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A lawyer representing multiple clients in litigation cannot obtain advance consent that they will abide by a settlement the majority approves, the state Supreme Court ruled last Wednesday. The justices said Rule of Professional Conduct 1.8(g), which bars representation of multiple clients who may have adverse interests, requires that each client consent to the settlement after its terms are known. But, noting that it was a case of first impression, the Court made its ruling prospective only, allowing the majority-rule agreement to stand in the case at bar, Tax Authority Inc. v. Jackson Hewitt Inc., A-24-05. Justice John Wallace Jr., writing for the unanimous court, said the nationwide trend is to disfavor majority-rule agreements, even though they may help settle a case faster. And the Court is asking its Professional Responsibility Rules Committee to study whether attorneys should be forbidden from negotiating them at all. The ruling came in a suit by franchisees of one of the country’s largest private tax return preparation companies over the proceeds of surplus money set aside for people seeking early tax refunds. The 154 plaintiffs decided early on to abide by a majority-rules agreement, negotiated by Boston attorney Eric Karp, by which each would get a share. But later on, Kenneth Leese, the owner of Tax Authority Inc., in Maple Shade, tried to back out, saying his share was too small. The trial court granted Jackson Hewitt’s motion to enforce the agreement. But the Appellate Division said that an attorney-client agreement with a weighted-majority provision was contrary to RPC 1.8(g) and unenforceable. When the case was argued to the Court in January, Jackson Hewitt’s lawyer, John Dienelt, said that Leese willingly entered the majority-rules agreement and that the record showed that Karp consulted with each plaintiff. “At some point, from our perspective, Mr. Leese got a case of buyer’s remorse,” said Dienelt, of Piper Rudnick in Washington, D.C. Dienelt said a ruling in Leese’s favor could have a serious impact on cases involving multiple plaintiffs who are not involved in a class action. “It will inhibit the ability of groups to pursue their rights collectively,” he said. Leese’s lawyer, Norman Shabel, of Marlton’s Shabel & DeNittis, said Karp violated RPC 1.8(g) by going forward after learning that Leese did not agree to the settlement terms. But some of the justices seemed to feel that Leese was being unnecessarily disruptive, having been on board for most of the distance and then pulling out. “Why spoil the settlements for 153 other plaintiffs?” asked Justice Barry Albin. Justice Roberto Rivera-Soto suggested that Leese might have been too quick to enter into the majority-rules agreement. “He should have pursued the case alone,” he said. In last Monday’s opinion, Wallace struck a similar note, observing that Leese had participated heavily in shaping the settlement. Until his resignation, he had been a member of the Steering Committee that negotiated the agreement in principle. But Wallace also noted that RPC 1.8(g), like its precursor, DR 5-106, has a clear mandate. “Simply stated, RPC 1.8(g) imposes two requirements on lawyers representing multiple clients. The first is that the terms of the settlement must be disclosed to each client. The second is that after the terms of the settlement are known, each client must agree to the settlement,” he wrote. “We conclude that RPC 1.8(g) forbids an attorney from obtaining consent in advance from multiple clients that each will abide by a majority decision in respect of an aggregate settlement.” Wallace also noted the impact of such an arrangement on the defendant. Jackson Hewitt, he said, “was led to believe that plaintiffs had agreed among themselves to be bound by a weighted majority vote and relied on that in reaching the settlement.” While New Jersey has not addressed majority-rule agreements, other jurisdictions have ruled against them. Wallace cited Hayes v. Eagle-Picher Industries Inc., 513 F.2d 892 (10th Cir. 1975), which found that an agreement contrary to the wishes of one client was “opposed to the basic fundamentals of the attorney-client relationship.” Similar conclusions were reached by the Appellate Court of Illinois in Knisley v. City of Jacksonville, 497 N.E.2d 883 (1986), and the Louisiana Supreme Court in In re Hoffman, 883 So. 2d 425 (2004). Still, Wallace was confronted with the fact that the settlement was a fait accompli. Jackson Hewitt lawyer Dienelt had told the Court at oral argument that except for The Tax Authority, the settlement had been executed and monies disbursed to the other 153 plaintiffs, many of whom are from other states. “On balance, we conclude that prospective application of our holding, and thus enforcement of the settlement against The Tax Authority, is the appropriate and equitable disposition of this matter,” Wallace wrote. Dienelt says he is pleased that the settlement will stand but is worried that reaching similar agreements may become more difficult. “It seems to me that we might not be able to settle these cases in the same way, if we can settle them at all,” he says. “It certainly changes the dynamics. The pressure will be on the attorney for the plaintiffs to have a clear sense.” Karp, of Witmer, Karp, Warner & Ryan, calls the ruling “a fair balancing of the equities.” But he agrees with Dienelt that it may lead to difficulties in reaching agreements. “One single holdout can torpedo the settlement,” he says. A lawyer for Leese, Stephen DeNittis, of Shabel & DeNittis, calls the ruling “well-reasoned” and does not think it will make cases harder to settle. “There are many cases that are settled where the settlements are enforced and where the attorney did not get 100 percent agreement from the clients,” he says. “I don’t believe that much is going to change.”

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