SCF Consulting, LLC v. Barrack Rodos ( 2016 )

J-A11041-16
NON-PRECEDENTIAL DECISION - SEE SUPERIOR COURT I.O.P. 65.37
SCF CONSULTING, LLC IN THE SUPERIOR COURT OF
PENNSYLVANIA
Appellant
v.
BARRACK, RODOS & BACINE
No. 1413 EDA 2015
Appeal from the Order Entered April 24, 2015
in the Court of Common Pleas of Philadelphia County Civil Division
at No(s): February Term, 2015, No. 1613
BEFORE: SHOGAN, MUNDY, and FITZGERALD,* JJ.
MEMORANDUM BY FITZGERALD, J.: FILED JULY 08, 2016
Appellant, SCF Consulting, LLC, appeals from the order entered in the
Philadelphia County Court of Common Pleas sustaining the preliminary
objections of Appellee, Barrack, Rodos & Bacine. Appellant claims the court
erred in sustaining the preliminary objections based upon its finding that the
Compensation Plan at issue violated Pennsylvania Rule of Professional
Conduct 5.4. We affirm.
The trial court summarized the facts of this case as follows:
[Appellant], a non-lawyer, alleges it had an oral consulting
contract with [Appellee] law firm “regarding [Appellee’s]
representation of various institutional investors who sought
to bring class actions alleging securities violations.”
Pursuant to this contract, [Appellant] claims it was paid a
yearly consulting fee, plus “a five percent (5%) share of
the firm’s annual profits attributable to the cases
*
Former Justice specially assigned to the Superior Court.
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originated and worked on by [Appellant] and 2.5% of
cases originated by other members of the firm.”
“Based on [Appellee’s] promised compensation package,
[Appellant] quickly became the face of [Appellee] and
assisted [Appellee] in becoming legal counsel for the class
representatives in virtually all of its cases.” . . .
[Appellant] admits that [Appellee] paid [Appellant] its
fixed annual consulting fee for each of the years it worked,
but [Appellant] alleges [Appellee] failed to pay the share of
profits due [Appellant] at the end of 2014.
Trial Ct. Op., 4/24/15, at 1-2 (footnotes omitted).
Appellant filed a complaint asserting claims for breach of contract,
unjust enrichment and breach of fiduciary duty.1 In the complaint, Appellant
averred the following facts:
1. [Appellant] is a Pennsylvania limited liability company . .
. . Scott C. Freda (“Freda”) was the sole member of
[Appellant] who provided valuable consulting services to
[Appellee].
2. [Appellee is] a Pennsylvania corporation and law firm . .
..
* * *
7. In or about 2001, [Appellee] initially requested Mr.
Freda to provide consulting services to [Appellee]
1
We note that Count II of the complaint asserted a claim for violation of the
Pennsylvania Wage Payment and Collection Law (“WPCL”). R.R. at 9a-10a.
For convenience of the parties, we refer to the reproduced record where
applicable. Appellant averred that “[p]ursuant to the WPCL, . . . Leonard
Barrack, Esq., is individually liable for [Appellant’s] claims as he directed
[Appellee] not to pay [Appellant] the wages due . . . .” Id. at 9a ¶ 34. The
parties stipulated to withdraw Count II of the Complaint with prejudice and
to remove Leonard Barrack, Esq. as a party to this action. See Stipulation,
3/9/15, at 1 (unpaginated).
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regarding its representation of various institutional
investors who sought to bring class actions alleging
securities violations.
8. Ultimately, Mr. Freda formed [Appellant] in 2006 and
continued working with [Appellee] up through early 2014,
when the facts giving rise to this lawsuit arose.
9. [Appellee] sought to enter into a long term consulting
agreement with [Appellant] based upon, among other
things, Mr. Freda’s excellent reputation and experience
with securities class actions filed on behalf of various State
and local governments and unions as clients.
10. [Appellee] induced [Appellant] to act exclusively on its
behalf assisting with securities class actions filed on behalf
of these entities in exchange for the promise of both a
fixed annual consulting fee and an annual profit sharing
plan at the firm that paid a five percent (5%) share of
the firm’s annual profits attributable to the cases
originated and worked on by Mr. Freda . . . .
* * *
12. [Appellee] breached the parties’ agreement by
refusing the make the promised profit share
payments to [Appellant] for cases that had resolved
and were both originated and worked on by Mr.
Freda in breach of [Appellee’s] obligations to [Appellant].
13. Just prior to his departure, Mr. Freda also reminded
Mr. [Leonard] Barrack that two large cases that he had
both originated and worked on were close to resolving so
he expected his five percent (5%) of the firm’s profits at
the end of the calendar year. These cases were the State
of Michigan v. AIG and the PA Retirement System v.
BOA class actions. . . .
* * *
19. In 2014, Mr. Freda provided substantial assistance to
[Appellees] in prevailing on a very substantial case
involving the Chicago Police Department and Apollo . . . .
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* * *
21. Much to Mr. Freda’s surprise when he met with Mr.
Barrack in December of 2014, he was told that [Appellant]
was not going to be paid its percentage of profits
previously agreed to . . . .
R.R. at 3a-5a, 7a-8a (emphases added). Appellant avers in the complaint
that he was paid his retainer fee of $210,000.00 per month in the year
2014. R.R. at 5a. Appellee filed preliminary objections, which the trial court
granted. This timely appeal followed. Appellant was not ordered to file a
Pa.R.A.P. 1925(b) statement of errors complained of on appeal.
Appellant raises the following issues for our review.
a. Whether the [t]rial [c]ourt erred in sustaining
Appellee[’s] demurrer to all [c]ounts of Appellant[’s
complaint] on the basis that the Compensation Plan
entered into by [Appellees] and [Appellant] was against
public policy for violation of Rule of Professional Conduct
5.4, where the [t]rial [c]ourt failed to apply the well-
settled standard for resolving preliminary objections and
accept as true the well-pleaded factual averments of the
[c]omplaint that the Compensation Plan was an express
exception to R.P.C. 5.4?
b. Whether the [t]rial [c]ourt erred in sustaining
[Appellees’] demurrer to all [c]ounts of [Appellant’s
c]omplaint on the basis that the Compensation Plan was
against public policy, where any determination that the
Compensation Plan was in violation of R.P.C. 5.4 is a fact-
intensive inquiry and requires a full development of the
record, as demonstrated by Wishnefsky v. Riley &
Fanelli, [799 A.2d 827 (Pa. Super. 2002),] and where the
[t]rial [c]ourt failed to allow a full development of the
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record, including discovery, prior to dismissing the
[c]omplaint?[2]
c. Whether the [t]rial [c]ourt erred in sustaining
[Appellees’] demurrer to all [c]ounts of [Appellant’s
2
Given our resolution of the first issue, see infra, we need not reach this
issue. However, we note that Appellant’s argument is meritless. Appellant
avers that
[t]he [t]rial [c]ourt and [Appellees] both cite Wishnefsky
v. Riley & Fanelli, [799 A.2d 827 (Pa. Super. 2002),] for
the proposition that where a compensation plan is violative
of Rule 5.4, a court cannot enforce such a contract.
However there is an important procedural distinction
between Wishnefsky and the instant matter─in
Wishnefsky the court granted summary judgment for
the defendant after a full development of the record. Id.
at 828. Accordingly, Wishnefsky compels a very different
conclusion than that drawn by the [t]rial [c]ourt─it
requires that even where the facts egregiously show on
their face that a non-attorney is complicit in the flouting of
the ethical rules regarding fee-splitting, the [c]ourt is
compelled to allow the full-development of the facts,
including discovery, before dismissing those claims. The
[t]rial [c]ourt erred by dismissing [Appellant’s c]omplaint
prior to that full-development of the facts. For that reason
alone, the [t]rial [c]ourt’s dismissal of [Appellant’s c]
omplaint must be reversed.
Appellant’s Brief at 19-20 (some emphasis added). The Court in
Wishnefsky referenced discovery in the context of the procedural posture
of the case. This Court stated:
Appellee filed preliminary objections to Appellant’s
complaints and to each of three amendments, then
unsuccessfully sought judgment on the pleadings. When
discovery was completed, both parties moved for the entry
of summary judgment. The trial court granted Appellee’s
motion, and this appeal followed.
Wishnefsky, 799 A.2d at 828.
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c]omplaint on the basis that the Compensation Plan was
against public policy, where, even assuming arguendo that
the Compensation Plan was in violation of R.P.C. 5.4,
Pennsylvania public policy has found that such an
agreement shall be enforced on the basis that an attorney
occupies a legally superior position to a non-attorney, and
therefore may not be financially rewarded for entering into
a fee-sharing agreement that is in violation of R.P.C. 5.4.
See John Grigsby v. Rania M. Major and Mark B.
Frost, Esquire. 1994 WL 1251205 (Phila. Com. Pl.
[3]
1994).
3
Although we do not address this issue given our resolution of the first issue
raised on appeal, we note that the claim was rejected by this Court in
Wishnefsky. This Court opined:
Assuming, without deciding, that [Appellant] is correct in
[his] contention that the mere difference in the status of
the parties suffices to establish that they were not in pari
delicto, we do not believe that the public interest will be
served by accepting [his] argument and enforcing the
contract. Under [Appellant’s] theory, every fee-sharing
agreement between an attorney and a nonattorney which
violates [the fee-splitting prohibition] would be enforceable
by the lay party since, by definition, such agreements will
always involve an attorney and a nonattorney. Although
consistent enforcement of such contracts against breaching
attorneys might deter attorneys from entering fee-sharing
agreements, presumably most lawyers are already
deterred from such conduct by the existence of [the
disciplinary rule] and by the possibility of sanctions that its
violation carries. By refusing in every case to assist the
lay party, the courts may deter laypersons as well as
attorneys from attempting such agreements. We believe
that, in this way the public will be protected more
effectively from the potential harms posed by fee-sharing
agreements.
Wishnefsky, 799 A.2d at 830 (citation omitted and emphasis added).
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Appellant’s Brief at 4-5.4
First, Appellant contends the trial court erred in sustaining Appellee’s
preliminary objections in the nature of a demurrer to the complaint because
it “included well-pled allegations that the Compensation Plan at issue was an
express exception to Rule of Professional Conduct 5.4.” Id. at 15. Appellant
avers that it has “sufficiently pled that [Appellees] induced him to enter into
a Compensation Plan that included a profit-sharing component.” Id. at 18.
Our review is governed by the following principles:
As a trial court’s decision to grant or deny a demurrer
involves a matter of law, our standard for reviewing that
decision is plenary. Preliminary objections in the nature of
demurrers are proper when the law is clear that a plaintiff
is not entitled to recovery based on the facts alleged in
the complaint. Moreover, when considering a motion for
a demurrer, the trial court must accept as true all well-
pleaded material facts set forth in the complaint and all
inferences fairly deducible from those facts.
* * *
Our standard of review of an order of the trial court
overruling or granting preliminary objections is to
determine whether the trial court committed an error of
law. When considering the appropriateness of a ruling on
preliminary objections, the appellate court must apply the
same standard as the trial court.
Preliminary objections in the nature of a demurrer test the
legal sufficiency of the complaint. . . . Preliminary
4
Appellant does not raise any issue regarding his unjust enrichment claim in
Count III of the complaint. Thus, we do not address the unjust enrichment
count. “It is not the obligation of [an appellate court] to formulate
[a]ppellant’s arguments for him.” Wirth v. Commonwealth, 95 A.3d 822,
837 (Pa. 2014) (citation omitted).
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objections which seek the dismissal of a cause of action
should be sustained only in cases in which it is clear and
free from doubt that the pleader will be unable to prove
facts legally sufficient to establish the right to relief. If any
doubt exists as to whether a demurrer should be
sustained, it should be resolved in favor of overruling the
preliminary objections.
Bargo v. Kuhns, 98 A.3d 686, 689 (Pa. Super. 2014) (emphasis added and
citations omitted). “A demurrer does not, however, admit the pleader’s
conclusions of law.” Hoffman v. Misericordia Hosp. of Phila., 267 A.2d
867, 868 (Pa. 1970).
Rule of Professional Conduct 5.4 provides as follows.
(a) A lawyer or law firm shall not share legal fees with a
nonlawyer, except that:
(1) an agreement by a lawyer with the lawyer’s firm,
partner, or associate may provide for the payment of
money, over a reasonable period of time after the
lawyer’s death, to the lawyer’s estate or to one or more
specified persons;
(2) a lawyer who undertakes to complete unfinished
legal business of a deceased lawyer may pay to the
estate of the deceased lawyer that portion of the total
compensation which fairly represents the services
rendered by the deceased lawyer;
(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;
(4) a lawyer or law firm may purchase the practice of
another lawyer or law firm from an estate or other
eligible person or entity consistent with Rule 1.17; and
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(5) a lawyer may share court-awarded legal fees with a
nonprofit organization that employed, retained or
recommended employment of the lawyer in the matter.
42 Pa.C.S. § 5.4(a)(1)-(5).
In Office of Disciplinary Counsel v. Jackson, 637 A.2d 615 (Pa.
1994), the Pennsylvania Supreme Court stated:
Disciplinary Rule 3-102(A) and Rule of Professional
Conduct 5.4 prohibit the sharing or splitting of fees
between a lawyer and a non-lawyer. There can be
no question but that Jackson, as a suspended
lawyer, is a “non-lawyer” within the meaning of the
rules. The purpose of this legal mandate is to
maintain a lawyer’s independent professional
judgment, unhampered by monetary obligation to a
party other than his client. In addition, the purpose
is to protect the Bar against the unauthorized
practice of law by persons the system does not
recognize as presently licensed to practice. The only
exception to the rule prohibiting sharing fees with
non-lawyers is the payment by a law firm into a
profit-sharing plan in which non-lawyer employees of
the firm share in the profits earned by the lawyers,
obviously from fees. The exception is sustainable
because there is no direct link between a specific fee
and a specific payment to a non-lawyer. In this
case, that very evil is present.
Report and Recommendations of the Disciplinary Board of
the Supreme Court of Pennsylvania, page 17.
Id. at 620.
In Wishnefsky, the non-lawyer appellant contended he had an oral
contract with the appellee law firm
governing a fee-splitting arrangement. In his Complaint,
[the a]ppellant contends that [the a]ppellee agreed to pay
him a forwarding fee of one third of the compensation
received from cases he referred, but ceased to do so after
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recovering $150,000 in fees from damages in a product
liability matter.
Wishnefsky, 799 A.2d at 828 (footnote omitted).
The appellant in Wishnefsky argued that his claim fell within the
exception to fee splitting found in Rule 5.4(a)(3). Id. at 830. This Court
rejected this contention and opined that
[w]hat is clearly contemplated by the exception is a
formalized program to benefit employees based on the
profitability of the firm. In [Jackson, supra,] our
Supreme Court explained that the exception, which
permits payment of profits earned by lawyers from fees,
“is sustainable because there is no direct link between
a specific fee and a specific payment to a non-
lawyer.” Id. The Jackson Court noted that the
exception did not apply because there, “that very evil,” the
direct link, “is present.” Id. The same may be said of this
case.
Id. at 830-31 (emphases added); accord Epstein v. Saul Ewing, LLP, 7
A.3d 303, 312-13 (Pa. Super. 2010).
In the case sub judice, the trial court opined:
[Appellant] attempts to cast itself as a beneficiary of
the exception to Rule 5.4(a), which allows law firms to
have employee profit sharing plans. However, [Appellant]
was not an individual employee of [Appellee’s] law firm.
* * *
Since the arrangement [Appellant] claims existed
between the parties violates public policy, all of
[Appellant’s] legal claims based on that arrangement fail .
...
Trial Ct. Op. at 3.
Appellant’s argument that his claim fell within the exception to fee
splitting found in Rule 5.4(a)(3) is unsupported by the facts as averred in
the complaint. See Wishnefsky, 799 A.2d at 830-31. As the trial court
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accurately noted, Appellant was not an employee of the firm participating in
a formalized program benefiting employees based upon the profitability of
the firm. See id. Therefore, the exception in Rule 5.4(a)(3) is
unsustainable in the instant case because there is a direct link between the
specific fees and specific payment to Appellant, a non-lawyer. See
Jackson, 637 A.2d at 620; Wishnefsky, 799 A.2d at 830-31. Based upon
the facts alleged in the complaint, we discern no error of law in the trial
court’s decision to grant the preliminary objections. See Bargo, 98 A.3d at
689.
Order affirmed.
Shogan, J. joins the memorandum.
Mundy, J. notes her dissent.
Judgment Entered.
Joseph D. Seletyn, Esq.
Prothonotary
Date: 7/8/2016
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