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MAXWELL v. GALLAGHER

April 2, 1998

JAMES S. MAXWELL, AND ROBERT H. BEAR, APPELLANTS,
V.
EUGENE J. GALLAGHER, DANIEL J. O'LONE, AND GALLAGHER & CO., APPELLEES.



APPEAL FROM THE SUPERIOR COURT, ZINORA M. MITCHELL-RANKIN, J.

Before Steadman, Farrell, and Reid, Associate Judges.

The opinion of the court was delivered by: Farrell, Associate Judge:

This appeal from a judgment and award of damages for breach of fiduciary duty requires us, inter alia, to consider once again the relationship between compensatory (or actual) and punitive damages. Because the trial judge as factfinder expressly found that the appellees (counter-claimants) had not [709 A2d Page 101]

proven a basis for an award of actual damages, we hold that the judge's award of punitive damages was impermissible. We reverse that award but otherwise affirm the judgment.

I.

Plaintiff James S. Maxwell sought a declaratory judgment in Superior Court confirming the right of the law firm Maxwell & Bear to retain its ownership of eleven shares of stock in Gallagher & Co., Real Estate, Inc., of which Maxwell and Robert H. Bear had been directors and Maxwell an officer. The remaining owners of the corporation, Eugene J. Gallagher and Daniel J. O'Lone, as well as the corporation (collectively "the appellees"), answered and filed a counterclaim adding Bear as a counter-defendant. They sought rescission of the stock transfer to Maxwell & Bear primarily on grounds of breach of fiduciary duty by the firm in providing legal representation to the corporation and the other owners. Following a bench trial, Judge Mitchell-Rankin issued an exhaustive written order and opinion concluding that Maxwell and Bear each had furnished legal representation to the corporation and Messrs. Gallagher and O'Lone during the relevant times and had breached their resultant fiduciary duty by placing their personal interest in controlling the corporation ahead of the interests of the clients. The judge ordered rescission of the stock held by Maxwell & Bear, awarded $1 in nominal damages to the appellees after finding no support for an award of actual damages, and ordered Maxwell and Bear to pay $75,000 in punitive damages.

II.

The trial judge found that Maxwell & Bear undertook to represent the corporation and its principals at meetings in December 1987 and January 1988 during which the division of ownership shares in the closely-held corporation was negotiated and agreed upon, resulting in the allocation of eleven of the one hundred shares to the law firm of Maxwell & Bear. The judge further found that Maxwell *fn1 undertook the representation "under circumstances where the interest between the members [including Maxwell & Bear] and the corporate client were not compatible, and under circumstances where the law firm fostered and exploited the divergence." In particular, the stock division, including "the equity interest . . . solicited and obtained by the law firm . . . was not consummated to facilitate the best interest of the corporation, but only to satisfy the demands of . . . [individual members] and the law firm." *fn1 Moreover, from the beginning of the attorney-client relationship, Maxwell had never disclosed to, or discussed with, the other principals the possible conflicts of interest that relationship entailed. By engaging in this course of "double dealing" designed to insure themselves effective control of the corporation, the judge found that Maxwell and Bear breached fundamental attorney-client obligations as reflected in multiple provisions of the District of Columbia Code of Professional Responsibility. See, e.g., DR 5-101, -104, -105; EC 2-19, 5-3, -16, -18 (1986). *fn1

On appeal, Maxwell and Bear primarily dispute the trial judge's finding that they undertook legal representation of the other principals in connection with the division of the stock. They concede that they represented Gallagher, O'Lone, and Pollard on other matters (indeed, they so stipulated at trial), but argue that when it came to the pivotal meetings at which the stock division was negotiated, all present knew that Maxwell and Bear "were there for their own business reasons." [709 A2d Page 102]

When a case has been tried without a jury, this court "may review both as to the facts and the law, but the judgment may not be set aside except for errors of law unless it appears that the judgment is plainly wrong or without evidence to support it." D.C.Code § 17-305(a) (1997). Whether the legal representation Maxwell and Bear provided to the corporation or principals extended to the stock division is at best a mixed question of fact and law requiring substantial deference to the factfinder insofar as the answer turns on the parties' understanding. Cf. Edmund J. Flynn Co. v. LaVay, 431 A.2d 543 (D.C. 1981) (reviewing under aegis of § 17-305(b) trial court's findings with respect to parties' intention to form a contract). Significant first is that Maxwell and Bear do not deny that they purported to represent the corporation with regard to the stock division. They contend that "[t]here is no evidence to support any finding that the attorneys ever undertook any professional responsibility in connection with the issuance of the stock . . . other than to the corporation" (emphasis added). Yet in that admitted capacity, they concede that they owed a fiduciary duty, see Egan v. McNamara, 467 A.2d 733, 738 (D.C. 1983), and the trial judge expressly found that they had placed their private interest in securing control of the corporation above the interests of the corporate client. *fn2

Moreover, there is ample record support for the judge's finding that the law firm purported to represent the other principals at the stock division meetings. Those meetings took place against the background of a course of dealing starting in 1984 during which Maxwell and Bear played the "dual/multiple roles" of business associates and legal counsel to Gallagher, including when jointly forming a predecessor company in 1986. As a later illustration, the judge found that Gallagher "sought and received legal advice from Mr. Maxwell as to the most appropriate time to resolve Mr. Pollard's interest in the company," an important issue because Pollard faced collateral legal (and potential criminal) liability at the time he joined the corporation. Indeed, the December 18, 1997 meeting at which the stock division became the paramount subject was originally called by Maxwell, at Gallagher's request, to discuss a real estate commission dispute the company had had with another real estate firm, "a matter in which Maxwell & Bear served as legal counsel for Messrs. Gallagher, Pollard, and O'Lone." According to testimony by O'Lone, Maxwell expressly justified the law firm's demanded percentage ownership as payment for the ongoing representation it was providing to and on behalf of the company and its principals. In short, we find no reason to disturb the finding of a legal relationship between Maxwell & Bear and the others extending through the stock division and beyond. *fn3

Nor will we disturb the finding that appellants breached the duties imposed by that relationship by failing to disclose the business advantages they sought which "might affect the firm's legal judgment vis-a-vis Mr. Gallagher" and by acting repeatedly to effectuate their own interests at the expense of the other principals.

The relation of attorney and client is one of the highest trust and confidence, and demands the utmost good faith on the part of the attorney. This relation is not only highly confidential, but presents so many opportunities for the reaping of special benefits at the expense of the client ...


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