Wells v. Hughes ( 2008 )

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
September 26, 2008
No. 07-10900
Charles R. Fulbruge III
Clerk
In re: RONALD D. WELLS,
Debtor.
RONALD D. WELLS,
Appellant,
v.
RHONDA HUGHES; RONALD HUGHES, SR.,
Appellees.
Appeal from the United States District Court
for the Northern District of Texas
USDC No. 3:06-CV-1815
Before SMITH, WIENER, and HAYNES, Circuit Judges.
PER CURIAM:*
Debtor Ronald Wells appeals the district court’s affirmance of a
bankruptcy court order finding one of his client fee contracts unconscionable and
*
Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not
be published and is not precedent except under the limited circumstances set forth in 5TH CIR.
R. 47.5.4.
No. 07-10900
requiring a partial refund to the clients.1 Because the bankruptcy court properly
ordered the refund under the circumstances of this case, we AFFIRM.
I.
A jury convicted Hughes of money laundering, and he was sentenced to
prison. After his direct appeal failed, his trial counsel recommended Wells as an
attorney to review the case and identify any grounds on which to attack the
conviction or sentence. The trial counsel paid Wells by the hour, and Wells
identified a “slim hope”2 for obtaining relief on a petition for writ of habeas
corpus under 28 U.S.C. § 2255 (Supp. V 2005). Wells communicated in a letter
to the trial counsel (with a copy to Hughes’s daughter, Rhonda Montee) that it
would “be a very difficult argument to make successfully, and even if [the trial
judge] grants this relief, the family and client should consider that the govern-
ment will likely appeal.”
On February 2, 1999, Hughes, acting through Montee, entered into the
first of three contracts with Wells for legal representation (the “First Contract”).
The First Contract was for the investigation and preparation of the habeas
petition. In exchange, the Hugheses paid Wells $125,000, in advance, with a
$10,000 expense deposit. The contract included a “no refund” provision that
stated:
Client further understands and agrees that should these matters be
dismissed or settled in any manner, NO part of the Attorneys’ fee is
to be refunded to Client. Because of Attorneys’ commitment to
handle this matter, Client further understands and agrees that
1
The parties dispute whether Hughes’s daughter, Rhonda Montee, was ever Wells’s
client. She held a power of attorney for her father, and no one disputes her intense
involvement in the control of the defense and the various transactions at issue. Her signature
appears on all three contracts, one expressly as client, and one, the Third Contract, more
ambiguously. Given the evidence in this case, we cannot conclude that the bankruptcy judge’s
award to “Plaintiffs” was in error.
2
Interestingly, the ground Wells identified as giving a “slim hope” is not the same
ground upon which habeas relief was ultimately granted by the trial court.
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No. 07-10900
Attorneys’ fees set out above will be considered by all parties as
earned at the time of payment, and no part of that fee will be
refunded to the Client.
Accordingly, Wells and several other attorneys prepared a habeas petition
alleging nine issues. The magistrate judge agreed with Hughes’s first issue and,
on February 23, recommended to the district court that it vacate the conviction.
On March 4, after the magistrate judge had given her recommendation, the
Hugheses and Wells entered their second contract (the “Second Contract”) for
“[r]epresentation after Findings, Conclusions, and recommendations [sic] of U.S.
Magistrate Judge.” The contract continued:
It is agreed that this employment is for the purpose of negotiating
a settlement of the criminal sentence and/or seeking a sentence
reduction to allow release and is in addition to the fee previously
paid in contract dated February 2, 1998, between the same parties
hereto. In the event a New Trial is granted and no settlement can
be obtained, a separate fee shall be required prior to any
representation in a new trial.
(emphasis added). Under this contract, the Hugheses made a series of payments
totaling $150,000 with an additional $25,000 due in the event of an appeal. The
contract contained the same “no refund” provision found in the First Contract.
The Second Contract unequivocally obligates Wells to represent Hughes in
connection with efforts to obtain a negotiated sentence reduction.3
After further proceedings on the habeas petition, the district court granted
the relief on June 30 and vacated Hughes’s conviction. It set September 20 as
the date for a new trial and released Hughes on a personal recognizance bond.
Under the Federal Rules of Appellate Procedure, the Government had until
August 30 to appeal the district court’s order granting relief. FED. R. APP. P.
3
Wells was hopeful that he could negotiate a deal with the Government whereby
Hughes would plead guilty and receive a sentence equal to time served (instead of the several
years then remaining on his original sentence). In exchange, Wells would testify against his
son-in-law, Montee’s husband, in an administrative proceeding involving Mr. Montee’s job as
an FBI agent.
3
No. 07-10900
4(a)(1)(B).
On July 16, the Hugheses and Wells entered their third contract (the
“Third Contract”), for “Representation after Granting of Writ and New Trial.”
It stated:
It is agreed that this employment is for the purpose of
representation in the above-referenced matter and is in addition to
any fees previously paid and in no way changes the terms of prior
agreements. The fee includes representation through all District
Court proceedings but does not include a re-trial if the trial results
in a hung jury.
(emphasis added). Thus, nothing in this contract purported to undo or alter
Wells’s pre-existing obligation under the Second Contract to provide
representation in the sentence/plea negotiations. This contract required the
Hugheses to pay Wells $300,000 for his services, with an additional $25,000 due
in the event of an appeal after the new trial. Like the two previous contracts,
the Third Contract included a “no refund” provision, but the terms were
different:
Client further understands and agrees that should these matters be
dismissed or settled in any manner, NO part of the Attorneys’ fee is
to be refunded to Client unless this matter settles on or before
August 23, 1999, in which event the total fee shall be $125,000. In
the event a negotiated settlement occurs in regard to the forfeited
two million dollars, a separate compensation agreement will entered
into [sic]. Because of Attorneys’ commitment to handle this matter,
Client further understands and agrees that Attorneys’ fees set out
above will be considered by all parties as earned at the time of
payment, and no part of the fee will be refunded to Client.
On August 27, 1999, the government appealed the grant of the writ of
habeas corpus and the new trial. As a result of the appeal filing, the September
trial was canceled. We reversed the grant of habeas relief and reinstated
Hughes’s conviction. United States v. Hughes, 230 F.3d 815, 822 (5th Cir. 2000).
He returned to prison to serve the remainder of his sentence and, obviously, no
new trial occurred.
4
No. 07-10900
More than three years later, on December 31, 2002, the Hugheses
demanded the return of the $300,000 paid to Wells under the Third Contract,
alleging that, because the new trial had never occurred, Wells did not earn the
money. In March 2003, the Hugheses sued in state court seeking a declaratory
judgment that the First and Third Contracts were unconscionable and therefore
unenforceable and that Wells had breached both contracts, entitling them to
$453,000 in damages.4
In April 2005, Wells filed for bankruptcy protection under Chapter 7 of
United States Code Title 11. Wells included the Hugheses’ claim for $453,000
as an unsecured and disputed claim. In March 2006, the bankruptcy court held
that the Third Contract was unconscionable because the anticipated new trial
had never occurred. Accordingly, the court reformed the contract and held that
Wells was entitled to $135,0005 and the Hugheses were entitled to a $165,000
refund. The court further held that the refund was a dischargeable unsecured
claim.6
Wells appealed the bankruptcy court’s ruling to the district court. The
district court affirmed, and Wells filed this appeal. The Hugheses have not
cross-appealed the dischargeability ruling or the partially adverse ruling on the
amount of the debt; thus, we do not reach those issues here.
4
In June 2003, the Hugheses filed grievances against Wells with the State Bar of Texas
based on the same claims. The grievances were dismissed.
5
This amount reflects the $125,000 Wells would have kept if the case were resolved
before August 23 and an additional $10,000 the bankruptcy court deemed appropriate, though
generous, for Wells’s efforts from August 23 until the government filed its appeal on August
27.
6
Somewhat cryptically, Appellee contends that although Wells appealed from the
August 9 amended judgment, he failed to appeal from the “Order Granting the Debtor’s
Objection to the Claim” thus “waiving his right to contest the terms or effect of such order.”
Because that order was entered the same day as the amended judgment and grants the same
relief, this contention is unavailing.
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No. 07-10900
II.
Wells contends the bankruptcy and district courts erred in concluding that
the Third Contract was unconscionable. Like the district court, we review the
bankruptcy court’s findings of fact for clear error and its conclusions of law de
novo. In re Hamilton, 125 F.3d 292, 295 (5th Cir. 1997). The court’s
determination that, under Texas law, the Third Contract was unconscionable is
a conclusion of law that is based on findings of fact. See Ski River Dev., Inc. v.
McCalla, 167 S.W.3d 121, 136-37 (Tex. App.SWaco 2005, writ denied).
Under Texas law, attorney fee contracts are not judged by general
commercial standards: “When interpreting and enforcing attorney-client fee
agreements, it is ‘not enough to simply say that a contract is a contract. There
are ethical considerations overlaying the contractual relationship.’” Hoover
Slovacek LLP v. Walton, 206 S.W.3d 557, 560 (Tex. 2006) (quoting Lopez v.
Muñoz, Hockema & Reed, L.L.P., 22 S.W.3d 857, 868 (Tex. 2000) (Gonzales, J.,
concurring in part and dissenting in part)). The attorney’s duty of ethical
conduct “is highest when the attorney contracts with his or her client or
otherwise takes a position adverse to his or her client’s interests.” Id. at 560-61.
At the time of the Third Contract, Wells was already Hughes’s lawyer on the
case in question. Thus, his conduct is subject to assessment as a fiduciary and
to a presumption of unfairness that arises when a fiduciary enters into a
transaction with his own client. See Keck, Mahin & Cate v. Nat’l Union Fire Ins.
Co., 20 S.W.3d 692, 699 (Tex. 2000) (“Contracts between attorneys and their
clients negotiated during the existence of the attorney-client relationship are
closely scrutinized. Because the relationship is fiduciary in nature, there is a
presumption of unfairness or invalidity attaching to such contracts.” (citations
omitted)); Archer v. Griffith, 390 S.W.2d 735, 739 (Tex. 1964) (“The relation
between an attorney and his client is highly fiduciary in nature, . . . . ‘The
burden of establishing its perfect fairness, . . . is thrown upon the
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No. 07-10900
attorney, . . . . ’ [This] general rule . . . applies to a contract or other transaction
relating to compensation provided the attorney-client relationship was in
existence at the time.” (citations omitted)); see also Tex. Disciplinary R. Prof’l
Conduct 1.04 cmt. 6, reprinted in TEX. GOV’T CODE ANN., tit. 2, subtit. G, app. A,
art. 10, § 9 (Vernon 2005) (hereinafter “Rule 1.04 ”) (“Once a fee arrangement
is agreed to, a lawyer should not handle the matter so as to further the lawyer’s
financial interests to the detriment of the client.”).
III.
The Texas Supreme Court has relied upon the Texas Disciplinary Rules
of Professional Conduct to provide the definition for unconscionability in the
context of an attorney fee agreement. Hoover Slovacek LLP, 206 S.W.3d at 561
n.6 (“Although the Disciplinary Rules do not define standards of civil liability for
attorneys, they are persuasive authority outside the context of disciplinary
proceedings, and we have applied Rule 1.04 as a rule of decision in disputes
concerning attorney’s fees.”). Under those rules, “A fee is unconscionable if a
competent lawyer could not form a reasonable belief that the fee is reasonable.”
Rule 1.04(a). “[I]n fee disputes between lawyer and client, a fee will not be
approved to the extent that it violates [§ 34] even though the parties had agreed
to the fee.” RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 34 cmt. a
(2000).
Texas law is clear that a contract that places an undue burden upon a
client’s ability to change counsel can be unconscionable. Hoover Slovacek LLP,
206 S.W.3d at 562-63. Courts should scrutinize whether such agreements are
unreasonably susceptible to overreaching and whether the risk-sharing
attributes of such a contract weigh too heavily in favor of the attorney at the
expense of the client. Id. at 563-64. As noted above, when a fee contract is
negotiated during the course of representing the client in an ongoing matter, it
is presumed to be unfair. Keck, 20 S.W.3d at 699; Archer, 390 S.W.2d at 739.
7
No. 07-10900
Thus, Wells had the burden of disproving the unfairness of his transaction with
his client. Keck, 20 S.W.3d at 699.
In his testimony before the bankruptcy court, Wells insisted that the Third
Contract was for “representation” and not for the new trial, though he also
claimed to be “on the hook” for the new trial if it ever occurred. He claimed the
Third Contract was to pay for services in securing Hughes’s release through a
negotiated plea arrangement. His appeal brief continues the same argument.
That argument is incredible in light of the fact that the Second Contract
expressly covers representation in the “settlement” negotiations. If Wells’s
testimony is true, the Third Contract is unconscionable because it covers services
he was already obligated to provide and for which he had already been fully and
generously compensated under the Second Contract. Wells’s own admission,
then, about the goal that the funds were actually paid to accomplish is the most
telling evidence of all against him and illustrates the one-sided nature of the
contract.
Even if the Third Contract was designed to cover pretrial preparation and
the new trial ordered by the district judge after the successful habeas, it still
suffers from the taint of unfairness. In this case, the bankruptcy court heard
testimony from two criminal defense attorneys – George R. Milner, Sr. and Gary
Alan Udashen – both of whom had participated in the Hughes representation,
and both of whom the court described as “well-regarded . . . in Dallas.” Those
attorneys testified that $300,000 would have been reasonable if the trial had
occurred; they also stated that the fee was not reasonable for a trial that never
occurred. Both were critical of Wells’s decision to treat the entire $300,000 as
earned and to keep the money regardless of what happened later.
The evidence also showed that, at the time of contracting, Wells put undue
pressure on the Hugheses to sign the Third Contract. Montee testified that
shortly after Hughes was released from prison on the grant of the writ, Wells
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No. 07-10900
called a meeting and expressed to the Hugheses that it was imperative for them
to sign the new contract so that Wells, Udashen, and one other attorney could
divide the work and begin preparing for trial. Montee also testified that Wells
told her that if she did not sign the agreement, she “could go look for another
attorney, and that there was no attorney in Dallas that [she] would be able to get
for anywhere near this on such short notice with all of the reading and
everything else that . . . he had already done.” The parties settled on $300,000
for Wells’s and Udashen’s services under the Third Contract. After the contract
was signed but before the consideration was paid, Wells further pressured
Montee by telling her that if she did not pay, he would seek to withdraw as trial
counsel, that he believed that the judge (whom Wells represented was his close
friend) would then revoke Hughes’s personal recognizance bond, and that
Hughes would be returned to prison pending trial. Even though Montee’s and
Wells’s characterizations of this conversation differ, they both acknowledge that
the conversation occurred and proceeded along these lines. This kind of undue
pressure is completely inconsistent with the high duty Wells owed to his clients.
Not only did Wells put undue pressure on the Hugheses, but also the time
pressure imposed was a fictional one – the attorneys knew there would be an
appeal such that no trial would occur in September. Udashen testified that
Wells was relying on him for most of the preparation work. Yet, Wells paid him
nothing, and Udashen did nothing to prepare for the new trial. Udashen
testified that he did not prepare for the new trial because he knew an appeal
would be filed.7
Finally, it is inexplicable why Wells, as a fiduciary, would allow his client
to enter into a contract with a “drop dead” date just one week before the true
appellate deadline. The Third Contract specified August 23 as the date when
7
Wells admitted that he filed only one pretrial motion (a motion for extension of time),
because former trial counsel had already filed “every motion that anyone has ever dreamt up.”
9
No. 07-10900
the entire $300,000 would become nonrefundable. Wells testified this date was
“loosely tied” to the deadline for the Government to appeal the habeas ruling.
He offers no other explanation for picking a date that was one week before the
true appellate deadline, August 30. Udashen testified that Wells knew there
would be an appeal because the Government’s lawyer had said there would be.
The filing of the appeal would cause the September trial setting to be vacated,
eliminating the need to rush and the concomitant difficulty of finding other
counsel that created the pressure to sign the Third Contract. Indeed, if the
appeal were filed, Wells would have been required to resume work under the
Second Contract to respond to the appeal.8 Yet none of that was disclosed to the
clients.9
In sum, attorney-fiduciary Wells entered into a contract with his existing
clients during his continuing representation of their interests (the settlement
negotiations) for services that he was already obligated to provide under an
existing contract. Even if the Third Contract was for pretrial and trial services
associated with the potential new trial, the evidence shows that Wells placed his
clients in an unnecessarily pressured situation, performed little or no work
under that contract, did not expect to perform much work under that contract
in the immediate future, and failed to disclose material information to his
8
In negotiating the Third Contract, Wells had a duty to disclose all conflicts of interest
with his own self-interest. Tex. Disciplinary R. Prof’l Conduct 1.06(b)(2), (c). If an appeal were
filed, Wells had a self-interest in seeing Hughes lose so that Wells would pocket the entire
$300,000 without having to do any work. Yet he was the lawyer retained to defend the appeal
under the Second Contract. We do not suggest that Wells deliberately lost the habeas appeal
to profit personally, just that this inherent conflict should have been disclosed under the
particular circumstances presented here. Disclosure obligations are fact intensive and we
express no opinion about the need to make such a disclosure in other cases.
9
Although the bankruptcy judge appeared to conclude that the Hugheses knew there
would be no trial in September if an appeal were filed, no evidence was presented to that effect
during the trial before that court. Even if the Hugheses knew this fact, it would not excuse
Wells’s conduct, without any reason, of entering into a contract using the hurry-up date of
August 23, rather than the actual appellate deadline of August 30.
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No. 07-10900
clients. This contract “weighs too heavily in favor of the attorney at the client’s
expense.” Hoover Slovacek, LLP, 206 S.W.3d at 564.
Wells had the burden of disproving the unfairness of his transaction with
his client. Archer, 390 S.W.2d at 739. He failed to do so. The evidence and
Texas law support the bankruptcy court’s determination that at least the second
half of the Third Contract was unconscionable.
IV.
The judgment of the district court affirming the bankruptcy court is
AFFIRMED.
11