Here, the Court grapples with an inheritance—the latest chapter of a litigation odyssey that began over a decade ago in a different domain.
Adv. No. 18-1091, Kansas City Southern Railway Company vs. Luz Chavez vs. Rosenthal & Watson, P.C. (Bankr. W.D. Tex. 1/31/20), p.1. The opinion can be found here.
To the outsider, proceedings in bankruptcy court may seem like lawyers talking in incomprehensible jargon while the judge looks down from on high staring Sphinx-like until called upon to make a ruling. However, there is a part of trial work that applies to bankruptcy as well and that is telling stories. The lawyers each spin their tales through arguments, witnesses and exhibits. The judge then takes the raw material the lawyers have given him and fashions it into his own tale. This case is a tragic tale of clients and some lawyers who failed to serve them well.
Note: on the cold light of the digital page, as drafted by the judge and his clerks, the story takes on clear heroes and villains. In this post, I do not seek to judge the parties, the judge has already done that. Instead, I am re-telling a story that I heard from a judge and found compelling.
The Prelude: How the Dispute Reached Bankruptcy Court
Judge Mott succinctly lays out the dispute in his opening paragraphs before delving into a 106 page opinion. I can't tell the story better than he did, so here it is.
Opinion, pp. 2-3.The saga began in 2007, when a father and son were tragically killed in a train accident at a South Texas railroad crossing. Surviving family members hired a law firm that immediately filed a wrongful death suit against the railway in state court. Just before trial in 2009, the law firm (without the family’s knowledge) saw fit to associate a different attorney who tried the case to a jury. A unanimous defense verdict was rendered by the jury against the family in 2009, which appeared to end the saga. Fate then intervened, as the family was granted a new trial against the railway based on newly discovered evidence.
In 2010, the railway made a seemingly reasonable settlement offer to the associated trial attorney hired by the family’s law firm. The associated attorney communicated the settlement offer to the family’s law firm, who relayed the settlement offer to one family member. The law firm obtained the disputed oral consent of one family member (the widow) to the railway’s settlement offer on the phone, but never discussed the settlement with the four other adult family members. After the associated attorney sent the railway a letter accepting the settlement offer for the whole family, the entire family denied authorizing any settlement.
The litigation odyssey then restarted in earnest, this time with a complete role reversal. In 2011, the railway sued the family to enforce the settlement, winning temporary success twice through summary proceedings in state trial court. This spawned two journeys to the Texas Court of Appeals, one journey to Texas Supreme Court, and three written appellate opinions. Ultimately, in 2017, the settlement enforcement suit against the family was reversed and remanded for trial in state court.
Meanwhile, the lead partner of the law firm was convicted of bribing witnesses and fabricating evidence in other railroad cases, resulting in a 20-year federal prison sentence. This twist in the voyage led the law firm to close operations and file Chapter 7 bankruptcy. The bankruptcy trustee then attempted to collect the law firm’s expenses owed by the family out of the still disputed settlement with the railway, by removing the settlement enforcement suit from the domain of the state court to this Court.
Now, through this Opinion, the Court will deal with the inherited chapter of this litigation odyssey.
Proceedings in Bankruptcy Court
The law firm, Rosenthal & Watkins, filed Chapter 7 in 2014. Ron Satija was appointed as Chapter 7 trustee. On October 1, 2018, the Trustee removed the state court action to bankruptcy court. After a bunch of pleadings and motions were filed and decided, the parties filed their joint pre-trial order and a trial was commenced. Judge Mott heard evidence over four days in December 2019. He heard from thirteen witnesses either in person or through deposition or both.
He made extensive findings about credibility of the witnesses. I am going to do a separate post looking at how judges examine credibility.
Where Things Went Wrong
Rosenthal & Watson (R & W) made critical mistakes at several junctures. The first was that they hired another lawyer to actually try the case and entered into a fee sharing agreement with him without obtaining the consent of their clients. James Christopher Dean was the trial attorney hired by the firm. The engagement agreement signed by the members of the Chavez family referred to "such other attorneys or law firms as Attorneys in their sole discretion shall employ or associate with in my behalf." This certainly allowed R & W to hire Dean to assist with the case. However, it did not allow them to do so and not tell their clients. Importantly Texas Rule of Disciplinary Conduct 1.09(f) states that no fee sharing may take place unless the client consents to both the fee sharing and the identity of the person with whom the fees would be shared.
Things really went south when Dean and R & W succeeded in getting the initial take-nothing judgment thrown out and a new trial date was set. At this point, the firm had expended hundreds of thousands of dollars pursuing the case and it was facing financial difficulties due to the criminal investigation of Rosenthal, one of its partners.
The railroad saw some risk in a re-trial as well since newly discovered evidence showed the engineer using his cell phone. Dean began engaging in settlement negotiations with Merritt Clements, the railroad's attorney. The engagement agreement entered into by R & W with the five members of the Chavez family allowed the attorneys to engage in settlement negotiations but reserved the sole authority to settle to the clients (as it necessarily must have). Clements did not know that Dean was negotiating without the authority of his clients or for that matter, without any communication with them.
Clements made a global settlement offer to Dean covering all five members of the Chavez family. Rosenthal, the soon to be disgraced partner of R & W, came up with an allocation of the settlement proceeds between the law firm and his clients. The lion's share of the funds were to go to R & W to cover its expenses. Other funds would go to reimburse worker's comp insurers who had subrogation rights and some would go to the family members. Rosenthal had one conversation with Luz Chavez, the matriarch of the family. She did not agree to the settlement in this conversation. In fact, she began refusing to return phone calls from R & W.
Eventually R & W grew desperate and hired a private investigator to contact Luz. Luz eventually did contact Watson, the other partner of R & W. After a brief phone call which was not followed up with anything in writing, Luz agreed to the settlement. However, Judge Mott found that the phone call was not sufficient to gain her informed consent to the settlement and that she did not understand what she had agreed to. Among other things, the settlement included a confidentiality agreement with a 10% liquidated damages clause and required the Chavez family to indemnify the railroad.
Watson then informed Dean that the family had approved the settlement even though she had not communicated with four out of five of the adult family members. In the meantime, the railroad increased its offer by $25,000 which R & W added to their share of the proceeds. They then added $1,000 per plaintiff as compensation for the confidentiality clause that the plaintiffs had not been informed of.
Dean sent a letter to Merritt accepting the offer. Merritt accepted subject to the confidentiality and indemnity provisions he had requested. Dean sent a copy of this letter to Watson but neither Dean nor Watson sent a copy to the family. Merritt then prepared a formal settlement agreement. This document was never provided to the family. Dean informed the court that the parties had reached a settlement and to take the case off the docket.
The court appointed a guardian ad litem to represent the interest of one plaintiff who was a minor. The ad litem negotiated some improvements to the agreement for the minor and ultimately recommended that it be approved. The railroad's attorney filed a motion to approve the settlement with the minor. The ad litem met with Luz who did not voice any objection to the settlement. However, shortly before the hearing, Luz told Alvarado, a former attorney with R & W, that she did not want to go through with the settlement. She then told the state court that she did not want to go through with the settlement and that she wanted three months in which to find another lawyer because she had become dissatisfied with R & W.
Several weeks later, the railroad filed a motion to enforce settlement agreement. The trial court granted the motion. The case went up on appeal and was reversed because the settlement letter had not been filed with the court and therefore could not be enforced as a Rule 11 agreement. The railroad then filed with settlement letter (signed by Dean) with the court and the court approved it a second time. This time the court of appeals affirmed but the Texas Supreme Court reversed and remanded, leading to the trial before Judge Mott.
Judge Mott's Ruling
Judge Mott's ruling is really, really long. However, I will convey the high points. He found that the Chavez family was not bound by the settlement agreement. The family had never done anything to clothe Dean with apparent authority. Indeed, they did not even know that he was their attorney. A principal cannot be bound by a person purporting to act on its behalf. Additionally, the family did not actually agree. Luz agreed verbally but was not given sufficient information to understand what she was agreeing to and the lawyer did not go out of their way to fully explain. The four other family members were not even told about the settlement so that they could not have consented. Finally, the settlement agreement violated what is known as the aggregate settlement rule. If an attorney represents multiple clients, he must negotiate separately on behalf of each client. If he does not, the settlement is void as against public policy. Here, Rosenthal decided the allocation and there was never any negotiation on behalf of the individual plaintiffs. Thus, Judge Mott found that the settlement was unenforceable.
Next, Judge Mott concluded that R & W breached its fiduciary duty to the Chavez family. An attorney owes his client a fiduciary duty. However, breach of fiduciary duty is different than malpractice. Malpractice consists of negligence in representing the client.
Breach of fiduciary duty by an attorney most often involves conflicts of interest, failure to deliver funds, placing an attorney’s interests over a client’s interest, improper use of client confidences, taking advantage of a client’s trust, engaging in self-dealing, and making misrepresentations.
Opinion, p. 75. Judge Mott found that R & W breached its fiduciary duty by entering into a fee sharing agreement without the consent of the clients, by misrepresenting that the family had agreed to the settlement, and by entering into an aggregate settlement.
As a remedy, Judge Mott applied the equitable remedy of forfeiture of fees. A fiduciary who breaches his duty can be forced to forfeit all fees. Judge Mott ruled that R & W should forfeit all fees and 50% of its expenses. Thus, the Trustee was left with a claim for $208,811. Judge Mott found that this amount was secured by a valid attorney's lien against any settlement or judgment based on the contractual language.
The railroad spent a ton of money trying to enforce a settlement which was ultimately denied. It faces re-trial on a case based on an accident which occurred thirteen years ago. R & W is in chapter 7 and its trustee will not recover anything for it unless the Chavez family recovers an award. The Chavez family succeeded in voiding the settlement. However, it faces a new trial and must obtain new counsel. There are several obscene terms for this situation which I will leave to the reader's imagination.
Recognizing the legal carnage which had been inflicted on the parties, Judge Mott counseled settlement. He said:
Opinion, p. 106.If history repeats itself, this Opinion (effectively Chavez IV) will not be the last written chapter in this litigation odyssey. But after a full-blown trial in this Court followed by this full-length Opinion, perhaps the Chavez Family will agree to end their litigation marathon with KCSR now, without further expense and delay. Failing that, the Court is concerned that history may repeat itself during the next phase of the journey—a second jury trial of the wrongful death suit in state court.
The Chavez family has appealed Judge Mott's ruling and the Trustee has cross-appealed. Therefore, we may not have heard the last of this case.
Why Write About This Case?
The short answer is that I am under a shelter in place order and have time to write. However, there is another reason. Early in my blogging career, I was accused of placing Texas lawyers in a bad light by writing articles which explored ethical lapses. That is not and was not my intent.
I practice with and against some great lawyers (including the trustee in this case). However, while this case demonstrates the deepest levels of legal perfidy, the issues here are ones that any lawyer can be faced with. In the midst of hearings, conference calls and meetings, it is hard to slow down and have good, solid communication with the client, especially if the client is a challenging one. It is also tempting that an attorney wanting to avoid a bad result for his client will focus on getting the deal done no matter what. Joe Martinec refers to this as placing your loyalty to the deal instead of the client.
This case, by showing what lawyers should not do, highlights what they should do. Lawyers should communicate with their clients. Lawyers should take the time to educate their clients. Lawyers should put things in writing. By writing about this train wreck of a case, I hope that lawyers will be reminded, as I have been reminded, to "be best" as the saying goes.
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