Contingency attorneys say City Hall reneged on their agreement
(Editor’s note: This article is one in a multi-part series that details the ongoing legal fees dispute between City Hall and three prominent law firms that represented it in its water contamination case against oil companies. On Tuesday, read about the future of a water treatment facility that will clean up seven of Santa Monica’s drinking wells.) CITY HALL — Attorneys here are embroiled in by far the largest and most bitter legal battle the local government has ever faced, with hundreds of millions of dollars in taxpayer money hanging in the balance.
The public attorneys and contingency lawyers who represented Santa Monica in its litigation against 18 oil companies for allowing MTBE to contaminate drinking water are set to wage war at a trial in February. At issue is just how much City Hall owes its team of contingency lawyers for securing a $121 million cash settlement plus the promise from oil companies to build a water treatment facility to clean up seven water wells.
The case was set for trial last month but was delayed until Feb. 6. Attorneys on both sides were in court last week when it was determined that the case is effectively stayed while the city’s motion to amend its complaint is heard by the Court of Appeals.
The amended complaint — which has been submitted to Los Angeles Superior Court Judge David Minning four times and denied each time — claims that the lead contingency attorney, Fred Baron, had a conflict of interest because he allegedly represented the other lawyers in their planned litigation against City Hall over fees without city officials knowing it.
“The court has refused to hear that complaint,” said Marshall Grossman, the Santa Monica-based attorney representing the contingency lawyers. “The city has been a serial loser in the court... almost every motion the city has filed has been won by the lawyers.”
Attorneys will face off in court again on Dec. 12 during a status conference on the case. But whether or not the case will go before a jury in February remains to be seen.
Meanwhile, millions of dollars are being racked up in attorney fees on both sides.
City Hall in September 2004 retained Los Angeles-based law firm Morgan Lewis & Bockius to represent it. Attorneys at the firm won’t disclose how much they are charging Santa Monica taxpayers, except to say that they are giving the public a deal.
“We are giving the city a discount because we think it’s appropriate to give a public entity a discount,” said Morgan Lewis & Bockius attorney David Halbreich, adding he was unsure at what hourly rate his firm is billing City Hall. “We are spending a considerable amount of time on this case, hundreds of hours.”
“We are giving the city a discount because we think it’s appropriate to give a public entity a discount.” — DAVID HALBREICH Morgan Lewis & Bockius attorney
Throughout the nine-year battle — with the oil companies and now the contingency lawyers — City Hall’s lead attorneys also have been consumed with the case. They have spent hundreds, if not thousands, of hours working on the case. In recent months, many of them have spent days and weeks in depositions, as have City Councilmembers.
“Their time has been monopolized in this case,” said City Councilman Richard Bloom, who added that city officials are still open to settlement negotiations with the contingency lawyers.
Grossman, who is representing the law firms of Texas-based Baron & Budd, Sacramento-based Miller & Sawyer and San Francisco-based Sher & Leff — the three law firms that worked on the MTBE case for City Hall — claims the attorney fees are reaching well into the millions of dollars.
“The residents ought to know how much they’re spending, simply in an effort not to pay,” he said, adding his attorney fees already have surpassed $5 million and he estimates City Hall’s bill will be much more since it has dozens of lawyers working on the case. “The city is certainly spending money at a faster clip than us, and the amount of money the city owes the attorneys mounts daily.”
The backstory to the bitter dispute is city officials’ problem with the nearly $1 million in expenses that the contingency lawyers had billed to local taxpayers to cover the costs of their work on the case. Those costs included expensive dinners at some of Santa Monica’s finest restaurants and hotels. The use of a chartered private jet also was billed to City Hall by the lawyers. Paying what they believed was reasonable, city officials have reimbursed the lawyers $620,000 in expenses thus far.
A LONG ROAD TO RECOVERY Grossman argues that City Hall reneged on a signed contract with his clients and are refusing to pay close to $70 million in contingency fees to which his clients are entitled.
Grossman’s calculation is that City Hall should pay the attorneys 25 percent of the $121 million cash settlement; 25 percent of the costs and operation of a yet-to-be-built water treatment plant, preliminarily estimated to cost $120 million, plus 7 percent interest; and his attorney fees. Based on testimony in depositions and other correspondence, Grossman said city officials agreed as far back as 2002 that 25 percent of a cash settlement was the fair amount to pay.
But city officials and their attorneys now argue that the amount is well below that, based on their claims that the contingency attorneys put their own interests ahead of the public’s, as well as delayed the case to get a higher percentage of fees. City Hall argues it should pay closer to 10 percent of the $121 million cash settlement and the undetermined value of a water treatment plant.
It will all come down to how a judge and jury interpret a 15-page complicated legal services agreement signed between City Hall and the contingency lawyers that is as ambiguous as the sliding scale of fee percentages outlined in it.
FROM SETTLEMENT TO SUIT A few months after the settlement between City Hall and the three major oil companies was finalized, the contingency attorneys expected to be paid.
City officials announced in November of 2003 that the litigation was over. The $121 million in cash was to be paid by the oil companies, less $18 million that was earmarked to go into an operating account to begin planning for a water treatment plant to clean up the wells and $1 million obligated by City Hall to pay Shell Oil Company in a separate case. The net result is $92 million and a water treatment plant yet to be valued, designed or built.
Shortly after the settlement was finalized by the court in December of 2003, Miller & Sawyer filed a notice of lien with the oil companies, effectively saying the money couldn’t be touched by the city, Halbreich said. That led to an agreement between the contingency lawyers and City Hall that the money would be put into a pledge account and couldn’t be touched until the dispute was over. Halbreich said city officials reluctantly agreed to it.
Then, the two sides unsuccessfully attempted to mediate and settle out of court, Halbreich said. The contingency lawyers sent a letter to City Hall, giving an ultimatum to either arbitrate or litigate.
City Hall filed a complaint in May of 2004, and Grossman filed a cross-complaint three months later.
“We’ve always argued that they were in pie in the sky and completely unrealistic (in their claims),” Halbreich said.
Grossman argues that a significant portion of the money sitting in the account, which is now at about $130 million with interest, is rightfully owed to his clients.
“If the city paid them tomorrow, the city would have free and clear the water treatment plant and $50 million,” he said.
NO JUDGE, NO JURY City officials from the outset made it clear they wanted to press the case to an early trial in order to maximize a cash recovery and before federal legislation was passed that could limit municipalities in recovering MTBE contamination damages from oil companies.
The contingency lawyers in early 2000 represented to city officials that getting a trial date within 30 months of filing and putting litigation pressure on the oil companies would be necessary to get an estimated recovery of between $400 and $500 million, according to the city’s complaint.
But that’s not what happened, city attorneys argue. “... the defendants’ actions did not remotely resemble their representations to the city... the defendants did almost nothing to advance the case toward trial,” the complaint reads. “And with each month that passed, the contingent fee percentage designed to compensate for concerted trial preparation increased.”
The more time the case took, the higher the fee percentage for the contingency lawyers became, according to the services agreement — 10 percent on recoveries obtained in the first six months; 20 percent on recoveries within seven to 18 months; and 25 percent from the 19th month and 27 percent on recoveries obtained after a trial started. Then, the fee was to be multiplied by the gross recovery to calculate the contingency fee. “... the defendants’ conduct had the effect of delaying the case — not prosecuting it vigorously toward the represented early trial date, as promised — in order to try to increase the defendants’ contingent fee payment,” according to the city’s complaint.
There was a one-year delay just in negotiating what venue the litigation against the oil companies should take place in, city attorneys say. And the case never advanced materially beyond the preliminary pleading stage, effectively having been stayed from the moment it was filed until the day it was settled, according to the city’s complaint.
Grossman claims that it was City Hall’s own incompetencies and unresolved issues that delayed the case, which the contingency attorneys had to first address before they could begin work on litigation.
Those issues included smoothing out the relationship between City Hall and the Environmental Protection Agency, as well as resolving City Hall’s legal dispute with Southern California Water Co. over ownership of the water wells, Grossman claims. He also says it was City Hall that wanted to fight for the trial to be heard in San Francisco, thus delaying the case for a venue change. The case ended up being moved to Orange County.
“Sure, there were periods of the case being delayed, but there was no delay by the attorneys,” Grossman said.
Halbreich categorically denies those allegations, saying the contingency lawyers didn’t do their due diligence in fighting for City Hall.
“Tell me how attorneys who did almost nothing are entitled to $100 million?” he said.
YOU GET WHAT YOU SETTLE FOR City officials say they would have never agreed to the settlement had they been aware of what they now consider conflicts of interest between the contingency lawyers, who City Hall claims had more to gain in pushing for a settlement than a trial.
“They were advised to accept it,” Halbreich said. “At the time, based on what they knew, they thought it was a good settlement. They didn’t know of Mr. Baron’s conflict of interest, and they didn’t know the lawyers would try to claim all of the cash.”
Halbreich said the lawyers consulted amongst themselves on what settlement they should push for, with lead attorney Fred Baron serving as their advisor. City Hall also claims that the lawyers breached their fiduciary duty by putting their own interests ahead of their clients.
“In the action, the city is asserting through forming this intramural attorney relationship without informing the city... they didn’t disclose their tactics,” he said.
Grossman said city officials have refused to pay the attorneys because they never fully understood the legal services agreement or the settlement, and are now trying to back track.
“Having them exposed as fools or worse by entering into an agreement they’ve never read or understood, and they are now attacking the lawyers because they consulted amongst themselves?” Grossman said. “There is nothing they know now that they didn’t know then, and there is nothing improper done by the attorneys.
“The bottom line is that the city has attempted to renege on every aspect of the agreement.”
Originally published in the Santa Monica Daily Press print edition on November 21, 2005. Read the original PDF.