E-Alert Case Updates

Maryland District Court Rejects “Lodestar” Approach in Favor of MRPC Rule 1.5 in Determining Attorneys’ Fees Where Parties Entered Into Express Contract with Fee Provision

James M. Beck v. Patrick Sullivan and Sandra Peiffer
United States District Court for the District of Maryland, No. RDB-11-3075, September Term 2010 (D. Md. October 4, 2013)
by Jhanelle Graham, Associate
Semmes, Bowen & Semmes (www.semmes.com)

In James M. Beck v. Patrick Sullivan and Sandra Peiffer, Plaintiff James M. Beck (“Plaintiff” or “Beck”) filed an action against Defendants Patrick Sullivan (“Sullivan”) and Sandra Peiffer (“Peiffer”), and Arbotek Associates, Inc. (“Arbotek”), alleging breach of contract, tortious interference with contract, intentional misrepresentations, and conversion. The allegations stemmed from the sale of Plaintiff’s company, Avtek Associates, Inc. (“Avtek”), to Defendants on October 29, 2007. The United States District Court for the District of Maryland entered an Order and Final Judgment against the Defendants, pursuant to Rule 58 of the Federal Rules of Civil Procedure, specifically providing that they were liable to Plaintiff for reasonable attorneys’ fees and court costs. Pending before the district court was Plaintiff’s Motion for Reasonable Attorneys’ Fees and Expenses (“Motion”). For reasons stated below, United States District Court Judge Richard D. Bennett granted Plaintiff’s Motion in the amounts of $64,269.25 for attorneys’ fees, $5,000.00 for expert fees, and $2015.17 for expenses, for a total of $71,284.42.

Beck formed Avtek in 1988, a company that represented manufacturers serving the technology market (referred to as “principals”) by designing, marketing, and selling their products in specific territories. Avtek, which maintained an office in Columbia, Maryland, grew to be a profitable firm, and in 1998, Beck hired Peiffer as a sales engineer. Beck was considering retirement and saw Peiffer as a candidate to buy Avtek and replace him. In 2000, Plaintiff promoted Peiffer to Vice President of Sales, and in 2004 or 2005, Peiffer was named President of Avtek, during which time Beck moved to Montana. Plaintiff maintained his position as owner and chief executive officer of Avtek by communicating remotely with staff and principals.

While serving as Avtek’s President, Peiffer began dating Sullivan sometime in late 2006 or early 2007, and eventually recommended that Beck hire Sullivan based on his management background. Beck hired Sullivan in March 2007, but at that time, Beck did not know that Sullivan was in Chapter Thirteen (13) bankruptcy. Soon thereafter, Beck discussed the sale of Avtek with both Peiffer and Sullivan, and, based on recent revenues and its principals, valued Avtek’s worth at $900,000. On October 29, 2007, Beck sold Avtek to Defendants through a Stock Purchase Agreement and a Management Agreement.

The Defendants agreed to manage Avtek, fulfill specific payment obligations, provide financial statements to the Plaintiff, and not to compete with Avtek until the Promissory Note had been satisfied. In particular, the Management Agreement created a “lockbox” whereby all Avtek revenue was to be placed in a separate holding account in order to prioritize payment of monthly installments on the Promissory Note. By agreeing to the terms of the sale, Sullivan represented that no bankruptcy proceeding was pending against him, and the Defendants pledged one hundred percent (100%) of their stock to the Plaintiff in the event of a default to secure the transaction. In addition, the Promissory Note dictated that upon default, the Plaintiff could accelerate the debt and recover the costs and expenses of enforcing the Note, including court costs, costs of appeal, and reasonable attorneys’ fees.

From November 2007 through August 2008, the first ten (10) monthly payments were made on-time and in-full. Thereafter, the payments became sporadic and fluctuated greatly in their amounts. Beck confronted the Defendants regarding Note payments after the first two (2) instances of irregularity in September and October of 2008. In early 2009, without waiving his rights under the various contracts, Beck allowed the Defendants to sign an agreement to make modified payments on the Note, but the payments continued to be inconsistent. Later in 2009, the Defendants failed to inform Beck of the losses of major principals, and failed to otherwise provide financial information in accordance with the Management Agreement. In a March 2010 meeting with Peiffer, Beck discovered that, as early as 2008, Sullivan had left Avtek for SuperJet, an Italian company, and learned for the first time that Sullivan had been in bankruptcy when he entered the contract. Sullivan did not receive a salary from Avtek at any point after 2008 and had transferred his ownership interest in the firm to Peiffer, who had no managerial skills.

After June 2011, Defendants made no more payments on the Note. On August 1, 2011, Beck notified the Defendants that they were in default, and declared all outstanding principal and interest due immediately, demanded repayment, and notified the Defendants that he was exercising his right to retake one hundred percent (100%) of Avtek Acquisition’s stock. By October 2011, the Plaintiff discovered that Avtek had in fact entered a joint venture with another company, Arbotek, creating a new company named ReSpin Sales and diverting business away from Avtek. Finally, it came to light that the Defendants improperly diverted funds that should have been deposited in the holding account for payment on the Note in the amount of $129,557.92, and that Peiffer cashed checks for her own use, totaling $13,950.00. When Beck reacquired the Defendants’ stock pursuant to the Stock Purchase Agreement, the value of Avtek was virtually zero.

On October 27, 2011, Beck filed a complaint against Defendants and Arbotek. During discovery, however, Beck encountered very little cooperation from Peiffer and Sullivan, including ignored discovery requests and refusal to communicate with counsel. When Peiffer failed to show cause regarding her lack of response to discovery requests, the United States District Court for the District of Maryland ordered that default judgment, only as to liability, be entered against her pursuant to Rule 37(b)(2) and (d) of the Federal Rules of Civil Procedure. Sullivan was directed to pay $1,020.00 as a sanction for his discovery violation. On April 5, 2013, the claims against Arbotek were dismissed with prejudice, after the parties reached a settlement.

As to the claim for breach of contract, the district court concluded that both Defendants breached provisions of the Stock Purchase Agreement and Management Agreement, particularly: (1) the clause requiring disclosure if one (1) of them was in bankruptcy at the time of signing, (2) the non-compete clause by forming a joint venture, (3) failing to provide financial information as required by various provisions of the Management Agreement, (4) improperly depositing Avtek revenue in accounts other than the “lockbox” account; and (5) breaching their obligations to pay on the Promissory Note. The district court, however, found in favor of Peiffer as to the allegation of Intentional Misrepresentation Regarding Joint Venture with Arbotek, where Beck failed to prove at trial that Peiffer made any false statement in connection with the joint venture, or that any false statements were made by agents of Arbotek, which settled. After favorable findings on all the other allegations in the complaint, the district court concluded that Defendants Sullivan and Peiffer were jointly and severally liable for $125,564.33, and awarded $13,950.00 to the Plaintiff against Peiffer for the amount she converted. For discovery violations, the court concluded that an award of punitive damages was warranted in the amount of $129,557.92, which was equal to the total amount of unauthorized deposits of Avtek funds into accounts other than the “lockbox” account. In sum, the Court awarded $269,072.95 to Beck, noting that Beck was the prevailing party in the action and was, therefore, entitled to reasonable attorneys’ fees, pursuant to the Stock Purchase Agreement. Beck filed a Motion for Reasonable Attorneys’ Fees and Expenses.

The district court began by stating that although courts generally use the “lodestar” approach when determining attorneys’ fees under fee-shifting statutes, the lodestar method does not apply to contractual fee shifting provisions under Maryland law. Roger E. Herst Revocable Trust v. Blinds to Go (U.S.) Inc., No. ELH-10-3226, 2011 WL 6444980, at *2 (D. Md. Dec. 20, 2011). Rather than using the lodestar approach, therefore, a court “should use the factors set forth in Rule 1.5 of the Maryland Rules of Professional Conduct (“MRPC”) as the foundation for analysis of what constitutes a reasonable fee when the court awards fees based on a contract entered by the parties authorizing an award of fees.” Id. (citing Monmouth Meadows Homeowners Ass’n, Inc. v. Hamilton, 7 A.3d 1, 5 (Md. 2010)). According to the trial court, those factors are: (1) the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly; (2) the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment of the lawyer; (3) the fee customarily charged in the locality for similar legal services; (4) the amount involved and the results obtained; (5) the time limitations imposed by the client or by the circumstances; (6) the nature and length of the professional relationship with the client; (7) the experience, reputation, and ability of the lawyer or lawyers performing the services; and (8) whether the fee is fixed or contingent. MD. R. PROF. CONDUCT 1.5(a). Nonetheless, the court articulated that it “does not need to evaluate each factor separately,” and need not “make explicit findings with respect to Rule 1.5 at all, or even mention Rule 1.5 as long as it utilizes the rule as its guiding principle in determining reasonableness.” Nautical Girl LLC v. Polaris Investments Ltd., No.ELH-10-3564, 2011 WL 6411082, at *2 (D. Md. Dec. 19, 2011) (quoting SunTrust Bank v. Goldman, 29 A.3d 724, 730 (Md. App. 2011)).

First, like the award of fees itself, the trial court has wide discretion to allocate the fee award among defendants. Other judges of the District of Maryland have concluded that joint and several liability was appropriate after considering: (1) the nature of the injury and who caused it; (2) the amount of time the plaintiffs spent litigating against each defendant; and (3) of the least importance, the defendants’ ability to pay.” See, e.g., Essex v. Randall, No. DKC-03-3276, 2006 WL 83424, at *6-7 (D. Md. Jan. 11, 2006). Consideration of these factors led the district court to conclude that joint and several liability was appropriate. Given that both Defendants’ concerted conduct contributed significantly to the circumstances giving rise to the Plaintiff’s claims, the court found it unreasonable to attribute certain portions of the requested fees only to one (1) and not to the other.

Although Defendants in the instant case did not specifically argue that the hourly rates charged by the Plaintiff’s attorneys are excessive, the district court stated that MRPC Rule 1.5 requires a court to consider “the fee customarily charged in the locality for similar legal services.” In analyzing this factor, a court compares the fee charged to the prevailing market rate by looking to affidavits from other counsel or relying on its own knowledge. CoStar Group, Inc. v. LoopNet, Inc., 106 F. Supp. 2d 780, 788 (D. Md. 2000). In this case, the rates charged by both counsel—where the suggested range for attorneys admitted for five (5) to eight (8) years is $165 to $250 per hour; and for attorneys admitted for fifteen (15) years or longer is $275 to $400 per hour—were reasonable. MD. GUIDELINES § 3.b & 3.d.

Finally, with respect to expert fees, the court opined that the tactical decision not to call an expert at trial does not bear on whether retaining him in earlier stages was reasonable, especially where the expert billed Beck for $8,664.70 and Beck only paid $5,000.00, seeking only that amount as an award. The court also granted an award of Beck’s total expenses in the amount of $2,015.17, where the expenses requested by Beck were the type normally incurred in preparing a case for litigation and taking the matter to a verdict. For these reasons, the court granted Beck’s Motion for Award of Reasonable Attorneys’ Fees and Expenses in the amounts of $64,269.25 for attorneys’ fees, $5,000.00 for expert fees, and $2,015.17 for expenses.