Caesars Entertainment Operating Company, Inc. v. Johnson et al
Filing
84
MEMORANDUM AND OPINION by Senior Judge Charles R. Simpson, III on 8/21/2015: The Court will grant Defendant Clare's cross-motion for summary judgment as to Counts V and VII, deny Clares cross-motion as to Count VI, and deny the Plaintiffs motion for summary judgment. A separate order and judgment will be entered this date in accordance with this Memorandum Opinion. cc:counsel (JBM)
UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF KENTUCKY
AT LOUISVILLE
CAESARS ENTERTAINMENT OPERATING
COMPANY, INC., as fiduciary and on behalf of,
HARRAHS OPERATING COMPANY, INC.
WELFARE BENEFIT PLAN
v.
PLAINTIFF
NO. 3:13-CV-00620-CRS
MICHAEL JOHNSON, and
BRIAN CLARE, individually, as administrator
and fiduciary of his client trust “IOLTA” account,
and as owner-operator of BRAIN E. CLARE –
ATTORNEY AT LAW
DEFENDANTS
MEMORANDUM OPINION
This matter is before the court on:
1. Motion by the Plaintiff, Caesars Entertainment Operating Company, Inc., as
fiduciary and on behalf of Harrahs Operating Company, Inc. Welfare Benefit Plan
(“Caesars”) for summary judgment on all remaining claims, Counts V-VII, in its
Amended Complaint (DN 29; DN 51); and
2. Cross-motion by the Defendant, Brian Clare (“Clare”), in his individual capacity, as
administrator and fiduciary of his client trust “IOLTA” account, and as owner
operator of Brian E. Clare – Attorney at Law, for summary judgment on all
remaining claims, Counts V-VII. (DN 68).
Fully briefed, these matters are now ripe for adjudication. Having considered the parties’
respective positions, the Court concludes that that there are no genuine issues of fact in dispute
as to Caesars’ state-law claims of conversion (Count V), and breach of fiduciary duty (Count
VII) against Defendant Clare, but that genuine issues remain with respect to the tortious
interference with contract claim (Count VI) against Clare. For the reasons set forth below, the
Court will grant in part and deny in part the Defendant’s cross-motion for summary judgment and deny
the Plaintiff’s motion for summary judgment.
1
I.
The parties are well aware of the facts that underlie this dispute. Most pertinent here,
Defendant Johnson was involved in a car accident and suffered significant injuries. DN 66.
Because he was a participant in Caesars’ Welfare Benefit Plan (“Plan”) at the time, the Plan paid
$136,479.57 toward his resulting medical treatment. Id. Unfortunately, this only covered a
fraction of Johnson’s medical bills. Johnson thus retained the services of Clare to pursue a
personal injury action against the driver who caused the accident. Id. Caesars became aware of
this action and sent Clare two letters notifying him that its Plan “may” have and, thus, “[is]
claim[ing] . . . a lien on any proceeds due or agreed to be due to [Johnson from the third-party
driver]” and requesting “that [Clare hold] said proceeds . . . in trust pending resolution or
adjudication of the [P]lan’s claim.” DN 51-15. In response, Clare requested from Caesars “an
itemization of all payments made” to Johnson and “a copy of [Caesars’] policy language as it
relates to” its alleged lien. DN 51-10. Caesars promptly sent the applicable language.
Then over a period spanning from April 2012 to July 2012, Clare settled Johnson’s
claims and received three settlement checks – made payable to both Johnson and Clare – totaling
$225,000, which he promptly deposited into his IOLTA account. DN 74. Clare then disbursed
$60,000 to Johnson, leaving $165,000 in the account, still enough to cover Caesars’ purported
$136,479.57 lien. Id. On July 10, 2012, Clare notified Caesars by letter that he had received
Johnson’s settlement but explained:
The documents which you produced for my inspection pertaining to the
lien or subrogation claim do not address the question of priority. Absent this
language, the fact that the claim is an ERISA claim, does not preclude my
argument. Under Kentucky law, as well as the federal common law, a claimant
such as Mr. Johnson is entitled to be “made whole” before subrogation claims
accrue. Traditionally, for that common law not to apply, the contract itself must
specify a different result. Hence, if the contract included language elevating the
plan to a position of greater priority than the claimant, then, and only then, the
2
made whole rule would be preempted. Please see Cagle v. Bruner, 112 F.3d 1510
(11th Cir. 1997); Community Ins. Co. v. Ohayon, 73 F.Supp.2d 862 (N.Dist.OH
1999).
I would ask that you take a further look at this and respond to my position.
My client may be willing to make a nominal payment to avoid any further delay
in being able to receive his settlement funds. . . .
DN 51-11. Clare then reiterated his position – a position we considered in depth and with
difficulty in our previous opinion – in three phone calls with a Plan agent from July 19 to August
8, 2012. DN 51-17. The agent never addressed the merits of Clare’s legal position in these
conversations but did negotiate settlement to the extent she was authorized. Id.
These
negotiations nevertheless failed.
On August 28, 2012, Clare sent a letter requesting a response to his July 10 letter and
restating his belief that Mr. Johnson had a right to be “made whole” before Caesars could be
reimbursed, a right that would negate Caesars’ right to reimbursement under the circumstances.
DN 51-16. In his letter, he also offered $20,000 to settle Caesars’ claimed lien but indicated that
this offer would expire on August 31. Id. Then on September 7, 2012, Clare left the same agent
a voicemail stating that he would disburse the funds to Johnson if Caesars did not accept his
$20,000 offer. DN 51-17. After another week passed without Caesars addressing his “priority”
and “made whole” arguments, Clare disbursed all but $20,000 from his IOLTA. Id. Only then,
on September 25, 2012, did Caesars finally respond to Clare’s arguments by letter. DN 51-22.
This letter simply stated, “It is our position that a sixth or seventh Circuit Court would uphold the
terms of the Plan’s recovery provisions.” Id. But the letter was of minimal value at this juncture,
for Clare had already disbursed all but $20,000 of Johnson’s settlement.
The parties’ dispute eventually came before this Court, and we took up the enforceability
of Caesars’ alleged lien on cross-motions for summary judgment. DN 66. This issue was rather
involved, and the Court was only able to resolve it by addressing: 1). whether Caesars’ Summary
3
Plan Description, which contained the lien language, was sufficiently incorporated into Caesars’
Plan; 2). whether the Court had to assess the sufficiency of this language under Sixth Circuit or
federal common law standards; 3). whether the language “conclusively disavowed” the “makewhole” doctrine by specifically establishing “both a priority to the funds recovered and a right to
any full or partial recovery;” and, 4). whether the fact that Caesars’ sent an outdated Summary
Plan Description to Clare for review affected its lien. See DN 66. Our analysis was then further
complicated because the Plan employed language quite dissimilar from that which other courts in
this arena have assessed. We nevertheless concluded that Caesars is entitled to enforce its
equitable lien by agreement against Johnson’s third-party recovery. Caesars now asks the Court
to find Clare liable for disbursing that recovery from his IOLTA account in spite of its request
that he hold it in trust.
II.
A court may grant a motion for summary judgment if it finds that there is no genuine
dispute as to any material fact and the moving party is entitled to judgment as a matter of law.
Fed. R. Civ. P. 56(a). The moving party bears the initial burden of specifying the basis for its
motion and identifying that portion of the record which demonstrates the absence of a genuine
issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). Once the moving
party satisfies this burden, the nonmoving party thereafter must produce specific facts
demonstrating a genuine issue of fact for trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242,
247–48 (1986).
The evidence must be construed in a light most favorable to the party opposing the
motion. Bohn Aluminum & Brass Corp. v. Storm King Corp., 303 F.2d 425 (6th Cir. 1962).
However, the nonmoving party is required to do more than simply show there is some
4
“metaphysical doubt as to the material facts.” Matsushita Elec. Indus. Co. v. Zenith Radio Corp.,
475 U.S. 574, 586 (1986). The nonmoving party cannot rely upon the assertions in its pleadings;
rather that party must come forward with probative evidence, such as sworn affidavits, to support
its claims. Celotex, 477 U.S. at 324. It must present specific facts showing that a genuine factual
issue exists by “citing to particular parts of materials in the record” or by “showing that the
materials cited do not establish the absence . . . of a genuine dispute[.]” Fed. R. Civ. P. 56(c)(1).
“The mere existence of a scintilla of evidence in support of the [nonmoving party’s] position will
be insufficient; there must be evidence on which the jury could reasonably find for the
[nonmoving party].” Anderson, 477 U.S. at 252.
III.
Both parties have moved for summary judgment on Caesars’ remaining state-law claims
of conversion, tortious interference with contract, and breach of fiduciary duty. The Court will
assess each claim in turn.
A. Conversion
Caesars first alleges that Clare converted the funds in his IOLTA because he disbursed
them despite having notice of Caesars’ lien on a portion thereof. As the Sixth Circuit recently
recognized, a plaintiff must show seven (7) elements to prove conversion under Kentucky law:
(1) the plaintiff had legal title to the converted property; (2) the plaintiff had
possession of the property or the right to possess it at the time of the conversion;
(3) the defendant exercised dominion over the property in a manner which denied
the plaintiff's rights to use and enjoy the property and which was to the
defendant's own use and beneficial enjoyment; (4) the defendant intended to
interfere with the plaintiff's possession; (5) the plaintiff made some demand for
the property's return which the defendant refused; (6) the defendant's act was the
legal cause of the plaintiff's loss of the property; and (7) the plaintiff suffered
damage by the loss of the property.
5
CNH Capital Am. LLC v. Hunt Tractor, Inc., 568 F. App'x 461, 466 (6th Cir. 2014), as amended
(July 2, 2014) (citing Ky. Ass'n of Cntys., All Lines Fund Trust v. McClendon, 157 S.W.3d 626,
632 n. 12 (Ky. 2005)) (emphasis added). Defendant Clare asks the Court to focus on the “legal
title”
1
element above – he argues that Caesars did not have legal title to any of Johnson’s
settlement at the time of alleged conversion because the checks he deposited into his IOLTA
account were made payable to Johnson and Clare, not Caesars. We agree.
First, there is no dispute that the settlement checks were made payable to Johnson and
Clare, DN 68-2, at least facially giving them legal title to the funds. Caesars did, however, hold
an “equitable lien by agreement” in the amount of $136,479.57 on the settlement Clare deposited
in his IOLTA. Thus, the question becomes: does an individual holding an “equitable lien by
agreement” on certain property have any legal title to that property? The short answer is no.
In our previous opinion, we held that the Plan language “entitled [Caesars] to enforce its
equitable lien by agreement [in the amount of $136,479.57] against Johnson’s third-party
recovery.” DN 66, p. 22. But even if the name “equitable lien by agreement” does not evince the
equitable, not legal, nature of that interest, the Court even clarified that Caesars’ interest merely
equated to a “right in equity to be reimbursed for benefits paid.” DN 66, p. 17. Thus, it would
seem that, although Caesars has an equitable right to the third-party recovery, Johnson and Clare
held legal title to that property at the time of the alleged conversion.
1
After initially putting forth “legal title” as a required element of conversion, DN 51-1, p. 19, Caesars appears to
have had a change of heart, now arguing that it “legal title” is not required. DN 76, p. 11-12. Yet, one case it has
cited in support of this proposition, Kendrick v. Standard Fire Ins. Co., does not discuss the “legal title” requirement
– in fact, it explains that Joseph Goldberger Iron Co. v. Cincinnati Iron & Steel Co. is “instructive in
comprehending the common law tort of conversion, and that case explicitly lists “legal title” as a requirement. No.
CIV.A.06 141 DLB, 2007 WL 1035018, at *13 (E.D. Ky. Mar. 31, 2007)(citing 153 Ky. 20, 154 S.W. 374, 376
(1913)). Moreover, the Sixth Circuit’s more recent identification of the required elements includes “legal title” and
is binding upon this Court. CNH Capital Am. LLC, 568 F. App'x at 466.
6
Indeed, the Supreme Court’s decision in Sereboff v. Mid Atlantic Medical Servivces, Inc.,
on which we relied in rendering our decision, recognized the purely equitable nature of an
equitable lien by agreement when the high court assessed whether enforcing an equitable lien
meant seeking “relief that w[as] typically available in equity.” 547 U.S. 356, 362, 126 S. Ct.
1869, 1876, 164 L. Ed. 2d 612 (2006). In reaching its holding, Sereboff first explained that an
equitable lien by agreement is a “contract to convey a specific object even before it is acquired
[that] make[s] the contractor a trustee as soon as he gets title to the thing.” 547 U.S. at 367
(quoting Barnes v. Alexander, 232 U.S. 117, 121, 34 S.Ct. 276, 58 L.Ed. 530 (1914)). This
assumes that a party who grants an equitable lien on certain property – Johnson, in this instance –
will still hold title to that property once he obtains it. Then the Court pointed to the following
quote: “‘[A]n agreement to charge, or to assign . . . property not yet in existence,’ although
‘creat[ing] no legal estate or interest in the things when they afterwards come into existence . . .
does constitute an equitable lien upon the property.”’ Id. (citing 4 S. Symons, Pomeroy's Equity
Jurisprudence § 1236, pp. 699–700 (5th ed. 1941)) (alterations in original) (emphasis added).
Read together, these excerpts from Sereboff leave no doubt that one holding an equitable lien by
agreement in property has “no legal estate or interest” in that property. Caesars has not seriously
suggested otherwise.
In a word, Caesars and Johnson entered into an agreement to “assign . . . property not yet
in existence” by virtue of Johnson’s participation in Caesars’ Welfare Benefit Plan. And while
that agreement did give Caesars an enforceable equitable lien on Johnson’s third-party recovery,
that lien: 1). gave Caesars “no legal estate or interest” in Johnson’s settlement; and, 2). does not
affect the reality that Clare and Johnson held legal title to the settlement while it was in Clare’s
IOLTA. Of course, then, Caesars’ equitable interest did not encroach upon Clare and Johnson’s
7
legal title at the time Clare disbursed the settlement. Because Caesars therefore cannot establish
that it had legal title to the allegedly converted property, it cannot prevail on its conversion
claim. We will accordingly grant Clare’s motion for summary judgment on Count V.
B. Tortious Interference with Contract
Caesars next alleges that by disbursing disputed funds from his IOLTA account, Clare
tortiously interfered with its contractual relationship with Johnson – namely, the Welfare Benefit
Plan. A claim for tortious interference with an existing contractual relationship requires the
plaintiff to prove: (1) the existence of a contract; (2) the defendant's knowledge of the contract;
(3) intent to cause the contract's breach; (4) the defendant's conduct caused the breach; (5)
damages; and (6) lack privilege or justification to excuse its conduct. CMI, Inc. v. Intoximeters,
Inc., 918 F. Supp. 1068, 1079 (W.D. Ky. 1995). And because “interference cases . . . turn[]
almost entirely upon the defendant's motive or purpose, and the means by which he has sought to
accomplish it,” the Supreme Court of Kentucky has required that the interference be “malicious
or without justification, or . . . accomplished by some unlawful means such as fraud, deceit, or
coercion.” Steelvest, Inc. v. Scansteel Serv. Ctr., Inc., 807 S.W.2d 476, 487 (Ky. 1991);
Warehousing, Inc. v. MIGS, LLC, 182 S.W.3d 529, 533 (Ky. Ct. App. 2005). Here, assuming
that Clare caused Johnson to breach the Plan at issue, we find that, although Clare acted without
justification, the factual record still presents genuine issues as to whether Clare intended to cause
breach.
We begin with the intent element. The Restatement (Second) of Torts, which Kentucky
has adopted for interference claims, defines “intent” as “denot[ing] the actor[‘s] desire to cause
consequences of his act, or [his] belie[f] that the consequences are substantially certain to result
from it.” Restatement (Second) of Torts § 8A (1965); Restatement (Second) of Torts § 766 cmt j.
8
(1979); Lillard v. Univ. of Louisville, No. 3:11-CV-00554-H, 2012 WL 5878715, at *4 (W.D.
Ky. Nov. 21, 2012) (explaining that Kentucky has adopted the Restatement (Second) of Torts for
interference claims). In the present case, Caesars sent Clare a “Notice of Lien to Attorney” on
February 20, 2012, months before Johnson’s third-party settlement was obtained. DN 51-15.
This notice explained that, under the terms of Johnson’s “health plan,” Caesars was “entitled to
be subrogated to and/or reimbursed from any settlement or judgment received by or on behalf of
[Johnson].” Id. Consequently, the notice explicitly “claim[ed] a lien on any proceeds due or
agreed to be paid to [Johnson] and request[ed] that said proceeds [be] held in trust pending
resolution or adjudication of the plan’s claim.” Id. Thus, from the outset, Clare was aware that
the Plan would assert a contractual right to Johnson’s eventual settlement. There is ample
evidence showing that when Clare obtained that settlement, he intended to disregard that
“claimed lien” by disbursing the funds in spite of it.
Even setting aside the “Notice of Lien,” Clare’s established ethical responsibilities
contemplate that “third parties may have lawful claims against specific funds . . . in a lawyer’s
custody . . . [and] when the third-party claim is not frivolous under applicable law, the lawyer
must refuse to surrender the property until the claims are resolved.” KY ST S CT RULE 3.130,
RPC Rule 3.130(1.15), cmt. 3. In fact, professionally speaking, “[a] lawyer should hold property
of others with the care required of a professional fiduciary.” Id. at cmt. 1. Clare nevertheless
decided to unilaterally adjudicate Caesar’s right to the settlement within just over two months of
obtaining it. What is more, Clare disbursed the funds before Caesars responded to the merits of
the legal position Clare had asserted on Johnson’s behalf – that the “made whole” doctrine
applied despite plan language to the contrary. One intending to respect the terms of Caesars’
Plan might not have acted until he received such a response.
9
And at a basic level, the fact that Johnson consistently asserted the “made whole”
doctrine is at the heart of the remaining genuine issue here. There is a difference between
advocating a legal position on behalf of a client simply because it is in that client’s best interest
and taking a legal position because the attorney is certain it is the correct one – the former may
manifest the intent required in a tortious interference claim. Here, the factual record is simply
too bare for the Court to determine whether Clare’s state of mind more resembled the former or
the latter. Weighing in Caesars’ favor, Clare blatantly ignored Caesars’ claimed lien, he failed to
follow proper procedure for resolving such a dispute, and he asserted a legal doctrine on behalf
of his client that was ultimately inapplicable; however, the fact that Clare never wavered from
his position may actually weigh in Clare’s favor. But it gives the Court pause that portions of the
record intimate that Clare would have disbursed his Johnson’s settlement – notably, in part to
compensate himself for attorney’s fees – regardless of what Caesars said or did. We will
accordingly leave the “intent” element for further factual development or resolution by the
factfinder.
But such genuine issues do not exist with respect to the final prong of Caesars’ tortious
interference claim – that the interference was malicious or without justification. On this prong,
Caesars notes that there were three appropriate methods through which Clare could have dealt
with the parties’ dispute: 1). file an action for declaratory judgment; 2). interplead the funds with
the Court; or, 3). attempt alternative dispute resolution. DN 76, p. 13. Caesars concludes that, in
light of these reasonable options and Clare’s professional obligations, Clare cannot say that his
actions were justified. These are compelling arguments.
Clare, on the other hand, points out that he held onto the settlement for several months
while waiting for a response to his legal arguments from Caesars. But this does not justify his
10
actions because he remained well aware that Caesars was claiming a lien on the funds and that
this claim was at least arguable, not frivolous. Next he argues that he had a professional duty to
“promptly deliver to [his] client any funds . . . that the client is entitled to receive.” KY ST S CT
RULE 3.130, RPC Rule 3.130(1.15)(b). That professional rule, however, also unambiguously
provides that it applies “[e]xcept as stated in this Rule or otherwise permitted by law.”
Accordingly, that duty could not have been a license to singlehandedly determine Johnson’s
entitlement to the settlement and disburse it without resolving Caesars’ claim. Consequently, we
find that Clare acted without justification as a matter of law.
Still, because a genuine issue of material fact exists regarding Clare’s intent to cause
Johnson’s breach of Caesars’ Plan, summary judgment for either party unwarranted. The parties
may continue to develop the factual record in that respect. The Court will therefore deny both
parties’ motions for summary judgment on Count VI.
C. Breach of Fiduciary Duty
Finally, Caesars asserts that Clare breached fiduciary duties that he owed the Plan when
he disbursed Johnson’s settlement from his IOLTA. As laid out by Caesars, a party claiming the
breach of a fiduciary duty must first establish that a fiduciary relationship existed by showing: 1).
“the relationship existed before the transaction that is the subject of the action;” 2). that reliance
on the alleged fiduciary was not merely subjective; and, 3). “that the nature of the relationship
imposed a duty upon the fiduciary to act in the principal's interest, even if such action were to the
detriment of the fiduciary.” Ballard v. 1400 Willow Council of Co-Owners, Inc., 430 S.W.3d
229, 242 (Ky. 2013), reh'g denied (June 19, 2014). “As to the second requirement, the party
seeking to have a fiduciary relationship recognized must . . . show that he trusted the other party
to act as a fiduciary and that such trust was reasonable under the circumstances.” In re Sallee,
11
286 F.3d 878, 892 (6th Cir. 2002). These relationships “can be informal but they must evidence
circumstances showing both parties agreed that one party would be acting in the interest of the
other.” Id. at 893.
For the following reasons, Caesars cannot establish that it had such a
relationship with Clare.
From the moment Caesars notified Clare that “it would have a lien on ‘any proceeds due
or agreed to be due to [Johnson in settlement] and requested that said proceeds [be] held in trust
pending resolution . . . of [Caesars’] claim,” Clare and Johnson’s interests became adversarial
with Caesars. Clare sought $225,000 from a third-party to compensate Johnson’s over $720,000
in damages, and then Caesars claimed a lien on over half of that amount. DN 66. Then, making
the adversarial nature of their relationship even more apparent, Clare sent a letter to Caesars
explaining his belief that Johnson’s right to be “made whole” trumped their right to
reimbursement and declining to reimburse Caesars in full. Nothing in these communications
manifests an “agree[ment] that [Clare] would be acting in the interest of [Caesars.]”
Caesars nevertheless argues that a fiduciary relationship was created because 1). both
Defendants allegedly agreed to hold the funds in Clare’s IOLTA until Caesars’ claim was
resolved by virtue of Johnson accepting benefits under the Plan, and 2). Caesars provided the
lien notice to Clare that requested that he hold the funds in trust. DN 5-1, p. 22. These
arguments miss the mark. First, it was Johnson, not Clare, who agreed to reimburse Caesars
from his third-party recovery by taking benefits under the Plan. Clare was not a participant in
the Plan and was not bound by its terms. Second, although Caesars’ lien notice requested that
Clare hold the disputed funds in trust, Clare responded by opining that Caesars lien was
effectively unenforceable. By doing so, Clare put Caesars on notice that he and his client’s
interest were adverse to Caesars, making it unreasonable for a Caesars, a nonclient, to repose
12
confidence and trust in him. Tocco v. Richman Greer Prof'l Ass'n, 912 F. Supp. 2d 494, 525
(E.D. Mich. 2012) aff'd, 553 F. App'x 473 (6th Cir. 2013) (citation omitted). Again, Clare then
exacerbated that adversity by disclosing his intent to act against Caesars’ interest and disburse
the funds. It would accordingly appear that Caesars and Clare lacked all of the indicia of a
common-law fiduciary relationship.
Yet, Caesars argues that Clare is a fiduciary of any funds in his IOLTA account because
his professional duties as an attorney and the “nature” of such an account mandate that he hold
disputed funds until any party’s rights thereto are resolved. DN 51-1, p. 22. For this proposition,
Caesars first looks to Kentucky Rule of Professional Conduct 1.15(a), which explains: “A lawyer
shall hold property of clients or third persons that is in a lawyer’s possession . . . separate from
the lawyer’s own property.” KY ST S CT RULE 3.130, RPC Rule 3.130(1.15). Caesars then
points to Comments 1 and 3 thereto, which provide, in relevant part: “A lawyer should hold
property of others with the care required of a professional fiduciary;” and, “third parties may
have lawful claims against specific funds . . . in a lawyer’s custody . . . [and] when the thirdparty claim is not frivolous under applicable law, the lawyer must refuse to surrender the
property until the claims are resolved.” Id. cmt. 1 and 3. However, the rules also unabashedly
state that “[v]iolation of a rule should not itself give rise to a cause of action against a lawyer nor
should it create any presumption in such a case. . . . They are not designed to be a basis for civil
liability.” KY ST S CT RULE 3.130, RPC Rule 3.130 (Preamble, XXI). Kentucky Courts have
recognized the same. Rose v. Winters, Yonker & Rousselle, P.S.C., 391 S.W.3d 871, 873 (Ky. Ct.
App. 2012) (citing Hill v. Willmott, 561 S.W.2d 331, 333–34 (Ky. Ct. App. 1978) (noting that
the Rules of Professional Conduct do not create a private cause of action). Moreover, Caesars
principally relies on comments to the rules, not the rules themselves. Because this is not a Court
13
of Ethics, Rule 1.15(a) and its comments are of no consequence here. Caesars must point the
Court elsewhere if it seeks to establish that the “nature” of an attorney’s IOLTA creates a
fiduciary relationship between that attorney and anyone claiming a right to funds therein.
To that end, Caesars argues that Clare is both a fiduciary and trustee of his IOLTA
account because it is, in reality, a state account. DN 77, p. 7-8. Both of the non-binding
authorities it cites for this proposition, however, do not reach such a conclusion – in fact, they
merely recognize that a fiduciary relationship exists between an attorney and his or her client’s
funds and do not mention third-party funds.2 IRS GCM 39601 (“lawyer is a fiduciary or trustee
with respect to client monies deposited in the fund”); 1986 Ky. Op. Att'y Gen. 2-224 (1986)
(“accounts for deposit of client funds held in a fiduciary capacity”). In other words, not only are
these non-binding authorities, but they do not stand for the principles that Caesars claim they do.
Coincidentally, these sources do reflect a rule that is worthy of application under the
circumstances: attorneys “have a duty to exercise ‘the most scrupulous honor, good faith and
fidelity’ to his or her client’s interest,” not to anyone else’s. Am. Cont'l Ins. Co. v. Weber &
Rose, P.S.C., 997 S.W.2d 12, 13 (Ky. Ct. App. 1998) (citing Daugherty v. Runner, 581 S.W.2d
12, 16 (Ky. Ct. App. 1978)). This duty would appear to undermine the idea that Clare owed
Caesars fiduciary duties.
Clare, on the other hand, has acknowledged the discord between this duty and the notion
that he owed fiduciary duties to any adversary – he argues that his attorney-client duties
precluded him from owing fiduciary duties to Caesars, a nonclient with adverse interests. He
points to a strikingly-similar case from the Supreme Court of Colorado for support. In Accident
& Injury Med. Specialists, P.C. v. Mintz, the defendant, Mintz, was an attorney who regularly
2
Of course attorneys are fiduciaries of the funds they deposit into their IOLTA accounts on behalf of their clients.
These are the exact circumstances that the Kentucky Supreme Court’s fiduciary framework contemplates. See
Ballard v. 1400 Willow Council of Co-Owners, Inc., 430 S.W.3d at 242.
14
referred uninsured personal injury clients to medical providers. 279 P.3d 658, 660 (Colo. 2012).
These providers treated many of Mintz’s clients on a lien basis; when Mintz recovered on a
client’s behalf, he would deposit the funds in his COLTAF account (Colorado’s version of an
IOLTA) then pay the providers for that client’s bills. Id. at 661. When Mintz became concerned
that the providers were overcharging his clients, however, he withheld payment from the
providers because he believed their “liens were unenforceable.” Id. The providers sued Mintz,
arguing that he breached fiduciary duties that he owed as trustee of his COLTAF account. The
providers relied in part on Colorado Rule of Professional Conduct 1.15, Colorado’s identical
version of Kentucky Rule of Professional Conduct 1.15. See id at 664.
The Supreme Court of Colorado nevertheless found that there was no fiduciary
relationship between Mintz and the lien-holding providers. It explained:
Although a COLTAF account is a “trust account,” it is created and maintained by
a lawyer for the benefit of the lawyer's clients within the unique structure of the
disciplinary rules, a structure which protects and furthers the attorney-client
relationship. See Olsen & Brown, 889 P.2d at 675–76. Even where a lawyer holds
property of a third party that the lawyer acquired in connection with
representation of a client, the lawyer's fiduciary obligations remain with the client.
The lawyer's possession of third party property clearly gives rise to ethical
obligations under Colo. RPC 1.15, but a rule imposing fiduciary obligations on a
lawyer as trustee of funds owed to third parties in a COLTAF account would
subject the lawyer to the possibility of tort liability for failing to act in the best
interests of the third party with respect to those funds, interests that conflict with
obligations the attorney owes the client. See Restatement (Second) of Trusts §
170(1) (1959) (“The trustee is under a duty to the beneficiary to administer the
trust solely in the interest of the beneficiary.”). The rule of liability the Providers
urge in this case would jeopardize the lawyer's undivided loyalties to his client. . .
Here, Mintz represented his clients . . . in negotiations with the Providers to
accept reduced amounts for medical services. Mintz's fiduciary obligations
remained with his clients. This should have been clear to the Providers given the
Providers' negotiations with Mintz concerning his clients' payment amounts for
medical services.
Id. at 665 (citations omitted). We are persuaded by the Supreme Court of Colorado’s reasoning
for two reasons: 1). it rested its conclusion on the sanctity of the attorney-client relationship; and,
15
2). it bolstered its finding by noting that Mintz negotiated against the providers, thus leaving
them no doubt as to with whom his loyalties laid.
Here, Kentucky courts have certified that they “are under a duty to protect and preserve
[the attorney-client] relationship for the benefit of the general public,” Am. Cont'l Ins. Co. v.
Weber & Rose, P.S.C., 997 S.W.2d 12, 13-14 (Ky. Ct. App. 1998) (citing In re Gilbert, 274 Ky.
187, 118 S.W.2d 535 (1938)), and we believe that Caesars’ proffered holding would conflict
with that duty. And like in Mintz, this legal determination is further supported by the fact that
Clare negotiated against Caesars on Johnson’s behalf, making it objectively unreasonable for
Caesars to rely on him as a fiduciary. As such, we refuse to find that an attorney owes fiduciary
duties to any entity claiming a right to funds within his IOLTA account – especially here, where
that attorney actively negotiated against that entity.
Finally, lest there be any doubt, we also reject Caesar’s insinuation that Kentucky’s
Uniform Trust Code might establish a fiduciary relationship between the parties. DN 51-1, p. 22.
Citing KRS § 386B.8-030, Caesars appears to suggest that Clare became Caesar’s fiduciary
because he deposited Johnson’s settlement in his IOLTA, of which he was allegedly a trustee,
and Caesars claimed an interest in those funds. Indeed, section 386B.8-030 of the Kentucky’s
Uniform Trust Code does establish that “[i]f a trust has two (2) or more beneficiaries, the trustee
shall act impartially in . . . distributing the trust property, giving due regard to the beneficiaries’
respective interests.” Ky. Rev. Stat. Ann. § 386B.8-030 (2014). However, as Clare retorted, this
Section only applies to “an express trust established by a trust instrument . . . whereby a trustee
has the duty to administer a trust asset for the benefit of a named or otherwise described income
or principal beneficiary, or both.” Ky. Rev. Stat. Ann. § 386B.1-010; see also § 26:2.Creation of
a trust, 4A Ky. Prac. Methods of Prac. § 26:2 (explaining that a trust’s “existence may be shown
16
by any writing signed by the person sought to be charged as a trustee, if it clearly expresses the
trust and sufficiently connects the trustee with the subject-matter of the trust.”).
Such
circumstances indisputably do not exist here, and Caesars has neither offered evidence to the
contrary nor advanced this argument in its briefing. Clare is not a “trustee” for purposes of KRS
§ 386B.8-030. Resultantly, this argument meets the same fate as Caesars’ arguments above – we
find that the Kentucky Uniform Trust Code fails to establish a fiduciary relationship between
Caesars and Clare.
Caesars’ attempts to show that it had a fiduciary relationship with Clare are unavailing.
Whether by virtue of common law, the “nature” of Clare’s IOLTA, the Kentucky Rules of
Professional Conduct, or the Kentucky Uniform Trust code, any relationship that that Caesars
and Clare did not encumber Clare with fiduciary duties. Consequently, Caesars’ breach-offiduciary-duty claim must fail on this ground, and we need not determine reach the question of
breach. The Court will therefore grant Clare’s motion to dismiss Count VII.
IV.
For the reasons set forth herein, the Court will grant Defendant Clare’s cross-motion for
summary judgment as to Counts V and VII, deny Clare’s cross-motion as to Count VI, and deny
the Plaintiff’s motion for summary judgment. DN 51-1; DN 68. A separate order and judgment
will be entered this date in accordance with this Memorandum Opinion.
August 21, 2015
C al R Smpo I , ei J d e
h r s . i sn I Sno u g
e
I
r
U i dSae Ds i C ut
nt tt ir t o r
e
s tc
17
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?