Bertelsen v. Harris ( 2008 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
JEFFREY P. BERTELSEN; AMY L. 
BERTELSEN, husband and wife and
the marital community comprised
thereof; BERTELSEN FOOD GAS,
INC., a Washington corporation;
RICHARD BERTELSEN; JANIS JO
BERTELSEN, husband and wife and
the marital community comprised No. 06-36020
thereof,
Plaintiffs-Appellants,  D.C. No.
CV-04-05135-LRS
v. OPINION
ROGER K. HARRIS; ROGER K.
HARRIS PC, an Oregon
professional services corporation;
HARRIS BERNE CHRISTENSEN LLP,
an Oregon limited liability
partnership,
Defendants-Appellees.

Appeal from the United States District Court
for the Eastern District of Washington
Lonny R. Suko, District Judge, Presiding
Argued and Submitted
April 10, 2008—Seattle, Washington
Filed August 11, 2008
Before: Carlos T. Bea and Milan D. Smith, Jr.,
Circuit Judges, and Joseph M. Hood,* Senior District Judge.
*The Honorable Joseph M. Hood, Senior United States District Judge
for the Eastern District of Kentucky, sitting by designation.
10249
10250 BERTELSEN v. HARRIS
Opinion by Judge Bea;
Dissent by Judge Milan D. Smith, Jr.
BERTELSEN v. HARRIS 10253
COUNSEL
Robert B. Gould, Brian J. Waid, Law Offices of Robert B.
Gould, Seattle, Washington, for the appellants.
Patrick N. Rothwell, Davis Rothwell Earle & Xóchihua, Seat-
tle, Washington, for the appellees.
OPINION
BEA, Circuit Judge:
We are called on to decide whether attorney misconduct
towards clients, involving violations of rules of professional
conduct binding on the attorney, requires forfeiture of the
attorneys’ fees paid to them when, after all righteous furor is
vented, the fees were eminently reasonable for the result pro-
duced.
10254 BERTELSEN v. HARRIS
Jeffrey and Amy Bertelsen, their now-defunct company
Bertelsen Food & Gas, Inc., and Jeffrey Bertelsen’s parents
Dr. Richard and Janice Jo Bertelsen (“Appellants”), appeal
the district court’s judgment after a bench trial in favor of
Appellants’ former attorney Roger Harris and his law firm
(“Appellees”) on Appellants’ breach of fiduciary duty claims.
Appellants claimed Harris and his firm (1) violated Wash-
ington Rule of Professional Conduct (“RPC”) § 5.4(a) by
agreeing to share legal fees with a nonlawyer; (2) failed to
comply with Washington law when they modified their legal
fee agreements during the course of representation;
(3) overcharged Appellants by miscalculating their contin-
gency fee and failed to comply with RPC § 1.5(c)(3)’s
requirement that at the conclusion of a contingency fee mat-
ter, the attorney provide his client with a written statement
showing the method of contingency fee calculation; and
(4) failed fully to inform Appellants of conflicts of interest in
their joint representation and obtain written waivers of the
conflicts.
Appellants sought disgorgement of $167,500 in fees they
paid Harris, his firm, and Harris’s non-attorney consultant.
The district court determined that, even assuming Harris and
his firm breached the fiduciary duties to their clients imposed
by the rules of professional conduct for attorneys, the circum-
stances of this case did not warrant an equitable award of dis-
gorgement of fees.
This case does not call upon us to determine whether
Appellees breached their fiduciary duty to their clients as a
matter of Washington state law. Nor is this occasion to
express opprobrium at an attorney’s failure to abide by the
rules of professional responsibility in representing his clients.
Rather, our task is a limited one: we must decide whether the
district court abused its discretion when it declined to award
disgorgement of fees. We hold there was no abuse of discre-
tion.
BERTELSEN v. HARRIS 10255
I.
In the 1990s, Jeffrey and Amy Bertelsen owned six gas sta-
tions, which they operated through the now-dissolved Bertel-
sen Food and Gas, Inc. (“BFG”), a Washington corporation.
BFG operated the gas stations under the ARCO brand. BFG
ceased operations in December 2000, because it had no
money to pay ARCO for gasoline or to pay other vendors for
other products. On January 3, 2001, ARCO sent BFG a “no-
tice of termination.” The notice stated ARCO’s intent to ter-
minate its franchise agreements with BFG in 90 days (on
April 9, 2001).
Jeffrey and Amy Bertelsen retained attorney Bill Hames for
advice on filing for bankruptcy for the Bertelsens individually
and for BFG. Hames advised the Bertelsens to speak with an
attorney with experience in the gas franchise industry. In lieu
of immediately filing for bankruptcy, Hames and Jeffrey Ber-
telsen contacted Roger Harris, an Oregon attorney who had
gas franchise industry experience.1 Jeffrey Bertelsen sought
Harris’s assistance to try to resurrect BFG’s relationship with
ARCO, so BFG could get gas from ARCO again and continue
to use the ARCO brand name. On March 16, 2001, Hames
called Harris to discuss BFG and the ARCO termination
notice. On March 19, 2001, Harris contacted Ronald McPher-
son, a non-attorney client of Harris who has expertise in the
gasoline franchise industry, and asked him to consult on the
BFG matter.
A. The March 21, 2001 Retainer Agreement
In March 2001, Jeffrey and Amy Bertelsen signed a
retainer agreement (“the March 2001 agreement”) with Harris
and his firm, Harris Berne Christensen LLP. The agreement
1
Although Harris was licensed in Oregon, the parties do not dispute the
Washington Rules of Professional Conduct apply to him and Appellants’
action is governed by Washington law.
10256 BERTELSEN v. HARRIS
stated the Bertelsens, for and on behalf of BFG, retained Har-
ris and his firm “as attorneys for the purpose of representing
and handling any and all legal matters on behalf of [BFG]
which may, from time to time, be requested. You have specif-
ically requested that we work to negotiate a resolution of the
ARCO franchise terminations and related issues.” The agree-
ment also stated BFG would pay the firm on an hourly basis,
at its rates of $150-$195/hour for attorneys. The agreement
also required BFG to pay a $10,000 retainer, which the Ber-
telsens paid on or about April 23, 2001.
Jeffrey and Amy Bertelsen received detailed bills describ-
ing services rendered between March 2001 and May 2001,
with a breakdown of time spent and hourly rates, from Har-
ris’s firm. They paid these bills without objection (nor do they
claim any breach of fiduciary duty with respect to those bills).
During Spring 2001, it became clear ARCO had no interest
in continuing a business relationship with BFG and did not
intend to rescind the notice of termination. Indeed, ARCO
filed an action against BFG in August 2001 for money due
under loan agreements with BFG. The Bertelsens decided
they would try to sell the six gas stations as a business solu-
tion, to avoid bankruptcy. In May 2001, Jeffrey and Amy Ber-
telsen asked Harris and McPherson (the non-attorney industry
consultant) to seek a buyer for the stations.
B. The May 29, 2001 Corporate Resolution
By May 2001, however, Jeffrey and Amy Bertelsen did not
have money to pay hourly attorney or consulting fees. They
asked Harris and McPherson if they would work on a contin-
gency fee basis; Harris and McPherson agreed.
Harris then drafted a “Terms of Engagement pursuant to
Corporate Resolution (Authorization) and Limited Power of
Attorney,” which Jeffrey and Amy Bertelsen signed on May
29, 2001 on behalf of BFG. The resolution stated BFG
BERTELSEN v. HARRIS 10257
retained “the services of” McPherson and Harris for 90 days
(i.e., expiring August 27, 2001). The resolution further stated
“Harris and McPherson will be reimbursed for their services
associated with the undertaking . . . at the rate of 1% of the
gross value of any transaction(s) entered into with third par-
ties plus full reimbursement of all out-of-pocket expenses
incurred by Harris and McPherson.” The resolution also
stated the Bertelsens could terminate the agreement, and Har-
ris and McPherson would be entitled to compensation for
work performed at their hourly rates of $195 and $150,
respectively. Harris and McPherson agreed to split the contin-
gency fee evenly between themselves (“50/50”).2
C. The September 19, 2001 Corporate Resolution
During the 90-day term of the May 2001 corporate resolu-
tion, no buyer for the gas stations was found. As early as July
2001, however, Tesoro Petroleum had expressed interest in
doing a deal with BFG, but no offer had come to fruition. At
the time of the expiration of the May 2001 corporate resolu-
tion on August 27, 2001, Jeffrey and Amy Bertelsen wanted
to sign a new contingency fee agreement with Harris and
McPherson to continue to try to sell the gas stations. Harris
discussed with Jeffrey and Amy Bertelsen the fact the new
agreement would be based on a 1.5% contingency (up from
1%).
On September 19, 2001, Jeffrey and Amy Bertelsen, on
behalf of BFG, signed a revised corporate resolution and lim-
ited power of attorney. The term of the agreement was for one
year and stated Harris and McPherson would receive “1.5%
of the gross value of any transaction(s) entered into with third
2
The corporate resolution did not state Harris and McPherson would
split the contingency fee. Harris, however, testified he told the Bertelsens
of the 50/50 arrangement and the Bertelsens agreed to it. The record does
not state whether the Bertelsens admitted they were aware of the 50/50
arrangement, and the district court did not make a finding on that point.
10258 BERTELSEN v. HARRIS
parties plus full reimbursement of all out-of-pocket
expenses.” Like the May 2001 corporate resolution, the Sep-
tember 2001 corporate resolution stated the Bertelsens could
terminate the agreement and Harris and McPherson would be
entitled to compensation at their hourly rates of $195 and
$150, respectively.
D. The Tesoro Transaction
At some point, Tesoro agreed to enter into a lease/option to
buy agreement with BFG. On September 20, 2001 (the day
after the Bertelsens signed the September 2001 corporate res-
olution), Harris faxed to Tesoro executed signature pages of
the “Tesoro/Bertelsen Agreement to Lease.”3 Tesoro agreed to
lease BFG’s six gas stations for ten years, for more than
$60,000 per month.4 It also paid $1 million for an option to
purchase the gas stations for $8.5 million. Tesoro never exer-
cised the option.
The transaction closed on October 31, 2001. Harris deter-
mined the contingency fee under the agreement would be
$142,500, which he calculated by taking 1.5% of $9.5 million
—the $1 million Tesoro paid for the option plus the $8.5 mil-
lion option price (even though Tesoro never exercised the
option). Jeffrey and Amy Bertelsen received correspondence
from Harris prior to the October 31, 2001 closing that showed
this $142,500 contingency fee. At the October 31, 2001 clos-
ing, Jeffrey and Amy Bertelsen did not object to the fee. The
3
Also on September 20, 2001, Harris faxed McPherson a cover sheet
stating: “Hallelujah! Please find attached the signed Power of Attorney
and corporate resolution authorizing our work. I will move ahead and exe-
cute the Tesoro documents.”
4
This is according to the district court’s findings of fact. An executed
copy of the lease agreement is not in the record before this court. Instead,
the parties have included a September 15, 2001 draft of the agreement;
according to that draft, the lease was a triple net lease, with a fixed annual
rate of $722,500 for years 1 through 5, increased by 10% to $794,750
annually for years 6 through 10.
BERTELSEN v. HARRIS 10259
Bertelsens do not claim they were afraid the Tesoro transac-
tion would not go forward if they did not agree to the contin-
gency fee or if they had not agreed to the terms of either of
the May or September 2001 corporate resolutions.
The invoice Harris’s firm sent to BFG described the ser-
vices billed as “Services rendered from June 1, 2001 through
October 31, 2001 pursuant to that Limited Power of Attorney
and Terms of Engagement as revised and extended, including
services rendered by consultant, Ron McPherson.” The space
under the heading on the invoice for “Hours” was blank.
Under “Amount,” the invoice simply stated “$142,500.” The
invoice did not explain how the amount of the contingency
fee was calculated; nevertheless, the Bertelsens paid the fee.
Harris’s firm paid McPherson $70,000 as his part of the
fee. Harris received $72,500. Jeffrey Bertelsen testified he
“did not feel that Mr. McPherson did anything improper and
that Mr. McPherson earned his $70,000 of this $142,500 pay-
ment.”5
Written records showing the exact number of hours Harris
spent on marketing and putting together the gas station trans-
action no longer exist. Harris testified he recalled that, during
the period from May 29, 2001 to October 31, 2001, he spent
approximately 400 hours on the matter. Based on his hourly
rate of $195, his fee on an hourly basis would have been at
least $78,000—more than his half of the contingency fee.
E. The ARCO Litigation
On August 10, 2001, ARCO filed an action in Washington
state court against BFG, Jeffrey and Amy Bertelsen, and Dr.
and Mrs. Bertelsen (Jeffrey Bertelsen’s parents). ARCO
claimed the Bertelsens and BFG defaulted on loan agree-
5
Nevertheless, Appellants seek to recover the entire $142,500 fee from
Harris and his firm in this action.
10260 BERTELSEN v. HARRIS
ments. ARCO further claimed the loans were personally guar-
anteed by Jeffrey and Amy Bertelsen, as well as by Dr. and
Mrs. Bertelsen. At the time the action was filed, none of the
Bertelsens recalled Dr. and Mrs. Bertelsen as having person-
ally guaranteed the loans.
Dr. Bertelsen knew Harris was representing his son in the
ARCO lawsuit. After he was served with ARCO’s complaint,
Dr. Bertelsen contacted Harris and set up a meeting in Sep-
tember 2001. Prior to the meeting, Harris sent a letter dated
August 30, 2001, to Dr. and Mrs. Bertelsen enclosing docu-
ments that ARCO’s counsel provided to Harris that “pur-
port[ed] to be” personal guarantee agreements signed by Dr.
and Mrs. Bertelsen. Harris stated he had “some question about
the validity of these signatures.”
At the September 2001 meeting, Harris “discussed potential
conflicts that could arise in representing all the Bertelsens and
suggested to Dr. and Mrs. Bertelsen that they confer with their
own counsel to evaluate whether they should be separately
represented.” During the meeting, Harris explained “the pos-
sible conflict that might arise in the future if the Bertelsen
family clients did not agree upon a trial strategy or began ‘fin-
ger pointing’ at one another.” Harris did not recall whether he
discussed with the Bertelsens the potential conflict of interest
between Dr. and Mrs. Bertelsen as guarantors, and Jeffrey and
Amy Bertelsen as debtors.
After the meeting, Harris sent Dr. and Mrs. Bertelsen a let-
ter dated September 7, 2001, to “confirm[ ] the substance” of
their meeting. Harris noted his firm had been retained to
defend the interests of Dr. and Mrs. Bertelsen, as well as Jef-
frey and Amy Bertelsen and BFG. He further stated: “We
understand those interests to be, in large part, identical and I
understand that you have waived any conflict that may arise.
At this point in time I am not aware of any such conflict, and
have so informed you.”
BERTELSEN v. HARRIS 10261
The letter enclosed the firm’s retainer agreement, which Dr.
and Mrs. Bertelsen signed and returned.
F. The October 23, 2001 Waiver
On October 22, 2001, Harris sent another letter to Dr. and
Mrs. Bertelsen. In the letter, Harris stated: “We are agreed,
following extended discussion and full disclosure, that there
is no conflict of interest and that all parties will proceed in an
effort to fully defend against the allegations and the claims
made by ARCO and will assert all affirmative defenses, off-
sets, discounts and counterclaims that might be available to
any and all parties in that litigation.”6 The Harris letter also
noted Dr. and Mrs. Bertelsen agreed to assume the obligation
of paying for the litigation, because Jeffrey and Amy Bertel-
sen and BFG lacked the resources to do so.
The Harris letter then discussed the Tesoro transaction and
a potential conflict of interest created by requirements Tesoro
was imposing. Tesoro required Dr. and Mrs. Bertelsen to
reconvey the deeds of trust they had against the six gas station
properties to reduce the amount of debt of record. Tesoro also
required Dr. and Mrs. Bertelsen, along with all secured lend-
ers, to execute a Non-Disturbance and Attornment Agree-
ment. The Harris letter explained:
These requirements, imposed by Tesoro, . . . create
a potential conflict of interest between our represen-
tation of Jeff and Amy Bertelsen and [BFG] and you
[i.e., Dr. and Mrs. Bertelsen] in connection with the
proposed transaction. Jeff and Amy Bertelsen and
[BFG] desire that you execute the deeds of recon-
6
The letter also stated: “We have agreed that we will vigorously contest
this matter working initially to extricate you from the lawsuit and ensure
that if any liability is incurred, it will be primarily, if not exclusively,
borne by Jeff and Amy Bertelsen and [BFG]. Jeff and Amy Bertelsen have
agreed to this approach and litigation strategy.”
10262 BERTELSEN v. HARRIS
veyance and Non-Disturbance Agreement, pursuant
to Tesoro’s Agreement to Lease.[7] Therefore, we
recommend that you seek new and separate legal
counsel with respect to this matter in order to deter-
mine your rights, remedies and obligations under the
proposed transaction with Tesoro.
In consideration for Dr. and Mrs. Bertelsen’s compliance with
Tesoro’s requirements, Jeffrey and Amy Bertelsen agreed,
among other things, to assume all defense costs in connection
with the ongoing ARCO litigation against all Bertelsens,
indemnify Dr. and Mrs. Bertelsen against any judgment
against them by ARCO, and assume payments on a loan
secured by Dr. Bertelsen.
Finally, in the letter, Harris stated that, if Dr. and Mrs. Ber-
telsen chose to proceed to discuss the matter with him without
the benefit of new legal counsel, he required them to sign an
attached waiver. The waiver stated: “We, separately and as
husband and wife, hereby waive any and all conflict of inter-
est as to the representation of Harris Berne Christensen LLP
for and in connection with the proposed transaction under the
Agreement to Lease, by and between Tesoro West Coast
Petroleum Company and Jeff and Amy Bertelsen and [BFG].”
Dr. and Mrs. Bertelsen signed the waiver on October 23,
2001, and did not seek independent counsel. Jeffrey and Amy
Bertelsen were not asked to sign this conflict waiver.
7
In other words, Dr. and Mrs. Bertelsen had to give up their secured sta-
tus by reconveying their title (held as security), as well as agree to keep
in place the lease agreement between BFG and Tesoro, should ownership
of the gas stations eventually fall into Dr. and Mrs. Bertelsen’s hands. The
letter noted this would create a potential conflict of interest for Harris, rep-
resenting Jeffrey and Amy Bertelsen on the one hand, who want the deal
to go forward, and Dr. and Mrs. Bertelsen on the other hand, who would
have to give up their security interests in the real property.
BERTELSEN v. HARRIS 10263
G. The October 29, 2001 Letter
On October 29, 2001, Harris sent a letter to Jeffrey and
Amy Bertelsen, and Dr. and Mrs. Bertelsen. The letter “sum-
marize[d], describe[d] and memorialize[d] [the parties’] reso-
lution and understanding of the disposition of the various
debts, liens against real property and financing of the ongoing
litigation with ARCO,” and stated the parties “ac-
knowledge[d] the rights and obligations” pursuant to the
Tesoro Lease Agreement. The letter set forth the agreement
among the Bertelsens under the terms of the October 23, 2001
waiver letter.
The final paragraph of the letter stated: “I ask that each of
you review this document and if consistent with your under-
standing of the arrangements made, please execute as shown
below . . . You have been previously advised and it is again
recommended that you seek separate legal counsel in connec-
tion with this matter in order to be fully advised with respect
to your rights, remedies and obligations herein.” On October
30, 2001, Dr. and Mrs. Bertelsen signed the agreement; on
October 31, 2001, Jeffrey and Amy Bertelsen signed the
agreement. The document does not discuss any potential or
actual conflict of interest created by Harris’s representation of
the parties in entering into the terms of the agreement outlined
in the letter.
Throughout the ARCO litigation, neither Jeffrey Bertelsen
nor Dr. Bertelsen thought Harris failed to render effective
legal representation or behaved in any manner detrimental to
any of the Bertelsens because of Harris’s joint representation
of them. No party challenged the amount of fees and costs
billed in the invoices Harris sent to the Bertelsens. Dr. and
Mrs. Bertelsen paid a total of $80,000 in fees and costs to
Harris for the ARCO litigation, $35,000 of which Jeffrey and
Amy Bertelsen reimbursed to Dr. and Mrs. Bertelsen. Dr. and
Mrs. Bertelsen seek disgorgement of the remaining $45,000
from Appellees in the instant action.
10264 BERTELSEN v. HARRIS
Events in September and October 2002 led Harris to con-
clude he must withdraw from representing all the Bertelsens.
First, in September 2002, Amy Bertelsen told Harris that Jef-
frey Bertelsen had paid a vendor a $3,000 “kickback” for gen-
erating a false invoice, which Jeffrey Bertelsen somehow used
to obtain approximately $178,000 of funding from ARCO for
work he never intended to be done.8 Then, in October 2002,
during settlement negotiations with ARCO, the Bertelsens
began taking conflicting positions with respect to settlement.
Jeffrey and Amy Bertelsen claimed they had no cash to con-
tribute to a settlement with ARCO, while Dr. Bertelsen was
not willing to contribute enough money out of his own pocket
to fund the settlement. Further, Amy Bertelsen wanted to be
relieved of the indemnity agreements Jeffrey Bertelsen and
she had signed indemnifying Dr. and Mrs. Bertelsen for any
losses which their guarantees might occasion.
After these events, Harris—after consultation with the Ore-
gon State Bar Association and ethics counsel—decided he
must withdraw as counsel as to all four of the Bertelsens, and
so informed them. Harris advised the Bertelsens to seek new
counsel. Ultimately, all four Bertelsens settled with ARCO—
Jeffrey Bertelsen dealt directly with ARCO, while Dr. Bertel-
sen retained an attorney to review the Bertelsen-ARCO settle-
ment agreement. Pursuant to the settlement agreement, Dr.
and Mrs. Bertelsen paid ARCO $225,000, while Jeffrey and
Amy paid ARCO $550,000.9
8
Neither the district court decision nor the record explains the details of
the alleged kickback scheme. The district court made no finding whether
Jeffrey Bertelsen in fact engaged in such a scheme, only that Amy Bertel-
sen told Harris that Jeffrey Bertelsen had engaged in such a scheme and
that Jeffrey Bertelsen did not deny he did so.
9
In its complaint ARCO sought $2,015,232 plus interest from the Ber-
telsens jointly and severally.
BERTELSEN v. HARRIS 10265
II.
On December 20, 2004, Appellants filed a complaint
against Harris and his law firm in federal district court invok-
ing diversity of citizenship jurisdiction. Appellants claimed
Appellees breached their fiduciary duties when they violated
various sections of the Washington Rules of Professional
Conduct (“RPC”).10 Appellants sought disgorgement of attor-
neys’ fees paid to Harris, plus interest and their own attor-
neys’ fees.
After a five-day bench trial, the district court entered judg-
ment in Appellee attorneys’ favor and dismissed Appellants’
claims. The court issued an oral ruling, which it then supple-
mented with Findings of Fact and Conclusions of Law. The
court found as follows.
A. Claims relating to the May and September 2001
“Corporate Resolutions”/Contingency Fee Agreement
1. Unlawful fee-splitting
Appellants claim Harris and his firm breached their fidu-
ciary duty by entering into the May and September 2001 “cor-
porate resolutions” under which Harris and McPherson would
share the contingency fee. They claim the agreement violated
RPC § 5.4(a), which prohibits a lawyer or law firm from shar-
ing legal fees with a nonlawyer.11 The district court made no
finding as to whether the May and September 2001 agree-
ments violated RPC § 5.4(a).
10
Appellants also alleged Appellees violated the Washington Consumer
Protection Act, Wash. Rev. Code § 19.86.020 et seq., and committed legal
malpractice. The district court entered judgment in Appellee attorneys’
favor on those claims; Appellants have abandoned those claims on appeal.
11
RPC § 5.4 provides various exceptions to this rule; no party contends
any of these exceptions apply here.
10266 BERTELSEN v. HARRIS
2. Improper modification of the fee agreement
Appellants also claimed the May 2001 corporate resolution,
which provided for a 1% contingency fee, was a modification
of the hourly fee agreement in the March 2001 retainer agree-
ment, and this modification did not comply with Washington
law.12 The district court found the May 2001 corporate resolu-
tion was not a modification of the fee agreement in the March
2001 hourly retainer agreement.13 The court further held even
if either the May or the September 2001 corporate resolutions
modified the March 2001 hourly fee agreement, Harris did not
breach his fiduciary duty by modifying the agreement to pro-
vide for a contingency fee; the agreements complied with
Washington law because they were “fair and reasonable,
made after full disclosure and free of undue influence based
on the standards set out in Ward v. Richards & Rossano, Inc.”
3. Contingency fee over-charge and failure to set forth
the method for calculating the fee
Appellants also claimed Harris over-charged them under
the September 2001 corporate resolution, by calculating the
1.5% fee based in part on the price of Tesoro’s option to pur-
12
Under Washington law, when an attorney’s fee agreement is renegoti-
ated after the attorney-client relationship is established, the fee modifica-
tion is “void or voidable until the attorney establishes that the contract
with his client was fair and reasonable, free from undue influence, and
made after a fair and full disclosure of the facts upon which it is predicat-
ed.” Ward v. Richards & Rossano, Inc., 754 P.2d 120, 124 (Wash. Ct.
App. 1988) (internal quotation marks and citation omitted).
13
Specifically, the district court found the May 2001 corporate resolu-
tion and the March 2001 retainer agreement were separate agreements: the
March hourly retainer dealt with Harris’s “work in trying to resurrect the
Bertelsen[s’] business relationship with ARCO. The May [2001] corporate
resolution dealt with the potential sale of the six gas stations through the
efforts of Mr. Harris and Mr. McPherson.” The district court also held the
subsequent September 2001 corporate resolution was not a modification
of the May 2001 corporate resolution, because the May 2001 resolution
had expired by its own terms.
BERTELSEN v. HARRIS 10267
chase the stations, which it had not exercised.14 The district
court made no findings as to this claim. It also made no find-
ings as to Appellants’ claim that Harris breached his fiduciary
duty by violating RPC § 1.5(c)(3), which requires “[u]pon
conclusion of a contingent fee matter, the lawyer shall provide
the client with a written statement stating the outcome of the
matter and, if there is a recovery, showing the remittance to
the client and the method of its determination.”
The district court held, even if Jeffrey and Amy Bertelsen
had a valid breach of fiduciary duty claim as to the May and
September 2001 corporate resolutions, the claim was barred
by Washington’s three-year statute of limitations for such
actions, because the Bertelsens did not file their action until
December 2004.
B. Conflict of Interest
Appellants also claim Harris and his firm breached their
fiduciary duty by failing fully to advise Appellants of poten-
tial conflicts of interest and to obtain written waivers of the
conflicts during the ARCO litigation. The district court found
no breach of fiduciary duty. The district court held Appellants
waived the conflict of interest at the outset of the ARCO liti-
gation, Harris “continually” advised Appellants to seek inde-
pendent counsel, and Harris did not favor one client over
another during the ARCO litigation.
14
Appellants contend Harris thus breached his fiduciary duty by violat-
ing RPC § 1.5(c)(4): “A contingent fee consisting of a percentage of the
monetary amount recovered for a claimant, in which all or part of the
recovery is to be paid in the future, shall be paid only (i) by applying the
percentage to the amounts recovered as they are received by the client; or
(ii) by applying the percentage to the actual cost of the settlement or award
to the defendant.” (emphasis added).
10268 BERTELSEN v. HARRIS
C. Disgorgement
Most importantly for this appeal, the district court held:
“Assuming for the sake of argument that all of plaintiffs’
assertions concerning violations of RPCs are true, this judicial
officer cannot conclude that the conduct of Harris and his firm
was so egregious as to justify disgorgement of fees paid.” The
court noted “the consulting arrangement with McPherson
could easily have been provided in a separate document.”
Moreover, while Appellants “understandably” took issue with
the fees paid in the Tesoro transaction “since they were based
on an option that was never exercised, this judicial officer
infers that the fee was ultimately reasonable, given the testi-
mony of all concerned, and specifically the fees paid to
McPherson, the description of the services provided and the
result achieved.” Finally, the court stated it did “not find that
there is sufficient grounds for disgorgement or sufficient equi-
table concerns . . . to justify disgorgement based upon the evi-
dence.”
As to the breach of fiduciary duty claim based on the pur-
ported conflict of interest, the court held disgorgement of fees
was not warranted because “[t]here is no showing that the giv-
ing of independent advice to the plaintiffs at the times mate-
rial to plaintiffs’ claims would have changed the strategic
positions taken by them or the ultimate outcome of either the
Tesoro transaction or the Arco litigation.”
III.
We review the district court’s findings of fact after a bench
trial for clear error and review the district court’s conclusions
of law de novo. Lentini v. Cal. Ctr. for the Arts, Escondido,
370 F.3d 837, 843 (9th Cir. 2004). Whether an attorney’s con-
duct violates a rule of professional conduct is a question of
law. Eriks v. Denver, 824 P.2d 1207, 1211 (Wash. 1992). We
review a trial court’s decision whether to award disgorgement
of fees for an attorney’s breach of his fiduciary duty for abuse
BERTELSEN v. HARRIS 10269
of discretion. See Kelly v. Foster, 813 P.2d 598, 602 (Wash.
Ct. App. 1991).
IV.
The only damages Appellants seek here for their various
claims of breach of fiduciary duty is disgorgement of attor-
neys’ fees paid to Appellees, plus interest and their own attor-
neys’ fees and costs in prosecuting this disgorgement claim.
Note, Appellants do not claim they suffered any injury by the
actions of Harris and his firm, apart from having to pay their
attorneys’ fees. That is, they do not complain Harris and his
firm bungled their extrications from the ARCO contract, nor
that Harris brought about a disadvantageous lease with
Tesoro. Of course, they do not complain about Harris keeping
them out of bankruptcy.
[1] Under Washington law, disgorgement of fees is a rem-
edy committed to the discretion of the trial court: “Disgorge-
ment of fees is a reasonable way to discipline specific
breaches of professional responsibility, and to deter future
misconduct of a similar type. Such an order is within the
inherent power of the trial court to fashion judgments.” Eriks,
824 P.2d at 1213 (internal quotation marks and citation omit-
ted). A court is not required to order disgorgement, even
where a breach of fiduciary duty is proven. See Kelly, 813
P.2d at 602. A court’s refusal to disgorge fees, whether a
breach of fiduciary duty is proven or not, is overturned only
for an abuse of discretion. Id.
The district court explicitly stated, even assuming Appel-
lants had established their breach of fiduciary duty claims, the
court nevertheless would not order disgorgement. In other
words, the district court held, even if its legal conclusions on
the merits of Appellants’ claims were incorrect—as the dis-
sent contends—the court would not order disgorgement on
this set of facts. We hold the district court did not abuse its
discretion in so holding.
10270 BERTELSEN v. HARRIS
Washington state law does not set forth particular factors a
trial court must consider to decide whether to order disgorge-
ment, or factors we must consider to determine whether the
trial court abused its discretion in rendering that decision. We
find Kelly v. Foster, 813 P.2d 598 (Wash. Ct. App. 1991),
instructive. Kelly, the sole beneficiary of her uncle’s estate,
brought an action for breach of fiduciary duty against attorney
Foster, who represented the estate’s executor. Id. at 599. Fos-
ter recommended the estate sell its land to a third party below
market value, but failed to disclose he had an interest in the
land sale; after the sale, the third party sold part of the land
to Foster and his wife. Id. The jury found Foster breached his
fiduciary duty to Kelly and awarded damages of $85,000. Id.
at 600. The trial court denied Kelly’s motion for disgorgement
of fees. Id. The Washington Court of Appeals affirmed. It
held “the trial court did not find factors present in this case
justifying a reimbursement to Kelly of attorney’s fees paid by
the estate. Such a ruling is well within the court’s discretion
and will not be overturned.” Id. at 602.
In contrast to Kelly, Appellants here claim no damages
caused by Appellees’ purported breach of fiduciary duty,
apart from the attorneys’ fees they want reimbursed. Compare
with Cotton v. Kronenberg, 44 P.3d 878 (Wash. Ct. App.
2002) (affirming award of disgorgement of fees in breach of
fiduciary duty action where criminal defense attorney took
title to his client’s real property as his retainer fee, sold the
property, and then refused to refund the unearned balance of
his fees after prosecutors successfully moved to remove the
attorney from representation of the client for having tampered
with a prosecution witness).
[2] As in Kelly, the district court here found the equities did
not justify an award of disgorgement of fees, for several rea-
sons. Foremost, it held the $72,500 contingency fee paid to
Appellees was reasonable for the work done and value of the
Tesoro transaction. This is an eminently reasonable conclu-
sion, given that Harris and McPherson’s work led to a multi-
BERTELSEN v. HARRIS 10271
million dollar rental deal, kept the six gas stations as Bertel-
sen property, and prevented Appellants from having to file for
bankruptcy.15 Indeed, Jeffrey Bertelsen admitted he thought
non-attorney McPherson “earned” his half of the contingency
payment. The district court did not abuse its discretion by
concluding Harris and his firm also “earned” their own half
of the fee. Further, the district court concluded there was no
evidence independent advice would have changed the posi-
tions taken by Appellants or affected the outcome of either the
ARCO litigation or the Tesoro transaction. In the court’s
opinion, Appellees’ alleged misconduct simply did not rise to
the level of conduct that warrants an equitable award of dis-
gorgement of fees.16
There is no basis upon which to find the district court
abused its discretion by refusing to order disgorgement of
fees. Whether the district court made an error of law in its
assessment of the merits of Appellants’ breach of fiduciary
duty claims, as the dissent contends, is of no moment to our
15
We do not establish a rule that an attorney is excused from a breach
of fiduciary duty where his work achieves a “favorable” result. The attor-
ney still is liable for actual damages, if any. Rather, we hold that, under
Washington state law, a trial court does not abuse its discretion when it
considers the result achieved and reasonableness of the fee when deter-
mining whether to award disgorgement of fees. And, contrary to the dis-
sent’s approach, we recognize we cannot substitute our own judgment for
that of the trial court as to what circumstances merit such an award. Our
task is to review the determination of the trial court, to whose sound dis-
cretion the award of disgorgement of fees is committed. “My brother and
I differ on what is the appropriate appellate function. He would retry. I am
content to review.” Li v. Ashcroft, 378 F.3d 959, 964 n.1 (9th Cir. 2004)
(Farris, J.). Here, the determination of the district court not to award dis-
gorgement does not rise to the level of abuse of discretion.
16
Contrary to Appellants’ contention, the district court did not misapply
Washington law by purportedly requiring Appellants to prove Appellees’
conduct caused them harm and to prove such conduct was “egregious.”
Rather, the district court assessed the circumstances of this case and con-
cluded they did not warrant the exercise of its discretion to award disgor-
gement of fees.
10272 BERTELSEN v. HARRIS
determination whether the court abused its discretion as to the
remedy. Remember: In Kelly, there was a finding of breach of
fiduciary duty and damages caused thereby ($85,000), but
there was no disgorgement of fees kept by the errant attorney.
Here, the district court considered the facts and circumstances
of this case and determined they did not warrant a discretion-
ary award of disgorgement of fees. It gave multiple, sound
reasons for doing so. The district court acted within its discre-
tion in refusing to order disgorgement of fees. See Kelly, 813
P.2d at 601.
We acknowledge that disgorgement of attorney’s fees
serves an important goal: “It deters attorney misconduct, a
goal worth furthering regardless of whether a particular client
has been harmed.” Hendry v. Pelland, 73 F.3d 397, 402 (D.C.
Cir. 1996). Similarly, rules of professional conduct serve a
critical role to maintain the integrity of the legal profession
and ensure an attorney abides by his duty as his client’s fidu-
ciary. Of course, nothing herein is meant to excuse Harris for
any breach of his professional duties imposed by Washington
State’s Rules of Professional Conduct, should that State’s Bar
proceed against him for sanctions. See Wash. Rules for
Enforcement of Lawyer Conduct § 1.1 et seq.; In re Gilling-
ham, 896 P.2d 656, 660 (Wash. 1995) (en banc) (“Attorney
misconduct is defined by the RPC, and any violation of the
RPC may be grounds for attorney discipline.”).
[3] But, under Washington law, the award of disgorgement
of fees is not mandatory even where the attorney who got the
fees also violated Washington’s Rules of Professional Con-
duct for attorneys; instead, whether to order disgorgement is
placed firmly within the discretion of the trial court. See
Kelly, 813 P.2d at 601. Here, the district court made a consid-
ered determination that the circumstances did not warrant dis-
gorgement of fees. Whether or not the district court erred in
its assessment of the merits of Appellants’ breach of fiduciary
duty claims—an issue we do not reach—it did not abuse its
BERTELSEN v. HARRIS 10273
discretion when it declined to award disgorgement on this set
of facts. We affirm its judgment on that basis.
AFFIRMED.
MILAN D. SMITH, JR., Circuit Judge, dissenting:
I respectfully dissent. My colleagues in the majority make
light of Appellants’ assertions regarding the conduct of Harris
and his law firm (collectively, Harris), suggesting that
because the economic result achieved was ultimately favor-
able to Appellants, and because the district court is owed dis-
cretion in whether to disgorge attorney’s fees, it is
unnecessary to decide whether Harris breached the Washing-
ton Rules of Professional Conduct (RPC) and his fiduciary
duties. In the words of the majority, “after all righteous furor
is vented, the fees were eminently reasonable for the result
produced.” Maj. Op. at 10253. In my view, Harris’s breaches
of the RPC and his fiduciary duties are plain, and the majori-
ty’s conception of attorneys’ fiduciary duties is the legal
equivalent of holding that a trustee who misappropriates
money from a trust and gambles those funds at the racetrack
is excused from his breach of fiduciary duty, and is entitled
to his trustee fees, so long as he wins enough at the track to
permit him to timely return the misappropriated money to the
corpus of the trust. Washington law does not support such a
legal theory of relativity concerning an attorney’s breach of
his fiduciary duties.
Under Washington law, it is well established that “the
attorney-client relationship is a fiduciary one as a matter of
law and thus the attorney owes the highest duty to the client.”
Perez v. Pappas, 659 P.2d 475, 479 (Wash. 1983) (en banc);
VersusLaw v. Stoel Rives, LLP, 111 P.3d 866, 878 (Wash. Ct.
App. 2005); Kelly v. Foster, 813 P.2d 598, 601 (Wash. Ct.
App. 1991). When acting as a fiduciary, attorneys “have a
10274 BERTELSEN v. HARRIS
duty to act in and for the client’s best interests at all times and
to act in complete honesty and good faith to honor the trust
and confidence placed in them.” Kelly, 813 P.2d at 600-01
(emphasis added).
In affirming the district court, the majority relies on the dis-
trict court’s conclusion that even if all of Appellants’ claims
against Harris were true, Harris’s conduct was not “so egre-
gious as to justify disgorgement of fees paid.” But neither the
majority nor the district court closely examined Appellants’
claims regarding Harris’s violations of his fiduciary duties
and the RPC, matters which this court reviews de novo. See
Eriks v. Denver, 824 P.2d 1207, 1211 (Wash. 1992) (en banc)
(stating that whether an attorney’s conduct violates the rele-
vant rules of professional conduct is a question of law); see
also Lentini v. Cal. Ctr. for the Arts, 370 F.3d 837, 843 (9th
Cir. 2004) (stating that a district court’s conclusions of law
following a bench trial are reviewed de novo).
I agree that the question of whether to disgorge fees is a
matter committed to the discretion of the trial court, and that
even when a breach of fiduciary duty is proven, a trial court
is not necessarily required to order disgorgement. See Kelly,
813 P.2d at 602. However, if an attorney is guilty of gross
misconduct in violation of public policy, the attorney may not
be entitled to any fees. See Ross v. Scannell, 647 P.2d 1004,
1011 (Wash. 1982) (en banc); Kelly, 813 P.2d at 601.
As demonstrated below, Harris violated the RPC and his
fiduciary duties to Appellants in numerous ways, some of
which were egregious. Given the obvious nature of these mul-
tiple violations, some of which the district court did not con-
sider at all, the district court “committed a clear error in
judgment” in concluding that Harris did not violate the RPC
or breach his fiduciary duties such that disgorgement may be
appropriate, and that even if he did so his conduct was not
egregious so as to warrant the disgorgement of fees. See Nat’l
Wildlife Fed’n v. Nat’l Marine Fisheries Serv., 422 F.3d 782,
BERTELSEN v. HARRIS 10275
798 (9th Cir. 2005) (stating that abuse of discretion review
requires the appellate court to uphold a district court’s exer-
cise of discretion unless the court has “a definite and firm
conviction that the district court committed a clear error of
judgment in the conclusion it reached”) (citation and internal
quotations omitted). Instead of affirming the district court,
this court should conclude that the district court abused its
discretion and remand the case to the district court so that it
may consider in the first instance what, if any, remedy is
appropriate in light of Harris’s egregious misconduct.
A review of Appellants’ most persuasive claims reveals
that Harris violated the plain language of the RPC due to the
method by which he calculated the contingency fee, the
invoice’s deficient explanation of how the fee was calculated,
and by representing clients with conflicting interests without
obtaining the requisite written consent.
First, RPC § 1.5(c)(4) provides, in relevant part, that a con-
tingent fee “in which all or part of the recovery is to be paid
in the future, shall be paid only by applying the percentage to
the amounts recovered as they are received by the client.”
(Emphasis added.) When Harris billed Jeffrey and Amy for a
1.5% contingency fee on October 31, 2000, the only money
they had received as a result of their transaction with Tesoro
(or were guaranteed to receive) was $1 million. Yet, Harris
took a $142,500 contingency fee, which was based upon the
sum of the $1 million Jeffrey and Amy were guaranteed to
receive plus an $8.5 million option granted to Tesoro, even
though the $8.5 million option was never exercised. RPC
§ 1.5(c)(4) is clear that no contingency fee is to be paid on a
sum until payment is “received by the client,” and there is no
dispute that Jeffrey and Amy never received the $8.5 million
sum incorporated into the contingency fee calculation. In
short, Harris took $127,500 to which he was not entitled
under the RPC. That is egregious conduct by any measure and
is, to my mind, little different from an attorney misappropriat-
ing money from his client trust account.
10276 BERTELSEN v. HARRIS
The majority would undoubtedly contend that everything
worked out well overall for Appellants and, accordingly, they
have no basis to complain. But that view of an attorney’s fidu-
ciary duty ignores the plain language of the RPC and Wash-
ington case law. It also sends a message that courts need not
strictly enforce the RPC against those sworn to uphold the
rule of law as long as a client receives a favorable result.
Moreover, it is not clear under the majority’s logic whether
Harris would have been allowed to retain the fee he obtained
in violation of the RPC if the results he obtained for his client
were much less favorable, or how “favorable” a result must
be in order to ignore a lawyer’s breach of his fiduciary duty.
Similarly, the district court’s view that the contingency fee
paid was, on the whole, “reasonable” given the services ren-
dered and the results achieved was also in error. The reason-
ableness of the fee does not determine whether violations of
the RPC occurred in the first instance. Like the majority, the
district court ignores the plain language of the RPC.
Second, the invoice setting forth the contingency fee was
itself a violation of the RPC. RPC § 1.5(c)(3) provides that if
there is recovery in a contingent fee matter, the lawyer shall
provide the client a written statement of “the outcome of the
matter . . . showing the remittance to the client and the
method of its determination.” Harris violated this rule by fail-
ing to issue a written statement showing how he calculated the
contingency fee. See In re Heard, 963 P.2d 818, 824 (Wash.
1998) (en banc) (holding that attorney violated RPC
§ 1.5(c)(1) when he failed to provide a client “with a written
statement stating the outcome of the matter and . . . showing
the remittance to the client and the method of its determina-
tion”).
Third, the May and September 2001 corporate resolutions
constitute illegal fee-splitting agreements in violation of RPC
§ 5.4(a). RPC § 5.4(a) prohibits a lawyer from “shar[ing]
legal fees with a nonlawyer.” The record is clear that Harris
and McPherson, a non-attorney, agreed to split the contin-
BERTELSEN v. HARRIS 10277
gency fee paid under the corporate resolutions. Moreover,
nothing in the record indicates that the fee was split pursuant
to a pre-existing agreement between the non-attorney and the
clients so as to ensure that the portion of contingency fee the
non-attorney was paid corresponded with work that was non-
legal in nature. Cf. In re Marshall, 157 P.3d 859, 864-67
(Wash. 2007) (en banc) (upholding a split fee where non-
attorney had pre-existing agreement with the client to receive
10% of the final settlement and agreement with attorney
merely carried out pre-existing agreement). As a result, it
appears that the corporate resolutions violated the plain lan-
guage of RPC § 5.4(a) and were, therefore, unenforceable.
See Valley/50th Ave., L.L.C. v. Stewart, 153 P.3d 186, 189
(Wash. 2007) (en banc) (“Attorney fee agreements that vio-
late the RPCs are against public policy and unenforceable.”).1
Finally, Harris violated RPC § 1.7 by representing clients
with conflicting interests without first obtaining the requisite
written consent. RPC § 1.7 provides that an attorney “shall
not represent a client if the representation involves a concur-
rent conflict of interest,” but authorizes such representation if,
among other requirements, “each affected client gives
informed consent, confirmed in writing.” (Emphasis added.)
This requirement applies to both actual and potential conflicts
of interest. See In re Marshall, 157 P.3d at 870 (“[RPC 1.7]
requires full disclosure of potential conflicts and written con-
sent of the client where multiple representation may materi-
ally affect the client’s case.”) (emphasis in original); In re
Egger, 98 P.3d 477, 486 (Wash. 2004) (en banc) (same). In
this case, there was a clear potential conflict of interest when
Harris, who was already representing Jeffrey, Amy and BFG
1
Because the September 2001 corporate resolution under which Harris
collected his fee was unenforceable due to this violation of RPC § 5.4(a),
I do not regard the three-year statute of limitations that applies to actions
for breach of fiduciary duty, Wash Rev. Code. § 4.16.080, as a bar to this
action. See In re Ocean Shores Park, 134 P.3d 1188, 1193 (Wash. Ct.
App. 2006) (“The statute of limitations does not apply where an act or
instrument is void at its inception.”) (citations omitted).
10278 BERTELSEN v. HARRIS
in their litigation with ARCO, took on the representation of
Richard and Janis Bertelsen in the same litigation. ARCO
sued Richard and Janis on the basis of alleged personal guar-
antees on promissory notes signed by Jeffrey, Amy, and BFG.
If Richard and Janis were guarantors for the debts of Jeffrey,
Amy, and BFG, their interests would clearly be adverse to
those of Jeffrey, Amy, and BFG since it is hornbook law that
guarantors who pay the debts of third-party obligors have a
claim against those obligors for the amounts they pay on the
guaranteed debt. Although Harris represented to Richard and
Janis in a letter dated September 7, 2001 that he was not
aware of any conflict “at [that] point in time,” the letter also
stated Harris’ understanding that Richard and Janis “waived
any conflict that may arise.” This suggests that Harris recog-
nized a potential conflict as of September 7, 2001.
Despite this potential conflict, Harris did not obtain the
written consent of each individual affected—Jeffrey, Amy,
Richard or Janis—before moving forward with the representa-
tion of all of the Bertelsens, nor did he describe in writing the
specific nature of the conflict he thought might arise. More-
over, Harris did not obtain any written waiver of conflicts
from Richard and Janis until October 22, 2001, and the only
written consent Harris ever received from Jeffrey and Amy
was given in response to an October 29, 2001 letter. But that
letter did not expressly state that Jeffrey and Amy’s signatures
represented their consent to waive any conflicts. Rather, the
letter summarized the disposition of various debts, liens, and
the ongoing ARCO litigation, and requested that if the docu-
ment was consistent with the Bertelsens’ understanding of the
arrangements made, they were to sign and return the docu-
ment. On this basis, I conclude that Harris breached his fidu-
ciary duties by not obtaining the written consent of every
client affected by his decision to undertake the representation
of Richard and Janis, in violation of RPC § 1.7.
Harris’s violations of the RPC and his breaches of fiduciary
duty were numerous and egregious. Accordingly, I conclude
BERTELSEN v. HARRIS 10279
that the district court abused its discretion in concluding that
Harris did not violate the RPC or breach his fiduciary duties
such that disgorgement was appropriate, and that even if he
did, his conduct was not egregious so as to warrant the disgor-
gement of fees. Thus, I would remand to the district court so
that it may consider in the first instance what remedy is
appropriate in light of Harris’s egregious breaches of his fidu-
ciary duties to his clients.