Preview:

TO BE PUBLISHED

,i5uprrtur (Court nf 1,firttfurku -

2011-SC-000382-KB

KENTUCKY BAR ASSOCIATION MOVANT
V. IN SUPREME COURT

STANLEY M. CHESLEY RESPONDENT
OPINION AND ORDER
The Board of Governors of the Kentucky Bar Association has recommended to this Court that Respondent, Stanley M. Chesley, KBA Number 11810, be permanently disbarred for committing eight counts of professional misconduct as charged in KBA File 13785. Chesley was admitted to the practice of law in Kentucky on November 29, 1978, and maintains a bar roster address of Fourth and Vine Tower, Suite 1513, Cincinnati, Ohio 45202.
The Board found that Respondent had violated the following provisions of SCR 3.130, the Kentucky Rules of Pi1 ofessional Conduct:
a) SCR 3.130-1.5(a) - a lawyer's fee shall be reasonable. Attorney's fee of over 820 million exceeded amount established by client contract and contract with co-counsel, and was otherwise unreasonable;
b) SCR 3.130-1.5(c) - contingent fee agreement. Attorney and co-counsel failed to provide clients with a written statement stating the outcome of
the matter and showing the remittance to the client and method of its
determination;
c) SCR 3.130-1.5(e)(2) - division of fees among lawyers of different firms. Attorneys dividing fees without the consent of clients confirmed in writing;
d) SCR 3.130-5.1(c)(1) - responsibility for partners. Attorney knowingly ratified specific misconduct of other lawyers.
e) SCR 3.130-1.8(g) - conflict of interest. Attorney representing two or more clients participated in making an aggregate settlement of the claims of the clients . . . without consent of clients and without disclosure of the existence and nature of all the claims ... and of the participation of each person included in the settlement; f) SCR 3.130-3.3(a) - candor to the tribunal. Attorney knowingly made a false statement of material fact or law to a tribunal; Attorney failed to disclose a material fact to the tribunal to avoid a fraud upon the tribunal; g) SCR 3.130-8.1(a) - disciplinary matters. Attorney made a false statement of a material fact in connection with a disciplinary matter; and h) SCR 3.130-8.3(c) [now codified as SCR 3.130-8.4(c)] - Attorney engaged in conduct involving dishonesty, fraud, deceit, or misrepresentation following the initial distribution of client funds and concealed unethical handling of client funds by others.
The Board recommended the permanent disbarment of Respondent and
further requests an order of this Court awarding restitution to the affected former clients in the amount of 7,555,000.00. Pursuant to SCR 3.370(8), Respondent filed with this Court a notice to review the Board's recommendation. Upon review, we find that Respondent is guilty of eight of the alleged violations, specifically those charged under SCR 3.130-1.5(a), SCR 3.130-1.5(c), SCR 3.130-1.5(e), SCR 3.130-1.8(g), SCR 3.130-3.3(a), SCR 3.130-8.3(c), SCR 3.130-8.3(c) [now codified as SCR 3.130-8.4(c)], and SCR
3.130-5.1(c)(1). We permanently disbar him from the practice of law in the
Commonwealth of Kentucky. We decline to order restitution, as that remedy is not appropriate in a case of permanent disbarment, and the claims are being
litigated in separate, civil litigation.

I. FACTUAL AND PROCEDURAL BACKGROUND
The following facts and procedural history are taken from the record of the trial commissioner hearings, and report of the trial commissioner, Honorable William L. Graham, which was presented to the Board of Governors.
In March 2006, the Inquiry Commission, acting under rules established by this Court for the adjudication of attorney disciplinary actions, formally began an investigation of Respondent, Stanley Chesley, for his conduct in the settlement of the case of Darla Guard, et al., v. A.H. Robins Company, et al, (the Guard case) 1 in the Boone Circuit Court, Boone County, Kentucky, including
1 Boone Circuit Court, Civil Action. Number 98-CI-795. The case is sometimes referred to as Jonetta Moore, et al. v. A.H. Robins Company, et al., or "the Moore case."
his conduct in the disbursement of funds generated by the settlement of that case. The Inquiry Commission had already been investigating the conduct of other lawyers in connection with that case, namely William Gallion, Shirley Cunningham, Melbourne Mills, and David Helmers, an employee of the Gallion firm. 2 In December 2006, the Inquiry Commission issued formal charges against Respondent.
The Guard case began in 1998. Gallion, Cunningham, and Mills had contingent fee contracts with some 431 3 persons who claimed to have been injured by the diet drug commonly known as "fen-phen." Mills, because of his aggressive advertising, had secured the great majority of those clients and his contingent fee contracts provided for an attorney's fee of 30% of the sum recovered for the client; Cunningham's contracts provided a 33% fee, and the Gallion/Helmers contracts provided for a contingent fee of 33 1/3%. The Boone Circuit Court certified the case as a class action on behalf of the 431 individually-named Kentucky residents and others similarly situated who had been injured by fen-phen. The manufacturer of fen-phen, American Home Products, was the principal defendant in the action.
2 All four of those attorneys have been disbarred by this Court for misconduct committed in connection with the Guard case. Kentucky Bar Association v. Mills, 318 S.W.3d 89 (Ky. 2010); Cunningham v. Kentucky Bar Association, 266 S.W.3d 808 (Ky. 2008); Gallion v. Kentucky Bar Association, 266 S.W.3d 802 (Ky. 2008); Kentucky Bar Association v. Helmers, 353 S.W.3d 599 (Ky. 2011). The trial judge in the case, Joseph Bamberger, was also disbarred for his related misconduct in the case. Kentucky Bar Association v. Bamberger, 354 S.W.3d 576 (Ky. 2011).
3 There is conflicting information about the actual number of clients that directly retained one of the attorneys. The Trial Commissioner refers to 431; other parts of the record say 440. In a court hearing, the number 441 is mentioned. We will refer to 431 clients but the precise number is immaterial to the issues presented in this matter.
When the Guard case was filed, other similar claims against American
Home Products were being pursued in other jurisdictions. A vast number of such claims were consolidated into a single "national" class action pending in a Pennsylvania federal district court. Respondent served as a member of the management committee in the Pennsylvania litigation and participated in the negotiations that reached a settlement of that case. As a result of his involvement in that case, Respondent became familiar with American Home's settlement policies and he became acquainted with its settlement personnel. All of the Guard case plaintiffs opted-out of the national settlement with the hope of achieving a more favorable settlement in the Kentucky litigation.
Independently of his involvement in the national case, Respondent initiated a fen-phen lawsuit on behalf of his own clients in the Boone Circuit Court, which he promptly attempted to have consolidated with the Guard case. The Guard case plaintiffs' counsel voiced strong objections to Respondent's effort to merge the cases. Eventually, however, they relented and accepted the consolidation. Respondent's national reputation and his experience in the national fen-phen settlement was a factor that induced them to drop their opposition to his intrusion into their case.
With the claims of their clients merged, Respondent, Gallion, Cunningham, Mills, and Richard Lawrence, an attorney from Cincinnati who also represented a few individual fen-phen claimants, entered into a collaborative agreement outlining the role each attorney was to perform in the litigation. They also agreed upon a method of dividing the attorneys' fees earned in the case. Gallion would serve as lead trial counsel in the event the case was tried, and would prepare the case accordingly. Cunningham and Mills would enroll clients and maintain client contact information. Respondent would act as "lead negotiator" in the effort to secure a settlement of the claims. Originally, the agreement provided that Respondent would take 27% of the total attorney's fee earned from any of the individual claims he might settle and from an aggregate settlement that resolved all of the claims.
The fee-apportionment agreement was reduced to writing and it expressly provided that "all parties to this agreement shall have the right to review all contracts between themselves and any other parties that may affect the fees earned and all clients shall be advised of this agreement." (emphasis added). The agreement also stated clearly that "all parties to this agreement shall be identified as co-counsel in the class action styled Guard v. American Home Products in Boone Circuit Court in Kentucky." The agreement provided that it could be terminated by any of the attorneys on December 31, 2000. Respondent, Gallion, Cunningham, Mills, and Lawrence all signed the agreement. Respondent did not inform any clients of the agreement and he undertook no effort to determine whether any of his "co-counsel" informed the clients of the division of effort and fee-sharing arrangements. None of the clients were so informed. Respondent attempted to negotiate a collective settlement of all the Guard claims before the December 31 termination date, but he was not successful. He did, however, achieve individual settlements of
a few cases. In those cases, the attorney's fees taken were based upon the
specific contingency fee agreement with that client.
In late 2000, Respondent corresponded with his co-counsel about extending the arrangement. As a result, a new agreement was reached. The new agreement was similar in all material aspects to the original agreement except that it reduced Respondent's fee for negotiating a settlement of the claims to 21% of the total attorney fees earned. The new agreement contained the same express provisions requiring that all clients receive notice of the fee agreement and that all of the attorneys be "identified as co-counsel in the class action styled Guard v. American Home Products in Boone Circuit Court in Kentucky."
The Guard case trial was scheduled to begin in the summer of 2001. A pretrial mediation conference was scheduled. Respondent suggests that his ongoing discussions with opposing counsel actually settled the case before the mediation conference, and that the mediation itself was merely for show. Regardless, a settlement agreement was announced on the second day of the mediation.
The settlement agreement provided that plaintiffs' counsel would obtain the decertification of the Guard case as a class action and the dismissal of all claims. American Home Products would pay an aggregate sum of 200 million to be divided among the 431 individual clients who had fee contracts with Mills, Cunningham, Gallion, and Lawrence. Those claims would be dismissed with prejudice. The remaining members of the class who had joined the action,
approximately 143 individuals, were not included in the financial settlement.
Their claims would be dismissed without prejudice. The agreement was reduced to writing and was signed by Gallion, Cunningham, Mills, and Lawrence. 4 Respondent claims that he did not sign the agreement because, as he contends, he did not represent any of the individual clients. In his view, he
had been employed by the attorneys and had no professional responsibility to
the individual clients.
American Home left it for the plaintiffs' attorneys to determine how much of the settlement fund to allocate to each of their clients. However, under the terms of the agreement, plaintiffs' counsel had to provide American Home with a schedule listing each of the settling clients and how much of the settlement money would be allocated to each client. A signed release from each client was also required. The agreement also provided that the settlement would not take
effect unless plaintiffs' counsel obtained a specific number of signed client
releases before a specified deadline. Two preconditions of the agreement
required approval of the Boone Circuit Court. First, the class action could be
decertified only by court order. Second, the claims of the individual Guard
clients could not be dismissed with prejudice without court approval.
The settlement agreement also incorporated a "side letter" which outlined an agreement by which the plaintiffs' attorneys agreed to indemnify American
Home up to a total of 7.5 million for any new fen-phen claims that might arise
4 Mills, who did not attend the mediation conference, and by his own admission was drunk during much of the relevant time period, was told by his co-counsel that the case settled for S 150 million, not $200 million.
from individuals who were eligible to be members of the decertified class. In
other words, 7.5 million of the aggregate settlement would have to be reserved to cover potential claims, at least until the applicable statute of limitations brought the subject to repose. Thereafter, any part of the reserve remaining would be subject to disposition by order of the court.
On May 9, 2001, Respondent, along with Gallion, Helmers, Cunningham, and David Schaefer, an attorney for American Home Products, appeared before the presiding judge, Joseph Bamberger, and tendered for his consideration the "Order Decertifying the Class and Dismissing Action" as required by the settlement. Judge Bamberger expressed concern about decertifying the class and dismissing the individual claims, especially when he realized that the settling clients and the members of the class had not been given notice of the settlement or of the impending dismissal of their claims. Respondent carefully explained to the judge that the settlement resolved only the claims of the client group (the 431); the claims of the members of the decertified class were dismissed without prejudice and they would have other avenues for redress, if they wanted to pursue them. Despite his misgivings, Judge Bamberger signed the "Order Decertifying the Class and Dismissing Action" which was entered into the record on May 16, 2001.
Respondent argues that the entry of that order terminated his responsibility in the case. He had negotiated the settlement pursuant to his agreement with Gallion, Cunningham, and Mills, and he had secured the entry of an order putting the settlement into effect.
None of the clients were informed of the decertification of the class action or the dismissal of their claims. At that point, none of the clients had even agreed to a settlement of the claim against American Home Products. Gallion, Cunningham, Mills, and Helmers then began the process of collecting the necessary releases before the deadline. They promptly set up a meeting with each client. At each meeting, the client was falsely informed that American Home had offered a specific amount for his or her claim, which the attorneys then encouraged the client to accept. Upon the acceptance of an "offer" and the signing of a release, each client was informed that the amount of his settlement must be kept secret and severe sanctions would follow any breach of that confidentiality. In each case, the amount of the "offer" was substantially less than the amount listed on the schedule provided to American Home. The clients were not informed that American Home had agreed to an aggregate settlement of 200 million. The clients were shown none of the actual settlement documents, and they were not informed that the "offer" was coming from their own attorneys, not American Home.
While we do not agree with Respondent's position that his responsibility to the clients ended with the entry of the settlement order, we note at this point that he did not participate in the process of contacting clients to secure the releases. He did not meet directly with any of the clients to effectuate the settlement and it is not shown that he had specific knowledge of the deception practiced upon each client to secure the signed release.
When the releases, sufficient in number to trigger the release of
settlement money, were obtained, Respondent advised Helmers on the most effective way to get the releases to American Home and secure its payment of the first installment of settlement money. 5 Upon receipt of the releases,
American Home made an initial payment of 150 million to a client trust account in Cunningham's name. Shortly thereafter, on June 19, 2001, Respondent received a check from that trust account in the amount of $12,372,534.37. He received additional checks on July 5, 2001 and August
14, 2001, which corresponded with the dates on which American Home paid additional installments on the $200 million settlement. On November 5, 2001, American Home paid the final installment on the settlement, bringing the total amount paid to 200,450,000.00. Respondent had been paid 16,497,121.87, and he would soon receive more. The payout to the clients totaled only S46 million.
In early 2002, questions about the Guard case settlement began to surface. The fee distribution had attracted the attention of Michael Baker, a law partner of Gallion, and of David Stuart, a law partner of Mills. Neither Baker nor Stuart had been actively involved in the fen-phen case, but each one became suspicious about the way the law firm income generated by that case was being handled in his respective law firm. Each of them alerted the Kentucky Bar Association of the potential misconduct in the handling the
5 American Home would pay out the settlement money, as releases were obtained, in a series of five installments between June 2002 and November 2002.
settlement proceeds, and each filed suit against his respective partner for an accounting of law firm funds.
On January 30, 2002, the Office of Bar Counsel served notice that it was requesting subpoenas for Gallion, Mills, Cunningham, and Bank One relating to the matter. At the same time, Stuart's lawsuit led to Mills' discovery that the settlement amount was not the 150 million as he had been told, but was instead 200 million. On February 6, 2002, Mills angrily confronted Gallion about the deception and demanded that more money be distributed to the
clients. That evening, or shortly thereafter, Gallion, Cunningham, Respondent, and Mark Modlin, a professional "jury consultant" and friend of the judge, arranged for an off-the-record meeting with Judge Bamberger.
At the meeting with Judge Bamberger, Respondent used his expertise in major class action lawsuits and mass tort settlements to persuade Judge Bamberger that a charitable organization should be established, using the cy pres doctrine, to administer the residual funds that might remain after all known claims against the settlement money were paid. 6 Respondent also persuaded the judge that he should award attorney's fees in the decertified and dismissed class action equal to 49% of the gross settlement, using the "Grinnell" factors 7 for awarding attorneys' fees in a successful class action. No consideration was given to the fact that each of the settling clients had a
6 This was the genesis of The Kentucky Fund for Healthy Living, a "charitable organization" used to harbor millions of dollars of the settlement money that was not distributed to the clients.
7 City of Detroit v. Grinnell Corp., 495 F.2d 448, 475 (2d Cir. 1974), abrogated by Goldberger v. Integrated Resources, Inc., 209 F.3d 43 (2d Cir. 2000).
contingency fee agreement setting the allowable fee at 30%, 33%, or 33 1/3% of the amounts recovered.
Judge Bamberger approved the 49% attorney fee and authorized the use of a charitable trust for any excess funds. He also agreed to counsel's suggestion that 50% of the then-remaining undistributed settlement money be paid to the clients on a pro ratabasis, and that 50% be retained by the attorneys for "indemnification or contingent liabilities." The judge was not informed what dollar amounts were represented by those percentages. The written order agreed upon at that meeting was signed a few days later, but it was not entered in the case record until June 6, 2002, at which time Judge Bamberger also ordered that the record of the case be sealed. It is worth noting that the written order does not reveal the attorney fee percentage allowed by the judge, nor does it disclose any absolute dollar amounts. By its omission of the specific attorney fee percentages, and the absolute dollar amounts, the written order preserves the secret of the fees claimed by the attorneys. Judge Bamberger restricted the clerk's certificate of service on that order to only Mills, Gallion, Cunningham, Helmers, and Respondent. From that point forward, all subsequent orders were sent to only those individuals. Respondent received the order following its June 6, 2002 entry, and other orders that followed, but denies that he read any of them.
Judge Bamberger's February order in effect approved retroactively, or ratified, the disbursement of millions of dollars in attorneys' fees that had already been taken by the attorneys. There is no doubt that the purpose of the February meeting with the judge, when several investigations were beginning to gather steam, was to cover the fee distribution with a thin veil of legitimacy, and to create a legitimate-looking repository in the forM of a charitable trust in which to place the undistributed money.
On February 11, 2002, the Inquiry Commission of the Kentucky Bar Association issued the requested subpoenas for bank records and other documents relating to the disbursement of the Guard case settlement money. That same afternoon, five wire transfers totaling some 59 million were made by Gallion and Cunningham from several personal accounts to an out-of-state bank account owned jointly by Gallion, Cunningham, and Mills.
After the successful meeting with Judge Bamberger on or about February 6, Respondent and Gallion contacted Helmers 8 to enlist his help in making the second round of disbursements to the clients that had been approved by the judge. Respondent's office provided Helmers with a document to present to each client for his or her signature. In the spring of 2002, with the documents signed, the Guard clients received a second distribution of settlement money.
The attorneys also received an additional distribution. On April 1, 2002, Respondent received a check for $4 million, drawn on the same out-of-state bank account of Gallion, Cunningham, and Mills, to which the remaining settlement money had been moved. Respondent testified that he had no expectation of receiving an additional $4 million fee. He testified that he did
8 In the fall of 2001, Helmers was paid $3 million for his work in the case. He left Gallion's firm to start his own law firm.
not know why the check was issued or how the amount was calculated. He
made no inquiry to determine the source of the payment or the reason for the payment, or the manner in which the payment was calculated. His firm simply deposited the check, and asked no questions.
That final distribution of attorneys' fees brought Respondent's total to more than 20 million, which he argues is a reasonable fee for a case of such magnitude. The total attorney's fee payable, based upon the contingent fee contracts in effect, using for illustrative purposes the contingent fee of 33 1/3%, or one-third, 9 and the 200,450,000.00 settlement, was
66,816,667.00. Respondents 21% share of that fee would equal
14,031,500.00.
Stuart, in his continuing effort to discover the extent of Mills' wrongful diversion of law firm funds, sought and obtained a commission from the Fayette Circuit Court authorizing the out-of-state deposition of Respondent, an Ohio resident. Before the deposition was taken, however, Stuart and Mills were ordered to attempt to settle their dispute by mediation. Respondent sent word through a Mills-employee attending the mediation conference that, if the settlement talks stalled, he would be willing to contribute money to get the case resolved. Initially, the mediation was unsuccessful because Stuart would not accept the highest amount Mills would offer. Respondent, who was not a party to the Stuart-Mills lawsuit, then agreed to sweeten the settlement pot by the
9 We decline to calculate the effective cumulative percentage derived from slight variations in rates charged by the three attorneys: Mills at 30%, Cunningham at 33%, and Gallion 33 1/3%.
sum of 500,000.00 to get the case settled and avoid his pending deposition. With that inducement, Stuart settled. Later, Gallion and Cunningham reimbursed Respondent $250,000.00, as their contribution to the Stuart-Mills settlement.
As the Inquiry Commission's investigation proceeded, Mills hired attorney William E. Johnson to represent him. Gallion and Cunningham hired Whitney Wallingford for the same purpose. Respondent, who at the time was not subject to a Kentucky bar disciplinary inquiry, attended a meeting with Mills, Gallion, and Cunningham, and their respective attorneys. At the meeting, Respondent urged all of the attorneys then subject to the KBA investigation to agree upon representation by the same counsel. As a result, Wallingford agreed to withdraw as counsel for Gallion and Cunningham. Before he did so, he submitted a set of doCuments in response to the Inquiry Commission subpoenas. The response included a client payment spreadsheet that grossly overstated the amounts of money that had been paid to the clients. Before filing the response and the spreadsheet, Wallingford asked Respondent to review the response and provide input. Respondent did so and voiced no disapproval. Respondent claims he had no way to know that the spreadsheet was inaccurate.
Respondent helped Judge Bamberger prepare for his 2005 appearance before the Kentucky Judicial Conduct Commission that was examining the judge's misconduct in the Guard case, including his involvement in the creations of the Kentucky Fund for Healthy Living, and his salary for serving as a member of its governing board. Respondent also appeared at the Judicial Conduct Commission meeting and spoke in support of the judge.
In 2005, problems for the Guard counsel developed on yet another front when several of the Guard case clients filed suit against Respondent, Gallion, Cunningham, Mills, and the Kentucky Fund for Healthy Living alleging misconduct and misappropriation of the settlement funds. The case, styled Abbott, et. al. v. Chesley, et. al., (the "Abbott case"), is currently pending review before this Court. Respondent initially admitted to being part of the Guard case class counsel in initial pleadings, but in subsequent pleadings denied he acted in that capacity.
In preparing a defense for the Abbott case, Respondent hired Kenneth Feinberg, a nationally-recognized specialist in handling large aggregate case and class action settlements. At Respondent's behest, and based largely upon information provided by Gallion, Feinberg prepared an affidavit supporting the actions of the Guard case counsel in the disbursement of the Guard case money. In this disciplinary proceeding, however, and after learning more of the details, Feinberg disavowed the opinion he expressed in the affidavit and withdrew his approval.
After the formal KBA investigation of Respondent began in 2006, Respondent asked Jack Vardaman, the attorney for American Home Products who had negotiated the Guard case settlement with Respondent, to write a letter based upon Respondent's notes stating that the Guard case had been "settled as a class action" and that "decertification was not relevant to the
collateral issues of attorneys' fees or administration of the settlement proceeds
and process." Vardaman refused to do so because the statements suggested in Respondent's notes were false.
On December 4, 2006, the Inquiry Commission issued its Complaint of Misconduct against Respondent alleging violations of SCR 3.130-1.5(a); SCR 3.130-1.5(c); SCR 3.130-1.5(e); SCR 3.130-1.7; SCR 3.130-1.8(g); SCR 3.130

Download 2011-sc-000382-kb.pdf

Kentucky Law