’s decision to grant the preliminary objections. See Bargo, 98 A.3d at

689.

       Order affirmed.

       Shogan, J. joins the memorandum.

     Mundy, J. notes her dissent.
Judgment Entered.

Joseph D. Seletyn, Esq.
Prothonotary

Date: 7/8/2016

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