Free Order on Motion for Summary Judgment - District Court of Arizona - Arizona

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NOT FOR PUBLICATION IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA Timothy A. Shimko, Sr., Shimko & Piscitelli, Plaintiffs, vs. David Goldfarb, Rhona Goldfarb, Richard Ross, Marcia Ross, Milton Guenther and Kathi Guenther, Defendants. ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) CV-04-78-PHX-FJM CV-05-1387-PHX-FJM [Consolidated]

ORDER

15 16 17 Plaintiffs, 18 vs. 19 Paul Woodcock and Bobbi Woodcock, 20 Defendants. 21 22 23 Timothy A. Shimko, Sr., Shimko & Piscitelli,

I. 24 A brief review of the tortured procedural history of this case is useful. Defendants 25 26 27 28 We recognize that Guenther and Woodcock's spouses remain defendants in this action. For ease of discussion, however, we refer only to Guenther and Woodcock.
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Goldfarb, Ross, Guenther, and Woodcock (collectively, "defendants")1 hired plaintiff

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Timothy Shimko and his law firm, Shimko & Piscitelli (collectively, "plaintiffs"), to represent them and their companies, known as the CORF entities, in a number of civil lawsuits filed against them. Plaintiffs brought this action against defendants alleging that defendants failed to pay for legal services rendered. We granted Ross and Goldfarb's joint motion for summary judgment, concluding that plaintiffs agreed to represent the CORF entities only and, as limited partners, Ross and Goldfarb are not personally liable for the CORF entities' attorney's fees (doc. 59). We granted Rule 54(b), Fed. R. Civ. P., certification and plaintiffs appealed. The Ninth Circuit reversed and remanded, concluding that Shimko's affidavit, stating that he orally agreed to represent Ross and Goldfarb individually, was sufficient to raise a genuine issue of material fact as to whether an oral contract existed for the provision of legal services to Ross and Goldfarb, individually. Shimko v. Goldfarb, 246 Fed. Appx. 525, 526 (9th Cir. 2007). Meanwhile, plaintiffs' claims against Guenther proceeded to trial. Following a bench trial, we held that Guenther, as a limited partner in control, was liable for the entirety of the unpaid attorney's fees owed by the CORF entities, and, based on plaintiffs' representation as to fees incurred, awarded $359,668.00 in favor of plaintiffs (doc. 127). Guenther separately appealed. The Ninth Circuit reversed, stating that as a lawyer Shimko is not an ordinary creditor, owes a fiduciary duty to his clients, and is charged with knowing that the CORF entities' organic documents establish that the individual defendants are limited partners. Shimko v. Guenther, 505 F.3d 987, 992 (9th Cir. 2007). The court concluded, therefore, that Shimko could not reasonably have believed that Guenther was a general partner, and accordingly held that Guenther is not personally liable for the CORF entities' debt. Id. The court remanded the case for us to consider, under quantum meruit and unjust enrichment theories, the extent to which Guenther is liable for legal fees provided to him personally. Id. at 993. We then ordered the parties to file post-trial memoranda on the remanded issues. Only plaintiffs filed a memorandum, again representing that the amount of unpaid fees was $359,668.00, and suggesting that we divide this amount by four, since Guenther was one of four named defendants. Absent opposition, we accepted plaintiffs' -2Case 2:04-cv-00078-FJM Document 218 Filed 06/27/2008 Page 2 of 7

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suggestion, and after reducing Shimko's hourly rate by one-third, we awarded $59,945.00 in favor of plaintiffs and against Guenther (doc. 181). We declined to grant Rule 54(b) certification and therefore this decision remains subject to revision at any time before final judgment is entered. Fed. R. Civ. P. 54(b). Before trial, Woodcock filed for bankruptcy. We entered an order instructing plaintiffs to seek an order lifting the automatic stay or we would dismiss the action against Woodcock. When plaintiffs failed to have the stay lifted, we dismissed the action against Woodcock without prejudice (doc. 86). Plaintiffs later filed a separate action against Woodcock, CV-05-1387, which we have consolidated with this action on remand. Therefore, unfortunately, all four defendants are before us once again. II. We now consider Woodcock's motion for summary judgment (doc. 190) and supplement to the motion for summary judgment (doc. 198), Goldfarb (doc. 191) and Ross's (doc. 195) joinder in Woodcock's motion for summary judgment, plaintiffs' response (doc. 208), Ross's reply (doc. 213), and Woodcock's reply (doc. 215). The gravamen of Woodcock's motion is that Shimko's representation of the defendants was so riddled with conflicts and ethical violations that it had no value, and therefore no additional attorney's fees are owing. We first summarily reject plaintiffs' argument that the Ninth Circuit has already concluded that summary judgment is inappropriate in this case, and that we "would commit reversible error if [we] were to grant summary judgment again on the Plaintiff's legal claims." Response at 13. First, the claims against Woodcock were previously dismissed without prejudice and no issue against him has been finally resolved. Moreover, the Ninth Circuit held only that an issue of fact exists as to whether Ross and Goldfarb entered into an oral contract with Shimko for their personal representation. The court did not rule on the conflict issue, and in fact recommended our consideration of the issue on remand. Defendants contend that Shimko's ethical violations amount to a separate and independent basis upon which to conclude that plaintiffs are not entitled to recovery of any attorney's fees. This issue is properly before us. -3Case 2:04-cv-00078-FJM Document 218 Filed 06/27/2008 Page 3 of 7

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III. Ethical Rule 1.7(a) of the Arizona Rules of Professional Conduct, Rule 42, Rules of the Supreme Court of Arizona, ("Ethical Rule" or "ER"),2 provides that a "concurrent conflict of interest exists if: (1) the representation of one client will be directly adverse to another client; or (2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer's responsibilities to another client, a former client or a third person or by a personal interest of the lawyer." If a conflict of interest exists, a lawyer may only represent the clients if the clients give informed consent, confirmed in writing. ER 1.7(b). We have adopted these rules as our own. LRCiv 83.2(e). Defendants contend that Shimko violated ER 1.7 by failing to disclose the conflicts inherent in the joint representation of the four defendants and the CORF entities and by failing to obtain defendants' written consent. In particular, defendants contend that Shimko did not explain that his joint representation would limit his ability to negotiate settlements for fewer than all of the joint defendants. They also allege that Shimko failed to advise the defendants of a possible conflict of interest even after he became concerned that Goldfarb's continued improper conduct created an increased risk for the other defendants. Defendants also contend that Shimko violated ER 1.8, which prohibits a lawyer from entering into a business transaction with a client without first providing full disclosure and an opportunity to seek advice from outside counsel, and then only with the client's written consent. Defendants allege that Shimko violated ER 1.8 when he made a $250,000 interestfree loan to a CORF entity, without notifying and obtaining the consent of all the defendants, and when he invested in an unrelated company with defendants and third parties.

The Ninth Circuit suggested that the conflict of interest question is appropriately considered in the context of both Arizona and Ohio law. Shimko v. Guenther, 505 F.3d 987, 992 & n.4 (9th Cir. 2007). However, because none of the parties discuss the application of Ohio law, we consider the issue under Arizona law only. In addition, this is a diversity action in which Arizona law applies to the claim for fees. -4Case 2:04-cv-00078-FJM Document 218 Filed 06/27/2008 Page 4 of 7

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These allegations raise issues of fact. Accordingly, we deny summary judgment on defendants' conflict of interest claim. Moreover, even if we assume that a conflict of interest existed and that Shimko failed to comply with the requirements of ER 1.7 and 1.8, defendants do not at this time show that any ethical violation affected the value of the legal services provided. Instead, citing Image Tech. Servs., Inc. v. Eastman Kodak Co., 136 F.3d 1354 (9th Cir. 1998), defendants contend that a violation of an ethical rule is sufficient in itself to establish that Shimko is not entitled to fees. But Image Tech. is a diversity action applying California law. Although California courts have held that a lawyer's conflict of interest violation renders the legal services valueless, resulting in a denial of fees in their entirety, see United States ex rel. Virani v. Jerry M. Lewis Truck Parts & Equip., Inc., 89 F.3d 574, 579 (9th Cir. 1996) (and cases cited therein), Arizona law does not provide this automatic remedy. The preamble to the Arizona Rules of Professional Conduct provides that the Rules "are not designed to be a basis for civil liability," and a violation of an ethical rule "does not necessarily warrant any other non-disciplinary remedy, such as disqualification of a lawyer in pending litigation." Rule 42, Rules of the Supreme Court of Arizona, Pmbl. ¶ 20. While a lawyer's violation of a Rule "may be evidence of breach of the applicable standard of conduct," it "should not itself give rise to a cause of action against a lawyer nor should it create any presumption in such a case that a legal duty has been breached." Id. We have found no Arizona case on point, nor have the parties cited any. Absent controlling state law, Arizona generally follows the Restatement. Espinoza v. Schulenburg, 212 Ariz. 215, 217, 129 P.3d 937, 939 (2006). Therefore, we look to the Restatement (Third) of the Law Governing Lawyers § 37 (2000), which provides that "[a] lawyer engaging in clear and serious violation of duty to a client may be required to forfeit some or all of the lawyer's compensation for the matter." The forfeiture is not automatic upon the finding of a violation. Instead, "[c]onsiderations relevant to the question of forfeiture include the gravity and timing of the violation, its willfulness, its effect on the value of the lawyer's work for the client, any other threatened or actual harm to the client, and the adequacy of other -5Case 2:04-cv-00078-FJM Document 218 Filed 06/27/2008 Page 5 of 7

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remedies." Id. Inadvertent violations or those that do not significantly harm the client do not justify a total forfeiture of fees. Id. cmt. b. Instead, forfeiture should be proportionate to the seriousness of the offense. Id. cmt. c. These considerations are fact intensive. Whether Shimko violated his ethical obligations under ER 1.7 and 1.8 and whether these ethical violations affected the value of Shimko's legal representation or caused injury to the defendants have yet to be decided. Of course, the defendants may raise Shimko's ethical violations in defense at trial and the jury will be instructed that it may reduce or bar any claim for fees in accordance with § 37 if the evidence justifies such an instruction.3 Finally, Mr. McDaniel [representing Woodcock] and Mr. Cohen [representing Ross] have obligations under ER 8.3, independent of this action, to inform the State Bar of Arizona, and the disciplinary authority in Ohio, of their allegations against Shimko because they do raise "a substantial question as to that lawyer's honesty, trustworthiness or fitness as a lawyer in other respects." ER 8.3(a). Mr. McDaniel and Mr. Cohen shall each file a brief memorandum no later than July 14, 2008, evidencing the action they have taken to satisfy ER 8.3. The court takes this action under Canon 3(B)(3), Code of Conduct for United States Judges.

Defendants contend that plaintiffs' have repeatedly misrepresented the amount of unpaid legal fees by failing to reduce the claimed amount, despite plaintiffs' concession that the claimed amount is incorrect. Defendants further contend that this inaccurate amount was improperly used to calculate the damages awarded against Guenther (doc. 181). Plaintiffs will be ethically obligated to present an accurate calculation of claimed fees at trial. Moreover, we reserve the right to revise any decision relating to Guenther in the final judgment. -6Case 2:04-cv-00078-FJM Document 218 Filed 06/27/2008 Page 6 of 7

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Therefore, IT IS ORDERED DENYING defendants' motion for summary judgment (doc. 190). DATED this 26th day of June, 2008.

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