Jeannette Martello v. Joshua Santana , 713 F.3d 309 ( 2013 )

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit I.O.P. 32.1(b)
File Name: 13a0100p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
X
-
JEANNETTE MARTELLO,
-
Plaintiff-Appellant,
-
-
No. 12-5729
v.
,
>
-
-
JOSHUA SANTANA, et al.,
N
Defendants-Appellees.
Appeal from the United States District Court
for the Eastern District of Kentucky at Lexington.
No. 5:11-cv-00093—Karl S. Forester, District Judge.
Argued: March 12, 2013
Decided and Filed: April 9, 2013
Before: MERRITT, MARTIN, and CLAY, Circuit Judges.
_________________
COUNSEL
ARGUED: Jeremy S. Rogers, DINSMORE & SHOHL LLP, Louisville, Kentucky, for
Appellant. Larry C. Deener, LANDRUM & SHOUSE LLP, Lexington, Kentucky, for
Appellees. ON BRIEF: Jeremy S. Rogers, DINSMORE & SHOHL LLP, Louisville,
Kentucky, for Appellant. Larry C. Deener, Elizabeth A. Deener, LANDRUM &
SHOUSE LLP, Lexington, Kentucky, for Appellees.
_________________
OPINION
_________________
BOYCE F. MARTIN, JR., Circuit Judge. This case arises out of a contract
dispute between Jeannette Martello, a medical doctor with a law degree, and Joshua
Santana, a Kentucky attorney. The district court granted summary judgment for Santana
on Martello’s breach of contract, fraud and fraudulent concealment of settlement, and
1
No. 12-5729 Martello v. Santana, et al. Page 2
breach of fiduciary duty claims. Martello now appeals. For the following reasons we
AFFIRM the district court’s judgment.
I.
Martello is a doctor who also has a law degree from University of California at
Berkeley, Boalt Hall School of Law. Despite taking the bar exam on four separate
occasions in Kentucky and New York, Martello has never passed the bar exam and does
not practice law. Although she never passed the bar exam, in March 1997
Martello passed the Multistate Professional Responsibility Examination. Beginning in
1991, Martello started reviewing medical malpractice cases for Santana and his law firm.
Martello described the work she did for Santana as “medical/legal consulting work” that
included “the acquisition and review of pertinent medical records; the formulation of
opinions regarding whether medical negligence existed; the identification of possible
defendants; . . . education and consultation with attorneys and expert witnesses . . . .”
Santana typically paid Martello an hourly rate for her work, but she alleges that they
changed the fee arrangement for three specific cases: the Howard/Lee case, the Davis
case, and the Tinker case.
The Howard/Lee case arose in 1993 when Martello treated, in her capacity as a
physician, “a toddler who became irreversibly brain damaged after a twenty-minute
minor surgery.” The toddler’s mother asked Martello to help her find out why the
surgery went wrong, and Martello introduced her to Santana. Martello’s complaint
states that she asked “Santana if there was any other working arrangement they could
enter into besides that of an hourly rate reimbursement. After all, but for her introducing
Santana to the family, Santana would never have met them.” Santana agreed and hand
wrote an agreement (later memorialized in a typed letter) stating that he would pay
Martello 20 percent of his fee if the case settled before the filing of the lawsuit and 25
percent of his fee if the case settled after the filing of the lawsuit. Martello alleges that
the handwritten document was also intended to cover consulting on future cases.
No. 12-5729 Martello v. Santana, et al. Page 3
However, on March 31, 1997, Santana sent a letter to Martello about the payment
arrangement for the Howard/Lee case stating that:
As we have discussed on several occasions, the Kentucky canons of
ethics prohibit the payment of your fees for assisting in the prosecution
of the referenced matter on a contingency basis. It is my understanding
that in preparing for the ethics portion of the bar exam this issue came up
and you have reviewed the law and are in agreement with my reading of
the canons. Accordingly, it is my understanding that you will be billing
us on an hourly basis for work associated with this claim . . . .
Martello claims that Santana told her to fabricate her time to make it look like she
worked on an hourly basis, but with the result being she earned the equivalent of what
she would have received under the contract. The Howard/Lee case settled in the spring
of 1997 for $400,000 and Santana’s firm received $160,000. This settlement would have
entitled Martello to 25 percent of the firm’s fee, or $40,000, under Santana and
Martello’s contract. Santana ultimately paid Martello $36,150.56 because, in a letter to
Martello on June 17, 1997, Santana claimed there were additional costs that reduced her
share of the fee. Martello now claims there were no additional costs and that Santana
breached their contract.
The Davis case began in 1996 when Martello treated “a young man who
underwent the surgical removal of the majority of dead lower leg musculature.” The
patient’s mother asked if Martello could help her find answers to how her son’s muscle
had died and whether anything could have been done to prevent it. She gave Martello
permission to speak with Santana. On July 1, 1996, Santana sent a letter to Martello
memorializing an oral agreement and agreeing to pay Martello 25 percent of the net fee
recovered by Santana if the case settled before trial and 33.3 percent of the net fee if the
case went to trial and Santana won a jury verdict. Santana sent this letter almost eight
months before he sent the letter discussing ethical issues with contingency fees in the
Howard/Lee case. Despite receiving Santana’s letter regarding the ethical problems of
fee-sharing in the Howard/Lee case during the course of the Davis litigation, Martello
alleges that she did not think the letter affected her contingency fees for the Davis case.
No. 12-5729 Martello v. Santana, et al. Page 4
The Davis case settled in 1999, and Santana received $67,556.85, meaning that
under the contract Martello would have been entitled to 25 percent of Santana’s fee, or
$16,889.21. Martello received $5,000 for her work. She alleges that when she inquired
about the settlement amount, Santana said he could not tell her the amount because there
was a gag order in place, but that he had taken care of her “like he always had.” Santana
responds that Martello never submitted hourly statements for her work and he felt the
$5,000 was “considered to be an equitable and agreed determination of the services
rendered.”
The final case at issue is the Tinker case, a 1997 case involving a child who had
his arm amputated. Just as in the other two cases, the family asked Martello for
assistance and she introduced the family to Santana. Unlike the other two agreements,
there is no letter from Santana providing the terms of a fee arrangement, and Martello
vaguely alleges only that “Santana agreed to the contingency fee relationship which had
been memorialized in the hand-written agreement [from the Howard/Lee case] and prior
letter agreements.” The Tinker case had two settlements. The first, in November of
1998, resulted in a $500,000 fee for Santana’s firm, and the second, in July of 2000,
provided Santana with an $83,333.33 fee. Martello alleges she was entitled to over
$100,000 for her work on the case, but instead she received $17,000 from the first
settlement, and $10,000 from the second settlement. As in the Davis case, Martello
alleges that she asked Santana about the settlement amounts and he told her a gag order
prevented him from disclosing the amount, but said “[d]on’t worry. I took care of you.”
In 2005, Martello started researching for a medical article and contacted the
Tinker family to see how their child was doing. During the conversation, the Tinker
family mentioned that the case settled for around 1.75 million dollars and that Santana’s
firm probably received around $700,000 as a fee. When Martello found this out, she
immediately contacted the Davis family, who told her they thought Santana received
around $70,000 for their case.
The day after discovering the settlement amount in the Davis case, Martello hired
an attorney and asked him to investigate whether she had been properly paid. In
No. 12-5729 Martello v. Santana, et al. Page 5
February 2006, Martello signed a confidentiality agreement with Santana and in March
2006, Santana’s attorney forwarded documents regarding the fee agreements and the
cases’ settlement amounts, which are now, contrary to the confidentiality agreement, part
of the record in this case.
During the course of the litigation, Martello and Santana signed two tolling
agreements relating to the statute of limitations. The first agreement, in November
2005, tolled the statute of limitations for all claims from July 11, 2005, through January
1, 2006. The second agreement tolled the statute of limitations for all claims from June
1, 2005, through April 1, 2006, a total of ten months.
On March 7, 2011, Martello filed a complaint in the United States District Court
for the Eastern District of Kentucky. The complaint Martello filed pro se was over
forty-five pages. On the motion for summary judgment, the district court broke the
complaint into three main claims: (1) a breach of the oral and written contracts for the
three cases; (2) fraud/fraudulent concealment of the settlement and legal fee amounts for
each of the three cases; and (3) a breach of fiduciary duty to Martello by failing to
disclose the settlement and legal fee amounts.
Santana moved for summary judgment and the district court granted the motion
in June 2012. The district court determined that Martello’s contract claims were barred
because the contracts were void as against public policy, while her fraud claims, even
accepting the tolling agreements, were barred by the statute of limitations. The district
court also granted summary judgment on the fiduciary claims. Central to its breach of
contract determination was the district court’s belief that the Kentucky Rules of
Professional Conduct inform public policy, and that Martello’s agreements with Santana
violated Rule 5.4. SCR 3.130-5.4. Martello appeals the district court’s decision only
on the breach of contract and fraud claims.
II.
We review a district court’s grant of summary judgment de novo. Binay v.
Bettendorf, 601 F.3d 640, 646 (6th Cir.2010) (citation omitted). Summary judgment is
No. 12-5729 Martello v. Santana, et al. Page 6
proper where “the movant shows that there is no genuine dispute as to any material fact
and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). The
court must consider the facts and draw all reasonable inferences in favor of the
nonmoving party. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S.
574, 587 (1986).
III.
Martello argues that the district court erred in holding that the agreements
between her and Santana are void as against Kentucky’s public policy for three reasons:
first, because the Kentucky Rules of Professional Conduct apply only to Kentucky
lawyers, they do not bind Martello, a non-lawyer; second, the contracts between
Martello and Santana fall within the exception to the Kentucky Rules of Professional
Conduct; third, voiding the contracts would provide a windfall to Santana.
Courts may void contracts that violate law or public policy. Smith v. The
Ferncliff, 306 U.S. 446, 450 (1939); Bassett v. Nat’l Collegiate Athletic Ass’n, 528 F.3d
426, 438 (6th Cir. 2006). Martello argues that public policy can only be created by the
Kentucky Legislature and not by the Supreme Court of Kentucky. However, Kentucky
courts have held that, in the absence of legislative guidance, courts may determine public
policy. Yeager v. McLellan, 177 S.W.3d 807, 809 (Ky. 2005) (“[A] court may refuse to
enforce a contract on grounds of illegality where the contract has a direct objective or
purpose that violates the federal or state Constitution, a statute, an ordinance, or the
common law.”) (citing Zeitz v. Foley, 264 S.W.2d 267, 268 (Ky. 1954)); Giuliani v.
Guiler, 951 S.W.2d 318, 321 (Ky. 1997) (“In the absence of a legislative decree, courts
may adopt and apply public policy principles . . . .”) (citing Owens v. Clemons,
408 S.W.2d 642 (Ky. 1966)). The Restatement (Second) of Contracts section 178
further supports this proposition by stating that a term is unenforceable as against public
policy “if legislation provides it is unenforceable or the interest in its enforcement is
clearly outweighed in the circumstances by a public policy against enforcement of such
terms.” Restatement (Second) of Contracts § 178 (1981). The Restatement’s comments
define legislation “in the broadest sense to include any fixed text enacted by a body with
No. 12-5729 Martello v. Santana, et al. Page 7
authority to promulgate rules, including not only statutes, but constitutions and local
ordinances, as well as administrative regulations issued pursuant to them.” Id.
The Kentucky bar is a mandatory unified bar and the Kentucky Rules of
Professional Conduct are public policy set by the Kentucky Supreme Court. Ex parte
Auditor of Pub. Accounts, 609 S.W.2d 682, 689 (Ky. 1980). These attorney standards
are not created only “for the private benefit of the legal community.” Id. (noting the
Kentucky Bar Association’s mission is to maintain “a high standard of professional
competence” and help promote improvement of the judicial system); Kentucky Bar Ass’n
v. Chesley, 2011-SC-000382-KB, 2013 WL 1197510 (Ky. Mar. 21, 2013). The
Kentucky Rules of Professional Conduct require lawyers to meet many ethical standards
to ensure they properly represent their clients, the public. SCR 3.130 (preamble). Under
Kentucky Rule of Professional Conduct 5.4 “[a] lawyer or law firm shall not share legal
fees with a nonlawyer . . . .” Id. at 3.130-5.4 (professional independence). Here,
Martello was not an attorney at any point during her work with Santana. She has a law
degree, but has never been admitted to any state’s bar. Thus, the fee-sharing contracts
violate Rule 5.4.
Martello tries to argue that she fell into Rule 5.4(a)(3)’s exception for non-lawyer
employees. Id. at 3.130-5.4(a)(3) (“[A] lawyer or law firm may include nonlawyer
employees in a compensation or retirement plan, even though the plan is based in whole
or in part on a profit-sharing arrangement . . . .”). Here, there is no evidence that Santana
employed Martello; rather, it appears that Santana contracted with Martello as an
independent consultant or contractor during the entirety of their business relationship.
Martello tries to support her argument by relying on Kentucky Bar Association
Ethics Opinion 394, an opinion released in response to the American Bar Association’s
formal opinion 87-354. The ABA’s opinion considers situations where a client asks a
lawyer to use a particular consultant who contracts on a contingent-fee basis, or where
a consultant employs a lawyer and supplies that lawyer with expert witnesses. ABA
Comm. On Ethics & Prof’l Responsibility, Formal op. 353 (1987). The ABA concluded
that those specific situations would violate the model rules. Id. Here, however, neither
No. 12-5729 Martello v. Santana, et al. Page 8
of those situations are before us, and so Opinion 394 is not directly on point. In
answering the question of whether a lawyer may knowingly present testimony of an
expert witness who is being compensated on a contingent fee basis, the Kentucky Ethics
opinion answers: “No in cases where the support services include the provision of expert
witness testimony or in arrangements that involve the splitting of legal fees with a
nonlawyer.” KBA Ethics op. 394 (1996). Even if the opinion applies to Martello, it is
to her detriment, because this Court considers her relationship with Santana to be a
“splitting of legal fees with a nonlawyer.” Id.
Martello asserts that voiding these contracts would create a windfall for Santana
at Martello’s expense. This argument, while possibly true, is unpersuasive. The Rules
of Professional Conduct were not created to protect non-lawyers who enter into contracts
with attorneys, but were instead designed to ensure both that the judicial process is
ethical and to protect potential clients. Furthermore, Martello was aware of these ethics
rules, both because of her having taken and passed the Multistate Professional
Responsibility Examination, and because of Santana’s letter to her as of March 31, 1997.
IV.
Martello argues that the district court erred in finding that her fraud and
fraudulent concealment claims were time-barred. State law determines the length of the
statute of limitations. Winnett v. Caterpillar, Inc., 609 F.3d 404, 408–09 (6th Cir. 2010).
In Kentucky, an action for relief or damages for fraud must be commenced within five
years of the cause of action accruing. Ky. Rev. Stat. Ann. § 413.120 (West 2013).
Although Kentucky law sets the length of the statute of limitations, federal law
establishes the date that the statute of limitations begins to run. Winnett, 609 F.3d at
408–09. Here, the statute of limitations began to run in federal and state court upon
discovery of the fraud or when the plaintiff, through the exercise of reasonable diligence,
should have discovered the fraud. Id. (citing Noble v. Chrysler Motors Corp., 32 F.3d
997, 1000 (6th Cir. 1994)) (the statute of limitations begins to run “when the claimant
discovers or in the exercise of reasonable diligence should have discovered the acts
constituting the alleged violation”).
No. 12-5729 Martello v. Santana, et al. Page 9
The district court found that Martello should have had reason to investigate
Santana’s payments, excluding the last Tinker payment, by August 1999, making her
claims time-barred. Martello disagrees, arguing that the district court ruled entirely on
disputed facts and did not consider the tolling agreement. We, however, agree with the
district court’s analysis.
For the Howard/Lee contract, Martello alleges Santana should have paid her
$40,000 but that Santana fraudulently reduced her fee by claiming that there were
additional attorney costs. Martello says she did not discover this fraud until 2005 and
thus her claim is not barred. We do not agree. Santana paid Martello a sum of
$36,150.56 on June 17, 1997. By this time, Martello had received the letter from
Santana discussing the ethics issues, thus alerting her to potential problems with her fee.
Furthermore, in Martello’s complaint and briefs she states that, after Santana sent the
letter, he told her to make up hours to have her hourly payment equal the previously
agreed-upon contingency fee amount. This falsification should have made Martello
question Santana’s moral fortitude and the legality of the agreement. The district court
found she should have been diligent in seeking payment. There was enough wrong with
the contract and the way Santana dealt with the contract to require more investigation
after she received the 1997 payment for her work in the Howard/Lee case.
Even if the circumstances surrounding the Howard/Lee case did not make
Martello aware of potential fraud in 1997, she should have become suspicious by the
time she received payment for the Davis case. In August 1999, Martello received $5,000
for her work and alleges that when she asked Santana about the settlement he told her
there was a “gag order” for the settlement preventing her from knowing whether
Santana’s representations were untrue. Martello tries to argue there are disputed issues
of fact because she says that Santana said there was a gag order, while Santana denies
calling it a gag order but says he told her there was a confidentiality agreement in place.
Martello’s arguments are not persuasive. Regardless of whether Santana said “gag
order” or “confidentiality agreement,” it is not an excuse for failing to investigate
whether he was faithful to the agreement. Martello knew, or should have known, that
No. 12-5729 Martello v. Santana, et al. Page 10
there were ethical issues surrounding their contingency fee agreement and that Santana
had recommended she fabricate her hours in the Howard/Lee case. When Santana
provided her with $5,000 and no explanation of how he computed the sum, it is likely
that a reasonably diligent person would have taken actions to ensure proper payment.
Martello could have hired an attorney to help her navigate the situation. She was not
totally helpless and did not need to rely entirely on Santana’s words. If Martello should
have discovered the fraud by August 1999, then the latest date Martello could have
brought the case would have been August 2004. The claims are time-barred.
The same analysis applies to the Tinker case. Martello received her first payment
of $17,600 in December 1998. By this time, Martello should have inquired as to how
Santana computed the payments, particularly given that this contract was an allegedly
oral contract for a contingency payment and was entered into after having received
Santana’s letter on the ethical issues. Furthermore, by December 1998, Martello had
allegedly fabricated bills at Santana’s request and had also received payments without
any proof that the payments were proper. Martello should have diligently investigated
soon after the December 1998 payment and thus, the claim is time-barred. The same
analysis applies to the second Tinker payment in August 2000 of $10,000. We agree
with the district court that, by this point, Martello should have discovered the fraud. The
claim for this payment is time-barred as well.
Martello argues that Santana’s fraudulent concealment of the settlement
payments tolled her statute of limitations. She relies on Kentucky Revised Statute
section 413.190(2), which tolls the statute of limitations if the defendant absconds or
conceals “or by any other indirect means obstructs the prosecution of the action.” Ky.
Rev. Stat. Ann. § 413.190(2) (West 2013). However, a plaintiff must also show
evidence of due diligence to bring a successful fraudulent-concealment claim. Hoover
v. Langston Equip. Assocs., Inc., 958 F.2d 742, 745 n.1 (6th Cir. 1992) (quoting Dayco
Corp. v. Goodyear Tire & Rubber Co., 523 F.2d 389, 394 (6th Cir. 1975)). Martello has
not shown due diligence here.
No. 12-5729 Martello v. Santana, et al. Page 11
Martello also contests the district court’s holding that her breach of contract
claims are time-barred. It is not necessary to consider this argument because Martello’s
breach of contract claims are void as against public policy.
V.
For the reasons above, we AFFIRM the district court’s judgment.