Opinion
Introduction
In this case we determine whether the trial court abused its discretion in disqualifying Attorney Michael N. Khourie as counsel for Cal Pak Delivery, Inc. (Cal Pak) where Khourie admitted he had offered to sell out his client *6 and the class which the client was seeking to represent for a payment to himself personally of approximately $8 to $10 million. We believe that to state the question is to answer it.
We also address the related question of whether the trial court abused its discretion in ruling that Khourie could receive no attorney’s fees either for work preceding his unethical act or thereafter, no matter how successful the eventual outcome of the litigation, and regardless whether his services materially contributed to that success.
Statement of the Case/Facts
Background.
In 1992 Cal Pak, a competitor of respondent United Parcel Service (UPS), filed a complaint with the Public Utilities Commission (PUC) alleging UPS had made illegal overcharges between February 24, 1992, and February 3, 1993, and challenging UPS tariff revisions. The PUC ruled the UPS tariffs were “[U]nlawful and ineffective, since they were not approved by the [PUC], as required by [law],” but that UPS rates were reasonable for the future.
In April 1993, Cal Pak filed this action against UPS for overcharges and exemplary damages in San Francisco Superior Court. Styled as a class action on behalf of 150,000 members of the public who had utilized UPS’s shipping services in 1992 it sought compensatory and punitive damages.
In November 1994, the PUC issued a decision dismissing with prejudice Cal Pak’s request for refunds against UPS on the ground that Cal Pak’s complaint “‘[N]either sought reparations nor established damages.’ ” Acknowledging that refunds could be ordered if damages were demonstrated, the PUC denied Cal Pak’s damage claim for lack of sufficient proof. In March 1995, the PUC denied Cal Pak’s request for rehearing, but clarified ambiguities in its prior decision, stating it was continuing jurisdiction over the consolidated proceeding, but remained open to facilitate the claim of shippers other than Cal Pak to seek refunds.
Khourie’s payoff proposal.
In January 1995, appellant Khourie, attorney for Cal Pak and the alleged class, contacted Edwin Reitman, UPS’s vice-president for legal and regulatory affairs, stating he was planning to retire and suggesting a meeting to discuss settlement. On January 26, 1995, at a meeting in Atlanta, Khourie *7 proposed that Cal Pak, the sole class representative, would release its claims against UPS and that Khourie, the sole class counsel, would abandon and dismiss this action. Khourie said he would enter into a “confidential relationship” with UPS in which he would provide UPS all of his work product and other documents concerning this action and related PUC proceedings. In return, Khourie wanted UPS to pay $8 to $10 million to him personally; the class would receive nothing. Khourie told Reitman that by paying him this amount “up front,” UPS could avoid paying the class, and stated that the multi-million-dollar payment to him had to be made on or before February 24, 1995. Coupled with this proposal was a threat of more litigation if UPS failed to make the payoff. The next day, Khourie faxed Reitman an article about attorney’s fees in common fund cases and repeated that his request for payment of millions of dollars was within the range of reasonableness. On January 31, Khourie sent Reitman another fax outlining the details of his proposal and stating that “unless a resolution is completed and consideration changes hands prior [to February 24], the new actions [he] mentioned to [Reitman] will be filed on February 23, 1995.” On February 1, 1995, Reitman sent Khourie a letter rejecting the proposal and emphasizing that the proposal breached Khourie’s fiduciary duty to the class and disabled him from acting as class counsel.
Todd-AO dismissal.
On February 23,1995, Khourie (together with the law firm of Lasky, Haas & Cohler) filed a class action on behalf of the Todd-AO Corporation and similarly situated parties, seeking the same relief as in this action. UPS demurred to the complaint in Todd-AO v. United Parcel Service, Inc. (Super. Ct. S.F. County, 1995, No. 967524) and simultaneously moved for an order disqualifying Khourie from further participation in the action. In April 1995, the trial court sustained the demurrer in Todd-AO, also ruling that because of its determination that it lacked subject matter jurisdiction, it also lacked jurisdiction over the disqualification motion.
Cal Pak dismissal and Khourie’s disqualification.
Approximately one week later, on April 27, 1995, UPS demurred to the complaint in the instant action and simultaneously moved for an order disqualifying Khourie from further participation in the prosecution of this action. On May 12, 1995 following a hearing, the trial court granted the disqualification motion and sustained the demurrer to the complaint without leave to amend. The order dismissing the action was entered on May 15, 1995. In disqualifying Khourie as class counsel and barring him from any *8 further participation in the prosecution of the case the court specifically found (1) it had jurisdiction to disqualify Khourie; (2) Khourie’s misconduct was contrary to the interests of the absent members of the proposed class; (3) Khourie’s misconduct would have a continuing effect on this putative class action; and (4) a balancing of interests required that Khourie be disqualified. The order also prohibited Khourie “from receiving any fees (directly or indirectly) in connection with his representation in this case.”
Thereafter, Khourie moved the court to vacate its disqualification order. Acknowledging it had not considered that portion of the order denying fees, the court, after a full hearing, nevertheless denied the motion to vacate its order, noting it had carefully examined its earlier ruling. 1
Appellate proceedings.
Cal Pak timely appealed from the judgment dismissing its action and from the order disqualifying Khourie. Khourie separately filed an appeal from the disqualification order and the subsequent order denying his motion to vacate and set aside the disqualification order. On November 27, 1995, in violation of the superior court disqualification order, Khourie filed on behalf of both appellant Cal Pak and himself a combined brief addressing both the merits of the judgment of dismissal and the order disqualifying him. On January 4, 1996, upon UPS’s motion to strike appellant’s opening brief, we ordered that pages 4-22 of Cal Pak’s opening brief (discussing the merits of the dismissal order) be stricken, stayed further briefing of the merits of the ruling on the demurrer, and ordered that UPS file a brief limited to its response to the argument that Khourie’s disqualification should be reversed.
I.
Disqualification
“The authority to disqualify an attorney stems from the trial court’s inherent power ‘[t]o control in furtherance of justice, the conduct of its ministerial officers, and of all other persons in any manner connected with a judicial proceeding before it, in every matter pertaining thereto.’ (Code Civ. Proc., § 128 [subd. (a)(5)];
In re Complex Asbestos Litigation
(1991)
A.
Khourie contends the court lacked jurisdiction to disqualify him. He argues that once the court granted the demurrer and dismissed the case, there was no “judicial proceeding before it” and consequently, the court was without power to disqualify him. We disagree.
Initially, we observe that it is unclear whether the grant of the demurrer in this action preceded or followed the disqualification ruling. Both orders were signed May 12, 1995, and were filed on May 15th. It would be absurd to argue that the court’s jurisdiction to disqualify counsel turns on which order it signed first.
More fundamentally, the case and counsel were properly before the court and the court had both “inherent power to exercise reasonable control over all proceedings connected with the litigation before it”
(Mowrer
v.
Superior Court
(1969)
Khourie argues that UPS’s concession in the trial court during hearing on the demurrer in Todd-AO that the sustaining of the demurrer would render the court without jurisdiction to decide the disqualification issue estopped UPS from obtaining the disqualification in this case. Again, we disagree.
UPS argued in this case that it had not fully considered the issue of the impact of granting the demurrer on the disqualification decision at the time
*10
of the hearing in Todd-AO as it had been raised there without benefit of briefing, but that in the interim and after further research, UPS had come to the conclusion that the court possessed jurisdiction to disqualify counsel. The trial court agreed. Any such concession made by UPS in Todd-AO as to a matter of law did not constitute an estoppel in this case. Even if it had been made in
this
case, such a concession could not prevent the trial court here from exercising its inherent and statutory powers to disqualify counsel. “The parties to a judicial proceeding cannot. . . effectively stipulate or concede that the court either has or lacks jurisdiction to act in the particular matter. [Citation.]”
(Griggs
v.
Superior Court
(1976)
B.
Khourie vigorously argues that the trial court abused its discretion in disqualifying him. He contends the court failed to properly apply the balance of interest test in that it improperly applied a per se disqualification rule, failed to consider the class’ interest in him continuing to serve as counsel, failed to consider his interest in representing the class and failed to consider that by disqualifying counsel the court may have given UPS a tactical advantage. He also contends the court failed to properly apply the “continuing effects” test. We disagree with all of these contentions.
The trial court expressly stated that “Khourie’s misconduct will have a continuing effect upon this putative class action.” It also found “a balancing of interests also requires Khourie be disqualified.”
In reviewing the trial court’s exercise of discretion to disqualify counsel, we apply the traditional substantial evidence standard of review.
(In re Complex Asbestos Litigation
(1991)
Recognizing that the instant case is unlike most disqualification cases, where disqualification results from a conflict of interest involving disclosure or threat of disclosure of confidential information, Khourie attempts to distinguish his situation on the basis that his “proposal” did not involve any threat of disclosure of confidential information and was, in any *11 case, unsuccessful. It is true that this case is factually distinguishable from most of the disqualification cases, but the most notable difference is the magnitude of the ethical lapse. Though Khourie’s conduct did not involve the misuse of confidential information, nor directly prejudice adverse parties, it was nonetheless more inimical to the interests of those he ostensibly represented. Had Khourie’s scheme succeeded his clients would have been not just tactically disadvantaged but completely undone.
“ ‘The relation between attorney and client is a fiduciary relation of the very highest character, and binds the attorney to most conscientious
fidelity—uberrima
fides.’ [Citations.] Among other things, the fiduciary relationship requires that the attorney respect his or her client’s confidences. [Citations.] It also means that the attorney has a duty of loyalty to his or her clients. [Citations.]”
(Zador Corp.
v.
Kwan, supra,
In
Gregori
v.
Bank of America
(1989)
We believe Khourie’s unethical conduct is likely to have a continuing effect in this litigation adverse to the interests of the class he purports to represent. As noted in
Palumbo
v.
Tele-Communications, Inc.
(D.D.C. 1994)
Furthermore, where there is reason to doubt the loyalty of counsel or the adequacy of counsel’s representation, serious questions arise concerning the preclusive effect of any resulting judgment. “If the certified class is not represented vigorously, the plaintiffs may lose a meritorious case and suffer the consequences of the adverse judgment, since all class members are bound by the result. [Citations.] Conceivably, even the defendant may also suffer prejudice from inadequate class representation because, in such circumstances, the class action judgment for defendant may not be given res judicata effect as to absent class members [citation] and the matters will be subject to costly relitigation.”
(Ferraro
v.
General Motors Corporation
(D.N.J. 1984)
The court properly determined that the balance of interest warranted disqualification.
Nor was the court prevented from disqualifying Khourie because his “proposal” was not successful or because he promised he would not again suffer such a lapse. The court was not required to credit Khourie’s self-serving statements in this regard. Khourie’s transgression might well have a substantial continuing effect on judicial proceedings to occur in the future.
(Chronometrics, Inc.
v.
Sysgen, Inc.
(1980)
As to Khourie’s claim that the court failed to consider the tactical advantage that might flow to UPS from his disqualification, nothing indicates the court failed to consider this possibility. Furthermore, “[e]ven if tactical advantages attend the motion for disqualification, that alone does not justify denying an otherwise meritorious motion.”
(In re Complex Asbestos Litigation, supra,
Apart from the interests of the class or possible prejudice to UPS from Khourie’s continued presence in the action, an additional consideration compels us to uphold his disqualification. This case truly is sui generis. Unlike
Gregori
and most other disqualification cases, here the trial court faced a direct, acknowledged, undisputed and indefensible betrayal by counsel of the interests of his client and the putative class. In such circumstances, the failure of the trial court to take immediate remedial action to disqualify counsel would constitute an abdication of judicial responsibility, violating the public trust and exposing judicial institutions to public obloquy. As our Supreme Court has observed: “However, ultimately the issue involves a conflict between a client’s right to counsel of his choice and the need to maintain ethical standards of professional responsibility.
‘The preservation of public trust both in the scrupulous administration of justice and in the integrity of the bar is paramount. . . . [The client’s recognizably important right to counsel of his
choice]
must yield, however, to considerations of ethics which run to the very integrity of our judicial process.
’
(Hull
v.
Celanese Corporation
(2d Cir. 1975)
We in the judicial branch are responsible for the integrity of the judicial process. Khourie’s misconduct shakes the foundations of that process, constitutes not just a betrayal of his clients but of public trust “ ‘in the scrupulous administration of justice and in the integrity of the bar.’ ”
We conclude the court did not abuse its discretion in disqualifying Khourie as counsel.
*14 II.
Denial of Fees
Khourie contends the trial court erred in ordering that he be prohibited from receiving any fees in connection with the present case. He argues first that the issue of fees was not ripe for decision because the litigation had not been concluded and the court could not yet determine whether his services contributed to any recovery on behalf of the class. In the alternative, Khourie contends he is at least entitled to fees for services rendered prior to his commission of unethical conduct.
The trial court order disqualifying Khourie also prohibited him “from receiving any fees (directly or indirectly) in connection with his representation in this case.” In the court’s subsequent order denying Khourie’s motion to vacate and set aside the order of disqualification, the court reexamined its ruling denying fees and concluded, “it is appropriate and necessary to bar Michael Khourie from recovering any fees for any services he rendered in connection with this action either before or after his admitted ethical misconduct in January 1995 in connection with this action.” In so ruling, the court relied upon
Clark
v.
Millsap
(1926)
It is the general rule in conflict of interest cases that where an attorney violates his or her ethical duties to the client, the attorney is not entitled to a fee for his or her services. (E.g.,
Jeffry
v.
Pounds, supra,
Clark
v.
Millsap, supra,
In
Jeffry
v.
Pounds, supra,
In
Estate of Falco, supra,
The foregoing cases are not directly on point. They articulate the rule that a court may prevent counsel’s recovery of fees from the client where the *16 attorney has violated ethical rules; whether through fraud, acts incompatible with the faithful discharge of duties or wrongful abandonment of the client. The trial court could properly conclude that Khourie’s “proposal” fit within any of these categories.
However, the appellate courts in all three of the above cases allowed partial fee recovery or acknowledged that
some
fees could be recovered by the attorney: (1) where there was no objection by the client
(Clark
v.
Millsap, supra,
Here, counsel labored on this case for three years before committing the actions resulting in his disqualification. It is unknown today whether a class ever will be certified, nor is it known whether Cal Pak or putative class members will benefit from Khourie’s past efforts. It may be that Khourie’s labors during the three years before his breach will prove dispositive in some future recovery by persons as yet unidentified.
Moreover, the fee denial request was initiated by respondent UPS; no client-victim of Khourie’s misconduct has yet sought to deny him fees. If in later litigation it is determined that UPS is liable to Cal Pak or to class members for its overcharges, the question arises whether Khourie’s violation of his ethical duties toward his own client and to the class warrant a denial of fees. On the other hand, it may also be the case that no fee issue will ever be presented, should the underlying litigation result in no recovery. We believe that with respect to the issue of Khourie’s right to recover fees for services rendered before his breach of duties to his client and to the putative class, the trial court order was premature, as many of the events which should guide the court’s discretion in making that determination have not occurred and may never occur. The determination whether to award fees to Khourie for services rendered before the date of his misconduct must await the outcome of the underlying litigation. At that time, the trial court will have before it all the factors bearing upon the fee issue.
At the same time, our reading of the above cases persuades us that the court clearly did not abuse its discretion insofar as it denied fees for services rendered by Khourie after the date of his misconduct.
*17 III.
No Prohibition on Work Product Access
In an effort to secure maximum tactical benefit from opposing counsel’s ethical breach, UPS seeks an order from this court denying successor counsel access to Khourie’s work product from this appeal and the related Todd-AO appeal. The trial court did not make such an order and there is no issue on appeal before this court relating to work product confidentiality. 3 We deny the request to the extent it relates to the instant appeal.
UPS argues that to allow Khourie to communicate his appellate work product to successor counsel rewards Cal Pak’s role in allowing Khourie to file the appeal brief in defiance of the superior court’s disqualification order. Such a prohibition at this point would injure not only Cal Pak, but the class, if one is eventually certified.
4
No California case that we have found goes so far where the ethical breach does not involve the acquisition of privileged or confidential information by counsel as a result of the breach of ethics, usually where the breach involved dual representation. The sole case cited by UPS in support of this sanction is
Wagner
v.
Lehman Bros. Kuhn Loeb, Inc.
(N.D.I11. 1987)
We affirm the order disqualifying Khourie as counsel. We reverse as premature that part of the order precluding him from recovering attorney’s fees for services rendered before January 10, 1995. Respondent UPS shall recover its costs on this appeal.
Haerle, J., and Lambden, J., concurred.
Notes
“Having considered the matter, and particularly the class action allegations pled in the complaint, the Court concludes that it is appropriate and necessary to bar Michael Khourie from recovering any fees for any services he rendered in connection with this action either before or after his admitted ethical misconduct in January 1995 in connection with this action.”
The rule that an attorney who engages in conflicting representation without obtaining informed consent is not entitled to compensation is not based on the premise that the attorney must pay a penalty so much as on the principle that “payment is not due for services not properly performed.”
(Schaefer
v.
Berinstein
(1960)
Appellant sought such order in its motion to strike Cal Pak’s opening brief and we did not address it in our order of January 4, 1996.
We note in this regard that rule 3-700 (D) of the State Bar Rules of Professional Conduct provides in relevant part that “[a] member [of the bar] whose employment has terminated shall: [IQ (1) Subject to any protective order or non-disclosure agreement, promptly release to the client, at the request of the client, all the client papers and property. ‘Client papers and property’ includes correspondence, pleadings, deposition transcripts, exhibits, physical evidence, expert’s reports, and other items reasonably necessary to the client’s representation, whether the client has paid for them or not. . . .”
The commentary following rule 3-700 makes clear that the member must “ ‘avoid reasonably forseeable prejudice to the rights of the clients.’ What such steps would include, of course, will vary according to the circumstances. Absent special circumstances, ‘reasonable steps’ do not include providing additional services to the client once the successor counsel has been employed and rule 3-700(D) has been satisified.” (Discussion, 23 pt. 3 West’s Ann. Cal. Court Rules (1996 ed.) rule 3-700, pp. 408-409.)