In a case of first impression, a Lehigh County trial judge has ruled that billable hour and contingency fee matters transferred from one firm to another are not “assets” under the Uniform Fraudulent Transfer Act.
Lehigh County Court of Common Pleas President Judge Carol K. McGinley did, however, entertain the possibility that the former firm’s potential quantum meruit claim for work it performed prior to the conclusion of a transferred contingency fee matter could be considered to have value, but she stopped short of actually finding that an unripened quantum meruit claim is an asset under the UFTA.
Instead, McGinley ruled in Yorston v. Karoly Law Firm that plaintiffs Ronald and Beverly Yorston, as part of the discovery in their suit seeking to recover a roughly $1.1 million arbitration award against the now-shuttered Karoly Law Offices PC, may obtain contingency fee agreements in matters that were transferred from the PC to a new firm called Karoly Law Firm LLC because that information could prove relevant if it’s eventually determined that the LLC has successor liability.
“If successor liability is established, the ripening of the contingent fee action in a successor corporation may provide an opportunity for a more accurate valuation of a potential quantum meruit claim existing in the PC at the time of dissolution,” McGinley said.
After quickly finding that open billable hour matters transferred from one firm to another cannot be considered assets under the UFTA because litigants have the absolute right to choose their own counsel, McGinley moved on to an analysis of whether contingency fee matters could be considered transferrable property under the law.
Citing the Pennsylvania Superior Court’s 1986 ruling in Beasley v. Beasley that unresolved contingency fee matters have no value for equitable distribution purposes because the potential ultimate return on such matters is too risky to speculate on, McGinley reached a similar conclusion with regard to contingency fee matters’ value under the UFTA.
“To the extent that clients of the PC had pending litigation, either filed or contemplated, which was the subject of contingent fee agreements, that litigation is not ‘anything that may be the subject of ownership,’ which is the definition of property as defined by the UFTA at 12 Pa.C.S.A. § 5101,” McGinley said. “That litigation is irrelevant, as it is unlikely to lead to admissible and relevant material under a UFTA theory; and it is, therefore, undiscoverable.”
The Yorstons had obtained a nearly $1.1 million arbitration award against their former lawyer, Lewis Thompson, and his firm, the PC, in May 2011, after alleging that Thompson had missed filing a complaint on the Yorstons’ behalf within the statute of limitations and falsified various praecipes for writ of summons in an attempt to make the Yorstons believe the suit had been timely filed, McGinley said.
When John P. Karoly Jr., the sole proprietor of the PC, was convicted on federal charges and disbarred in 2010, the firm closed and his sons, Joshua Karoly and John P. Karoly III, started the LLC, according to McGinley.
The Yorstons subsequently filed suit against the Karoly sons, the PC and the LLC, alleging that assets were fraudulently transferred from the PC to the LLC in an attempt to avoid payment of the arbitration award, McGinley said.
The Yorstons filed a motion to compel discovery of cases and other client matters transferred from the PC to the LLC, alleging that those matters are assets, according to McGinley.
Noting that the court could not find any case law examining whether pending cases are “assets” as defined by the UFTA, McGinley looked to the Beasley ruling and determined that unresolved contingency fee cases cannot be considered to have any intrinsic value.
Moving on to the question of whether contingency fee matters transferred from the PC to the LLC were relevant to a successor liability cause of action, McGinley cited the Superior Court’s 2012 ruling in Huber v. Etkin, which held that contingency fees from matters that are initiated at a firm and conclude after the firm breaks up are property of the partnership.
The Superior Court distinguished Huber from Beasley by noting that Beasley required a valuation of cases that had not yet concluded and, therefore, the potential contingency fees were merely speculative, according to McGinley.
Conversely, the Superior Court reasoned, the cases in Huber had already been resolved and it was simply a matter of deciding how the contingency fees should be divided, according to McGinley.
“The Superior Court did not hold that litigation which might generate a contingent fee was an asset, but that the fee itself was an asset which required an accounting in the dissolution of a partnership,” McGinley said.
But McGinley added that it was “important to reiterate that the contingent fee actions themselves are not an asset under Pennsylvania law.”
“If indeed there is a transferred asset here, it would be limited to a quantum meruit right to receive compensation for the work already performed on behalf of the client by the PC,” McGinley said, noting that, ordinarily, a quantum meruit claim cannot be determined in a contingency fee action until the case concludes.
“What we are holding is that plaintiffs may discover those contingent fee agreements in the litigation existing in Karoly PC and transferred to Karoly LLC, subject to specific confidentiality measures set forth in the accompanying order,” McGinley said. “What we do not conclude by this discovery order is whether the transfer of an unripened quantum meruit claim is indeed an asset, or indeed recoverable by plaintiff. We do not conclude whether the attorney who initiated the contingent fee case has an obligation to pursue a quantum meruit claim. These issues are for a later time.”
In the accompanying order in Yorston, McGinley directed the defendants to turn over a list of all contingency fee cases transferred from the PC to the LLC, including the county, case number, a brief description of the contingency fee agreement, the date the case opened, the procedural status of the case and information on the distribution of fees from those cases.
McGinley noted in the order that the parties agreed to redact all client names from the information provided.
Counsel for the defendants, Charles Laputka of Allentown, Pa., said he disagreed with the ruling.
Counsel for Yorston, Robert M. Fellheimer of Abington, Pa., could not be reached for comment at press time.
(Copies of the 14-page opinion in Yorston v. Karoly Law Firm, PICS No. 14-0497, are available from Pennsylvania Law Weekly. Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information.) •