Stone v. Thomas (In Re Wright) ( 2005 )

United States Court of Appeals
Fifth Circuit
F I L E D
IN THE UNITED STATES COURT OF APPEALS
July 14, 2005
FOR THE FIFTH CIRCUIT Charles R. Fulbruge III
Clerk
_____________________
No. 03-50609
_____________________
In The Matter Of: FRANKLIN Y. WRIGHT, JR.,
Debtor
__________________
ROBERT M. STONE,
Appellee,
versus
JOHNNY W. THOMAS,
Appellant.
_________________________________________________
_____________________
No. 04-50365
_____________________
In The Matter Of: FRANKLIN Y. WRIGHT, JR.,
Debtor
__________________
ROBERT M. STONE,
Appellant-Cross-Appellee,
versus
JOHNNY W. THOMAS, Trustee, Successor
in Interest to Debtor,
Appellee-Cross-Appellant.
__________________________________________________
Appeals from the United States District Court
for the Western District of Texas
USDC No. SA-00-CV-166
__________________________________________________
Before REAVLEY, JONES and GARZA, Circuit Judges.
PER CURIAM:*
We reverse the judgment insofar as it awarded actual and punitive damages for
tortious interference, and affirm the judgment insofar as it awarded actual and punitive
damages for conversion.
A. Tortious Interference Claim
The bankruptcy court toiled admirably to reach a fair result in this legally and
factually difficult case, but we cannot agree that the trustee was entitled to recover for
tortious interference with contract. While we do not question that Stone had a financial
incentive and motive to persuade the clients to terminate Wright, we agree with Stone that
he was privileged under Texas law to interfere with the contractual relationship between
the clients and Wright. Wright was convicted of tax fraud in December of 1997. Under
*
Pursuant to 5TH CIR. R. 47.5, the Court has determined that this opinion should
not be published and is not precedent except under the limited circumstances set forth in
5TH CIR. R. 47.5.4.
2
Texas law, federal tax evasion is considered moral turpitude per se and is grounds for
disbarment. In re Humphreys, 880 S.W.2d 402, 408-09 (Tex. 1994). Wright was in fact
suspended and later disbarred as a result of this conviction.
The record further establishes that Wright’s competence as an attorney had
become compromised for reasons other than the conviction itself. Wright had been
sanctioned by an agreed judgment in state district court in 1995 for commingling his and
his clients’ funds. The trustee admitted in the pretrial order that “Wright had a long-
standing practice of borrowing from client recoveries, giving clients personal promissory
notes instead of their money. Many of these clients are now creditors in this
bankruptcy.” Wright confirmed this practice at trial, and admitted that one client had to
threaten to file a grievance to get Wright to pay her back. Stone was aware that “Wright
had been siphoning client funds out of the trust accounts.” Bankruptcy counsel for the
law firm that represented Wright in his criminal case stated in a pretrial hearing that “I
think this Court is certainly aware . . . that there’s probably a bunch of people out there
who have client trust funds that probably ought to take priority over anybody in this
case.”
Wright’s own adversary proceeding complaint and amended complaint confirm
that during his tax “ordeal,” he “had begun to drink heavily outside of the office and,
outside of the office, had become dependent upon alcohol.” Wright’s counsel stated at a
pretrial hearing on a discovery dispute that Wright had been treated for alcohol addiction
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at three facilities. Wright admitted at trial that he is an alcoholic. The judge in his
criminal case ordered him to go for treatment.
Under his arrangements with his clients and with Stone, Wright was supposed to
cover litigation expenses for the cases and office overhead for himself and Stone. The
contingent fee agreements provided that Wright would cover litigation expenses and that
the clients were not responsible for reimbursing Wright unless there was a recovery.
Wright also paid health care expenses for clients pursuant to letters of protection. These
obligations were undoubtedly the reason he was able to retain a contingent fee interest of
60 percent or more of the fees in shared cases, more than the traditional referral fee, when
the cases were turned over to Stone for further prosecution.
Wright’s complaints admit that prior to and during his criminal trial, “some
expenses were not paid, clients had not received settlement proceeds, and medical costs
had not been reimbursed.” Stone was aware that Wright had failed to pay expenses on
some cases. Wright admitted that obligations under letters of protection had not been
paid. In January 1998 he wrote a letter to Stone stating that he had put his house up for
sale to cover outstanding letters of protection.
In addition, there was ample evidence that Wright’s office was in disarray during
and subsequent to his tax conviction. Stone testified that during the criminal trial
Wright’s staff had become preoccupied with that trial, and that the day after the jury
verdict Wright showed up at the office staggering and visibly intoxicated. One of
Wright’s employees testified that on the day of the verdict the employees were “in shock”
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and “[a] few of the girls completely lost control.” When Stone visited Wright a few days
later at Wright’s lake house, Wright was again intoxicated and told Stone he was going in
for treatment. Diana Garcia, another attorney who worked in Wright’s office, went with
Stone to the lake house, and described Wright as laughing, crying, and “extremely
intoxicated.” Garcia moved out of Wright’s offices shortly after Stone moved out. She
testified that money had stopped coming into the office because “Mr. Wright had been
away from the office for long, long periods of time.”
Wright had told Stone that the IRS might try to seize the office. Wright testified
that the IRS had levied on his business account three times in earlier years. The
bookkeeper told Stone in December 1997 that she would have to raid the trust account to
meet expenses. After the conviction Wright put the office up for sale. Stone testified that
the building had been “up for foreclosure” several times. Garcia testified that Wright had
told her the building had been posted for foreclosure. After the conviction Stone
confirmed that the mortgage was not being paid. Garcia stated that although Wright told
her “they would never take the building away from him . . . there were people coming by,
photographing the building, and looking at it, and I know that it had been posted for
foreclosure.”
When asked to describe the atmosphere in Wright’s office in December of 1997,
Garcia testified that “aside from the chaos, everybody was despairing as to what they
were going to be doing; looking for jobs. They were extremely concerned about what
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was going to happen with the office and Franklin.” She testified that to her knowledge
Wright stopped coming into the office after the conviction.
As to all the clients whose cases are relevant to this appeal, an attorney-client
relationship existed between Stone and the client. The trustee does not argue otherwise
in his appellate briefing, and instead points out that with respect to the Person, Rakowitz,
and other cases, “Stone was attorney of record for purposes of client contact, court
appearances, and settlement and fund distribution” and refers to “the unremarkable
proposition that Stone had an attorney-client relationship with the Clients.” We agree
with the bankruptcy court that “Stone already had an attorney-client relationship with the
clients in question, as a result of Wright’s having ‘sent the files upstairs’ to Stone. Stone
entered appearances in court for the clients, advised clients regarding settlement potential,
and the like.”
In these circumstances, we believe that the Texas courts would view the attorney-
client relationship between Stone and the clients as paramount to any relationship
between Wright and Stone, and that Stone was privileged as a matter of law to inform the
clients of Wright’s conviction and that he could no longer work or associate with Wright.
Even if Stone’s conduct extended to expressly recommending that the joint clients fire
Wright, which Stone denies, we conclude that the privilege would extend to such
recommendations. Stone’s first duty was to his clients. He had a informal fee sharing
relationship with Wright, but he had a higher, fiduciary duty to his clients. The
attorney-client relationship is highly fiduciary in nature and requires the utmost good
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faith. Judwin Properties, Inc. v. Griggs & Harrison, 911 S.W.2d 498, 506 (Tex.
App.–Houston [1st Dist.] 1995, no writ). “As a fiduciary, an attorney is obligated to
render a full and fair disclosure of facts material to the client’s representation.” Willis v.
Maverick, 760 S.W.2d 642, 645 (Tex. 1988).
In tortious interference cases, Texas law recognizes a justification defense or
privilege based on the exercise of the defendant’s own legal rights or a good faith claim
to a colorable legal right. Prudential Ins. Co. of Am. v. Fin. Review Servs., Inc., 29
S.W.3d 74, 80 (Tex. 2000). The Texas courts have also described the defense as
applicable where the defendant has a right in the subject matter equal or superior to that
of the other party. Southwestern Bell Tel. Co. v. John Carlo Tex., Inc., 843 S.W.2d 470,
472 (Tex. 1992); Sakowitz, Inc. v. Steck, 669 S.W.2d 105, 107 (Tex. 1984). If the
defendant has a legal right to interfere with a contract, then he “has conclusively
established the justification defense, and the motivation behind assertion of that right is
irrelevant.” Tex. Beef Cattle Co. v. Green, 921 S.W.2d 203, 211 (Tex. 1996). “[I]n a
tortious interference case, a defendant’s motivation behind the assertion of a legal right is
irrelevant since the right conclusively establishes the justification defense.” Calvillo v.
Gonzalez, 922 S.W.2d 928, 929 (Tex. 1996).
Texas courts have also held that a person who shares a confidential relationship
with a party to a contract is privileged to induce the breach of such a contract. John
Masek Corp. v. Davis, 848 S.W.2d 170, 175 (Tex. App.–Houston [1st Dist.] 1992, writ
denied); Russell v. Edgewood Indep. Sch. Dist., 406 S.W.2d 249, 252 (Tex. App.–San
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Antonio 1966, writ ref’d n.r.e.). As an attorney Stone was a party to a confidential
relationship with all his clients, whether or not those clients had signed fee agreements
with Wright.
Under these authorities, Stone had a legal right and a duty to inform the clients of
Wright’s conviction. He further had a legal right to represent the clients in their ongoing
litigation without the participation of Wright if the clients, once informed of Wright’s
conviction, chose to terminate Wright. “A client has the right to terminate representation
at any time.” Walton v. Hoover, Bax & Slovacek, L.L.P., 149 S.W.3d 834, 843 (Tex.
App.–El Paso 2004, pet. field). The clients and Stone had a right to end their dependence
on Stone and disassociate themselves from a convicted felon whose financial, mental, and
legal capacity to practice law and fulfill his contractual obligations was plainly in
jeopardy. On these facts we hold that Stone’s fiduciary attorney-client relationship with
the clients imbued him with a justification defense to Wright’s tortious interference
claims. We believe that the Texas Supreme Court would not hesitate to recognize that
Stone’s actions were privileged in these circumstances.
The trustee argues that there was no reason for Stone to encourage the clients to
fire Wright other than Stone’s greed. First, we think Texas law, as set forth in Texas
Beef Cattle and Calvillo, quoted above, recognizes the justification defense regardless of
Stone’s financial motive. Second, we disagree with the factual premise of this argument.
The trustee’s theory, as we understand it, is that Stone had full responsibility for the cases
in issue and his only reason for persuading the clients to fire Wright was to deprive
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Wright of his share of the contingent fee. The trustee points to the “sole responsibility”
letters Stone had written Wright. However, prior to Wright’s termination, he was the
only attorney with a written contingent fee agreement with the clients, and under Texas
law a contingent fee contract must be in writing. TEX. GOV’T CODE ANN. § 82.065(a)
(Vernon 2005); TEX. DISCIPLINARY R. PROF’L CONDUCT 1.04(d), reprinted in TEX. GOV’T
CODE ANN., tit. 2, subtit. G app. A (Vernon 2005). Wright was arguably entitled to
replace Stone at any time with other counsel or to take the cases back and attempt to
settle or otherwise resolve them on his own. In a January 23, 1998 letter, Wright in fact
told Stone that the files Stone had worked on in the past were Wright’s files and “always
have been my files,” and demanded that Stone “return all of my files that you were
assisting me on . . . .” Wright continued to insist at trial that “[t]hey were always my
files,” and even disputed that the clients had terminated him when they wrote letters
stating that they were doing just that. The bankruptcy court found that Stone was
“absolutely dependent” on Wright for payment of Stone’s attorney’s fees. Stone testified
that on cases where Wright associated him, Wright continued to attend hearings,
mediations, or depositions when needed. Stone testified that settlement checks went into
Wright’s trust account until Stone opened his own trust account in late 1997, and that
even after Stone opened his own trust account, Wright’s bookkeeper would often disburse
settlement proceeds.
No client in these circumstances could be pleased by the criminal conviction of his
lawyer. The only client who testified at trial, Mrs. Rakowitz, stated that she was
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horrified when she learned the news of the jury verdict, that immediately she and her
husband “didn’t want Mr. Wright to have anything to do with our case, ” and that the
decision to fire Wright “was ours totally.” Person’s sports agent and personal attorney,
Herbert Rudoy, testified that after learning of the conviction, he told Person “that he must
immediately dismiss Mr. Wright as his attorney.” None of the joint clients chose to
remain with Wright. Wright was also obliged to front expenses for the litigation and there
was evidence, described above, that he had sometimes failed to do so.
In addition, in 1998 affidavits in the record Wright claims that he associated Stone
in the Rakowitz case “to assist me as co-counsel” and that “[h]ad I not been terminated by
Mr. and Mrs. Rakowitz . . . it was my intention to attend the scheduled mediation of their
lawsuit . . . .” Wright also testified in a deposition that he intended to participate in the
Rakowitz trial, and that, after he associated Stone, he had interviewed witnesses and “was
involved in the decision making of the case.” The Rakowitz case was one of the two
most valuable cases in issue. As to the most valuable case, the Person case, Rudoy
testified that he understood that Wright was going to remain involved throughout the
case. Wright testified that Stone “just worked” the files that Wright sent to him, but that
the files belonged to Wright. In another case “sent upstairs” to Stone, the Browning case,
Wright informed the client in a letter that Stone would be assisting Wright, and that the
client could contact either attorney. Wright similarly wrote to Person, informing him that
Wright had asked Stone “to work with me on your back injury claim.” Wright testified
that, due to Stone’s people skills, “I was constantly intervening with clients . . . and I
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would always tell them . . . that if they needed any help from me, why, I would certainly
help them.”
Stone was privileged if not obligated to inform the clients that Wright had been
convicted of a felony, that his license to practice was in jeopardy, and that absent a
termination Wright could still attempt to control the litigation and the disbursement of
any settlement funds. The added circumstances that Wright was not funding all the
expenses of the lawsuits as he was obliged to do under the arrangements with Stone and
the clients, that Wright was suffering from alcoholism and emotional strain, that he had
been sanctioned in the past, that he had borrowed money belonging to his clients and not
paid them back, that he was missing work, and that his offices were in disarray, were all
the more reason that Stone was privileged to interfere with Wright’s contractual
relationship with the clients.1 Accordingly, the tortious interference claim fails, and the
trustee is not entitled to actual or punitive damages on this claim.
B. Contract Claim
The trustee argues in the alternative that if we reverse the judgment on the tortious
interference claim, he should be able to seek recovery under the fee sharing agreement
between Stone and Wright. We agree with the bankruptcy court that the fee sharing
agreement was unenforceable under Rule 1.04(f) of the Texas Disciplinary Rules of
1
On a related issue, and lest there be any belief that the trustee has a claim against
the clients for terminating Wright without good cause, we categorically reject the
trustee’s suggestion, in the pretrial order, that “there is a serious question of whether
Wright’s termination was for good cause vis a vis the clients.”
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Professional Conduct, for the reasons explained in detail in the court’s findings of fact
and conclusions of law. Specifically, we do not agree with Stone that the statement in
Wright’s written contingent fee agreements that he “is hereby authorized to associate
such other Attorney or Attorneys in this cause as they may desire” satisfies Rule
1.04(f)(1)(iii). This subpart requires that “[a] division or agreement for division of a fee”
must be made “by written agreement with the client, with a lawyer who assumes joint
responsibility for the representation.” This is in addition to the requirement of subpart (2)
that “the client is advised of and does not object to the participation of all the lawyers
involved.” We read subpart (f)(1)(iii) to require that the fee sharing agreement between
Stone and Wright must be in writing and signed by the client. The mere authorization to
associate other counsel in the contingent fee agreement, without setting out the fee
splitting arrangement between Stone and Wright, or even identifying Stone, does not
satisfy this subpart.
C. Conversion Claim
The judgment included a recovery under a conversion theory for fees in the Kwon
case. A distinction between the conversion claim and the tortious interference claim is
that the client did not terminate Wright as to those cases subject to the conversion claim.
Stone argues that there were actually two Kwon cases and that Wright did not have a
contingent fee agreement in the case that was the subject of the conversion claim. We
have reviewed the record on this claim and cannot say that the bankruptcy court’s
findings of fact were clearly erroneous. Stone never produced a written contingency fee
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contract between himself and Kwon. He knew that Texas law requires contingency fee
contracts to be in writing.
As stated above, we also agree with the bankruptcy court that the fee sharing
agreement was unenforceable under Rule 1.04(f), a position Stone argued repeatedly in
the bankruptcy court. The trustee is therefore entitled to the entire contingent fee of
$12,000 on this claim.
We further see no error in the award of $36,000 in punitive damages on this claim.
The issue of punitive damages was thoroughly litigated in the bankruptcy and district
courts. The evidence supports a finding that Stone simply took for himself the entire fee
in the Kwon case knowing that the fee was subject to a contingent fee agreement with
Wright that had not been terminated by the client. Stone’s only argument regarding
punitive damages in the pending appeal is that punitive damages cannot be recovered
absent tort liability and an underlying award of actual damages. Having concluded that
the actual damages for conversion should stand, the punitive damages on that claim
should also stand.
D. Other Issues
The trustee does not persuade us that the bankruptcy court abused its discretion in
denying costs. The denial of costs is all the more appropriate given our decision to vastly
reduce the judgment. We see no error in the accrual date selected for post-judgment
interest.
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We reject the “acceptance of benefits” theory urged by the trustee. Stone did not
forfeit his right to appeal a multi-million dollar judgment by arguing that he should be
allowed to keep the $73,497.90 fee in the Moreno case in light of the bankruptcy court’s
ruling that the fee splitting agreement was unenforceable. The bankruptcy court rejected
damages in the Moreno case due to a failure of proof of such damages. Both sides have
taken inconsistent positions regarding the enforceability of the fee sharing arrangement.
Even in the pending appeal, the trustee argues in the same brief that (1) the trustee is
entitled to the entire fee in the Rakowitz, Person, and other cases, a position that
necessarily embraces the holding below that the fee sharing agreement is unenforceable,
and (2) in the alternative, the trustee is entitled to a share of the fees per the fee sharing
agreement if that agreement is enforceable.
As to prejudgment interest, we do not agree with the trustee that prejudgment
interest is governed by state law and therefore mandatory. We agree with the district
court’s analysis of this question. The bankruptcy court did not abuse its discretion in
denying prejudgment interest under federal law. We note that the award of punitive
damages in an amount equal to three times the amount of actual damages on the
conversion claim appears more than adequate to compensate the trustee for the loss of the
time value of money on the conversion damages.
E. Conclusion
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The judgment is modified to strike the award of $2,990,900 in actual damages for
tortious interference, and to strike the award of $164,000 in punitive damages for tortious
interference. The judgment is otherwise affirmed.
AFFIRMED AS MODIFIED.
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