Fee Dispute Leads To Directly Adverse Conflict

A summary of a recent decision of the Idaho Supreme Court

This appeal involved a dispute over the division of a personal injury settlement between a predecessor law firm (“Litster”), a successor law firm (“IILG”), and a client who was subjected to unfair and deceptive trade practices in violation of the Idaho Consumer Protection Act (“ICPA”). Litster represented Melissa Gryder for approximately three years before IILG took over representation and settled Gryder’s case roughly two months later. Gryder had followed her attorney, Seth Diviney, from Litster to his new firm, IILG. After Gryder’s case was settled, Litster sued IILG and Gryder, claiming a portion of the settlement fund for its incurred attorney fees and costs. Gryder, through Diviney as her attorney, counterclaimed that Litster had violated the ICPA and could not recover from the fund.

The district court granted Gryder summary judgment on the liability portion of her ICPA counterclaim but reserved the mechanics of her elected ICPA remedy (rescission) for trial. By the time of the bench trial, the district court understood, based on representations by Diviney, that only IILG and Litster claimed a stake in the disputed fund—not Gryder. From this, the district court balanced the equities and divided the disputed fund between only IILG and Litster while reducing Litster’s share to account for its ICPA violation. IILG and Gryder appealed the district court’s division of the fund and Litster cross-appealed the grant of partial summary judgment to Gryder.

On appeal, the Idaho Supreme Court vacated the judgment of the district court and reversed the court’s division of the fund but affirmed the grant of partial summary judgment to Gryder. The Court explained that summary judgment to Gryder on the liability portion of her ICPA counterclaim was correct. However, the district court erred in balancing the equities and deciding the mechanics of rescission under the ICPA to divide the fund. Part of this error was, by no fault of its own, the district court’s omission of Gryder from the equitable balance. On remand, the Court instructed the district court to re-weigh the overall equities between all three parties.

Next, the Court concluded, sua sponte, that Diviney had engaged in an unwaivable concurrent conflict of interest on appeal—and throughout this case below. The Court explained that Litster, IILG, and Gryder have competing claims on how to distribute the fund. Yet, at all times, Diviney represented both Gryder’s and IILG’s directly adverse claims in the same litigation. To ensure procedural due process, the Court declined to, on appeal, determine the appropriate sanction for Diviney’s ethical violation. Instead, the Court remanded the matter for the district court to determine the appropriate sanction after a hearing.

Finally, the Court affirmed the district court’s denial of attorney fees to IILG below because, on appeal, IILG failed to argue how the district court had abused its discretion.

The case had moved with Diviney's departure

During this time, Diviney and other former Litster employees—including members of Diviney’s family—asserted a series of demands against Litster totaling hundreds of thousands of dollars. The district court noted Diviney, “[s]eemingly embittered by the circumstances prompting his departure, [ ] posted on Facebook that he is ‘consumed with the need for justice’ and ‘ready to wield [his] focused revenge at those who devastated [his] kindly village.’ ”

As to the "directly adverse" conflict

Here, we decline to exercise our power on appeal to sanction Diviney directly because procedural due process requires that the district court determine the appropriate sanction for Diviney’s conflict after a hearing on remand. On remand, the district court must determine, under the principles above, what overall sanction will assure fairness to the parties, the integrity of the judicial process, and, if possible, is least burdensome to Gryder’s interests.

We note that the cost of disqualifying Diviney from representing Gryder on her ICPA claim may, at this stage, outweigh any benefits Gryder would receive from conflict-free counsel. It has been nearly six years since Gryder’s underlying personal injury occurred, the parties have been disputing the distribution of Gryder’s personal injury settlement for over two years, one trial has already occurred, and a judgment against Gryder has been entered. Moreover, Diviney and IILG’s right to compensation in Gryder’s underlying personal injury case is materially entwined with Gryder’s right to deny Diviney and IILG a fee for the same under Gryder’s ICPA cause of action.

Thus, the district court may appropriately require that Diviney forfeit, and disgorge himself of, any fee owed to him by Gryder in her underlying personal injury claim and on her ICPA counterclaim after determining how to equitably distribute the disputed portion of Gryder’s settlement fund.

However, we do not presume to know what sanction will be appropriate in the district court’s discretion, or what sanction Gryder might argue for on remand. It is possible that Gryder may argue fairness and the integrity of the judicial process requires time for her to acquire conflict free counsel; to investigate Diviney and Litster for “repeated or flagrant” violations of the ICPA to add punitive damages to her ICPA claim; and to present such evidence in a new trial.

In sum, from the genesis of this dispute, Diviney has engaged in an impermissible concurrent conflict of interest by representing two directly adverse parties (Gryder and IILG) in the same litigation. Under the above principles, and after a hearing on remand, we direct the district court to determine the appropriate sanction to remedy Diviney’s ethical violation.

Legal Newsline reported on the decision. (Mike Frisch)