Johnson v. Nextel Communications, Inc.
2011 U.S. App. LEXIS 19624
| 2d Cir. | 2011Background
- This is an appeal from a Rule 12(b)(6) dismissal of a class-action complaint against Nextel, the Leeds, Morelli & Brown law firm (LMB), and several LMB lawyers.
- Plaintiffs, former clients of LMB, allege LMB compromised fiduciary duties by entering the DRSA with Nextel, which paid LMB substantial sums regardless of individual client recoveries.
- The DRSA created staged dispute resolution (interview/negotiation, non-binding mediation, binding arbitration) with escalating payments to LMB and a two-year consultancy arrangement with Nextel.
- Key terms required waivers of rights (jury trials, punitive damages, confidentiality, etc.), with waivers allegedly benefiting LMB and Nextel rather than claimants.
- Plaintiffs signed Individual Agreements and Pledges of Good Faith; they claim they did not receive full DRSA disclosure and that LMB aggregated claims improperly.
- The district court applied New York law after venue transfer; the court held the conflict disclosures negated fiduciary-duty and fraud claims and dismissed the remainder.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does the DRSA create unconsentable conflicts of interest for LMB? | LMB’s DRSA created pervasive, non-consentable conflicts undermining loyalty to claimants. | Any conflicts were consentable, and signatures on Individual Agreements reflect informed review. | Yes; conflicts are unconsentable, and DRSA breached fiduciary duties. |
| Did Nextel aiding and abetting breach of fiduciary duty by LMB survive pleading? | Nextel knowingly aided and participated in LMB’s breach via the DRSA. | Arguments rely on a settled relationship; insufficient showing of knowledge or participation. | Yes; plaintiffs adequately alleged aiding and abetting. |
| Did LMB breach the original retainer agreement by pursuing the DRSA instead of individual representation? | DRSA violated duties to represent clients individually and pursue differing claims. | DRSA was a permissible settlement mechanism; representation occurred through DRP. | Yes; pleading supports breach of contract claim against LMB. |
| Do plaintiffs state a fraud claim in inducement of the retainer agreement? | LMB misrepresented its intent to pursue individual claims and concealed the DRSA terms. | No specific fraud details; reliance insufficient, and disclosures were acknowledged. | Yes; allegations satisfy misrepresentation, intent, reliance, and damages. |
| Are claims against Nextel for aiding and abetting fraud, malpractice, and contract breaches viable after the DRSA? | Nextel knowingly facilitated LMB’s fiduciary breaches and related torts. | Dismissal of underlying claims negates aiding/abetting theories. | Yes; district court should reconsider these claims in light of the fiduciary-duty ruling. |
Key Cases Cited
- Twombly, Bell Atl. Corp. v., 550 U.S. 544 (U.S. Supreme Court 2007) (plausibility standard for pleading claims)
- Faulkner v. Beer, 463 F.3d 130 (2d Cir. 2006) (pleading standards and deference to allegations in Rule 12(b)(6) context)
- In re Agent Orange Prod. Liab. Lit., 818 F.2d 216 (2d Cir. 1987) (class action settlement safeguards and fiduciary considerations)
- Elacqua v. Physicians’ Reciprocal Insurers, 860 N.Y.S.2d 229 (N.Y. App. Div. 3d Dep’t 2008) (conflicts-of-interest and fiduciary duty in insurance context)
- Int’l Bus. Machs., Corp. v. Levin, 579 F.2d 271 (3d Cir. 1978) (business conflicts and consent)
- Kaufman v. Cohen, 760 N.Y.S.2d 157 (N.Y. App. Div. 1st Dep’t 2003) (aiding and abetting and fiduciary duty principles)
- Ziegelheim v. Apollo, 128 N.J. 250 (N.J. 1992) (informed consent and fiduciary duties in transformation of representation)
- Matter of Educ. Law Ctr., Inc., 86 N.J. 124 (N.J. 1981) (conflicts and professional duties)