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The Unjustified Referral Fee

Buntz v. Peperno, 2008 WL 693590, (Pa. Com. Pl. 2008) is a Lackawanna County case which examines the interaction of referrals and attorney-client fee arrangements. It is notable if only for its ordinary nature, in that it is no different than the practice undertaken by many attorneys. The underlying case giving rise to the legal malpractice was a car accident suit. The full extent of Brenda Buntz's suit was based on breach of fiduciary duty, unjust enrichment, legal malpractice, and fraud mainly. 

On October 30, 2001, Buntz was injured in a car accident. In November, 2001, she retained an attorney named David J. Gnall, who operated a solo attorney firm to represent her in the negligence action against the other driver. In late 2002, Gnall suggested that an attorney he associated with, Nicholas E. Fick, be allowed to file the case. Eventually, Gnall did file suit, and met with Buntz throughout 2002 and 2003. Each time the two spoke, Gnall reassured Buntz that Fick was moving the case forward. In 2003, Gnall informed Buntz that Fick had not proceeded with the matter, and referred her to a different firm in order to file a legal malpractice suit against Fick.

When Buntz went to the other firm, she told them of the referral from Gnall, and they acted accordingly by not naming Gnall as a defendant. After the initial consultation, the malpractice firm executed a contingency agreement with Buntz, which stated any award received would be a 40/60 split between the firm and Buntz respectively. At the same time, a letter was sent to Gnall, thanking him for the referral and assuring him a 1/3 recovery of any award the malpractice firm recovered. The original contingency agreement said suit would be filed against all relevant defendants. However, several months later, a new agreement was sent identifying only Fick, and not speaking of any referring attorney. The malpractice firm subsequently filed suit against Fick, who immediately joined Gnall as a defendant. Buntz was never informed that Gnall was a party to the suit.

Prior to litigation, Fick asserted that Gnall was also responsible for any malpractice, and maintained that position throughout. Eventually, the malpractice firm settled for $1,000,000 judgment against Fick. At the time of settlement neither Fick nor Buntz was aware that Gnall, a co-defendant was going to receive a referral fee. On April 14, 2005 a breakdown of the settlement was sent to Buntz. It asked her to sign off on deposits into the firm's escrow account of their share of the award. It did not list that Gnall was receiving a portion, but did mention the settlement was against Gnall and Fick. Buntz then met with Gnall on April 15, and he neglected to tell her of the referral fee he was receiving, he only signed his portion. The settlement check and referral fee were then sent to Gnall to give to Buntz.

In May, 2005, Buntz came to receive her settlement check. Gnall would not give it over until Buntz met with a financial advisor, Peperno. Eventually, Peperno signed a 4 year consulting agreement with Buntz. Gnall did not disclose that he would receive a portion of the initial deposit made, as well as a percentage of the money paid to Peperno. The proper paperwork was completed, and Peperno was accepted by Buntz. Buntz did not know that Peperno was unlicensed by the SEC, and the Pennsylvania Securities Commission. Peperno then misappropriated almost half of the settlement for private usage. Buntz continued to face difficulties in withdrawing her funds, and attempted to fire Peperno. Gnall assured her every time that Peperno was fine, and advised her to retain him. In late 2005, Peperno was subject to a federal investigation known by Gnall, but not revealed to her until 2006. Gnall acted as counsel for Peperno during the indictment, which gave rise to the numerous claims asserted in this action against Peperno and Gnall as co-defendants.

Gnall fought the lawsuit on several grounds. He first alleged he did not breach fiduciary duty because there was no attorney-client relationship.Pennsylvaniadoes not require a traditional fee arrangement for an attorney-client relationship to exist. In the absence of express agreements, an implied relationship will be found if the purported client sought advice from the attorney; the advice sought was within the attorney's professional competence; the attorney expressly or impliedly agreed to render such assistance; and it was reasonable for the client to believe the attorney was representing her. The court found it persuasive that Buntz continued to seek advice from Gnall following settlement, the fact that he oversaw the Peperno investment, and the fact that he watched her sign the release. Most persuasive however, was the court's belief that the referral fee was a substantial factor. It is interesting to note the court does not delve into the scope of an attorney-client relationship based on a referral agreement.

While the dishonesty, and divided loyalties are somewhat obvious, it is important to note the standard inPennsylvania. An attorney owes the highest duty of honesty, confidentiality, and fidelity to a client. An intentional misrepresentation to a client during any transaction where an attorney represents that client is clearly a violation of the duty of honesty. Thus, the multiple lies concerning Peperno sufficed in this instance.

The court next discussed the unjust enrichment claim. Unjust enrichment is an appreciation of benefits by a defendant and acceptance and retention of such benefits under circumstances that it would be inequitable for defendant to retain the benefits without paying value. The plaintiff must demonstrate that the defendant either wrongfully secured or passively received a benefit that it would be unconscionable for the defendant to retain. Gnall argued there was no legal proscription against retaining a referral fee from the legal malpractice action against him. The court felt differently. While not conclusive, they formed a large part of their reasoning on the disciplinary board's decision that fee disputes should be decided by arbitration, and in this arbitration, it was decided that Gnall was not entitled to a referral fee. Thus, the resolution meant the referral fee was required to be refunded. Although, the decision was based on a violation of ethical rules of conduct, which were not conclusive to liability, they established a standard of care.

Furthermore, attorney fee-sharing agreements are against public policy if entered into without client's consent. InPennsylvania, an agreement may be found void if it is against a clearly expressed public policy that is derived from laws and legal precedents rather than general considerations of supposed public interest. The court believed the fee-sharing agreement was against public policy because Buntz did not acquiesce, or give her permission to split it in that nature. Thus, while it did not provide a basis for the unjust enrichment action, if proven, then Buntz could have received restitution for the violation. Thus, the court dismissed the objection to this charge. Gnall was also overruled when he objected to the same portion of the Peperno fee-splitting agreement.

The last action this entry will discuss is the legal malpractice claim. Gnall asserted that the attorney-client relationship did not exist here either, and thus he did not breach a duty. He also suggested Buntz did not state that the breach of a professional duty was the cause of harm to her or that a deficiency in professional services by Gnall defendants was the reason Peperno converted her money or [why] she was unable to recover her money. To succeed with her professional negligence claim, Buntz must also aver facts establishing Gnall's failure to exercise ordinary skill and knowledge and that such negligence was the proximate cause of damage to her. On this count, the court had myriad options to show that there was a breach, and that Gnall in their belief acted recklessly. Mainly, the investment agreement with an unlicensed person was what supplied the basis of this reasoning.

This case seems somewhat egregious, but the question must remain what actions the client took to protect her interests. It is not obvious here, but what should have occurred most certainly did not. It does not appear that the settlement agreement was read very closely, or that Buntz understood the full extent of her rights. A solution which might help in complex cases like this is a legal presumption. For instance, if in litigation, a client produces evidence that an attorney's misconduct resulted in a disciplinary violation, then there should be a presumption that the effects suffered by the client were a result of that conduct. Then, it would be up to the defendant attorney to produce evidence that they did not produce the harm. It seems to be inequitable to require an aggrieved client to go through both a disciplinary hearing against an attorney, as well as a separate civil law suit.

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