Hildebrand v. State Bar

225 P.2d 508, 36 Cal. 2d 504, 1950 Cal. LEXIS 265

Opinions

THE COURT.

Petitioners are attorneys, Hildebrand having been admitted to practice in 1925, Bills in 1923, and McLeod in 1935. By this proceeding they seek a review of the recommendation of the Board of Governors of The State Bar that they be disciplined for the violation of rule 2, section a (commonly known as the “solicitation” rule) and rule 3 (generally referred to as the “ambulance chasing” rule) of the Rules of Professional Conduct of The State Bar of California. (26 Cal.2d 32.) The disciplinary action arose out of petitioners’ representation of injured railroad men on claims against railroad companies, pursuant to a contract with the Brotherhood of Railroad Trainmen designating them as regional counsel for the Brotherhood—Hildebrand having acted alone in such capacity beginning in 1933, then joined by Bills sometime prior to 1940, and by McLeod in 1942.

By the notice to show cause petitioners were charged with 41 separate acts of solicitation of professional employment; a general “conspiracy” for the purpose of soliciting and obtaining employment as attorneys, including the employment of others to procure such employment for them, with • “runners and cappers” acting for them in violation of section 182 of the Penal Code, and “dividing . . . attorneys’ fees with persons not attorneys,” and “knowingly accepting . . . professional employment” offered to them as an incident of the activities of such persons; and specific instances of compensation of certain named persons not licensed to practice law for their solicitation of employment on behalf of petitioners.

Petitioners filed a written answer in denial of all the charges, and in addition urged as affirmative defenses: (1) that the proceeding was “brought to serve private purposes and private spites” of the railroad companies (Peck v. State Bar, 217 Cal. 47 [17 P.2d 112]; Burke v. State Bar, 218 Cal. 143 [21 P.2d 577]; Herrscher v. State Bar, 4 Cal.2d 399 [49 P.2d 832]); and (2) that petitioners’ methods of practice and activities had been approved by decisions from this and other jurisdictions. (Hildebrand v. State Bar, 18 Cal.2d 816 [117 P.2d 860]; Ryan v. Pennsylvania R. Co., 268 Ill.App. 364; In re Seidman, 228 App.Div. 515 [240 N.Y.S. 592].)

Numerous hearings were held before the local administrative committee running from May through August, 1948, during the course of which an amendment was made to the notice to show cause whereby (1) the “conspiracy” count was expanded to include specific reference to petitioners’ acceptance of “professional employment” as “incident to the activities ... of the Brotherhood of Railroad Trainmen, an association that for compensation, controlled, directed and influenced such employment”; and (2) a new count was added describing the legal aid services rendered by the Brotherhood to its injured members and petitioners’ connection therewith. Following petitioners’ denial of these later added charges at the subsequent hearings, and argument and submission of the matter, the committee on December 1, 1948, made findings and conclusions adverse to petitioners. In this regard it will suffice to say that the committee sustained the charges of petitioners’ solicitation of professional employment in more than 20 separate cases; petitioners’ compensation of some six persons acting as “runners” or “cappers,” and as their agents, in obtaining employment for them; and petitioners’ knowing acceptance of employment through the legal aid services of the Brotherhood of Railroad Trainmen in directing the handling of injury claims by its members against the railroads. Upon such findings the committee recommended suspension from practice of the law for varying. periods against petitioners—Hildebrand for four years, Bills for two years, and McLeod for one year.

Thereafter the record was submitted to the Board of Governors, which body, after full argument and consideration of the matter, made its own findings affirming substantially the conspiracy and solicitation findings of the committee both as to petitioners’ procurement of professional employment through the activities of individuals operating as “runners” or “cappers” for petitioners, as well as through the contractual undertaking with the Brotherhood of Railroad Trainmen. However, in passing upon the separate charges of solicitation, the Board of Governors stated that such instances of alleged misconduct “dissociated from [the] basic arrangement” with the Brotherhood and “standing alone” would fail “to make out a case of solicitation” in that “in practically every such case, standing alone, there was either a proper reference or a proper contact made by the attorneys within the holdings of cases such as Hildebrand v. State Bar, 18 Cal. 2d 816 [117 P.2d 860],” and it “is only when these individual cases are viewed in the light of their relationship to the central arrangement and in the light of the evidence bearing upon the charges of conspiracy . . . that they acquire significance.” With such limitation of the controlling factor in this disciplinary proceeding against petitioners, and after a detailed recital of the prevailing contractual arrangement between petitioners and the Brotherhood of Railroad Trainmen whereby the latter “channeled” the injury cases of its members to petitioners for prosecution, the Board of Governors concluded that petitioners were “guilty ... of violations of Rule 2, section a, and Rule 3 of the Rules of Professional Conduct” but reduced the degree of discipline to be imposed upon petitioners according to the following recommendation •—-that “Hildebrand be suspended from the practice of the law . . . for a period of four months” and that “Bills and . . . McLeod be publicly reproved by the Court.”

It appears from a full examination of the record herein that the Board of Governors properly narrowed the fundamental issue of professional misconduct to petitioners’ participation in the basic plan of the Brotherhood of Railroad Trainmen in providing legal services for its members. Accordingly, the basic plan must be carefully analyzed with respect to its operation and effect in relation to the particular Rules of Professional Conduct here involved.

Rule 2, section a, reads: “A member of The State Bar shall not solicit professional employment by advertisement or otherwise.” (26 Cal.2d 32.) Rule 3, so far as here pertinent, provides: “A member of The State Bar shall not employ another to solicit or obtain, or remunerate another for soliciting or obtaining, professional employment for him'; nor, except with a person licensed to practice law, shall he directly or indirectly share compensation arising out of or incidental to professional employment; nor . . . knowingly accept professional employment offered to him as a result of or as an incident to the activities of any person not so licensed or of any association or corporation that for compensation controls, directs or influences such employment . . .” (26 Cal.2d. 34.)

There is no conflict in the evidence concerning the basic plan. It appears that in 1930 the Brotherhood of Bailroad Trainmen established a Legal Aid Department as a service to its members and their families in procuring lawyers experienced in personal injury law to prosecute damage claims against the railroad companies, at charges which would be somewhat less than the usual percentage of contingent fees in such cases. Regional counsel was designated in each territorial zone, and the employment of such counsel was urged or strongly recommended to the injured members and their families. As part of this Legal Aid Department, there was also established an investigation service with investigators assigned to report on the facts of an accident case and obtain evidence thereon pertinent to the presentation of the damage claims.

The plan originally called for a written contract on a 20 per cent contingent fee basis, with the agreement on the part of the attorney to turn over one-fourth of that amount, or 5 per cent, to the Brotherhood for maintenance of the Legal Aid Department. Contracts' were to be executed directly between the designated regional counsel and the injured claimants on forms approved by the Legal Aid Department, and such counsel was required to advance all necessary court costs, expert witness fees, expense of medical examinations, and like expenditure items. These expenses were to be deducted from the amount of recovery before a division would be made of the net sum between the lawyers and the claimants. As here pertinent in the time period involved, Hildebrand, who had been acting alone as regional counsel in this state for the Brotherhood since 1933, was joined in the enterprise by Bills sometime prior to 1940 and by McLeod in 1942; and together they undertook by contractual arrangement with the Brotherhood to render legal services to its members in pursuance of the basic plan. Meanwhile it appears that a change was made in the contingent fee provisions so that the claimant was required to sign two contracts covering an aggregate contingent fee of 25 per cent—one contract calling for 19 per cent to the attorney for legal services and the other for 6 per cent to the Brotherhood for the maintenance of the Legal Aid Department, with its investigating service. Then as of June 15, 1946, this fee procedure was superseded under an arrangement with the Brotherhood permitting the attorneys to handle the cases on a flat 25 per cent basis but requiring them to pay the investigators, members of the Brotherhood’s staff, on a quantum meruit basis for their services.

A realistic appraisal of this basic plan compels the conclusion that it offended recognized standards of professional conduct in providing the means whereby solicitation of the employment of petitioners was effected on a wholesale basis in violation of rule 2, section a. While the members of the Brotherhood were not compelled to employ regional counsel for the handling of their lawsuits, they were subject to continuous and strong recommendation from the Brotherhood to do so through its journal publications and circulars to the members, as well as by personal visits from officers of the Brotherhood locals advising the injured railroad men and their families to avail themselves of the benefits furnished by the Legal Aid Department, embracing selected investigating and legal services. The compensation to be received by regional counsel for their representation of injured railroad men or their families was all predetermined according to the basic plan with the Brotherhood, and the client’s signing of the contracts calling for legal and investigating services on the 19 per cent and 6 per cent contingent fee basis was no more than a ratification of the Brotherhood’s arrangement with the designated regional counsel. There is no question from the record but that petitioners knew exactly how their professional employment by injured railroad men was being solicited for them through the Brotherhood’s activities, and they were willing to perform the desired legal services at a substantially reduced contingent fee rate in the belief that the volume of business to be directed to them through such solicitation would warrant such financial consideration. From such aspect it is apparent that the solicitation in question had its “origin in the mind[s] of” petitioners pursuant to the common course of action arranged with the Brotherhood (see People v. Levy, 8 Cal.App.2d Supp. 763, 769 [50 P.2d 509]), and as parties to such agreement, petitioners should be held accountable for the results of their participation in the preconceived general scheme.

Rule 3 of the Rules of Professional Conduct, supra, expressly proscribes the remuneration by an attorney of another for “soliciting or obtaining professional employment for him,” and likewise denounces an attorney’s knowing acceptance of employment as a result of the “ activities of . . . any association or corporation that for compensation controls, directs or influences such employment.” It is clear from the record that the Brotherhood has been remunerated and compensated for soliciting, directing and influencing the employment of petitioners by its members. In the first place for its participation in the common course of action, it appears that the Brotherhood under the two-contract contingent fee arrangement—the 6 per cent allowance for investigation and the 19 per cent allowance for legal services, which was the procedure followed for a great deal of the time here pertinent—discharged a sizable deficit ($100,000) which had accrued over the years in the beginning of the Legal Aid Department’s operations when the investigating services were furnished free to the members, and, in addition, built up a reserve of “approximately $80,000.00.” But furthermore, it cannot be said that the reference to remuneration and compensation in rule 3 envisages only the receipt of money as distinguished from other advantages or benefits that may accrue from an employment undertaking as is here involved. Thus (1) it was a matter of concern to the Brotherhood that the lawsuits of its injured members be handled by experienced lawyers, and the basic plan with petitioners was designed to provide legal services for its members at what might be termed “wholesale rates”; and (2) such service would reasonably constitute an inducing cause for attracting membership in the Brotherhood and the payment of dues thereto. In the light of these considerations, it appears indisputable that the ethical standards envisaged by rule 3, supra, have been violated by petitioners.

Petitioners argue that the Brotherhood’s Legal Aid plan has been approved by judicial decision, citing Ryan v. Pennsylvania R. Co. (Ill. 1932), 268 Ill.App. 364. In that case a regional attorney for the1 Brotherhood sought to assert a lien for professional service, based upon a contingent fee contract of 20 per cent executed with the injured railroad man, where the railroad company had secretly settled with the client. The railroad company contended that such retainer embodied an illegal contract (1) not only in that the professional employment had been solicited by the Brotherhood (2) but also in the fee-splitting feature inherent in the arrangement in that the compensation for the attorney was in reality only 14 per cent and the remaining 6 per cent was to go to the Brotherhood as its share of the damage recovery. The contract in question was upheld by the appellate court of Illinois for the purpose of the attorney’s lien, and accordingly the attorney was awarded 20 per cent of the amount of the settlement. It is true that in reaching such decision, the court fully detailed the “organized plan” in its operative effect upon regional counsel’s undertaking personal injury cases for members of the Brotherhood, but such examination of the coordinated activity of the Brotherhood and regional counsel was correlated with the processes of the Legal Aid Department as a service feature to the Brotherhood’s members in securing legal services at a minimum fee coincident with the competent investigation of reported injury claims. In so discussing the facts from the standpoint of the benefits afforded the Brotherhood and its members in the assertion of their legal rights rather than from the standpoint of the proprieties of the lawyer in maintaining professional standards, the Illinois court concluded that it “would not be justified in holding that the contract on which the [attorney’s] claim is based ‘was secured by unlawful and unethical solicitation and fee-splitting.’ ” (P. 379.)

The distinct premise of the Ryan decision is precisely noted in the case of In re O’Neill (Dist. Ct., E.D. N. Y., 1933), 5 P. Supp. 465, a disciplinary proceeding for the alleged infraction of the ethical standards of the New York State Bar Association relative to “stirring up litigation.” There in passing upon the Brotherhood’s basic arrangement with regional counsel for the handling of injury claims of Brotherhood members, the court noted that “during the progress of [the] proceeding” the original contingent fee arrangement between “the [attorney], his client, and the Brotherhood” (calling for a single contract for a 20 per cent fee with the attorney, who “turned over one-quarter [thereof] to the Brotherhood”) was “somewhat altered in form—as the result of an intimation judicially imparted at preliminary hearing—so that now the [attorney] procures two contracts, one to secure his 15 per cent, contingent fee, and the other whereby the client employs the Legal Aid Department of the Brotherhood” to do the investigating work on his claim, and “ agree [s] ... to pay it, in accordance with its plan, 5 per cent, of the net settlement, verdict or recovery.” (P. 467.) With regard to this ostensible change in the contractual relations of the parties, the court pertinently continued at page 467: “We can see no difference in principle between the use of two contracts and one, where the purpose is to secure for the Brotherhood one-quarter of the contingent fee as a contribution to the Legal Aid Department of which the investigator is a representative.” Then after noting the further professional standard of the New York State Bar Association declaring that the “professional services of a lawyer should not be controlled or exploited by any lay agency, personal or corporate, which intervenes between client and lawyer” and so destroys the latter’s independence of function with the former, the court rejected the attorney’s claim that “the practice in question” might be justified “because of what was written in the ease of Ryan v. The Pennsylvania Railroad Co.,” with this observation (pp. 467-468): “The basis of [that] decision was that the contract was not contrary to public policy, and that the Brotherhood was engaged in rendering an enlightened service to its members . . . [but that] is not the question upon which this court has to pass, which has to do only with the infraction of its rules. ... It is our conclusion that the [attorney’s] unprofessional conduct as indicated has been clearly established, and invites the censure of the court, which is hereby recorded.”

Petitioners argue that the contingent fee arrangements here made between the parties are not vulnerable to the prevailing objection in the O’Neill case because the contract in favor of the Brotherhood for 6 per cent of the net recovery was presented to the client not by the attorney but by a representative of the Brotherhood, so that the attorney concerned himself only with his own contract for the 19 per cent allowance. In fact, petitioners admit that this new procedure in handling the two contracts was adopted as the result of the discussion and criticism expressed in the O’Neill case. But the censurable premise of the divided contingent fee contract remained the same. There was no change in the substance of the entire transaction as emanating from the Brotherhood’s Legal Aid Department for the coordinated purpose of supplying to the members the services of investigators and legal counsel. Contracts for the two services were made dependent one upon the other, for, according to the record, petitioners were unable to cite any instance where the injured member ever executed a contingent fee contract with the Brotherhood for the investigation of his ease and yet did not at substantially the same time execute a contingent fee contract for legal representation. In short, the two contracts constituted but one overall transaction involving the division of compensation between regional counsel and the Brotherhood as a fee-splitting device contrary to rule 3 of the Rules of Professional Conduct and the requirement that an attorney dissociate himself in his professional employment from control by a lay intermediary or organization.

Petitioners claim that their conduct was approved by this court in the case of Hildebrand v. State Bar (1941), 18 Cal.2d 816 [117 P.2d 860], where a “charge of solicitation of professional employment” made against petitioner Hildebrand, acting as regional counsel in the representation of an injured railroad man under the auspices of the Brotherhood’s Legal Aid Department, was dismissed as not “sufficiently supported by the evidence”—the so-called “Bishop Matter.” (Pp. 830, 834.) A reading of that opinion, however, clearly shows that the disciplinary issue there resolved related only to alleged misconduct as correlated with the charge of solicitation of the one case in question, and did not purport to pass upon the general charge of “solicitation of professional employment” pursuant to the basic plan of the Brotherhood in procuring its members to employ designated regional counsel as part of the services rendered by the Legal Aid Department. As so distinguished, the Hildebrand case is not a judicial determination of the precise disciplinary consideration here argued—the propriety of petitioners’ contractual relationship with the Brotherhood as a part of the basic service plan of the Legal Aid Department to its members, when attacked as a general overall solicitation of legal employment contrary to established professional standards.

There is no merit to petitioners’ further claim that any fee-splitting criticism to which the divided contingent fee contract might be subject is no longer a factor for consideration here, since that arrangement was superseded in June, 1946, by the single contractual stipulation of a 25 per cent contingent fee running wholly in favor of the attorney, who paid therefrom the Brotherhood's investigators on a quantum meruit basis. Obviously, in the determination of this disciplinary proceeding petitioners must be held accountable for the practices which existed during the period that they were charged with misconduct. Moreover, under both situations as to fee arrangements the general “channeling" of legal work to petitioners continued as a prevailing procedure embraced in the Brotherhood’s undertaking with petitioners. Likewise immaterial is the fact that as of October 15, 1949, petitioner Hildebrand’s appointment as “regional counsel for the Brotherhood of Railroad Trainmen” was canceled and terminated. While there may no longer be a “basic contractual arrangement" with the Brotherhood as a present disciplinary problem it is petitioners’ prior actions as heretofore discussed which must be examined in the light of the .charge of professional misconduct. Nor does the worthiness of the Legal Aid Department as an enterprise established by the Brotherhood to render valuable services to its members in providing the means for appropriate presentation of their damage claims In re O’Neill, supra, 5 P.Supp. 465) or the manner in which the charge of misconduct on the part of petitioners was made to The State Bar obscure the essential issue of petitioners’ alleged violation of professional standards by reason of their participation in the basic plan of the Brotherhood as a general scheme for the solicitation of professional employment among members of the Brotherhood.

Petitioners’ acts as here assailed in relation to rule 2, section a, and rule 3 of the Rules of Professional Conduct, supra, cannot be condoned as consistent with the ethical proprieties exacted of members of the bar in this state. However, in view of the somewhat divergent implications found in the cited cases concerning the Brotherhood’s basic plan, and in the absence of any prior decision in this state holding that it was improper for petitioners to participate in such a plan in the manner above described, it is our conclusion that the ends of justice will be served by dismissing the present proceeding without disciplinary action, thereby permitting this opinion, as the first expression of the views of this court upon the subject, to serve prospectively as a guide to the members of the profession generally, rather than to serve retrospectively to the detriment of petitioners.

The proceeding is dismissed.