H. CHRISTOPHER MOTT, UNITED STATES BANKRUPTCY JUDGE.
Here, the Court grapples with an inheritance—the latest chapter of a litigation odyssey that began over a decade ago in a different domain.
The saga began in 2007, when a father and son were tragically killed in a train accident at a South Texas railroad crossing. Surviving family members hired a law firm that immediately filed a wrongful death suit against the railway in state court. Just before trial in 2009, the law firm (without the family's knowledge) saw fit to associate a different attorney who tried the case to a jury. A unanimous defense verdict was rendered by the jury against the family in 2009, which appeared to end the saga. Fate then intervened, as the family was granted a new trial against the railway based on newly discovered evidence.
In 2010, the railway made a seemingly reasonable settlement offer to the associated trial attorney hired by the family's law firm. The associated attorney communicated the settlement offer to the family's law firm, who relayed the settlement offer to one family member. The law firm obtained the disputed oral consent of one family member (the widow) to the railway's settlement offer on the phone, but never discussed the settlement with the four other adult family members. After the associated attorney sent the railway a letter accepting the settlement offer for the whole family, the entire family denied authorizing any settlement.
The litigation odyssey then restarted in earnest, this time with a complete role reversal. In 2011, the railway sued the family to enforce the settlement, winning temporary success twice through summary proceedings in state trial court. This spawned two journeys to the Texas Court of Appeals, one journey to Texas Supreme Court, and three written appellate opinions. Ultimately, in 2017, the settlement enforcement suit against the family was reversed and remanded for trial in state court.
Meanwhile, the lead partner of the law firm was convicted of bribing witnesses and fabricating evidence in other railroad cases, resulting in a 20-year federal prison sentence. This twist in the voyage led the law firm to close operations and file Chapter 7 bankruptcy. The bankruptcy trustee then attempted to collect the law firm's expenses owed by the family out of the still disputed settlement with the railway, by removing the settlement enforcement suit from the domain of the state court to this Court.
Now, through this Opinion, the Court will deal with the inherited chapter of this litigation odyssey.
I. INTRODUCTION 517
II. PROCEDURAL BACKGROUND-ADVERSARY PROCEEDING 517
III. FINDINGS OF FACT 518
IV. CONCLUSIONS OF LAW 539
V. FINAL CONCLUSION 570
On December 2, 3, 4, and 19, 2019, the Court conducted a trial in this adversary proceeding. This adversary proceeding is a severed state court suit that originated in the 406th District Court of Webb County, Texas, cause no. 2017-CVA-002223-D4, which was removed to this Court.
The parties to this adversary proceeding are as follows: Kansas City Southern Railway Company and Jose Juarez (collectively "
This Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 1334(b). This adversary proceeding arises in and relates to a bankruptcy case referred to this Court by the U.S. District Court through the Standing Order of Reference entered in this District under 28 U.S.C. § 157(a). Both "core" proceedings under 28 U.S.C. § 157(b)(2) and "related to" proceedings under 28 U.S.C. § 157(c)(1) are involved in this adversary proceeding. The parties have expressly consented to entry of a final judgment by this Court under 28 U.S.C. § 157(c)(2). As a result, this Court has the jurisdiction and authority to enter a final judgment in this adversary proceeding.
This Opinion constitutes the Court's findings of fact and conclusions of law in this adversary proceeding, in accordance with Rule 52(a)(1) of the Federal Rules of Civil Procedure ("
On February 26, 2014, R&W (as a debtor) filed a voluntary petition under Chapter 7 of the Bankruptcy Code, bankruptcy case no. 14-10286. Shortly thereafter, the Trustee was appointed as the Chapter 7 trustee for the R&W bankruptcy estate.
On October 1, 2018, the Trustee filed a Notice of Removal with this Court under 28 U.S.C. § 1452 (dkt# 1).
Following a status hearing in November 2018, the Court required the parties to replead under the applicable federal rules. KCSR filed a Third Amended Complaint ("
The parties expressly consented to entry of final orders and a final judgment in this adversary proceeding by the Court (dkt# 12, 13, 16). After hearing, the Court dismissed the civil conspiracy counterclaim asserted by the Chavez Family against KCSR in the Chavez Counterclaim under Rule 12(b)(6) and struck certain affirmative defenses of the Chavez Family under Rule 12(f), by order entered on May 3, 2019 (dkt# 70). After hearing, the Court also dismissed the civil conspiracy and perjury crossclaims asserted by the Chavez Family against the R&W estate in the Chavez Crossclaims under Rule 12(b)(6), by order entered on May 3, 2019 (dkt# 69).
A scheduling order was entered on January 24, 2019 in this adversary proceeding (dkt# 26) ("
On August 29, 2019, the parties filed a Joint Pre-Trial Order ("
The following constitutes findings of fact by the Court in this adversary proceeding. These findings include factual stipulations by the parties in the PTO.
The trial in this adversary proceeding was conducted on December 2, 3, 4, and 19, 2019. The Court admitted exhibits into evidence during trial. The exhibits of KCSR admitted into evidence were P-1 through P-51 (herein "
Excerpts from the deposition testimony of ten witnesses were admitted into evidence during trial (herein "
A total of 13 witnesses testified at trial.
Following is a brief description of the parties, the witnesses, their respective roles, and an assessment by the Court of the credibility of witnesses.
Kansas City Southern Railway Company and Jose Juarez (collectively herein "
Mr. Leonard Wagner, associate general counsel of Kansas City Southern Railway Company, provided brief testimony at trial in person. The Court finds that Mr. Wagner is a credible witness.
Several members of the Chavez Family (some living, some now deceased) are parties to this adversary proceeding. The Chavez Family were plaintiffs in the underlying wrongful death suit filed against KCSR in 2007 and were clients of R&W. Now, the Chavez Family deny the enforceability of a 2010 settlement with KCSR of the wrongful death suit in this adversary proceeding. Three members of the Chavez Family (Luz Chavez, Darlene Chavez, and Allen Chavez) testified at trial in person.
The Chavez Family consists of the following:
(1) Rudolph Chavez, Sr. ("
(2) Rudolph Chavez, Jr. ("
(3) Luz Chavez ("
Luz was a key witness in this adversary proceeding. She testified at trial in person and by deposition. Luz suffers from legitimate memory problems and appears to have some cognitive difficulties. Some of her memory lapses are attributable to the stress of tragically losing a husband and son and the time that has passed since many critical events between 2007 and 2011. Portions of sworn statements signed and filed by Luz in State Court were shown to be incorrect (at best) and false (at worst) during the trial of this adversary proceeding. Her testimony was sometimes inconsistent, riddled with responses like "I don't remember" and "I don't recall," and when pressed, she was easily confused. As a result, the Court gives limited weight to much of her testimony.
(4) Joel Chavez ("
(5) Darlene Chavez ("
Darlene was an important witness in this adversary proceeding. She testified at trial in person and by deposition. Darlene appeared both honest and competent. The Court finds Darlene's testimony to be credible on matters within her personal knowledge.
(6) Allen Chavez ("
Allen was also an important witness in this adversary proceeding. He testified at trial in person and by deposition. Allen appeared candid and forthright to the Court. The Court finds Allen's testimony to be credible on matters within his personal knowledge.
(7) Francisco Chavez ("
(8) Celia Chavez ("
Rosenthal & Watson P.C. (herein "
At trial, nine witnesses testified who are not parties to this adversary proceeding, as follows:
(1) Juanita "Lynn" Watson ("
Watson was a key non-party witness in this adversary proceeding. She testified at trial in person and by deposition. At trial, Watson appeared competent and straightforward to the Court. However, her testimony appeared intentionally vague and non-specific in certain critical areas, such as obtaining the approval of all adult Chavez Family members to the 2010 settlement with KCSR. To the extent that Watson provided specific testimony, the Court finds much of her testimony to be credible. On the other hand, Watson's generalized and vague testimony about the approval of the entire Chavez Family to the settlement and the surrounding circumstances is given limited weight by the Court.
(2) Marc Rosenthal ("
Rosenthal testified at trial only by deposition, taken at a federal prison where he is presently incarcerated. In 2013, Rosenthal was convicted for a criminal scheme that spanned four years. His crimes included conspiring with witnesses to provide false testimony, extortion, fabrication of evidence, bribery of a state court judge, and other acts of fraud by Rosenthal while an attorney with R&W. The conviction included actions taken by Rosenthal in several wrongful death suits filed against railroads, but do not appear to involve the suit filed for the Chavez Family against KCSR. See U.S. v. Rosenthal, 805 F.3d 523, 526-28 (5th Cir. 2015); (Ex. P-45). The Court gives Rosenthal's testimony little weight.
(3) James Christopher "Chris" Dean ("
Dean was an important non-party witness. As Dean testified only by deposition, the Court was unable to assess his demeanor. Dean's independent recollection of events appeared limited, and he had no direct contact with the Chavez Family regarding the 2010 settlement. In his testimony, Dean generally seemed cooperative and honest. The Court finds Dean's testimony generally to be credible on matters within his personal recollection and knowledge.
(4) Mark Alvarado ("
Alvarado was a fact witness and testified in person at trial. Alvarado has continued to wear multiple hats. At trial in this adversary proceeding, Alvarado was both the attorney advocate for the Chavez Family and a fact witness.
(5) Merritt Clements ("
Clements was also a fact witness that testified in person at trial. As a result, Clements also acted in dual roles—as an attorney advocate for KCSR and a fact witness in this adversary proceeding. Clements' testimony included background information regarding the litigation with the Chavez Family, as well as his role in negotiating the 2010 settlement for KCSR with Dean. Clements was candid, honest, and competent as a witness. Given his dual role as both advocate and witness in a bitter, lengthy dispute, the Court gives his non-background testimony limited weight to the extent it was not supported by contemporaneous records.
(6) Adriana Maddox ("
Adriana played a peripheral role in this controversy. She testified at trial only by deposition. She only had a partial recollection of events. In her testimony, Adriana seemed straightforward and honest. The Court finds Adriana's testimony to be credible on matters within her personal recollection.
(7) Edward Maddox ("
Like his spouse, Edward had a peripheral role in this controversy. He testified at trial only by deposition. Edward had a limited recollection of events. In his testimony, Edward seemed candid. The Court finds Edward's testimony to be credible on matters within his personal recollection.
(8) Alfonso "Pancho" Gonzales ("
Gonzales had a very limited role in this controversy. He testified at trial only by deposition. Gonzales appeared to have a good recollection of events and was candid. The Court finds the testimony of Gonzales to be credible on the limited matters that were the subject of his testimony.
(9) Stephen T. Dennis ("
Dennis provided brief testimony only by deposition, on a very tangential matter. The Court finds that the testimony of Dennis was credible, although the subject matter of his testimony had remote relevance to the disputes in this adversary proceeding.
Following is a factual chronology of the key events, which also constitute findings of fact by the Court, after weighing all the evidence and the credibility of all witnesses.
On February 15, 2007, a Kansas City Southern Railway Company locomotive collided with a pickup truck at a grade crossing in Webb County, Texas. Jose Juarez, an employee of the railway, was the engineer on the lead locomotive. As a result of the train accident, Rudolph Chavez, Sr. (herein "
Within a week of the train accident, Rosenthal and Watson of the R&W law firm met with the Chavez Family, as well as other relatives, in South Texas. At the meeting, the Chavez Family decided to hire R&W as their counsel to file a wrongful death suit against KCSR.
By late February 2007, each member of the Chavez Family signed a Power of Attorney with Assignment of Interest ("
In general, each Engagement Contract provides that the "Client" (each a member of the Chavez Family) employs the "Attorneys" (R&W)
Significantly, with respect to settlement authority, the Engagement Contract signed by each member of the Chavez Family with R&W provides as follows:
(Ex. CD-5) (capitalization in original) (emphasis added).
On March 2, 2007, on behalf of each member of the Chavez Family, R&W filed a wrongful death suit against KCSR in the 406th District Court of Webb County, Texas (herein "
Over the next few years, R&W spent significant time and expense in preparing the wrongful death suit for trial in State Court. Numerous contested discovery and pretrial hearings were conducted in the suit. R&W incurred substantial and necessary out-of-pocket expenses on behalf of the Chavez Family in trial preparation and at trial, including the cost of multiple experts,
The wrongful death suit was set for jury trial in early December 2009. Unknown to the Chavez Family, shortly before trial, R&W unilaterally associated Dean to act as lead trial counsel for the Chavez Family in the wrongful death suit. On November 23, 2009, Alvarado (at the time an attorney with R&W), filed a Notice of Appearance of Counsel in the State Court identifying Dean as an additional attorney of record for the Chavez Family. (Ex. P-9). The Chavez Family was completely unaware that a notice of appearance of Dean as their counsel had been filed in the suit. In late November 2009, Dean appeared at pre-trial hearings in the wrongful death suit in State Court, along with Alvarado of R&W.
The Chavez Family did not hire or retain Dean as their attorney in the wrongful death suit. The Chavez Family did not agree to Dean's participation in the suit or subsequent settlement negotiations. The Chavez Family never intended or thought they had an attorney-client relationship with Dean. There was never an understanding or agreement by the Chavez Family regarding the nature of legal work to be undertaken by Dean. Dean could not specifically recall meeting with any member of the Chavez Family.
Neither R&W nor Dean obtained the written or verbal consent of the Chavez Family to the hiring or association of Dean by R&W, or even discussed with the Chavez Family that Dean was going to appear in the suit on their behalf. Dean's fee arrangement with R&W in the wrongful death suit was part contingency fee and part flat fee. Neither R&W nor Dean obtained the written or verbal consent of the Chavez Family to this fee sharing arrangement or even discussed it with the Chavez Family. No contract or other writing was signed between Dean and any member of the Chavez Family. However, Dean reviewed the Engagement Contract between R&W and the Chavez Family, which prohibited the attorneys from settling without the client's consent and final approval.
Starting in early December 2009, a jury trial was conducted in the wrongful death suit brought by the Chavez Family against KCSR in State Court. Dean served as lead counsel for the Chavez Family at trial. Attorneys with R&W also participated in the jury trial for the Chavez Family. Lead trial counsel for KSCR at the jury trial was Clements.
Outside the courtroom during the jury trial, Watson of R&W told Darlene of the Chavez Family that Dean would be assisting R&W during the trial. This was the first time that any member of the Chavez Family ever heard of Dean or saw that Dean would be acting as an attorney for the Chavez Family at trial. Darlene immediately told R&W that hiring Dean was not part of their agreement. Some members of the Chavez Family (Luz and Darlene, and Allen when he was in attendance) saw Dean speaking on their behalf during the jury trial, as well as R&W attorneys. Other members of the Chavez Family (elders Francisco and Celia) did not attend the trial and never even saw Dean. None of the Chavez Family members attending the jury trial voiced any opposition to the judge during the trial about Dean acting as one of their attorneys.
After a lengthy trial, the jury returned a unanimous defense verdict in favor of KCSR in the wrongful death suit in mid-December 2009.
Alvarado left the law firm of R&W in January 2010 due to the firm's financial difficulties, and worked sporadically thereafter on a contract basis for R&W. In early 2010, Rosenthal was sent a target letter by the government. Watson of R&W became aware that Rosenthal was under investigation for crimes for which he would ultimately be indicted and convicted. This had a negative effect on the financial productivity of the R&W law firm.
In January 2010, based on the December 2009 jury verdict, the State Court entered a final judgment that the Chavez Family recover nothing on their claims against KCSR in the wrongful death suit. Dean appeared as counsel for the Chavez Family at post-trial hearings in the wrongful death suit, unbeknownst to the Chavez Family.
In early 2010, R&W, with the assistance of Dean, filed a motion for new trial in the wrongful death suit on behalf of the Chavez Family. The request for new trial was based in part on newly discovered evidence regarding the trial testimony of the train engineer (Mr. Juarez) about cell phone usage prior to the train collision. In March 2010, the State Court granted the motion, set aside its final judgment, and ordered a new trial in the wrongful death suit. (Ex. D-1). The new trial was scheduled to commence on November 15, 2010.
In the summer of 2010, Dean (purporting to act on behalf of the Chavez Family) began negotiating with Clements (counsel for KCSR) about settlement of the wrongful death suit. Dean admitted that he did not have authority from the Chavez Family to enter into any settlement; instead, Dean relied upon R&W to communicate with the Chavez Family about settlement and obtain their consent. No members of the Chavez Family were aware that Dean was undertaking settlement negotiations or authorized Dean to negotiate or settle on their behalf.
In July 2010, Clements (counsel for KCSR) emailed Dean with a lump-sum offer of $400,000 to settle the claims of all Chavez Family members, subject to conditions. The conditions included a full release of all claims, a confidentiality clause with a liquidated damages provision of 10% if breached, and indemnification by the Chavez Family. Clements (on behalf of KCSR) also offered to pay the fees of the guardian ad litem for minor Joel. In August 2010, Clements (on behalf of KCSR) provided an increased lump-sum settlement offer of $500,000 to Dean to settle the claims of all members of the Chavez Family, subject to the same conditions.
In August 2010, Dean communicated the lump-sum $500,000 settlement offer from KCSR to Rosenthal and Watson of R&W. Rosenthal, working by himself, allocated the $500,000 lump-sum settlement offer from KCSR among his multiple clients (the Chavez Family members) and R&W for expenses. Rosenthal's internal allocation of the lump-sum $500,000 settlement offer between his clients is outlined in Watson's case notes dated September 2, 2010. (Ex. P-4, p. 1).
In late August 2010, Rosenthal apparently called Luz of the Chavez Family to discuss the $500,000 settlement offer from KCSR. In their testimony, neither Rosenthal nor Luz could accurately or coherently recount any of their discussions. Luz, at various times, stated that Rosenthal yelled at her and tried to pressure her into accepting the $500,000 settlement offer, and that she told Rosenthal that she did not want to settle with KCSR. In contrast, Rosenthal was under the impression that Luz was supposed to get back to him about the KCSR settlement offer after their discussion. All the Court can find
A few days later, in early September 2010, Rosenthal relayed the $500,000 settlement offer to his partner Watson and requested her assistance. Rosenthal asked Watson to try to reach Luz and get an answer to the $500,000 settlement offer from KCSR. Watson then began to attempt to reach Luz by phone to discuss the proposed settlement. When Luz did not return her call, Watson directed R&W staff to try and reach Luz.
In the following weeks, R&W staff repeatedly tried to reach Luz by phone on nine different days between September 7, 2010 and September 27, 2010. Luz did not return any of these calls, and Luz was clearly reluctant to speak with R&W. This led Watson of R&W to hire private investigator Gonzalez to reach Luz and encourage her to contact R&W about the proposed KCSR settlement. Ultimately, Gonzalez made brief contact with Luz near her home on September 28, 2010, and Luz then called R&W's office.
In the evening of September 28, 2010, Luz and Watson had about a 19-minute phone call regarding the $500,000 settlement offer from KCSR. No other member of the Chavez Family was present during the call.
During this September 28 phone call, Watson explained to Luz that KCSR had made a $500,000 settlement offer. Watson also verbally provided Luz with numerous specific figures about the allocation of the $500,000 devised by Rosenthal among the various members of the Chavez Family, the amounts allocated for the workers compensation liens of Service Lloyds Insurance Company ("
None of these numerous specific figures and the complex allocation of the $500,000 settlement offer was put in writing by Watson or R&W for Luz to review. Watson and R&W never met in person with Luz to explain the offer and the complicated allocation created internally by Rosenthal. The lump-sum $500,000 settlement offer and its allocation was not communicated or discussed in any manner by Watson or R&W with R&W's other clients—the remaining four adult members of the Chavez Family (Darlene, Allen, Francisco, and Celia). Watson told Dean that she had specifically worked these allocation numbers with the clients, and that they had approved the numbers; but Watson had not. Watson only discussed the settlement allocation with one client—Luz.
During the September 28 phone call, Watson did not tell Luz that Dean was negotiating a settlement on the family's behalf with KCSR. Watson also did not advise Luz that the $500,000 settlement offer by KCSR to Dean was subject to
Conflicting evidence at trial in this adversary proceeding was presented regarding whether or not Luz accepted the $500,000 settlement offer conveyed by Watson during their phone call on September 28, 2010. Luz, at various times, has stated that she never accepted the $500,000 settlement offer, yet Luz also testified that she could not remember having this phone call with Watson about the settlement. In contrast, Watson's testimony was specific and consistent that Luz accepted the settlement offer during this phone call. Significantly, this aspect of Watson's testimony was supported by Watson's contemporaneous written case notes. (Ex. P-4, p. 4).
After weighing all the evidence and the credibility of the witnesses, the Court makes three additional specific findings of fact relating to this September 28, 2010 phone call between Watson and Luz about the $500,000 KCSR settlement offer.
First, the Court finds that Luz
Second, the Court finds that Luz
Third, the Court finds that Luz
On September 28, 2010, immediately after completing the phone call with Luz, Watson called Dean and advised him that the clients wanted to accept the KCSR settlement offer. Watson also advised Dean that they needed to speak further about how to allocate the recovery. R&W and Watson believed that the $500,000 settlement offer made by KCSR was a reasonable and good offer, which R&W recommended.
Unknown to Watson at the time of her September 28 phone call with Luz, KCSR had increased its lump-sum settlement offer to $525,000, subject to its previous
On October 5, 2010, Dean (purportedly on behalf of the Chavez Family) sent a letter by email to Clements (counsel for KCSR) confirming that the parties had reached an agreement to settle the wrongful death suit ("
According to the Dean Letter, the total settlement amount to be paid by KCSR was $531,000, which was allocated to be paid as follows:
(Ex. P-1).
Dean sent Watson of R&W a copy of the Dean Letter. No members of the Chavez Family were sent a copy of the Dean Letter or were even aware that it was sent on their behalf by Dean at the time. The Chavez Family did not authorize Dean to send the Dean Letter to KCSR's counsel and were not even aware that Dean was negotiating a settlement with KCSR. The Dean Letter was never signed by any member of the Chavez Family or by R&W.
Promptly after receiving the Dean Letter, KCSR's counsel, Clements, responded to Dean by email on October 5, 2010, stating that "[s]ubject to the conditions set out in my earlier letter, we have a deal." (Ex. P-27). The "subject to" conditions set by KCSR included a confidentiality clause with a 10% liquidated damages provision in the event of breach by the Chavez Family and indemnification by the Chavez Family. (Ex D-17). The Chavez Family were never advised of these "subject to" conditions set
The Dean Letter was not signed by KCSR or by counsel for KCSR. KCSR and its counsel did not investigate the existence or scope of any authority that Dean had to negotiate or send the Dean Letter on behalf of the Chavez Family. KCSR counsel knew that Dean was only a middleman between R&W and KCSR with respect to settlement, and that R&W was in charge of client communications about the settlement.
During the months of October and November 2010, Dean communicated with Lloyds about resolution of their subrogation liens and rights against any settlement recovery by Luz and Joel. (Ex. P-31). Lloyds was the workers' compensation carrier paying benefits to Luz and Joel.
In early November 2010, counsel for KCSR sent a proposed formal Settlement Agreement and Release of All Claims with Confidentiality and Indemnification Obligations ("
On November 10, 2010, Dean sent a letter to the State Court, advising that the parties had reached an agreement and requesting that the wrongful death suit be removed from the November 15, 2010 trial docket. (Ex. P-33). Dean was not asked by R&W to prepare for trial.
On November 15, 2010, R&W and Dean filed a Motion for the Appointment of a Guardian Ad Litem with the State Court, on behalf of the Chavez Family. (Ex. D-24). The Chavez Family was not informed that this motion would be filed on their behalf. A guardian ad litem needed to be appointed for Joel (a minor) to evaluate any proposed settlement, determine whether it was in the best interest of the minor Joel, and make a recommendation to the State Court regarding approval of any settlement of the minor Joel's claims.
On November 18, 2010, the State Court granted this motion, and signed an order appointing Adriana Maddox (herein "
In March 2011, KCSR filed a Motion to Set Hearing Regarding Minor's Settlement with the State Court. (Ex. D-27). In part, such motion stated that on October 5, 2010 the parties reached a tentative settlement, and that the settlement was contingent on the State Court's approval of the settlement as it affected the minor Joel.
On March 8, 2011, the State Court sent notice of a hearing to be held on April 7, 2011 to approve the settlement of the minor Joel's claims to attorneys of record in the wrongful death suit, including Dean and R&W. R&W notified Luz of the April
On April 6, 2011, the day before the April 7 hearing, Luz met with Adriana (the ad litem) at Adriana's office in Laredo to discuss the terms of the proposed settlement of minor Joel's claims. At that meeting, Luz did not express to Adriana that she had any objection to the proposed settlement of Joel's claims.
On April 7, 2011, the State Court conducted its first hearing to consider approving settlement of the minor Joel's claims. R&W hired Alvarado to travel and attend this hearing. Adriana (the ad litem) was unable to attend this hearing, so her husband and law partner Edward attended. On the morning of April 7 and before the hearing started, Edward met with Luz to again review the settlement. During that meeting with Edward, Luz voiced no objections to the settlement. However, shortly before the start of the April 7 hearing, Luz told Alvarado that she had "changed her mind" about the settlement.
During the hearing on April 7, 2011, Luz informed the State Court that she did not desire to go forward, requested at least three months to find another law firm, and that she no longer wanted to continue with R&W as counsel because she did not feel comfortable with R&W at all. (Ex. P-10). Luz did not mention Dean, as she did not know or think Dean was her counsel. This was the first time that Luz or any member of the Chavez Family had indicated to the State Court that they were dissatisfied with R&W or any of their counsel. During the April 7 hearing, Luz never told the State Court that she objected to the terms of the settlement, although Edward (the ad litem) advised the State Court that Luz was not satisfied with the settlement and the settlement was against her wishes.
At the conclusion of the April 7, 2011 hearing, the State Court set a status hearing for May 31, 2011 for the purpose of learning what Luz had decided about her lawyers and if Luz had hired new counsel. The State Court announced the May 31, 2011 status hearing on the record with Luz in attendance, and thus Luz had notice of the May 31, 2011 status hearing.
Prior to this April 7, 2011 hearing, no member of the Chavez Family notified R&W or the State Court that the Chavez Family was terminating R&W as their counsel. No member of the Chavez Family notified Dean or the State Court that the Chavez Family was terminating Dean as their counsel. That the Chavez Family did not inform the State Court or Dean about Dean's termination is not surprising, given that the Chavez Family never hired Dean and did not even know that Dean was acting as their counsel in settlement negotiations.
On April 28, 2011, KCSR filed a Motion to Enforce Settlement Agreement with the State Court. (Ex. D-37). In this motion, KCSR stated that Dean, as the lead trial counsel for the Chavez Family, and Clements, as lead trial counsel for KCSR, negotiated a settlement of the wrongful death suit in September and October 2010. KSCR also stated that the essential terms of the settlement were set forth in emails between Clements and Dean and a letter sent by Dean to Clements on October 5, 2010 (the Dean Letter). Through this motion, KCSR requested that the State Court enforce the settlement agreed to by Dean (as counsel for the Chavez Family) and Clements (as counsel for KCSR). This motion was not served by KCSR on Luz or any member of the Chavez Family. The State Court set a hearing on this motion
At some point in May 2011, Alvarado (a former attorney with R&W) began advising and informally representing Luz. Alvarado became the "ghost writer" of several letters, affidavits, pleadings, and a brief subsequently filed by Luz with the State Court and the Texas appellate court.
On May 31, 2011, the State Court conducted a hearing on the Motion to Enforce Settlement Agreement filed by KCSR, the same date as the previously noticed status hearing. (Ex. P-46). Clements, as counsel for KCSR, attended this hearing, as well as Edward (ad litem for Joel) and Watson of R&W.
At the May 31 hearing, Watson advised the State Court that it was clear that R&W had been discharged as counsel for the Chavez Family based on the April 7 hearing, and that R&W had not yet filed a motion to withdraw as counsel only because R&W had not received instructions on who new counsel for the family would be. Watson also told the State Court that Luz had the authority to speak on behalf of the Chavez Family throughout the pendency of the case, but that Watson and R&W could take no position on enforcement of the settlement because R&W no longer represented the Chavez Family.
At the May 31 hearing, Edward (acting as ad litem) announced some modifications to the allocation of the settlement funds to minor Joel, which would be taken from the allocation to Darlene and Allen. Edward advised the State Court that he and Adriana recommended the settlement on behalf of minor Joel as just and reasonable, with these modifications. The State Court then orally granted the Motion to Enforce Settlement and directed counsel and the ad litem to agree on an ad litem fee to be included in the judgment reflecting the ruling.
Although Luz received notice of the May 31, 2011 hearing, neither Luz nor any other member of the Chavez Family attended the hearing. Instead of attending, Luz sent a letter dated May 18, 2011 to the State Court, requesting a continuance because she had yet to find new counsel. (Ex. P-48). Luz also filed a Motion for Continuance with the State Court on May 31, 2011, where Luz stated that she "had to wait until the hearing in April to tell you in person that I did not want this settlement. I also had to wait to tell you that I did not agree to this because I did not trust the Rosenthal firm or the Brownsville lawyer for my youngest son, Joel." PTO (dkt# 98, p. 16).
Luz followed this up with a Motion for Reconsideration dated June 2, 2011 addressed to the State Court. (Ex. P-49). Through this motion, Luz requested that the State Court reconsider its May 31, 2011 ruling that enforced the KCSR settlement. This motion, signed by Luz, is riddled with inaccurate factual statements. In response to this request by Luz, the State Court apparently set a rehearing on the Motion to Enforce Settlement Agreement filed by KCSR for June 23, 2011.
On June 15, 2011, Watson, on behalf of R&W, sent the State Court a letter, and provided a copy to Luz and other counsel. (Ex. P-39). This letter was sent by Watson to the State Court primarily as a response to Luz's accusations that R&W promoted a settlement without authority. In the letter, Watson stated that "Luz Chavez did agree, on behalf of all Plaintiffs, to the settlement, and the settlement agreement was reached based on the informed consent of Luz Chavez." Watson stated that she was "mindful of the lawyer's duties to a client concerning confidentiality," but the circumstances fell into "the category of situations in which a lawyer may (and in some
On June 23, 2011, the State Court conducted a rehearing on the Motion to Enforce Settlement filed by KCSR, in response to Luz's request. (Ex. P-44). Watson of R&W attended this hearing by phone. Adriana (as ad litem for minor Joel) and Clements (counsel for KCSR) appeared in person. Luz did not attend this hearing, although several attempts were made to notify her of the hearing. The State Court noted that the hearing was set for the benefit of Luz so that she could have an opportunity to hire a new law firm and make any additional arguments or statements to the court. Understandably, the State Court appeared frustrated that Luz did not show up to a rehearing set for her benefit.
At this hearing, Watson reiterated to the State Court that R&W had been terminated as counsel. Watson also advised the State Court that Luz gave consent to the settlement on behalf of all plaintiffs, as stated in her June 15 letter to the State Court. Ultimately, the State Court agreed with the previous recommendations of the co-guardians ad litem that the settlement was in the best interests of minor Joel, and again granted the Motion to Enforce the Settlement filed by KCSR.
At the conclusion of the June 23, 2011 hearing, the State Court signed an Order Granting Motion to Enforce Settlement Agreement and Final Judgment Reflecting Terms of Settlement Agreement ("
On July 25, 2011, a Motion for New Trial was filed with the State Court by Luz on behalf of "Luz Chavez et al." (Ex. P-19). While this motion purported to be filed on behalf of all members of the Chavez Family, it was signed only by Luz. The motion requested that the State Court set aside its First Judgment and order a new trial. The State Court did not grant this motion.
An affidavit signed by Luz on July 25, 2011 was filed with this motion. (Ex. P-8). Luz's affidavit contains several inaccuracies as to factual events. Luz stated in her affidavit that R&W was hired to represent her family and that "I did not agree to settle our lawsuit against the railroad, and I have always been the person that the law firm contacts for decisions on the case." Luz further stated in the affidavit that she had spoken with Darlene and Allen, and that "they did not agree to settle the case against the railroad, either."
Affidavits signed by Darlene and Allen on July 25, 2011 were filed concurrently with this motion. (Ex. P-12). In her affidavit, Darlene stated that she did not agree to settle the suit against KCSR and that she did not give R&W her consent to settle. Likewise, in his affidavit, Allen stated that he did not agree to settle the suit against KCSR and that he did not give R&W his consent to settle. Both Darlene and Allen have consistently and credibly maintained this position—that neither of them gave their consent to R&W to settle their individual claims—through trial in this adversary proceeding.
On August 31, 2011, Francisco (an elderly member of the Chavez Family and a party) passed away.
The Chavez Family appealed the First Judgment enforcing the 2010 settlement to the San Antonio Court of Appeals, where it was assigned cause no. 04-11-00697-CV ("
On November 7, 2013, R&W filed a Petition in Intervention with the State Court. In this pleading, R&W sought recovery of the 40% contingency fee and over $400,000 in reimbursable expenses from the Chavez Family pursuant to the attorney's lien created in the Engagement Contract.
On February 13, 2013, the San Antonio Court of Appeals issued its Opinion in the First Appeal. Chavez v. Kansas City S. Ry. Co., 522 S.W.3d 468 (Tex. App-San Antonio 2013, pet. denied) ("
On remand to the State Court, KCSR filed the Dean Letter of record under Rule 11 with a counterclaim against the Chavez Family, which again sought to enforce the 2010 settlement. On November 13, 2013, KCSR filed a Motion for Summary Judgment and Motion to Affirm Approval of Minor's Settlement and Adopt it as the Judgment of the Court ("
On February 6, 2014, the State Court held a hearing on the Motion for Summary Judgment filed by KCSR and granted the motion by Order on the same date. (Ex. P-11). On February 13, 2014, the State Court corrected an error in such Order by entering a Judgment Nunc Pro Tunc ("
On February 26, 2014, R&W filed a voluntary bankruptcy petition under Chapter 7. Shortly thereafter, the Trustee was appointed for the R&W bankruptcy estate.
In April 2014, Celia (an elderly member of the Chavez Family and a party) passed away.
The Chavez Family appealed the Second Judgment enforcing the 2010 settlement to the San Antonio Court of Appeals, where it was assigned cause no. 04-14-00354-CV ("
On June 17, 2015, the San Antonio Court of Appeals issued its Opinion in the Second Appeal. Chavez v. Kansas City S. Ry. Co., 518 S.W.3d 33 (Tex. App-San Antonio 2015) ("
Undeterred, the Chavez Family sought review by the Texas Supreme Court, which was granted. On May 16, 2017, the Texas Supreme Court issued a per curiam Opinion, which reversed the Court of Appeals. Chavez v. Kansas City S. Ry. Co., 520 S.W.3d 898 (Tex. 2017) ("
Addressing the issue in the context of summary judgment, the Texas Supreme Court in Chavez III stated:
Chavez III, 520 S.W.3d at 900-01.
Following remand from the Texas Supreme Court, on September 5, 2017, the State Court severed the breach of contract counterclaim by KCSR to enforce the 2010 settlement against the Chavez Family from the underlying wrongful death suit filed by the Chavez Family against KCSR. The severed breach of contract suit to enforce the 2010 settlement was assigned cause no. 2017-CVA-002223-D4 by the State Court (herein "
Numerous hearings and discovery disputes were conducted and adjudicated by the State Court in the Severed Suit. On August 31, 2018, the Chavez Family filed a third-party petition and crossclaim against R&W in the Severed Suit pending in State Court. In this pleading, the Chavez Family alleged claims against R&W for breach of fiduciary duty, negligent misrepresentation, civil conspiracy, and perjury.
With respect to specific subject matters, the following are additional findings of fact by the Court after weighing all the evidence and the credibility of all witnesses.
The Court finds that Luz did not have authority as an agent for the other four adult members of the Chavez Family to accept a settlement on their behalf in the September 28, 2010 phone call with Watson.
Initially, the Court has examined the conduct and communications of the adult members (the principals) to Luz (their alleged agent) to determine if Luz had actual authority to settle their claims of the other adults. Darlene and Allen were not aware of the 2010 settlement offer when it was made to Luz and never consented to any settlement of their individual claims. Darlene testified that Luz did not have authority to act for her in all aspects of the case. Darlene and Allen did not allow Luz to believe that Luz had authority to finally settle their individual claims in September 2010 without their specific consent. The evidence did not establish that Darlene and Allen intentionally or negligently conferred authority on Luz to settle their individual claims without their specific consent. There was no credible evidence that Francisco and Celia (Luz's in-laws and individual claimants) took any actions that could be construed as providing actual authority to Luz to settle on their behalf.
None of these four adults (or Luz for that matter) ever contacted R&W or anyone else asking for their funds under the 2010 settlement. Luz also signed the same form of Engagement Letter as the other four adults, so Luz was charged with knowledge that the individual claims of the other four adults could not be settled without the consent and final approval of the other four adults. In sum, the Court finds that these four other adults did not give Luz actual authority to settle their claims.
Next, the Court has examined the conduct of these adult members (the principals) and the reasonableness of the assumption by Watson that Luz (the alleged agent) had the apparent authority to settle the claims of the other adults. Darlene testified that in the past, Watson of R&W would contact each of them individually when any "big topic" in the case came up. Allen testified that in the past, he was present and making settlement decisions at mediations with R&W as his counsel. Darlene and Allen did not knowingly permit Luz to hold herself out as having authority to finally settle their individual claims. There was no credible evidence that Francisco and Celia (Luz's in-laws) took actions that could be construed as providing apparent authority to Luz to settle on their behalf.
By permitting Luz to be the primary contact person for the family, the other adult members of the Chavez Family did not clothe Luz with the authority to unilaterally make the most important decision on their behalf in the suit—whether or not to settle their individual claims and for how much. During the September 2010 phone call, Watson did not ask Luz if she
The evidence suggesting that Luz had actual or apparent authority from Darlene and Allen to accept a settlement offer for them came from the testimony of Watson. On this critical point, Watson provided mostly vague and general testimony. For example, at trial, Watson generally agreed with counsel's question that Darlene and Allen "confirmed" that Luz was the "voice of the family" when Watson spoke "to them, all jointly, on several occasions"; that Darlene and Allen "always deferred" and then "usually deferred" to Luz's decisions in the case; and that Darlene and Allen always "indicated" that Luz had authority to speak on their behalf. (TR at pp. 16-18, 69; dkt# 131). Watson's deposition testimony was similar—often responding "yes" to questions about Allen and Darlene with little specifics or detail other than general statements about authority. (Ex. JT-1, Tab 10, pp. 19-20, 23, 143-4, 156-7). However, none of Watson's detailed case notes (or other writings) support Watson's generalized testimony that Darlene and Allen had previously agreed that Luz had their authority to settle their individual claims. (Ex. P-4).
To the Court, Watson appeared to be carefully stretching her testimony to try and justify her actions after the fact. At the time of the September 28, 2010 phone call with Luz, Watson and R&W were under pressure as a November 15, 2010 trial date was looming. R&W was beginning to experience financial difficulty as part of the fallout from the federal investigation of Rosenthal. R&W had no desire to retry an expensive suit against KCSR that was lost the first time. KCSR had made a reasonable settlement offer under the circumstances, an offer that Watson felt her clients should accept and would recoup some of R&W's significant expenses. When Watson was finally able to chase down Luz on the phone, Watson managed to get Luz to verbally agree to the settlement.
At that time, Watson figured that the other four adult clients would just go along with Luz and ultimately agree to the KCSR settlement offer, so Watson never even tried to meet or speak to her other adult clients about the settlement offer. Later, when Luz disavowed the settlement and the other adult clients refused to give their consent to the settlement, Watson was forced to stretch and justify the settlement by taking the position that Luz had authority to settle the claims of the other adult clients as well. Further, even if the Court were to accept Watson's generalized testimony that the other adults agreed that Luz was the voice for the family, this does not establish that the scope of authority granted to Luz included settling the individual claims of the other adults without their knowledge and specific consent.
The Court recognizes that several months after the September 2010 phone call with Watson, Luz signed an affidavit stating that "I have always been the person that the law firm contacts for decisions on the case." (Ex. P-8).
No writings exist whereby Darlene, Allen, Francisco or Celia gave authority to Luz to settle their individual claims. The only writings on authority to settle claims are the Engagement Contracts, signed by Watson herself for R&W and by Darlene, Allen, Francisco, and Celia individually. Each Engagement Contract specifically states that R&W may not settle "MY" claims without "MY" consent and "my" final approval. (Ex. CD-5).
After weighing all the evidence and considering the credibility of all witnesses, the Court finds, as a factual matter, that Luz did not have actual or apparent authority as agent for the other adult members of the Chavez Family to accept a settlement on their behalf during the September 2010 phone call with Watson.
When the Chavez Family retained R&W in February 2007, they had not hired any other lawyer or firm to represent them in their claims against KCSR. The credible and probative evidence did not prove that in February 2007 a non-attorney associated with R&W solicited a relative of the Chavez Family to hire R&W as counsel for the Chavez Family. It was not established that R&W paid or caused to be paid $10,000 to a non-attorney to secure the Chavez Family as clients by credible evidence.
At the first meeting in February 2007, relatives of Luz asked R&W if they could pay some funds to Luz (who was recently widowed and raising a small child) for living expenses while the case proceeded to trial. In response, R&W agreed to this request, and ultimately advanced $10,000 and $2,000 monthly to Luz for living expenses. The $10,000 was not advanced by R&W to Luz for the purpose of soliciting employment of R&W by the Chavez Family.
As of September 28, 2010, R&W had incurred $416,724 in out-of-pocket expenses relating to the wrongful death suit filed against KCSR, including advances made directly to the Chavez Family of about $64,000. As of November 10, 2010, R&W had incurred out-of-pocket expenses on behalf of the Chavez Family in the prosecution of the wrongful death suit against KCSR totaling $417,622.
The Court specifically finds that the $417,622 in out-of-pocket expenses of R&W are actual, necessary, and reasonable expenses incurred by R&W in the prosecution of the wrongful death suit against KCSR and are within the scope of reimbursable expenses in the Engagement Contracts. The expenses included the cost of multiple experts, reports, research, investigation,
KCSR has been and remains ready, willing, and able to perform the 2010 settlement, as reflected in the Dean Letter as modified by the Second Judgment. KCSR is holding such settlement funds in reserve for the Chavez Family. The settlement funds have not been paid to date as it would be a useless act, because the Chavez Family has denied that any enforceable settlement exists. The filing of suit to enforce the settlement against the Chavez Family has been duly authorized by KCSR.
Lloyds is the workers' compensation carrier for Rental Xpress, the employer of Sr and Jr at the time of the fatal train accident. (Ex. D-44). Since the accident and through October 2019, Lloyds has paid workers' compensation benefits totaling $373,737 to Luz and Joel. Luz continues to receive weekly benefits of $392. (Ex. P-51).
Lloyds asserts a statutory subrogation lien under the Texas Labor Code for benefits it has paid to Luz and Joel ($373,737) and will continue to pay to Luz, up to the amount that Luz and Joel may recover from KCSR. (Ex. P-51). By the time the Second Judgment was entered by the State Court in February 2014 enforcing the 2010 settlement reflected in the Dean Letter, Lloyds had agreed to accept the $61,333 allocated to Lloyds for its workers' compensation lien against the recovery by Luz and Joel under the settlement. Recently, Lloyds has notified counsel for the Chavez Family and KCSR that Lloyds will continue to honor its previous agreement to accept $61,333 for its lien if this Court enforces the settlement reflected by the Second Judgment. On the other hand, if the settlement is not enforced by this Court and the wrongful death suit continues forward, Lloyds has advised counsel for the parties that it will not abide by its previous agreement to limit its lien against any recovery by Luz and Joel. (Ex. P-51).
The following constitutes the conclusions of law with legal analysis by the Court in this adversary proceeding.
KCSR seeks specific performance and enforcement of the 2010 settlement agreement reflected by the Dean Letter (with the settlement for the minor Joel approved by the State Court) against the Chavez Family, based on breach of contract. See KCSR Complaint (dkt# 18). Likewise, on behalf of the R&W estate, the Trustee seeks specific performance and enforcement of the 2010 settlement agreement against the Chavez Family, based on breach of contract. See Trustee Counterclaims (dkt# 56). The Chavez Family has asserted a plethora of defenses to the enforcement of the 2010 settlement. See Chavez Answer (dkt# 50-1).
For the multiple and independent reasons set forth below, the Court concludes that KCSR and the Trustee are not entitled to enforce the 2010 settlement against the Chavez Family by specific performance.
The Court concludes that the 2010 KCSR settlement reflected by the Dean Letter may not be enforced by specific performance against Darlene, Allen, Francisco and Celia (the other adult client members of the Chavez Family). In short, these other adults did not authorize or provide consent to the settlement of their individual claims, as set forth below.
Under Texas law, if the evidence shows that an attorney did not have the authority of a client to enter into a settlement agreement, the settlement will not be enforced against the client. See, e.g., Karle v. Innovative Direct Media Ltd. Co., 309 S.W.3d 762, 765-66 (Tex. App.-Dallas 2010, no pet.) (citing Cleere v. Blaylock, 605 S.W.2d 294, 296-97 (Tex. Civ. App.-Dallas 1980, no writ)); Ebner v. First State Bank of Smithville, 27 S.W.3d 287, 300 (Tex. App.-Austin 2000, pet. denied) (supporting citations omitted). Settlement of a suit by an attorney without the knowledge or consent of a client is an unauthorized act, and an unauthorized settlement agreement will be set aside. See Johnson v. Rancho Guadalupe, Inc., 789 S.W.2d 596, 598 (Tex. App.-Texarkana 1990, writ denied) (supporting citations omitted). The employment of counsel does not "clothe" counsel with authority to settle a suit "without the specific consent of the client." Breceda v. Whi, 187 S.W.3d 148, 152 (Tex. App.-El Paso 2006, no pet.) (citing Sw. Bell Tel. Co. v. Vidrine, 610 S.W.2d 803, 805 (Tex. Civ. App.-Houston [1st Dist.] 1980, writ ref'd n.r.e.)).
Although some Texas courts have held that an attorney "retained for litigation" is presumed to possess actual authority to enter into a settlement on behalf of a client, this presumption is rebuttable. See, e.g., City of Roanoke v. Town of Westlake, 111 S.W.3d 617, 629 (Tex. App.-Fort Worth 2003, pet. denied).
Here, the 2010 settlement sought to be enforced by KCSR and the Trustee against the Chavez Family is set forth in the Dean Letter. (Ex. P-1). Dean sent this settlement letter purportedly as counsel for all members of the Chavez Family to counsel for KCSR. It is undisputed that Dean did not have authority directly from any of the Chavez Family to send this settlement letter; instead, Dean relied upon Watson of R&W to obtain authority from each of the client members of the Chavez Family to the settlement set forth in the Dean Letter.
The only Chavez Family client that Watson discussed the 2010 settlement with was Luz, in one phone call on September 28, 2010. As a factual matter, the Court has already found that Luz did not accept the
Even if Luz did accept the 2010 settlement offer on behalf of the other adult members of the Chavez Family in the phone call with Watson (contrary to the Court's factual finding), the Court concludes that Luz did not have authority to accept the KCSR settlement offer on behalf of the other adult members. In this regard, KCSR and the Trustee contend that Luz was the "agent" for the other adult family members, with the actual or apparent authority to accept the settlement on behalf of these other adults.
Recently, the Fifth Circuit examined the two types of agency authority under Texas law, which are "actual authority" and "apparent authority." Russell v. Russell (In re Russell), 941 F.3d 199, 204-05 (5th Cir. 2019). Absent actual or apparent authority, an agent cannot bind a principal under Texas law. Russell, 941 F.3d at 204 n.3 (supporting citations omitted). Texas law does not presume agency in a non-attorney client relationship; it must be proven by the party alleging an agency relationship. See, e.g., Lifshutz v. Lifshutz, 199 S.W.3d 9, 22 (Tex. App.-San Antonio 2006, pet. denied) (supporting citations omitted).
Actual authority is authority that the principal "intentionally conferred on the agent or allowed the agent to believe was conferred." Russell, 941 F.3d at 204 (citing Ebner, 27 S.W.3d at 300). Such authority "is created through the written or spoken words or conduct of the principal communicated to the agent." CNOOC Se. Asia Ltd. v. Paladin Res. (SUNDA) Ltd., 222 S.W.3d 889, 899 (Tex. App.-Dallas 2007, pet. denied) (citing Walker Ins. Servs. v. Bottle Rock Power Corp., 108 S.W.3d 538, 550 (Tex. App.-Houston [14th Dist.] 2003, no pet.)). Actual authority cannot be based merely on the words or deeds of the agent. CNOOC Se. Asia Ltd., 222 S.W.3d at 889.
Apparent authority under Texas law is based on estoppel. Gaines v. Kelly, 235 S.W.3d 179, 183 (Tex. 2007) (citing Baptist Mem'l Hosp. Sys. v. Sampson, 969 S.W.2d 945, 948 (Tex. 1998)). Apparent authority arises in two situations: (1) from a principal knowingly permitting an agent to hold the agent out as having authority; or (2) by a principal's actions, which lack such ordinary care as to clothe an agent with the indicia of authority, thus leading a reasonably prudent person to believe that the agent has the authority the agent purports to exercise. Gaines, 235 S.W.3d at 183; Russell, 941 F.3d at 205. In determining apparent authority, a court may consider only the conduct and acts of the principal (not the agent). Gaines, 235 S.W.3d at 182; Russell, 941 F.3d at 204. The acts of the principal are examined to ascertain whether those acts would lead a reasonably prudent person using diligence and discretion to ascertain the agent's authority to act on behalf of the principal. Gaines, 235 S.W.3d at 182-83. In short, to determine an agent's apparent authority, the conduct of the principal and the reasonableness of the third party's assumptions
Three limitations exist on the use of apparent authority of an agent to bind a principal under Texas law. First, and significant here, a principal is not bound when the third party had "notice of the limitations of the agent's power." Russell, 941 F.3d at 205 (citing G.D. Douglass v. Pan., Inc., 504 S.W.2d 776, 779 (Tex. 1974)). Second, "a principal's full knowledge of all material facts is essential" to establish apparent authority. Gaines, 235 S.W.3d at 182 (supporting citations omitted). Third, a party dealing with an agent has a duty to ascertain both the fact and the scope of the agent's authority; and if the party deals with the agent without having made such determination, the party does so at its own risk. Texas Cityview Care Ctr., L.P. v. Fryer, 227 S.W.3d 345, 353 (Tex. App.-Fort Worth 2007, pet. dism'd); Suarez v. Jordan, 35 S.W.3d 268, 272 (Tex. App.-Houston [14th Dist.] 2000, no pet.).
The Court will now apply these agency rules in the context of the September 2010 phone call between Watson and Luz. In this framework, Luz is the "agent," the other adult members of the Chavez Family are the "principals," and Watson of R&W is the "third party."
The Court has already found, as a factual matter, that Luz did not have the actual authority as an agent for the other adult Chavez Family members to accept a settlement offer on their behalf. The Court has examined the conduct and communications of the other adults (the principals) to Luz (the alleged agent) in making this determination, as set forth in detailed factual findings.
Although a slightly closer call, the Court has also found, as a factual matter, that Luz did not have the apparent authority as an agent for the other adult Chavez Family members to accept a settlement on their behalf. In this respect, the Court has examined the conduct and actions of the other adults (the principals) and the reasonableness of the assumptions by Watson (the third party) about the authority of Luz (the alleged agent), as set forth in detailed factual findings.
Just as importantly, the doctrine of apparent authority cannot be used to establish that Luz was the agent of the other adult members for the purpose of accepting the KSCR settlement offer on their behalf. As recognized by the Fifth Circuit, a principal is not bound when the third party had "notice of the limitations on the agent's power." See Russell, 941 F.3d at 205 (applying Texas law).
Here, Watson of R&W (the third party) had notice of a limitation on Luz's power (as agent) to accept a settlement offer on behalf of the other adult family members (the principals). The limitation is specifically set forth in the Engagement Letter signed by Watson of R&W with each of the other adult family members, as clients. The Engagement Letter provides, in all capitalized letters, that "NO SETTLEMENT OF MY SAID CLAIMS WILL BE MADE BY ATTORNEYS [R&W] WITHOUT MY CONSENT." The Engagement Letter further provides that R&W "shall neither settle or compromise this matter without my final approval." (Ex. CD-5).
For these reasons, the Court concludes that the 2010 KCSR settlement reflected by the Dean Letter cannot be enforced by specific performance against Darlene, Allen, Francisco and Celia (the other adult client members of the Chavez Family) because they did not authorize or approve the settlement of their claims.
The Court also concludes that the 2010 settlement reflected by the Dean Letter cannot be enforced against any member of the Chavez Family. In short, Dean was not an authorized attorney of record for the Chavez Family, so Dean had no authority to settle the suit under Rule 11 through the Dean Letter, for the reasons set forth below.
KCSR and the Trustee seek to enforce the Dean Letter sent by Dean (purportedly as attorney for the Chavez Family) under Rule 11 of the Texas Rules of Civil Procedure. Rule 11 provides as follows:
TEX. R. CIV. P. 11 (emphasis added).
A Rule 11 agreement made by an attorney will not be enforced against a client, if the evidence shows that an attorney was not authorized to settle for the client. Karle, 309 S.W.3d at 765; Ebner, 27 S.W. 3d at 300. Although Texas courts have recognized certain rebuttable presumptions regarding an attorney's authority to enter into a Rule 11 agreement for a client, the attorney must be "retained for litigation" and must be "duly employed" by the client for these presumptions to arise. See, e.g., City of Roanoke, 111 S.W.3d at 629 (an attorney "retained for litigation" is presumed to possess authority to enter into a Rule 11 agreement on behalf of a client, although the presumption is rebuttable); Ebner, 27 S.W. 3d at 300 (courts indulge every reasonable presumption to support a Rule 11 settlement agreement made by a "duly employed attorney," although the presumption is rebuttable).
An attorney that enters an appearance for a party is presumed to be authorized to do so, unless it is conclusively shown that the attorney was not authorized to appear for the party. Grey v. First Nat. Bank in Dallas, 393 F.2d 371, 384 n.17 (5th Cir. 1968) (applying Texas law) (supporting citations omitted); West v. City Nat'l Bank of Birmingham, 597 S.W.2d 461, 463 (Tex. Civ. App.-Beaumont 1980, no writ). The "longstanding rule in Texas" is that a party is not bound by the acts of an attorney if the party rebuts this presumption and demonstrates that an attorney was not authorized to act on behalf of the party. Latter and Blum of Texas, LLC v. Murphy, No. 02-17-00463-CV, 2019 WL 3755765, at *8 (Tex. App.-Fort Worth Aug. 8, 2019, pet. filed) (mem. op.) (citing Merritt v. Clow, 2 Tex. 582, 588 (1847); Levy v. Roper, 230 S.W. 514, 516 (Tex. Civ. App.-San Antonio 1921), modified, 113 Tex. 356, 256 S.W. 251 (1923)).
Texas law presumes that an attorney has authority to sign pleadings on behalf of a client; however, "an attorney does not have authority to act on behalf of a purported client if the purported client did not hire the attorney to represent
An attorney-client relationship is contractual under Texas law. SMWNPF Holdings, Inc. v. Devore, 165 F.3d 360, 364-65 (5th Cir. 1999) (citing Yaklin v. Glusing, Sharpe & Krueger, 875 S.W.3d 380, 383 (Tex. App.-Corpus Christi, no writ); Parker v. Carnahan, 772 S.W.2d 151, 156 (Tex. App.-Texarkana 1989, writ denied)). Both the client and the attorney must understand and mutually agree to "the nature of the work to be undertaken." SMWNPF Holdings, 165 F.3d at 364-65 (quoting Parker, 772 S.W.2d 151 at 156). The parties must explicitly or by their conduct manifest an intent to create an attorney-client relationship. LeBlanc v. Lange, 365 S.W.3d 70, 79 (Tex. App.-Houston [1st Dist.] 2011). The determination of whether a contract exists that creates an attorney-client relationship is based on an objective standard of what the parties said and did. LeBlanc, 365 S.W.3d at 79 (citing Tanox, Inc. v. Akin, Gump, Strauss, Hauer & Feld, LLP, 105 S.W.3d 244, 254 (Tex. App.-Houston [14th Dist.] 2003, pet. denied)). One party's subjective belief that a relationship was formed is not sufficient to form an attorney-client relationship. LeBlanc, 365 S.W.3d at 79; SMWNPF Holdings, 165 F.3d at 364.
The Court will now apply these legal principles to the basic facts in this case. Here, the evidence showed that the Chavez Family never hired or retained Dean as their attorney in the wrongful death suit. Instead, the Chavez Family hired the R&W law firm to be their attorneys. R&W, on the eve of trial, associated Dean to make an appearance and try the wrongful death suit for the Chavez Family —without consulting with or the consent of the Chavez Family. As a result, because Dean was not "retained for litigation" or "duly employed" by the Chavez Family (the clients) in the wrongful death suit, there is not even a legal presumption that Dean had authority to settle the suit and enter into a Rule 11 agreement (the Dean Letter) for the Chavez Family.
R&W unilaterally filed a Notice of Appearance with the State Court adding Dean as counsel of record for the Chavez Family about a week before the jury trial started in the wrongful death suit. It was conclusively shown that this Notice of Appearance was filed for Dean without the authorization or approval of the Chavez Family. It was conclusively shown that the Chavez Family never hired Dean and did not authorize his appearance or his engagement in the suit as their attorney. The Notice of Appearance for Dean was filed without discussing or notifying the Chavez Family, and the family was completely unaware that R&W had associated Dean when it was filed. R&W did not have authority from the Chavez Family to employ and associate Dean to represent the Chavez Family in the suit. As a result, under Texas law, since Dean was not authorized by the Chavez Family (the clients) to appear on their behalf as attorney of record
Under the circumstances, the Court also concludes that no attorney-client relationship existed between Dean and the Chavez Family. There is no written agreement between the Chavez Family and Dean, so the conduct of both parties must be examined to determine if an attorney-client relationship existed. Dean appeared at the jury trial and a few hearings at the request of the R&W, not the Chavez Family. Dean could not specifically recall ever meeting with any member of the Chavez Family. The subjective belief by one party (Dean) that he was an attorney for the Chavez Family is insufficient under Texas law to create an attorney-client relationship.
The first time that any member of the Chavez Family even heard of Dean was during the jury trial. Outside the courtroom during trial, Watson of R&W told Darlene of the Chavez Family that Dean would be assisting R&W during the trial. Darlene immediately told R&W that hiring Dean was not part of their agreement. Some members of the Chavez Family (Luz and Darlene, and Allen when he was in attendance) saw Dean speaking on their behalf during the jury trial, as well as attorneys with R&W. Other members of the Chavez Family (elders Francisco and Celia) did not attend the trial, so they never even saw Dean.
Although none of the attending family members voiced any opposition to the judge during the jury trial about Dean acting as one of their attorneys, it would be unreasonable to expect any family member to jump up in the middle of a jury trial and interrupt the proceeding in that manner.
Dean also appeared at some post-trial hearings with R&W as attorney for the Chavez Family, but none of the family attended so they did not know that Dean was acting as their attorney at these post-trial hearings. Likewise, months after the trial when Dean negotiated with KCSR counsel about a settlement of the suit, the Chavez Family were completely unaware that Dean was purporting to act as an attorney on their behalf.
The Court also concludes that there was not an understanding or agreement by the Chavez Family regarding the nature of the legal work to be undertaken by Dean. When viewed from an objective standpoint, there was not an attorney-client relationship between the Chavez Family and Dean under these circumstances. As a result, and for this reason as well, the Court concludes that Dean had no authority to settle the suit and enter into a Rule 11 agreement (like the Dean Letter) for the Chavez Family as their attorney of record.
The only possible sources of authority for Dean to act as an attorney for the Chavez Family were the Engagement Contracts signed by the Chavez Family with R&W. Each Engagement Contract between R&W and the Chavez Family provides, in pertinent part, as follows:
(Ex. CD-5) (emphasis added).
For three independent reasons, the Court finds that this authorization in the Engagement Contracts for R&W to associate another attorney did not provide Dean with authority to appear as attorney of record for the Chavez Family in the wrongful death suit or to enter into a Rule 11 agreement (the Dean Letter) as counsel of record for the Chavez Family.
First, the plain language of the Engagement Contracts does not grant R&W authority to associate another attorney (Dean) to appear in the wrongful death suit as attorney of record for the Chavez Family or to try the suit on behalf of the Chavez Family. Instead, the Engagement Contracts only authorize R&W to associate another attorney to "enter into settlement negotiations." Since Dean was not authorized by the Chavez Family to appear and try the suit as their attorney of record, Dean did not have authority to enter into a Rule 11 agreement settling the suit on their behalf as their attorney of record.
Second, the Engagement Contracts contain only limited authorization—they authorize R&W to associate an attorney to "enter into settlement negotiations." This limited authorization does not authorize the associated attorney (Dean) to actually settle the suit, by entering into a binding Rule 11 settlement agreement as attorney of record for the Chavez Family in the suit. Further, the limited authorization to engage in settlement negotiations certainly does not authorize Dean to settle the suit without consent of the Chavez Family members (the clients).
Third, the Texas Disciplinary Rules of Professional Conduct (herein "
In pertinent part, Rule 1.04 of the Disciplinary Rules provides as follows:
TEX. DISCIPLINARY RULES PROF'L CONDUCT ("
The Comments to Disciplinary Rule 1.04, as well as the Rule itself, make clear that the client must be advised of the key features of the arrangement (including the identity of the associated lawyer) and that the client must consent in writing before the non-firm lawyer is associated by the law firm. DISCIPLINARY RULES R. 1.04 cmts. 15, 16. Here, it is undisputed that R&W associated Dean to act as an additional attorney for the Chavez Family without first consulting with the Chavez Family about Dean and without seeking or obtaining the prior written consent of the Chavez Family to the association of Dean.
Disciplinary Rule 1.04(g) could even be read to require prior client disclosure to associate a non-firm lawyer without fee sharing. See DISCIPLINARY RULES R. 1.04(g) ("Every agreement that allows a lawyer or law firm to associate other counsel in the representation of a person, . . . and that results in such an association with . . . a different law firm or a lawyer in such a different firm, shall be confirmed by an arrangement conforming to paragraph (f)"—which requires prior disclosure and consent by a client); see also State Bar of Texas Prof'l Ethics Comm., Op. 577 (Mar. 2007) (if a non-firm lawyer is working on a case without fee sharing, the name and identity of the non-firm lawyer must be clearly disclosed to the client); Joyner v. Comm'n for Lawyer Discipline, 102 S.W.3d 344, 347 (Tex. App.-Dallas 2003, no pet.) (attorney employed by client to file personal injury suit violated Disciplinary Rule 1.01(a) when attorney associated another attorney to work on suit without prior informed consent of client).
Regardless, the disclosure and prior client consent provisions of Rule 1.04 clearly apply here because R&W and Dean agreed to fee sharing—Dean would be paid part contingency and part flat fee for his work for the Chavez Family.
For these multiple independent reasons, the Court concludes that the 2010 settlement reflected by the Dean Letter cannot be enforced against any member of the Chavez Family. In sum, Dean was not an authorized attorney of record for the Chavez Family, so Dean had no authority to settle the suit on their behalf under Rule 11 through the Dean Letter.
The Chavez Family also contends that the 2010 settlement with KCSR is unenforceable because it was an impermissible "aggregate settlement." The Court agrees for the following reasons.
Texas courts describe an "aggregate settlement" as one in which an "attorney, who represents two or more clients, settles the entire case on behalf of those clients without individual negotiations on behalf of any one client." Authorlee v. Tuboscope Vetco Int'l, Inc., 274 S.W.3d 111, 120 (Tex. App.-Houston [1st Dist.] 2008, pet. denied); Arce v. Burrow, 958 S.W.2d 239,
In Texas, attorneys are prohibited from entering into an aggregate settlement of claims made by their multiple clients, unless specific requirements are satisfied. In this regard, Disciplinary Rule 1.08(f) provides:
DISCIPLINARY RULES R. 1.08(f) (emphasis added).
In sum, Disciplinary Rule 1.08(f) imposes the following specific requirements on an attorney that represents multiple clients in an aggregate settlement:
DISCIPLINARY RULES R. 1.08(f).
In Authorlee, the Court of Appeals determined that there was not an undisclosed and impermissible aggregate settlement for several reasons. The plaintiffs' attorney negotiated individual settlements for his multiple clients and sent each client a letter detailing a specific settlement offer. The plaintiffs' attorney obtained the signed authorization from each client to settle and acknowledging that each client's claims were negotiated with similar claims but not part of an aggregate settlement. After receiving the written authorization from each client, the plaintiffs' attorney then made a specific demand for each client on the defendant. When the defendant accepted an offer made for each plaintiff client, each client then signed a formal settlement and release agreement and an affidavit stating that each client has relied on his attorney's legal advice. Authorlee, 274 S.W.3d at 116-21. In stark contrast, with respect to the members of the Chavez Family, there were no individual negotiations at all and no specific settlement authorization from each client family member that even resembled the situation in Authorlee.
Here, R&W represented multiple clients in the wrongful death suit filed against KCSR. Five different members of the Chavez Family were clients of R&W, asserting eight different claims against
Dean communicated the KCSR lump-sum offer to Rosenthal and Watson of R&W (at the time, $500,000). Rosenthal, by himself, allocated the $500,000 lump-sum settlement offer from KCSR among his multiple clients (the Chavez Family members) and R&W expenses. Watson then communicated the $500,000 offer and the allocation created by Rosenthal in a phone call to one Chavez Family client member—Luz. (Ex. P-4, p. 1). Watson and R&W did not discuss or disclose the $500,000 offer and Rosenthal's allocation with their other four adult clients (Darlene, Allen, Francisco, and Celia). R&W never consulted with each of these other four adult clients about the nature of the claims involved and the extent and participation of each settling member of the Chavez Family. R&W also never obtained the consent of these other four adult clients to the $500,000 settlement offer and the allocation between the Chavez Family members.
As a result, the Court concludes that the 2010 settlement with KCSR was an impermissible aggregate settlement. R&W and Dean did not consult with each of their multiple clients (Darlene, Allen, Francisco, and Celia), did not disclose the settlement to their multiple clients, and did not obtain the consent of each of their multiple clients to the settlement.
After speaking with Luz only, Watson of R&W called Dean and told him that the clients wanted to accept the KCSR settlement offer. Dean likely assumed that Watson had discussed the $500,000 offer and its allocation with each client member of the Chavez Family, and thus the consultation and consent requirements of Disciplinary Rule 1.08(f) were satisfied. Dean was incorrect in this assumption, as Watson and R&W never discussed the $500,000 offer and allocation with the other four adult client members of the Chavez Family. Dean then took the allocation devised by Rosenthal, adjusted the allocation in later discussions with Watson, and sent the Dean Letter to counsel for KCSR. (Ex. P-1). The Dean Letter broke down the lump-sum offer made by KCSR to individual claimants and R&W expenses; however, this allocation was never discussed in any manner with the other four adult clients. The Dean Letter also included an additional $25,000 allocation to R&W for expenses (raising the expense reimbursement to
A Texas court has found a settlement to be unenforceable as against public policy when the settlement violated the Disciplinary Rule prohibiting aggregate settlements.
In Quintero, a plaintiffs' attorney filed suit for one homeowner couple (the Quinteros) against a homebuilder, and with client consent, engaged a trial attorney that tried the suit. At the same time, the plaintiffs' attorney also represented multiple other homeowner clients in claims against the homebuilder. The plaintiffs' attorney negotiated a lump-sum aggregate settlement of $1.8 million for his other multiple clients with the homebuilder's counsel, to be divided among all the homeowner clients according to a formula. The plaintiffs' attorney then consulted with his homeowner clients that had filed suit (the Quinteros) and obtained their consent to join in the aggregate settlement with his other multiple clients and release their claims against the homebuilder. Unknown to the plaintiffs' attorney or the homeowner Quinteros at the time, the trial court had rendered a judgment in the suit in favor of the homeowner Quinteros against the homebuilder that was litigated by the associated trial attorney. Once the homeowner Quinteros became aware of the more lucrative judgment in their favor, they revoked their consent to the aggregate settlement. The trial court still enforced the settlement against the homeowner Quinteros and dismissed their suit against the homebuilder. Quintero, 709 S.W.2d at 227-28.
The appellate court in Quintero reversed the trial court and held that the settlement was unenforceable and void as being against public policy, because it was an aggregate settlement that did not comply with the Disciplinary Rules. Quintero, 709 S.W.2d at 230. The appellate court found that the homeowner Quinteros were not informed of the nature of the claims involved in the aggregate settlement or the total settlement amount by their attorney, as required by the Disciplinary Rule governing aggregate settlements. The appellate court also found that the settling homeowner clients (the Quinteros) were not provided with a list of the individual amounts that other settling clients would receive by their attorney, another requirement of the Disciplinary Rule governing aggregate settlements. The Quintero court stated that the purpose of the Disciplinary Rule governing aggregate settlements is to ensure that clients do not give up their rights unless they have full knowledge of the other settlements involved. As a result, the Quintero court concluded that the settlement agreement and release was unenforceable as against public policy. Quintero, 709 S.W.2d at 229-30.
The Court is aware that the Quintero case involved one relatively extreme fact (the settling homeowners were unaware of a more lucrative judgment in their favor) when they agreed to the aggregate settlement. Nonetheless, in finding the settlement unenforceable, the Quintero court focused on the Disciplinary Rule governing aggregate settlements, and its requirement that clients be fully informed about what other clients are receiving through an aggregate settlement.
Here, with respect to the KCSR settlement sought to be enforced against the Chavez Family, the facts are more extreme than those presented in Quintero.
Here, the aggregate settlement offer made by KCSR was allocated among the Chavez Family clients by Rosenthal (now a convicted felon for offenses committed in the same time frame), without consulting with any client. The allocation devised by Rosenthal resulted in his law firm (R&W) getting about 60% of the total settlement amount, and the clients netting less than 30% of the settlement. Unilateral changes were then made to Rosenthal's allocation to increase the recovery to the R&W firm by $25,000, without discussion with or the consent of any client. This revised allocation found its way into the Dean Letter sent to KCSR, representing the 2010 settlement.
The Court does not lightly determine that the 2010 settlement with KCSR is unenforceable because it is an impermissible aggregate settlement. The Court recognizes that KCSR bears little or no responsibility for the failure of R&W and Dean to consult with each of their clients about the aggregate settlement and to obtain each of their clients' informed consent to the aggregate settlement. But KCSR could have avoided the aggregate settlement requirements if KCSR had conducted individual negotiations with Dean or R&W about each of the claims of the different Chavez Family members. That did not occur, and the facts in this case are extreme and unusual. The safeguards created for clients like the Chavez Family by Disciplinary Rule 1.08(f) were not even close to being satisfied in this case.
For these reasons, the Court concludes that the 2010 settlement with KCSR is unenforceable because it is an impermissible aggregate settlement.
KCSR and the Trustee seek specific performance and enforcement of the 2010 settlement against the Chavez Family, based on a breach of contract theory. The Court concludes that KCSR and the Trustee are not entitled to specific performance of the 2010 settlement against the entire Chavez Family. The Court also declines to order partial specific performance of the 2010 settlement against Luz (the only family member that agreed in any manner to the 2010 settlement).
Specific performance of a contract is an equitable remedy under Texas law that may be awarded at the trial court's discretion upon a showing of breach of contract. TLC Hosp., LLC v. Pillar Income Asset Mgmt., Inc., 570 S.W.3d 749, 768 (Tex. App.-Tyler 2018, pet. denied) (supporting citations omitted); see also Roundville Partners L.L.C. v. Jones, 118 S.W.3d 73, 79 (Tex. App.-Austin 2003, pet. denied) (recognizing that specific performance is not a matter of right to enforce
The Court has already determined that the 2010 KCSR settlement reflected by the Dean Letter is not enforceable against Darlene, Allen, Francisco, and Celia (the other adult client members of the Chavez Family) for the multiple reasons set forth above. In sum, these other adults did not authorize or approve the settlement of their individual claims. Dean was not an authorized attorney of record and had no authority to settle the claims of the Chavez Family under Rule 11 through the Dean Letter as their attorney of record. These four adults were never consulted about or consented to the aggregate settlement of their claims. As a result, these four adults did not breach any contract with KCSR, and specific performance of the settlement against these four adults is simply not an available remedy.
The Court has found that Luz (one member of the Chavez Family) agreed to the 2010 settlement on her own behalf, in a phone call with Watson of R&W on September 28, 2010. After the close of evidence and prior to closing arguments, the Court asked KCSR if, in the event the Court determined that Darlene and Allen were not bound by the settlement, it wanted the Court to consider a decree of partial specific performance of the 2010 settlement against Luz. KCSR responded in the affirmative (dkt# 132).
The Court concludes that an award of partial specific performance of the 2010 settlement against Luz would not be proper. In this Opinion, the Court has now determined that the 2010 settlement is not enforceable against Luz for several reasons. In sum, Dean was not an authorized attorney of record for Luz and had no authority to settle the claims of Luz under Rule 11 through the Dean Letter as her attorney of record. The 2010 settlement is also unenforceable as an aggregate settlement. These determinations mean that Luz did not breach any enforceable contract with KCSR, and partial specific performance of the 2010 settlement against Luz is not even an available remedy.
Even if partial specific performance of the settlement were an available remedy, the Court would, in its discretion, equitably decline to order partial specific performance against Luz under the circumstances. As set forth in its detailed factual findings, Luz did not fully understand the KCSR settlement offer and the complex allocation devised by Rosenthal explained to her in one phone call from Watson. In short, Luz did not give an effective and informed consent to the settlement. Numerous important details about the settlement were never even discussed with Luz, such as increasing the expense allocation to R&W, confidentiality with liquidated damages, and indemnity. The Court agrees with KCSR that the 2010 settlement seems quite fair and reasonable to the Chavez Family under the circumstances. But the simple fact is that all members of the Chavez Family did not accept the settlement; and the Court cannot make the Chavez Family agree to it.
For these reasons, the Court declines to enforce the 2010 settlement by complete or partial specific performance.
In conclusion, for a host of independent reasons, the Court determines that KCSR and the Trustee are not entitled to enforce the 2010 settlement against the Chavez Family by specific performance for breach of contract.
As a result, all relief sought by KCSR against the Chavez Family in the KCSR Complaint (dkt# 1) will be denied by the
The Chavez Family contends that R&W breached its fiduciary duty to them as clients, in their crossclaim filed against the R&W estate. See Chavez Crossclaims (dkt# 50-1, ¶¶ 58-65).
In substance, the Chavez Family alleges that R&W breached their fiduciary duties by: (1) R&W making false representations that the Chavez Family had authorized R&W and Dean to settle their claims against KCSR in the wrongful death suit; (2) R&W entering into an aggregate settlement without consent of all members of the Chavez Family; (3) R&W hiring Dean to act as trial counsel and entering into a fee sharing agreement with Dean without consent of the Chavez Family; (4) R&W producing portions of client files which contained privileged information of the Chavez Family in February 2014; (5) R&W entering into a conspiracy with KCSR to cause dismissal of their wrongful death claims; and (6) R&W not providing proof of payment of each expense item incurred by R&W. See Chavez Crossclaims (dkt# 50-1, ¶¶ 58-65). The Chavez Family seeks equitable fee forfeiture by R&W and to void the fee agreements (the Engagement Contract) with R&W due to such breaches of fiduciary duty. See Chavez Crossclaims (dkt# 50-1, ¶ 62); PTO (dkt# 98, ¶ 133).
In sum, the Court concludes that R&W committed clear and serious breaches of their fiduciary duty to the Chavez Family in certain respects, as set forth below. The Court also concludes that equitable forfeiture of all fees owed to R&W under the Engagement Contracts and a portion of R&W's expenses is the proper equitable remedy for such breaches under the circumstances, as explained below.
An attorney owes fiduciary duties to a client as a matter of law. Beck v. Law Offices of Edwin J. (Ted) Terry, Jr., P.C., 284 S.W.3d 416, 428-29 (Tex. App.-Austin 2009, no pet.) (citing Willis v. Maverick, 760 S.W.2d 642, 645 (Tex. 1988)). In this context, the term "fiduciary" refers to "integrity and fidelity," and accordingly, the "attorney-client relationship is one of most abundant good faith, requiring absolute perfect candor, openness and honesty, and the absence of any concealment or deception." Beck, 284 S.W.3d at 429 (quoting Goffney v. Rabson, 56 S.W.3d 186, 193 (Tex. App.-Houston [14th Dist.] 2001, pet. denied) (internal quotations omitted)). Attorneys must, among other things, "render a full and fair disclosure of facts material to the client's representation." Beck, 284 S.W.3d at 429 (citing Willis, 760 S.W.2d at 645).
To prevail on a breach of fiduciary duty claim against an attorney, the following must be established: (1) the existence of a fiduciary duty relationship, (2) a breach of that duty by the attorney, (3) which causes (4) damages to the client. Beck, 284 S.W. 3d at 429 (supporting citation omitted). However, causation and damages need not be proven for a client to obtain the equitable remedy of fee forfeiture based on a "clear and serious" breach of fiduciary duty. See Burrow v. Arce, 997 S.W.2d 229, 240-41 (Tex. 1999); Beck, 284 S.W.3d at 429.
The Court concludes that R&W had and breached their fiduciary duty to the Chavez Family in the following respects.
First, R&W misrepresented that all members of the Chavez Family had authorized R&W and Dean to settle their claims against KCSR in the wrongful death suit, as set forth in detail in the Court's findings of fact and other conclusions of law. In sum, R&W did not have the consent of all five client members of the Chavez Family to settlement of the suit. R&W only obtained the verbal consent of one client (Luz), which was not an effective informed consent. The other four adult members were not even informed about the proposed settlement by R&W and did not consent to the settlement in any manner. Disciplinary Rule 1.02(a)(2) required that R&W communicate and obtain the consent of their clients to accept any settlement offer. See DISCIPLINARY RULE R. 1.02(a)(2).
Second, R&W entered into and promoted an impermissible aggregate settlement of the claims of all members of the Chavez Family against KCSR, as set forth in detail in the Court's findings of fact and other conclusions of law. In sum, R&W represented multiple clients in the wrongful death suit, KCSR made a lump-sum offer to settle all claims of their clients, Rosenthal of R&W internally devised an allocation scheme, and Watson (on behalf of R&W) communicated and consulted with only one client (Luz) about the $500,000 offer and the allocation between the different clients. R&W did not consult with each of their multiple other clients, did not disclose the aggregate settlement to their multiple other clients, and did not
Under Texas law, when an attorney enters into an aggregate settlement without the consent of clients, the attorney breaches a fiduciary duty owed to the clients. See, e.g., Arce v. Burrow, 958 S.W.2d 239, 245 (Tex. App.-Houston [14th Dist.] 1997), rev'd in part on other grounds, Burrow v. Arce, 997 S.W.2d 229 (Tex. 1999); accord Authorlee, 274 S.W.3d at 126; Estate of Aguilar, No. 04-15-00688-CV, 2017 WL 1244447, at *8 (Tex. App.-San Antonio Apr. 5, 2007, pet. denied) (mem. op.). Settling a case in mass without consent of the clients is unfair to the clients as such settlement "may result in a benefit to the attorney (speedy resolution and payment of fees) to the detriment of the clients (decreased recovery)." Arce, 958 S.W.2d at 245. Because "[u]nfairness is the cornerstone in an action for breach of fiduciary duty," when an attorney enters into an aggregate settlement without the consent of clients, the attorney breaches the fiduciary duty owed to those clients. Arce, 958 S.W.2d at 245. This impermissible aggregate settlement is also a clear and serious breach of fiduciary duty by R&W.
Third, R&W hired Dean to be lead trial counsel for the Chavez Family and also entered into a fee sharing agreement with Dean without the knowledge or consent of its clients (the Chavez Family), as set forth in detail in the Court's findings of fact and other conclusions of law. R&W then concealed from the Chavez Family that Dean was negotiating a settlement on their behalf and that R&W had instructed Dean to send the Dean Letter to KCSR in October 2010 settling all their claims. The unilateral hiring of Dean by R&W was material to the representation of the Chavez Family and was not disclosed to the Chavez Family until the jury trial had started.
By unilaterally hiring Dean to represent the Chavez Family and having Dean send the Dean Letter settling the suit without the clients' prior knowledge and consent, R&W not only ignored Disciplinary Rules 1.02(a)(2) and 1.04(g), but also failed to "render a full and fair disclosure of facts material" to their clients (the Chavez Family). See Beck, 284 S.W.3d at 429. The failure of R&W to obtain the consent of the Chavez Family to the hiring of Dean and the sending of the Dean Letter demonstrates the lack of "candor, openness and honesty" as well as "concealment" employed by R&W in its dealings with the Chavez Family. See Goffney, 56 S.W.3d at 193. The Chavez Family trusted R&W to represent them in the wrongful death suit, and R&W improperly took advantage of that trust by hiring another attorney (Dean) to try the suit and then settle the suit without the knowledge or consent of the Chavez Family. This is also a clear and serious breach of fiduciary duty by R&W.
The Court concludes that R&W did not breach any fiduciary duty to the Chavez Family in the following respects.
The Chavez Family contends that R&W's production of a portion of the Chavez Family case file that contained privileged information constitutes a breach of fiduciary duty by R&W. The Court concludes that this production was not a breach of fiduciary duty by R&W under the circumstances. Rule 503(b) of the Texas Rules of Evidence sets forth the general rule that a client holds the attorney-client privilege to prevent disclosure of confidential communications between an attorney and client. TEX. R. EVID. 503(b). However, there is an exception to the general rule set forth in Rule 503(d)(3). If the privileged communication is relevant to an issue of breach of duty to or by a client, the privilege does not apply. TEX. R. EVID. 503(d)(3). Here, the redacted client files
Just as importantly, because the Chavez Family asserted to the State Court that R&W did not have their consent to settle the wrongful death suit, the Chavez Family waived any attorney-client privilege with respect to communications between R&W and the Chavez Family about their consent to the settlement. According to the Fifth Circuit and the great weight of authority, the attorney-client privilege is waived by a client when a client places information protected by the privilege at issue through some affirmative act for the client's own benefit. Conkling v. Turner, 883 F.2d 431, 434 (5th Cir. 1989). To allow the privilege to protect against disclosure of such information under such circumstances would be manifestly unfair to the attorney. Conkling, 883 F.2d at 434. Here, the case file notes produced by R&W (Ex. P-4) were relevant to the lack of consent issues raised by the Chavez Family and were carefully redacted by R&W prior to production to include only information relevant to consent.
The Chavez Family has also alleged that R&W breached its fiduciary duty by conspiring with KCSR to cause dismissal of their wrongful death suit. The probative evidence at trial did not prove that there was any conspiracy between KCSR and R&W. Further, the Court has previously dismissed the separate conspiracy claims asserted by the Chavez Family against R&W and KCSR under Rule 12(b)(6). See Orders (dkt# 69, 70).
Finally, the Chavez Family has alleged that R&W breached its fiduciary duty because R&W and the Trustee did not produce proof of payment of each expense item sought by R&W. As a factual matter, the Chavez Family stipulated at trial that R&W had incurred out-of-pocket expenses on behalf of the Chavez Family in the prosecution of the wrongful death suit against KCSR totaling $417,622. See PTO (dkt# 98, ¶ 87). The witnesses at trial (including current counsel for the Chavez Family) testified that such expenses were incurred by R&W and were reasonable. And as a legal matter, this would not constitute a breach of fiduciary duty by R&W in any event.
The Texas Supreme Court has held that when an attorney breaches a fiduciary duty to a client, the attorney may be required to forfeit all or part of the attorney's fees, regardless of whether the breach caused actual damages to the client. Specifically, forfeiture may be appropriate where a "clear and serious" violation of an attorney's duty to a client has occurred. Burrow, 997 S.W.2d at 243.
To determine whether the attorney has committed a "clear and serious" violation of fiduciary duty, as well as the extent to which forfeiture is appropriate, a court should apply the following non-exclusive factors to the individual circumstances of the case: the gravity and timing of the violation, its willfulness, its effect on the value of the lawyer's work for the client, any other threatened or actual harm to the client, and the adequacy of other remedies to the client. Burrow, 997 S.W.2d at 243, 245. The Texas Supreme Court in Burrow stated that the "public interest in maintaining the integrity of attorney-client relationships" is an additional factor that "must be given great weight" in deciding forfeiture. Burrow, 997 S.W.2d at 244.
Here, after considering the factors outlined by the Texas Supreme Court in Burrow, the Court concludes that the breaches of fiduciary duty by R&W are "clear and serious" and a total forfeiture of all fees and a portion of expenses by R&W under the Engagement Contracts is appropriate based on the circumstances in this case.
The gravity, timing, and willfulness of the violations by R&W are quite serious. In short, R&W had five adult clients, obtained the verbal consent of one client to the proposed KCSR settlement on the phone (and even that was not an effective informed consent), and subsequently represented the settlement as being authorized by all five clients. The Engagement Contract signed by each client with R&W clearly stated that R&W would not settle the claim of each client without "MY" (each client's) consent, and R&W willfully ignored this clear written directive. The KCSR settlement offer also had conditions (such as confidentiality, indemnity, and liquidated damages) which were never discussed or disclosed by R&W to any of its clients.
Compounding the gravity and willfulness of the violations was that the settlement here was an aggregate settlement. The allocation of the lump-sum settlement offer from KCSR was made internally by Rosenthal of R&W without consulting with any client, and his internal allocation gave the lion's share of the settlement to R&W. When the amount of the settlement offer was increased by KCSR, the initial allocation was then adjusted by R&W to allocate even more to R&W, without informing any client. R&W completely failed to discuss and obtain any consent to the aggregate settlement from four of their five adult clients. R&W also clearly placed its own financial interests in the settlement ahead of the interests of its clients, and plainly violated the Disciplinary Rule governing aggregate settlements.
Just before the jury trial, R&W saw fit to unilaterally hire another attorney (Dean) to appear as its attorney of record and to try the wrongful death suit as lead trial counsel, without disclosing or obtaining consent of the clients. R&W also entered into a fee sharing arrangement with Dean without the consent of its clients—a clear violation of the Disciplinary Rules. The hiring of Dean by R&W and his appearance in the suit as attorney of record was not known to or authorized by the clients. This unauthorized appearance of Dean as an attorney of record in the suit (caused by R&W) led to a cavalcade of misfortune for the Chavez Family, including a defense verdict, a settlement letter by an unauthorized attorney of record (the Dean Letter) in October 2010, and years of appeals by the clients to try and undo the unauthorized settlement.
No real value was received by the Chavez Family (the clients) from the services rendered by R&W. No value was received from the jury trial in State Court, which resulted in a unanimous defense verdict. Although a new trial was granted, the new trial has been delayed for nearly a decade while the legal battle (caused by R&Ws actions) has raged over the enforceability of the 2010 KCSR settlement. In effect, the Chavez Family will now be starting close to ground zero with respect to the new and second trial of its wrongful death suit against KCSR.
The Chavez Family has suffered harm due to the violations by R&W, primarily in
The interest of the public in maintaining the integrity of the attorney-client relationship requires a complete forfeiture of fees by R&W and a partial forfeiture of expenses by R&W, given the unseemly circumstances of this case. Clients should be able to rely on their law firm not to settle a case without their consent. Clients should be able to know that their law firm will not put their financial interests ahead of clients. Clients should be able to rely on the law firm they employed to pursue and try a suit, without fear that the law firm will unilaterally delegate that responsibility to a different attorney that the clients have never even met or approved. Clients should be able to know that their law firm will follow the Disciplinary Rules and engagement contracts that they sign with the law firm.
In Burrow, the Texas Supreme Court specifically addressed equitable forfeiture of fees by an attorney for breach of fiduciary duty. 997 S.W.2d at 232. Forfeiture of expenses was not raised on appeal by the parties and therefore was not addressed in Burrow. Exhaustive research did not reveal any Texas cases which prohibited a court from ordering equitable forfeiture of expenses for breach of fiduciary duty. One Texas federal district court has held that equitable forfeiture of expenses, as well as fees, is appropriate for breach of fiduciary duty using the rationale of the Burrow decision. See Ginn v. Seidel (In re Allied Physicians Grp.), No. Civ.A.3:04-CV-0765-G, 2004 WL 2965001, at *3 (N.D. Tex. Dec. 15, 2004). The Ginn court found that expenses were a form of compensation and that under the remedial regime of Burrow, the court had discretion to require forfeiture of compensation, which includes reimbursable expenses. 2004 WL 2965001, at *3.
Indeed, while examining the jurisprudential underpinnings governing the equitable remedy of forfeiture for breach of fiduciary duty, the Texas Supreme Court in Burrow stated:
Burrow, 997 S.W. 2d at 237-38.
Here, for the multiple reasons already set forth, R&W breached the relationship of trust with the Chavez Family and the Engagement Contracts between the parties. R&W's right to be reimbursed for expenses arises out of the Engagement Contracts which R&W has breached. As a result, the Court concludes that R&W should be required to equitably forfeit a portion of its expenses, as well as its fees, under the Engagement Contracts with the Chavez Family.
R&W incurred expenses on behalf of the Chavez Family in the prosecution of the wrongful death suit against KCSR totaling $417,622. These expenses included advances of about $64,000 to $73,000 by R&W to Luz and Darlene for living expenses. See PTO (dkt# 98, ¶¶ 53, 87); Case
The amount of the expenses incurred by R&W in prosecuting the wrongful death suit through the first trial were significant. On one hand, the Court recognizes that since R&W is now in bankruptcy, innocent creditors of the R&W estate may suffer from any reduction in expenses owed to R&W. On the other hand, these R&W expenses will be of limited benefit to the Chavez Family now. More than a decade has elapsed since the first jury trial in the wrongful death suit. As a result, new expert reports for the wrongful death suit will undoubtedly have to be sought and obtained at considerable expense, the memories of previously deposed witnesses will have undoubtedly faded and may have to be retaken, and additional expenses will have to be borne to prepare for an upcoming second trial of the wrongful death suit. Finally, forfeiture of just R&Ws fees is not adequate under the circumstances, as they are contingency fees (40%) with the contingency not having occurred (and which may never occur).
After balancing all equitable concerns, the Court concludes that a partial forfeiture of 50% of R&W's expenses is appropriate for the clear and serious breaches of fiduciary duty by R&W under the circumstances of this case. As consequence, the Court determines that $208,811 of the $417,622 in expenses incurred by R&W should be forfeited, in addition to all of R&W's fees (40% contingency fee) under the Engagement Contracts.
The Trustee, on behalf of the R&W estate, has asserted two affirmative defenses to the breach of fiduciary duty claims by the Chavez Family—statute of limitations and the failure of the Chavez Family to timely file a Proof of Claim in the R&W bankruptcy case.
The statute of limitations for breach of fiduciary duty in Texas is four years from the day the cause of action accrues. TEX. CIV. PRAC. & REM. CODE § 16.004(a)(5). Here, the actions of R&W that give rise to the breach of fiduciary duty claims based on an unauthorized and impermissible aggregate settlement occurred in September 2010 and October 2010. The actions of R&W that give rise to the breach of fiduciary duty claims based on the unauthorized hiring of Dean started in November 2009 and continued through October 2010 (the date of the Dean Letter). In February 2014, R&W filed this bankruptcy case, which created an automatic stay of actions against R&W and tolled the statute of limitations for claims against R&W.
The Trustee also contends that since the Chavez Family did not timely file a Proof of Claim in the R&W bankruptcy case, their claims for breach of fiduciary duty by R&W must be denied. The Court disagrees for several reasons. First, the Trustee did not establish that the Chavez Family had notice of the bar date for filing
To the extent that the Trustee has asserted any other defenses to the breach of fiduciary duty claims against R&W, the Court finds that they lack merit and should be denied.
In conclusion, for these reasons, the Court determines that the relief sought for breach of fiduciary duty by R&W in the Chavez Crossclaims (dkt# 50-1) should be granted in part as set forth above. The Court also determines that all of R&Ws fees (40% contingency fee) and 50% of R&W's expenses (the amount of $208,811) under the Engagement Contracts with the Chavez Family should be equitably forfeited for clear and serious breaches of fiduciary duty by R&W.
The Chavez Family alleges that R&W committed barratry by soliciting them as clients back in February 2007, in their crossclaim against the R&W estate. As a result, the Chavez Family contends that their legal services contracts with R&W (the Engagement Contracts) are voidable. See Chavez Crossclaims (dkt# 50-1, ¶¶ 68-71).
In sum, the Court concludes the barratry claims by the Chavez Family must be denied for multiple reasons set forth below. First, the barratry theory actually pled by the Chavez Family was not proven by a preponderance of the credible and probative evidence. Second, the unpled barratry theories raised at trial were not proven by credible evidence and should not be considered by the Court in any event because they were not pled. Third, as a matter of law, the Chavez Family is not entitled to the relief they seek (voiding the Engagement Contracts) based on the statute and rule relied upon and pled by the Chavez Family in their barratry claim. Fourth, the statute of limitations has expired on any barratry claim by the Chavez Family.
The factual basis pled for barratry by the Chavez Family is that R&W allegedly used a "non-attorney affiliated with the firm to make repeated telephone calls to members of the Chavez family in an effort to convince them to terminate their existing legal counsel" and hire R&W. The Chavez Family also alleges that "[t]his non-lawyer also visited members of the family at different settings in person, to secure their termination of their existing counsel and subsequent signing" with R&W. See Chavez Crossclaims (dkt# 50-1, ¶¶ 69-70).
These factual allegations by the Chavez Family were not proven at trial by a preponderance of credible evidence. Instead, the Court was given disjointed, general, and speculative testimony based on second-hand information about what might possibly have happened over 12 years ago.
The Court was able to glean from the testimony that the "non-attorney" was a Mr. George Gavito ("
The primary barratry theory was that Gavito initiated contact with a relative of the Chavez Family (a "Roel" and possibly a "Leo") and solicited the relative to tell the Chavez Family to meet and hire R&W. However, this theory was not proven by probative and credible evidence at trial. For example, Luz testified that she "heard from a family member" that Gavito called "Roel," she did not know if Gavito called "Leo," and that Gavito "probably" visited some family members "down in Brownsville" but she could not specifically remember this happening. (TR, dkt# 130, pp. 191-194). Darlene generally testified that Gavito "showed up to my uncle's place of work" and asked if "my uncle could reach out to us." (TR, dkt# 130, p. 75). Allen testified that he "had heard that a gentleman showed up to my uncle's work" and that "if I'm [Allen] not mistaken he talked to my—or tried to talk to my" uncle "Roel" and that Gavito "called Leo because Leo lived in Corpus," but "other than that I don't know." Finally, on cross-examination, Allen testified that he "was not too sure" whether Leo was contacted by Gavito. (TR, dkt# 130, pp. 214, 225). Significantly, none of the persons who participated in and would have actual knowledge of the alleged events (Gavito, Roel, and Leo) were witnesses or provided any testimony at trial.
The second part of the barratry theory —that the Chavez Family had already hired counsel to represent them, and that Gavito and R&W convinced the Chavez Family to terminate their existing counsel and hire R&W—was actually disproven at trial. Luz and Allen both testified that they had not already hired another attorney before they hired R&W as their counsel. (TR, dkt# 130, pp. 184, 226). Watson of R&W confirmed that she did not believe the Chavez Family was represented by a different attorney when they hired R&W. (TR, dkt# 131, p. 9).
After weighing all the evidence, the Court concludes that the Chavez Family did not prove the barratry theory pled in their crossclaim against R&W—that a non-attorney affiliated with R&W solicited a relative of the Chavez Family to hire R&W and convinced the Chavez Family to terminate counsel already hired by the Chavez Family.
During trial, counsel for the Chavez Family raised two new barratry theories that were not pled. Chavez Crossclaims (dkt# 50-1, ¶¶ 68-71).
Basically, the first unpled theory was that Gavito was paid $10,000 by R&W to secure the Chavez Family as clients for R&W. The sole evidence of this was brief deposition testimony by Rosenthal taken at a federal prison. In his deposition, Rosenthal testified: "I know Jim Solis paid [Gavito]. If I'm not mistaken, I'm guessing it was $10,000 maybe, something like that." (Ex. JT-1, Rosenthal deposition, p. 79). It was not proven at trial that Jim Solis was an attorney with R&W; instead, Jim Solis was an attorney with his own firm. Further, the uncertain testimony of convicted felon Rosenthal ("If I'm not mistaken," "guessing," "maybe," and "something like that") is not credible evidence to the Court. Finally, Watson of R&W contradicted Rosenthal's testimony and testified that Gavito was not paid $10,000 to sign up the Chavez Family. (TR, dkt# 131, pp. 119-120). Again, none of the participants in this alleged event (Gavito or Solis) were witnesses or provided any testimony at trial.
After weighing all the evidence, the Court concludes that the Chavez Family
The second unpled barratry theory raised at trial was that R&W offered and paid Luz $10,000 up front so that Luz would employ R&W as her counsel. This unpled theory was not proven by credible evidence at trial. Luz provided rambling and largely incoherent testimony regarding the $10,000 payment. (TR, dkt# 130, pp. 175, 178-82). After weighing the evidence and the credibility of the witnesses, the Court finds that relatives of Luz asked R&W to help Luz (who was recently widowed and raising a small child) with living expenses. In response, R&W agreed to advance $2,000 monthly to Luz plus $10,000 for living expenses.
The relevant Texas statute creating a civil barratry claim is section 82.0651 of the Texas Government Code ("
TEX. GOV'T CODE § 82.0651 (a) (emphasis added).
Sections 38.12(a) and 38.12(b) of the Texas Penal Code ("
As the Trustee for R&W correctly points out, this Court (a bankruptcy court) has no jurisdiction or authority to adjudicate purely criminal barratry offenses under section 38.12(d) of the Penal Code, since they do not also give rise to a civil barratry claim. And a violation of section
Similar problems exist with the allegation of the Chavez Family that the Disciplinary Rule governing barratry entitles them to void the legal services contract with R&W. The Chavez Family pled and relies upon an alleged violation of Disciplinary Rule 8.04(a)(1) as grounds for voiding the contract with R&W.
For these reasons, the Court concludes that the Chavez Family is not entitled to void the legal services contract with R&W (the Engagement Contracts) for barratry based on their crossclaim, as a matter of law.
The Trustee, on behalf of the R&W estate, also contends that any civil barratry claim by the Chavez Family is barred by statute of limitations. The Court agrees for the reasons set forth below.
There is no specific statute of limitations for bringing a civil barratry claim in Texas. However, the Texas Civil Practice and Remedies Code provides a residual statute of limitation of four years. TEX. CIV. PRAC. & REM. CODE § 16.051.
Only one written opinion in Texas was located that addresses the statute of limitations for barratry. See Neese v. Lyon, 479 S.W.3d 368, 383-84 (Tex. App.-Dallas 2015, no pet.). The Neese court found that the four-year residual statute of limitations of section 16.051 of the Texas Civil Practice and Remedies Code applied to a client's cause of action for barratry against their former attorney to void a fee agreement. 479 S.W.3d at 384.
Here, the Chavez Family did not bring a barratry claim against R&W until March 4, 2019. See Chavez Crossclaims (dkt# 50-1, ¶¶ 68-71). The facts alleged by the Chavez Family giving rise to the barratry claim occurred in February 2007 and were known by the Chavez Family at the time. Over 12 years elapsed between the date any cause of action for barratry accrued (February 2007), and the filing of a barratry claim by the Chavez Family against R&W (March 2019). As a result, the four-year statute of limitations has long since expired, and any claim for civil barratry by the Chavez Family against the R&W estate is barred by the statute of limitations.
In conclusion, for these many reasons, the Court determines that the claims for civil barratry by the Chavez Family must be denied. As a result, all relief sought by the Chavez Family against the R&W estate for barratry in the Chavez Crossclaim (dkt# 50-1) will be denied by the Court.
On behalf of the R&W estate, the Trustee has alleged three other counterclaims against the Chavez Family: (1) a contractual attorney's lien under the Engagement Contracts; (2) quantum meruit; and (3) unjust enrichment. See Trustee Counterclaims (dkt# 56, ¶¶ 43-55).
The Trustee, on behalf of the R&W estate, asserts a contractual attorney's lien created under the Engagement Contracts in the amount of 40% of any recoveries the Chavez Family may obtain from KCSR and for $419,000 in R&W's expenses.
In pertinent part, the Engagement Contracts signed by each member of the Chavez Family with R&W provide as follows:
(Ex. CD-5) (emphasis added).
R&W incurred out-of-pocket expenses on behalf of the Chavez Family in the prosecution of the wrongful death suit against KCSR totaling $417,622, as of November 10, 2010. See PTO (dkt# 98, ¶ 87). The $417,622 in out-of-pocket expenses of R&W are actual, necessary, and reasonable expenses incurred by R&W in the prosecution of the wrongful death suit against KCSR and are within the scope of reimbursable expenses set forth in the Engagement Contracts. The expenses included the cost of multiple experts, reports, research, investigation, depositions, discovery, travel, and jury trial in the complex wrongful death suit. (Ex. P-38). The witnesses at trial (including current counsel for the Chavez Family) testified that such expenses were incurred by R&W and were reasonable.
The Court has already determined that all of R&Ws fees (the 40% contingency fee) and 50% of R&Ws expenses (the amount of $208,811) under the Engagement Contracts with the Chavez Family should be equitably forfeited for clear and serious breaches of fiduciary duty by R&W.
So, the remaining issue to be decided by the Court is whether the $208,811 in expenses of R&W (the amount of expenses not equitably forfeited) are secured by a contractual attorney's lien under the Engagement Contracts. The Court concludes that the Trustee, on behalf of the R&W estate, has a valid contractual attorney's lien in the amount of $208,811 for R&Ws expenses, for the following reasons.
Under Texas law, an attorney may establish a valid lien for attorney's fees and expenses, by contract with a client. See, e.g., Mount Spelman & Fingerman, P.C. v. GeoTag, Inc., 70 F.Supp.3d 782, 786 (E.D. Tex. 2014) (applying Texas law) (citing United States v. Betancourt, CRIM. B-03-090-S1, 2005 WL 3348908 at *3 (S.D. Tex. Dec. 8, 2005) (applying Texas law); Stephenson v. LeBoeuf, 16 S.W.3d 829, 838 (Tex. App.-Houston [14th. Dist.] 2000, pet. denied)); see also DISCIPLINARY RULE R. 1.08(h) (recognizing that an attorney may ethically acquire a lien to secure fees or expenses).
Here, the Engagement Contracts signed by the Chavez Family granted a valid contractual lien to R&W to secure payment of R&Ws expenses. This contractual lien is set forth in three separate provisions. See Engagement Contracts ("guaranteed by lien," "all of which shall be a lien," and "retaining a lien") (Ex. CD-5). The lien is binding on the Chavez Family and any other attorneys that the Chavez Family may employ. See Engagement Contracts (this Assignment "shall be binding on Client . . . and any other attorneys or law firms who Client shall employ") (Ex. CD-5).
R&W retained a lien for its expenses on the causes of action by the Chavez Family
Also, R&W had an assignment from the Chavez Family of any amounts collected from KCSR to secure payment of R&Ws expenses. The Engagement Contracts assign to R&W an interest in the share of the amounts collected by the Chavez Family "in a sum of money equal to all expenses of litigation and investigation plus all other expenses and other sums of money paid" by R&W "out of the amount collected, all of which shall be a lien . . ." (Ex. CD-5).
Counsel for the Chavez Family has generally asserted that the Engagement Contracts are unenforceable, because the signatures of the Chavez Family members on the Engagement Contracts are not notarized. Post-trial, the Court provided the Chavez Family with the opportunity to brief this issue, and to specifically set forth exactly what provisions of the Engagement Contracts were unenforceable due to lack of a notarized signature. See Order (dkt# 137).
In response, counsel for the Chavez Family filed a post-trial brief ("
The Court interprets the Brief as an argument by the Chavez Family that all of the provisions of the Engagement Contracts are unenforceable because all of the provisions are powers of attorney. The Court disagrees. Certain provisions of the Engagement Contracts may constitute powers of attorney—such as the grant of power and authority by the Chavez Family to R&W to sign documents on behalf of the Chavez Family. But the provisions of
In the Brief, the Chavez Family cites no cases or statutes that support the legal proposition that an employment contract between an attorney and client must be notarized or acknowledged to be effective and enforceable between the attorney and client. Indeed, here the Engagement Contracts expressly state that they become effective on the date that they are signed by the client even "without execution of notarial." (Ex. CD-5). More to the point, the Chavez Family cites no cases or statutes in the Brief that support the legal proposition that a contractual attorney's lien granted in an employment agreement is invalid, if the client's signature on the agreement is not notarized.
All that is required in Texas to create a contractual attorney's lien is a valid contract signed between the client and the attorney granting a lien. See, e.g., Tarrant Cty. Hosp. Dist. v. Jones, 664 S.W.2d 191, 196-97 (Tex. App.-Fort Worth 1984, no writ) (attorney entitled to a lien on a percentage of his clients' recovery where attorney entered into a valid contract with his clients providing for such lien). Notarized or acknowledged signatures are not required to create a contractual attorney's lien or a valid contract. This is consistent with other Texas law governing the grant of consensual security interests and liens; all that is required is the signature of the person on the contract granting the security interest and lien. See TEX. BUS. & COM. CODE §§ 9.102(7), 9.203(a)(3)(A) (security interest in personal property is enforceable when agreement is signed by person granting security interest).
In conclusion, for these reasons, the Court determines that the relief sought by the Trustee for an attorney's lien against the Chavez Family in the Trustee Counterclaims (dkt# 56) should be granted in part as follows. The Trustee, on behalf of the R&W estate, has a valid contractual attorney's lien in the amount of $208,811 for R&W's expenses ("
The Trustee, on behalf of the R&W estate, seeks recovery of the reasonable value of services rendered and expenses incurred by R&W from the Chavez Family in the wrongful death suit under the doctrine of quantum meruit. See Trustee Counterclaims (dkt# 56, ¶ 47-54). The Court finds that the quantum meruit claim made by the Trustee should be denied for three independent reasons.
First, the general rule is that a party cannot recover under quantum meruit when there is a valid contract covering services, according to the Texas Supreme Court. Hill v. Shamoun & Norman, LLP,
Second, quantum meruit is an "equitable remedy" under Texas law that is based upon an implied promise to pay for beneficial services rendered and knowingly accepted. Hill, 544 S.W.3d at 732, 741 (supporting citations omitted). The ultimate decision regarding whether and how much equitable relief is warranted based on quantum meruit is a decision for the court. According to the Texas Supreme Court in Hill, the court should weigh equitable considerations particular to the case in deciding whether to grant equitable relief in the form of quantum meruit. Hill, 544 S.W.3d at 741 (citing Burrow, which allowed for fee forfeiture based on serious and clear breaches of fiduciary duty by an attorney).
Here, the Court sees nothing equitable in allowing R&W to recover for services rendered for the Chavez Family under quantum meruit. The Court has already exhaustively weighed the equitable considerations in this case and determined that the clear and serious breaches of fiduciary duty by R&W requires equitable forfeiture under Burrow of all R&W fees and a portion of R&Ws expenses. The equitable remedy of quantum meruit cannot be used by the Trustee to step around equitable forfeiture for breach of fiduciary duty.
Third, to recover under quantum meruit, the Trustee must prove that valuable services were rendered or valuable materials were furnished by R&W to the Chavez Family. See Hill, 544 S.W.3d at 732 (citing Vortt Exploration Co. v. Chevron U.S.A., Inc., 787 S.W.2d 942, 944 (Tex. 1990)). The measure of damages for recovery under quantum meruit is the reasonable value of the work performed and the materials furnished. See Hill, 544 S.W.3d at 732 (supporting citation omitted). A claimant must introduce evidence on the correct measure of damages to recover under quantum meruit. Reliance on a bare contingency-fee percentage is not evidence of the reasonable value of the services for a quantum meruit claim. See Hill, 544 S.W.3d at 732, 744. Instead, an attorney seeking recovery for legal services based on quantum meruit must show that the fees are reasonable under the Arthur Andersen standard, which includes the results obtained by the attorney for the client. See Hill, 544 S.W.3d at 743; Arthur Andersen & Co. v. Perry Equipment Corp., 945 S.W.2d 812, 818 (Tex. 1997).
Here, the Trustee did not prove the reasonable value of the services provided by R&W for the Chavez Family that would support recovery of any fees under quantum meruit. The fact that the Engagement Contracts signed by the Chavez Family provided for a 40% contingency fee is not evidence of the reasonable value of services rendered by R&W. No witness provided probative evidence at trial with respect to the Arthur Andersen factors as required by Texas law. Instead, the evidence showed that the Chavez Family received no value from the services provided by R&W and R&W obtained no tangible
With respect to the reasonable value of expenses, R&W incurred expenses on behalf of the Chavez Family in the prosecution of the wrongful death suit against KCSR totaling $417,622. The bulk of the expenses incurred by R&W appear to be for expert fees and deposition costs for the first jury trial. (Ex. P-38). In the context of equitable forfeiture for breach of fiduciary duty by R&W, the Court has already weighed the equitable considerations and determined that partial forfeiture of 50% of R&Ws expenses ($208,811) is appropriate. In short, the Chavez Family has received limited value from such expenses for experts and depositions incurred in preparing the suit for the first jury trial, given the decade that has now passed. And again, the equitable remedy of quantum meruit for expenses cannot be used by the Trustee to avoid equitable forfeiture for breach of fiduciary duty.
In conclusion, for these several reasons, the Court determines that all relief sought by the Trustee for quantum meruit against the Chavez Family in the Trustee Counterclaims (dkt# 56) should be denied.
The Trustee, on behalf of the R&W estate, also seeks recovery of attorney's fees in a reasonable amount and reimbursement of expenses incurred by R&W from the Chavez Family in the wrongful death suit under the doctrine of unjust enrichment. See Trustee Counterclaims (dkt# 56, ¶ 52-55). The Court finds that the unjust enrichment claim made by the Trustee should be denied for the following three separate reasons.
First, under Texas law, a claimant may recover for unjust enrichment if a person "has obtained a benefit from another by fraud, duress, or taking of an undue advantage." Sullivan v. Leor Energy, LLC, 600 F.3d 542, 550 (5th Cir. 2010) (citing Heldenfels Bros., Inc. v. City of Corpus Christi, 832 S.W.2d 39, 41 (Tex. 1992)). Here, there was no probative evidence that any member of the Chavez Family committed fraud in its dealings with R&W, exercised any duress on R&W, or took undue advantage of R&W. Indeed, the Trustee did not even plead (much less prove) any fraud, duress, or taking of any undue advantage by the Chavez Family.
Second, unjust enrichment applies when there is no actual contract between the parties, and thus is available under circumstances that give rise to an implied or quasi-contractual obligation to pay. Sullivan, 600 F. 3d at 550; Argyle Indep. Sch. Dist. v. Wolf, 234 S.W.3d 229, 247 (Tex. App.-Fort Worth 2007, no pet.) (supporting citations omitted). Unjust enrichment is not an available remedy when there is an express contract between the parties covering the same subject matter. Fortune Production Co. v. Conoco, Inc., 52 S.W.3d 671, 684 (Tex. 2000). Here, there are actual and express contracts between R&W and the Chavez Family (the Engagement Contracts) governing R&W's legal services and expenses for the Chavez Family in the wrongful death suit. (Ex. CD-5). As a result, the Trustee is precluded from recovery under the theory of unjust enrichment.
Third, unjust enrichment is an equitable remedy that may be used when the person sought to be charged has "wrongfully secured a benefit" or "passively
In conclusion, for these several reasons, the Court determines that all relief sought by the Trustee for unjust enrichment against the Chavez Family in the Trustee Counterclaims (dkt# 56) should be denied.
For the reasons set forth above, the Court concludes that the relief sought by the Trustee for an attorney's lien against the Chavez Family in the Trustee Counterclaims (dkt# 56) will be granted in part as follows. The Trustee, on behalf of the R&W estate, has a valid attorney's lien in the amount of $208,811 for R&W's expenses (herein "Lien"). The Lien is against all causes of action and claims of the Chavez Family against KCSR in the wrongful death suit (cause no. 2007-CVE-00347-D4), and any amounts that may be recovered or collected by the Chavez Family based on such causes of actions and claims against KCSR. Any other relief sought by the Trustee for an attorney's lien against the Chavez Family in the Trustee Counterclaims (dkt# 56) will be denied by the Court.
Finally, all relief sought by the Trustee for quantum meruit and unjust enrichment against the Chavez Family in the Trustee Counterclaims (dkt# 56) will be denied by the Court.
If history repeats itself, this Opinion (effectively Chavez IV) will not be the last written chapter in this litigation odyssey. But after a full-blown trial in this Court followed by this full-length Opinion, perhaps the Chavez Family will agree to end their litigation marathon with KCSR now, without further expense and delay. Failing that, the Court is concerned that history may repeat itself during the next phase of the journey—a second jury trial of the wrongful death suit in state court.
A separate Final Judgment will be signed by the Court and entered in this adversary proceeding under Rule 58 (which applies to adversary proceedings through Bankruptcy Rule 7058), consistent with this Opinion.
