Friday, September 13, 2019

Hail Concordia! Idaho Endorses Disgorgement For Fiduciary Breach

This post is for Professor (and ex-Bar Counsel) Mike Oths' class at Concordia Law and involves a recent decision of the Idaho Supreme Court.

The court's headnote

Rebecca Parkinson appealed a district court’s dismissal of her claim for breach of fiduciary duty against her attorney, James Bevis. Parkinson filed a complaint alleging Bevis breached his fiduciary duty when he disclosed a confidential email to the opposing attorney after a settlement had been reached in Parkinson’s divorce action. Bevis filed a motion to dismiss under I.R.C.P. 12(b)(6), arguing that Parkinson’s complaint failed to state a claim for relief. The district court dismissed Parkinson’s claim after finding it was, in essence, a legal malpractice claim, which Parkinson could not prevail on because she suffered no damages as a result of the disclosure. Parkinson filed a motion to amend her complaint to clarify that the remedy she sought was the equitable relief of fee disgorgement, which the district court denied.

The Idaho Supreme Court reversed and remanded, recognizing that a lawyer can violate his fiduciary duty, causing no damage, in which case an equitable remedy like Parkinson sought may be recoverable. The Court held that Parkinson could sue her attorney for breach of a fiduciary duty arising out of the attorney-client relationship, just as any other principal may sue an agent who owes a fiduciary duty. The Court explained that its holding was narrow, and offered relief to a client only in those cases in which the client seeks fee disgorgement as a solitary remedy. For these reasons the Court held that the district court also abused its discretion when it denied Parkinson’s motion to amend.

The allegation

In 2015, Bevis, a licensed attorney, represented Parkinson in her divorce proceedings. Parkinson alleged that Bevis breached his fiduciary duties to her by forwarding to opposing counsel a copy of an email she sent to Bevis that accused Bevis of failing to represent her adequately at a mediation conference.

The question on review

The principal question here is whether a client can sue an attorney for breach of fiduciary duty when the cause of action arises from the attorney-client relationship, no matter whether the breach caused the client actual damages. Parkinson argues that Bevis breached his fiduciary duty by disclosing a confidential attorney-client email and that this breach impaired the value of Bevis’ services to Parkinson. On the other hand, Bevis maintains that when an attorney breaches a fiduciary duty to a client, the only cause of action that arises from the attorney-client relationship is legal malpractice.

Damage for fiduciary breach

We agree with, and now adopt, the Restatement’s approach in section 37 as we have stated it. The sanction of fee forfeiture is available when an attorney violates his duty to his client in a serious way. The criteria listed in section 37 are to be used to determine whether the trial court may order forfeiture of all or a portion of an attorney’s fee as an appropriate equitable remedy in these circumstances. To reiterate, those factors are (1) the extent of the misconduct, (2) whether the breach involved knowing violation or conscious disloyalty to a client, (3) whether forfeiture is proportionate to the seriousness of the offense, and (4) the adequacy of other remedies. Id.

The reason for such a remedy makes sense. “[A] lawyer’s clear and serious violation of a duty to a client destroys or severely impairs the client-lawyer relationship and thereby the justification of the lawyer’s claim to compensation.” Id. at cmt. b. The equitable remedy of fee forfeiture discourages an agent from disregarding his or her duty of loyalty to a principal under the theory the principal will suffer no damages. To limit the remedy of forfeiture to situations in which the principal suffers actual damages would defeat the purpose of the rule. It is this breach of loyalty, not actual damages, which violates the fiduciary relationship. The primary purpose of an equitable remedy of forfeiture is to protect the relationship between a principal and her agent by discouraging the agent’s disloyalty...

The result here is narrow, offering relief to a client only in those cases in which the client seeks fee disgorgement as a solitary remedy. To the extent that legal malpractice plaintiffs seek both damages and fee disgorgement, the principles articulated in this decision would apply to the equitable portion of the claim. But, if the breach of fiduciary duty claim includes a claim for damages, that claim is appropriately subsumed by the legal malpractice claim.

We thus conclude that whether an attorney must forfeit any or all fees for a breach of fiduciary duty to a client must be determined by applying the rule as stated in section 37 of the Restatement (Third) of the Law Governing Lawyers and the factors we have identified to the individual circumstances of each case. In light of this conclusion, the district court’s determination that Parkinson could not pursue her claim on an equitable basis as a matter of law was incorrect. We therefore vacate the judgment of dismissal and reverse the district court’s grant of the motion to dismiss.

(Mike Frisch)

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