Court Opinion

ID: 38647
Source: CourtListenerOpinion
Date Created: 2010-04-25 20:13:18+00
Date Added: 2024-06-11T17:16:03.064776
License: Public Domain

United States Court of Appeals
                                                                     Fifth Circuit
                                                                  F I L E D
          IN THE UNITED STATES COURT OF APPEALS
                                                                    July 14, 2005
                   FOR THE FIFTH CIRCUIT                      Charles R. Fulbruge III
                                                                      Clerk
                    _____________________

                         No. 03-50609
                    _____________________

In The Matter Of: FRANKLIN Y. WRIGHT, JR.,

                                      Debtor
__________________

ROBERT M. STONE,

                                      Appellee,

                             versus

JOHNNY W. THOMAS,

                                 Appellant.
      _________________________________________________

                    _____________________

                         No. 04-50365
                    _____________________

In The Matter Of: FRANKLIN Y. WRIGHT, JR.,

                                      Debtor

__________________

ROBERT M. STONE,

                                      Appellant-Cross-Appellee,
                                            versus

       JOHNNY W. THOMAS, Trustee, Successor
       in Interest to Debtor,

                                    Appellee-Cross-Appellant.
              __________________________________________________

                     Appeals from the United States District Court
                          for the Western District of Texas
                              USDC No. SA-00-CV-166
              __________________________________________________

Before REAVLEY, JONES and GARZA, Circuit Judges.

PER CURIAM:*

       We reverse the judgment insofar as it awarded actual and punitive damages for

tortious interference, and affirm the judgment insofar as it awarded actual and punitive

damages for conversion.

       A.     Tortious Interference Claim

       The bankruptcy court toiled admirably to reach a fair result in this legally and

factually difficult case, but we cannot agree that the trustee was entitled to recover for

tortious interference with contract. While we do not question that Stone had a financial

incentive and motive to persuade the clients to terminate Wright, we agree with Stone that

he was privileged under Texas law to interfere with the contractual relationship between

the clients and Wright. Wright was convicted of tax fraud in December of 1997. Under

       *
        Pursuant to 5TH CIR. R. 47.5, the Court has determined that this opinion should
not be published and is not precedent except under the limited circumstances set forth in
5TH CIR. R. 47.5.4.

                                              2
Texas law, federal tax evasion is considered moral turpitude per se and is grounds for

disbarment. In re Humphreys, 880 S.W.2d 402, 408-09 (Tex. 1994). Wright was in fact

suspended and later disbarred as a result of this conviction.

         The record further establishes that Wright’s competence as an attorney had

become compromised for reasons other than the conviction itself. Wright had been

sanctioned by an agreed judgment in state district court in 1995 for commingling his and

his clients’ funds. The trustee admitted in the pretrial order that “Wright had a long-

standing practice of borrowing from client recoveries, giving clients personal promissory

notes instead of their money. Many of these clients are now creditors in this

bankruptcy.” Wright confirmed this practice at trial, and admitted that one client had to

threaten to file a grievance to get Wright to pay her back. Stone was aware that “Wright

had been siphoning client funds out of the trust accounts.” Bankruptcy counsel for the

law firm that represented Wright in his criminal case stated in a pretrial hearing that “I

think this Court is certainly aware . . . that there’s probably a bunch of people out there

who have client trust funds that probably ought to take priority over anybody in this

case.”

         Wright’s own adversary proceeding complaint and amended complaint confirm

that during his tax “ordeal,” he “had begun to drink heavily outside of the office and,

outside of the office, had become dependent upon alcohol.” Wright’s counsel stated at a

pretrial hearing on a discovery dispute that Wright had been treated for alcohol addiction

                                              3
at three facilities. Wright admitted at trial that he is an alcoholic. The judge in his

criminal case ordered him to go for treatment.

       Under his arrangements with his clients and with Stone, Wright was supposed to

cover litigation expenses for the cases and office overhead for himself and Stone. The

contingent fee agreements provided that Wright would cover litigation expenses and that

the clients were not responsible for reimbursing Wright unless there was a recovery.

Wright also paid health care expenses for clients pursuant to letters of protection. These

obligations were undoubtedly the reason he was able to retain a contingent fee interest of

60 percent or more of the fees in shared cases, more than the traditional referral fee, when

the cases were turned over to Stone for further prosecution.

       Wright’s complaints admit that prior to and during his criminal trial, “some

expenses were not paid, clients had not received settlement proceeds, and medical costs

had not been reimbursed.” Stone was aware that Wright had failed to pay expenses on

some cases. Wright admitted that obligations under letters of protection had not been

paid. In January 1998 he wrote a letter to Stone stating that he had put his house up for

sale to cover outstanding letters of protection.

       In addition, there was ample evidence that Wright’s office was in disarray during

and subsequent to his tax conviction. Stone testified that during the criminal trial

Wright’s staff had become preoccupied with that trial, and that the day after the jury

verdict Wright showed up at the office staggering and visibly intoxicated. One of

Wright’s employees testified that on the day of the verdict the employees were “in shock”

                                              4
and “[a] few of the girls completely lost control.” When Stone visited Wright a few days

later at Wright’s lake house, Wright was again intoxicated and told Stone he was going in

for treatment. Diana Garcia, another attorney who worked in Wright’s office, went with

Stone to the lake house, and described Wright as laughing, crying, and “extremely

intoxicated.” Garcia moved out of Wright’s offices shortly after Stone moved out. She

testified that money had stopped coming into the office because “Mr. Wright had been

away from the office for long, long periods of time.”

       Wright had told Stone that the IRS might try to seize the office. Wright testified

that the IRS had levied on his business account three times in earlier years. The

bookkeeper told Stone in December 1997 that she would have to raid the trust account to

meet expenses. After the conviction Wright put the office up for sale. Stone testified that

the building had been “up for foreclosure” several times. Garcia testified that Wright had

told her the building had been posted for foreclosure. After the conviction Stone

confirmed that the mortgage was not being paid. Garcia stated that although Wright told

her “they would never take the building away from him . . . there were people coming by,

photographing the building, and looking at it, and I know that it had been posted for

foreclosure.”

       When asked to describe the atmosphere in Wright’s office in December of 1997,

Garcia testified that “aside from the chaos, everybody was despairing as to what they

were going to be doing; looking for jobs. They were extremely concerned about what

                                             5
was going to happen with the office and Franklin.” She testified that to her knowledge

Wright stopped coming into the office after the conviction.

       As to all the clients whose cases are relevant to this appeal, an attorney-client

relationship existed between Stone and the client. The trustee does not argue otherwise

in his appellate briefing, and instead points out that with respect to the Person, Rakowitz,

and other cases, “Stone was attorney of record for purposes of client contact, court

appearances, and settlement and fund distribution” and refers to “the unremarkable

proposition that Stone had an attorney-client relationship with the Clients.” We agree

with the bankruptcy court that “Stone already had an attorney-client relationship with the

clients in question, as a result of Wright’s having ‘sent the files upstairs’ to Stone. Stone

entered appearances in court for the clients, advised clients regarding settlement potential,

and the like.”

       In these circumstances, we believe that the Texas courts would view the attorney-

client relationship between Stone and the clients as paramount to any relationship

between Wright and Stone, and that Stone was privileged as a matter of law to inform the

clients of Wright’s conviction and that he could no longer work or associate with Wright.

Even if Stone’s conduct extended to expressly recommending that the joint clients fire

Wright, which Stone denies, we conclude that the privilege would extend to such

recommendations. Stone’s first duty was to his clients. He had a informal fee sharing

relationship with Wright, but he had a higher, fiduciary duty to his clients. The

attorney-client relationship is highly fiduciary in nature and requires the utmost good

                                              6
faith. Judwin Properties, Inc. v. Griggs & Harrison, 911 S.W.2d 498, 506 (Tex.

App.–Houston [1st Dist.] 1995, no writ). “As a fiduciary, an attorney is obligated to

render a full and fair disclosure of facts material to the client’s representation.” Willis v.

Maverick, 760 S.W.2d 642, 645 (Tex. 1988).

       In tortious interference cases, Texas law recognizes a justification defense or

privilege based on the exercise of the defendant’s own legal rights or a good faith claim

to a colorable legal right. Prudential Ins. Co. of Am. v. Fin. Review Servs., Inc., 29
S.W.3d 74, 80 (Tex. 2000). The Texas courts have also described the defense as

applicable where the defendant has a right in the subject matter equal or superior to that

of the other party. Southwestern Bell Tel. Co. v. John Carlo Tex., Inc., 843 S.W.2d 470,

472 (Tex. 1992); Sakowitz, Inc. v. Steck, 669 S.W.2d 105, 107 (Tex. 1984). If the

defendant has a legal right to interfere with a contract, then he “has conclusively

established the justification defense, and the motivation behind assertion of that right is

irrelevant.” Tex. Beef Cattle Co. v. Green, 921 S.W.2d 203, 211 (Tex. 1996). “[I]n a

tortious interference case, a defendant’s motivation behind the assertion of a legal right is

irrelevant since the right conclusively establishes the justification defense.” Calvillo v.

Gonzalez, 922 S.W.2d 928, 929 (Tex. 1996).

       Texas courts have also held that a person who shares a confidential relationship

with a party to a contract is privileged to induce the breach of such a contract. John

Masek Corp. v. Davis, 848 S.W.2d 170, 175 (Tex. App.–Houston [1st Dist.] 1992, writ

denied); Russell v. Edgewood Indep. Sch. Dist., 406 S.W.2d 249, 252 (Tex. App.–San

                                              7
Antonio 1966, writ ref’d n.r.e.). As an attorney Stone was a party to a confidential

relationship with all his clients, whether or not those clients had signed fee agreements

with Wright.

        Under these authorities, Stone had a legal right and a duty to inform the clients of

Wright’s conviction. He further had a legal right to represent the clients in their ongoing

litigation without the participation of Wright if the clients, once informed of Wright’s

conviction, chose to terminate Wright. “A client has the right to terminate representation

at any time.” Walton v. Hoover, Bax & Slovacek, L.L.P., 149 S.W.3d 834, 843 (Tex.

App.–El Paso 2004, pet. field). The clients and Stone had a right to end their dependence

on Stone and disassociate themselves from a convicted felon whose financial, mental, and

legal capacity to practice law and fulfill his contractual obligations was plainly in

jeopardy. On these facts we hold that Stone’s fiduciary attorney-client relationship with

the clients imbued him with a justification defense to Wright’s tortious interference

claims. We believe that the Texas Supreme Court would not hesitate to recognize that

Stone’s actions were privileged in these circumstances.

       The trustee argues that there was no reason for Stone to encourage the clients to

fire Wright other than Stone’s greed. First, we think Texas law, as set forth in Texas

Beef Cattle and Calvillo, quoted above, recognizes the justification defense regardless of

Stone’s financial motive. Second, we disagree with the factual premise of this argument.

The trustee’s theory, as we understand it, is that Stone had full responsibility for the cases

in issue and his only reason for persuading the clients to fire Wright was to deprive

                                              8
Wright of his share of the contingent fee. The trustee points to the “sole responsibility”

letters Stone had written Wright. However, prior to Wright’s termination, he was the

only attorney with a written contingent fee agreement with the clients, and under Texas

law a contingent fee contract must be in writing. TEX. GOV’T CODE ANN. § 82.065(a)

(Vernon 2005); TEX. DISCIPLINARY R. PROF’L CONDUCT 1.04(d), reprinted in TEX. GOV’T

CODE ANN., tit. 2, subtit. G app. A (Vernon 2005). Wright was arguably entitled to

replace Stone at any time with other counsel or to take the cases back and attempt to

settle or otherwise resolve them on his own. In a January 23, 1998 letter, Wright in fact

told Stone that the files Stone had worked on in the past were Wright’s files and “always

have been my files,” and demanded that Stone “return all of my files that you were

assisting me on . . . .” Wright continued to insist at trial that “[t]hey were always my

files,” and even disputed that the clients had terminated him when they wrote letters

stating that they were doing just that. The bankruptcy court found that Stone was

“absolutely dependent” on Wright for payment of Stone’s attorney’s fees. Stone testified

that on cases where Wright associated him, Wright continued to attend hearings,

mediations, or depositions when needed. Stone testified that settlement checks went into

Wright’s trust account until Stone opened his own trust account in late 1997, and that

even after Stone opened his own trust account, Wright’s bookkeeper would often disburse

settlement proceeds.

       No client in these circumstances could be pleased by the criminal conviction of his

lawyer. The only client who testified at trial, Mrs. Rakowitz, stated that she was

                                             9
horrified when she learned the news of the jury verdict, that immediately she and her

husband “didn’t want Mr. Wright to have anything to do with our case, ” and that the

decision to fire Wright “was ours totally.” Person’s sports agent and personal attorney,

Herbert Rudoy, testified that after learning of the conviction, he told Person “that he must

immediately dismiss Mr. Wright as his attorney.” None of the joint clients chose to

remain with Wright. Wright was also obliged to front expenses for the litigation and there

was evidence, described above, that he had sometimes failed to do so.

       In addition, in 1998 affidavits in the record Wright claims that he associated Stone

in the Rakowitz case “to assist me as co-counsel” and that “[h]ad I not been terminated by

Mr. and Mrs. Rakowitz . . . it was my intention to attend the scheduled mediation of their

lawsuit . . . .” Wright also testified in a deposition that he intended to participate in the

Rakowitz trial, and that, after he associated Stone, he had interviewed witnesses and “was

involved in the decision making of the case.” The Rakowitz case was one of the two

most valuable cases in issue. As to the most valuable case, the Person case, Rudoy

testified that he understood that Wright was going to remain involved throughout the

case. Wright testified that Stone “just worked” the files that Wright sent to him, but that

the files belonged to Wright. In another case “sent upstairs” to Stone, the Browning case,

Wright informed the client in a letter that Stone would be assisting Wright, and that the

client could contact either attorney. Wright similarly wrote to Person, informing him that

Wright had asked Stone “to work with me on your back injury claim.” Wright testified

that, due to Stone’s people skills, “I was constantly intervening with clients . . . and I

                                              10
would always tell them . . . that if they needed any help from me, why, I would certainly

help them.”

       Stone was privileged if not obligated to inform the clients that Wright had been

convicted of a felony, that his license to practice was in jeopardy, and that absent a

termination Wright could still attempt to control the litigation and the disbursement of

any settlement funds. The added circumstances that Wright was not funding all the

expenses of the lawsuits as he was obliged to do under the arrangements with Stone and

the clients, that Wright was suffering from alcoholism and emotional strain, that he had

been sanctioned in the past, that he had borrowed money belonging to his clients and not

paid them back, that he was missing work, and that his offices were in disarray, were all

the more reason that Stone was privileged to interfere with Wright’s contractual

relationship with the clients.1 Accordingly, the tortious interference claim fails, and the

trustee is not entitled to actual or punitive damages on this claim.

B.     Contract Claim

       The trustee argues in the alternative that if we reverse the judgment on the tortious

interference claim, he should be able to seek recovery under the fee sharing agreement

between Stone and Wright. We agree with the bankruptcy court that the fee sharing

agreement was unenforceable under Rule 1.04(f) of the Texas Disciplinary Rules of

       1
          On a related issue, and lest there be any belief that the trustee has a claim against
the clients for terminating Wright without good cause, we categorically reject the
trustee’s suggestion, in the pretrial order, that “there is a serious question of whether
Wright’s termination was for good cause vis a vis the clients.”

                                              11
Professional Conduct, for the reasons explained in detail in the court’s findings of fact

and conclusions of law. Specifically, we do not agree with Stone that the statement in

Wright’s written contingent fee agreements that he “is hereby authorized to associate

such other Attorney or Attorneys in this cause as they may desire” satisfies Rule

1.04(f)(1)(iii). This subpart requires that “[a] division or agreement for division of a fee”

must be made “by written agreement with the client, with a lawyer who assumes joint

responsibility for the representation.” This is in addition to the requirement of subpart (2)

that “the client is advised of and does not object to the participation of all the lawyers

involved.” We read subpart (f)(1)(iii) to require that the fee sharing agreement between

Stone and Wright must be in writing and signed by the client. The mere authorization to

associate other counsel in the contingent fee agreement, without setting out the fee

splitting arrangement between Stone and Wright, or even identifying Stone, does not

satisfy this subpart.

C.     Conversion Claim

       The judgment included a recovery under a conversion theory for fees in the Kwon

case. A distinction between the conversion claim and the tortious interference claim is

that the client did not terminate Wright as to those cases subject to the conversion claim.

Stone argues that there were actually two Kwon cases and that Wright did not have a

contingent fee agreement in the case that was the subject of the conversion claim. We

have reviewed the record on this claim and cannot say that the bankruptcy court’s

findings of fact were clearly erroneous. Stone never produced a written contingency fee

                                              12
contract between himself and Kwon. He knew that Texas law requires contingency fee

contracts to be in writing.

       As stated above, we also agree with the bankruptcy court that the fee sharing

agreement was unenforceable under Rule 1.04(f), a position Stone argued repeatedly in

the bankruptcy court. The trustee is therefore entitled to the entire contingent fee of

$12,000 on this claim.

       We further see no error in the award of $36,000 in punitive damages on this claim.

The issue of punitive damages was thoroughly litigated in the bankruptcy and district

courts. The evidence supports a finding that Stone simply took for himself the entire fee

in the Kwon case knowing that the fee was subject to a contingent fee agreement with

Wright that had not been terminated by the client. Stone’s only argument regarding

punitive damages in the pending appeal is that punitive damages cannot be recovered

absent tort liability and an underlying award of actual damages. Having concluded that

the actual damages for conversion should stand, the punitive damages on that claim

should also stand.

D.     Other Issues

       The trustee does not persuade us that the bankruptcy court abused its discretion in

denying costs. The denial of costs is all the more appropriate given our decision to vastly

reduce the judgment. We see no error in the accrual date selected for post-judgment

interest.

                                             13
       We reject the “acceptance of benefits” theory urged by the trustee. Stone did not

forfeit his right to appeal a multi-million dollar judgment by arguing that he should be

allowed to keep the $73,497.90 fee in the Moreno case in light of the bankruptcy court’s

ruling that the fee splitting agreement was unenforceable. The bankruptcy court rejected

damages in the Moreno case due to a failure of proof of such damages. Both sides have

taken inconsistent positions regarding the enforceability of the fee sharing arrangement.

Even in the pending appeal, the trustee argues in the same brief that (1) the trustee is

entitled to the entire fee in the Rakowitz, Person, and other cases, a position that

necessarily embraces the holding below that the fee sharing agreement is unenforceable,

and (2) in the alternative, the trustee is entitled to a share of the fees per the fee sharing

agreement if that agreement is enforceable.

       As to prejudgment interest, we do not agree with the trustee that prejudgment

interest is governed by state law and therefore mandatory. We agree with the district

court’s analysis of this question. The bankruptcy court did not abuse its discretion in

denying prejudgment interest under federal law. We note that the award of punitive

damages in an amount equal to three times the amount of actual damages on the

conversion claim appears more than adequate to compensate the trustee for the loss of the

time value of money on the conversion damages.

E.     Conclusion

                                               14
       The judgment is modified to strike the award of $2,990,900 in actual damages for

tortious interference, and to strike the award of $164,000 in punitive damages for tortious

interference. The judgment is otherwise affirmed.

       AFFIRMED AS MODIFIED.

                                            15