Free Response - District Court of Colorado - Colorado

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO

Civil Action No. 04-F-0438 (OES) TIMOTHY C. HOILES, Plaintiff and Counterclaim Defendant, v. JOSEPH M. ALIOTO, Defendant and Counterclaim Plaintiff,

JOSEPH M. ALIOTO'S RESPONSE BRIEF REGARDING IDENTIFIED ISSUES

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TABLE OF CONTENTS Page I. II. INTRODUCTION .............................................................................................................. 1 SUBSTANTIAL COMPLIANCE ...................................................................................... 2 A. THE NON-REFUNDABLE RETAINER IS NOT ILLEGAL ...................................................... 3 B. THE CONTINGENT FEE WAS JUSTIFIED IN LIGHT OF THE RISK UNDERTAKEN AND RESULT ACHIEVED ........................................................................................................ 3 C. THE FEE AGREEMENT SUBSTANTIALLY COMPLIES WITH RULE 4 ................................... 5 D. THE FEE AGREEMENT SUBSTANTIALLY COMPLIES WITH RULE 5 ................................... 5 III. IV. V. PAROL EVIDENCE IS ADMISSIBLE TO AID IN CONSTRUCTION OF A FEE AGREEMENT.................................................................................................................... 6 HOILES MISAPPREHENDS THE CONCEPT OF CAUSATION .................................. 7 CONCLUSION................................................................................................................... 8

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I.

INTRODUCTION The parties have agreed that the issue of whether the contingent fee agreement at issue is

in "substantial compliance" with Chapter 23.3 of the Colorado Rules of Civil Procedure ("C.R.C.P.") is to be determined by the Court after evaluating the evidence to determine if it satisfies the legal standard. This is a watershed issue in the case, for its outcome will resolve all or most of the contract claim, one way or the other, and either create or obviate the need to proceed on the unjust enrichment claim.1 With respect to that legal standard, Mr. Alioto explored the meaning that courts and the legislature have ascribed to the term "substantial compliance" in his Memorandum Re: Identified Issues ("Opening Memo."), and demonstrated that the primary focus of the inquiry is on whether the party entitled to the "substantial compliance" was materially prejudiced by the purported omissions. Thus, the onus should be on Mr. Hoiles to not merely point out technical deficiencies in the retainer agreement, but to demonstrate with admissible evidence that, but for those supposed deficiencies, things would have turned out better or more favorably for him. This is particularly appropriate in light of the fact that the alleged discrepancies were not raised until performance was completed and the objective of the representation realized.2 The purpose of this briefing is (1) to specify which issues are for the Court and which for the jury (a matter on which the parties substantially agree); (2) to set forth how the court is to decide the issue of substantial compliance (which Hoiles has not done); (3) to

1 The parties have also agreed that Mr. Alioto's claim for unjust enrichment/quantum meruit is to be determined by the Court sitting in equity.

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In making this determination, extrinsic evidence about the fee agreement, such as "the conduct and acts of the parties" in performing the agreement "may, and perhaps even should, be considered by the court in eliminating any ambiguity, and in ascertaining the mutual meaning of the parties at the time of the contracting." Nahring v. Denver, 174 Colo. 548, 484 P.2d 1235, 1237 (Colo. 1971) (citations omitted).

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explain the role of parol evidence (where the parties are in disagreement); and (4) to explain the role of causation (where the parties again disagree). The bulk of Mr. Hoiles's memorandum reads like a motion for reconsideration of his summary judgment motion, which was previously denied. The purpose of this briefing is primarily to address the factors that the Court is to take into consideration in trying legal issues, not to reargue the summary judgment motion. II. SUBSTANTIAL COMPLIANCE While this is not an evidentiary proceeding, but was designed to establish certain ground rules for trial, Mr. Hoiles's memorandum sets forth purported contentions of fact which shall be briefly discussed because they underscore the immateriality of his protests. Mr. Hoiles conclusorily asserts that the contingent fee agreement does not substantially comply with the requirements of Chapter 23.3; however, his discussion faults Mr. Alioto only for failure to strictly and literally comply with the rules, when the term "substantial compliance" has been given a more practical interpretation under Colorado law. Clearly, it was not the intent of the legislature to create traps for the unwary and penalize attorneys for inconsequential omissions. Rather, it was to prevent lawyers from taking advantage of unsophisticated clients. At the end of the day, what is "material" is determined by examining whether the purposes of the agreement were fully and fairly realized without any untoward "surprises" being sprung on the client. Stated differently, the focus of the inquiry is on whether Mr. Hoiles was in any way prejudiced by the supposed shortcomings. As the Court is well aware, Mr. Hoiles sought out Mr. Alioto in California to sue (or threaten to sue) a California company in a California court. Hence, there is a very good reason why Mr. Alioto did not strictly comply with the letter of Chapter 23.3 but instead included provisions required by California's statutory counterpart. Nevertheless, both the retainer and Mr. Alioto's representation were in substantial compliance with the spirit of Chapter 23.3, Mr. 2

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Hoiles was not even slightly prejudiced by any claimed shortcomings, and it is disingenuous posturing to assert otherwise after the services have been performed and the benefits fully realized and accepted. A. The Non-Refundable Retainer Is Not Illegal

Not only is the non-refundable retainer permitted under California law, but Colorado permits an "engagement retainer fee," which is earned upon receipt where, as here, the lawyer forgoes other business opportunities by giving priority to the client's work over other matters. Colorado Rules of Professional Conduct, Rule 1.5, Comment. Such a fee would be appropriate in this context. Mr. Hoiles asked Mr. Alioto to take on a time-consuming contingent fee matter that was considered a significant long shot. Previously, Mr. Hoiles's father had unsuccessfully attempted litigation to obtain liquidity for his Freedom Communications shares, and it wound up costing him $6 million. In undertaking the commitment Mr. Hoiles asked of him, Mr. Alioto agreed to undertake a huge risk and forego other opportunities, and lived up to his promise. Seeking various assurances and commitments from the client was highly reasonable on his part. B. The Contingent Fee Was Justified In Light of the Risk Undertaken and Result Achieved

Mr. Alioto does not dispute that the contingent fee is a significant amount of money, as is the amount realized by Mr. Hoiles as a result of his being able to liquidate his Freedom Communications holdings. The point is that Mr. Alioto took the risk, made the commitment and performed according to his promise. Due to his efforts, the contingency occurred and Mr. Hoiles obtained liquidity.3

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In his deposition, Mr. Hoiles testified at length both that he expected Mr. Alioto to provide various services as part of the representation, and that Mr. Alioto in fact provided those services. (Hoiles Depo., pp. 65-69.) On December 11, 2003, six days before the shareholder recapitalization vote, Mr. Hoiles wrote to the Davison defendants, "I truly believe that if we obtain a positive result it is in fact due to the work of Joe Barletta, Mr. Alioto, and the team (appropriately nicknamed `the Posse') he assembled and Christopher Shaw." (EX 25.) At his deposition, Mr. Hoiles was asked: Q. A. Is that a true statement? At the time it was true.

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"Causation" is not a substantive element of a breach of contract claim (but relevant to the unjust enrichment claim in valuing the services); however, the reality is that Mr. Alioto's efforts were a substantial proximate cause of the result, and but for Mr. Alioto's efforts, the recapitalization would never have happened. While Mr. Hoiles sidesteps and downplays that fact and belittles Mr. Alioto's contribution in this after-the-fact litigation, he has admitted and acknowledged the value of Mr. Alioto's services and is hard pressed to repudiate these positions. Mr. Hoiles's attempt to paint the agreement as unconscionable is disingenuous and the cases cited on this issue are off the mark. Unlike the lawyer in Brillhart v. Hudson, 169 Colo. 329, 455 P.2d 878 (Colo. 1969) (who tried to get a large contingency for brokering a simple deal with a highly motivated buyer), and the lawyer in People v. Nutt, 696 P. 2d 242 (Colo. 1984) (who swindled unsophisticated mineral rights holders out of royalties),4 Mr. Alioto brought his expertise and reputation in an esoteric legal specialty to the representation, along with a novel strategy designed to shake up the entrenched status quo at Freedom. He also took a significant risk in agreeing to devote the bulk of his professional energies to a task generally understood to have a very small chance of success. The result achieved far exceeded any expectations, including most importantly, those of Mr. Hoiles. The Court, which has a measure of oversight responsibility to determine if the fee agreement is reasonable,5 should determine that this agreement is neither unreasonable nor unconscionable, but is eminently fair under the circumstances.

Q. A. [Hoiles Depo., p. 23.]
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And six days later, did the transaction go through? Yes.

To even suggest a comparison between the blatant fraud and self-dealing practiced by the lawyer in People v. Nutt and the services provided by Mr. Alioto is over-the-top exaggeration.
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See Brillhart at 881; accord Bryant v. Hand, 158 Colo. 56, 404 P.2d 521, 523 (Colo. 1965).

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C.

The Fee Agreement Substantially Complies with Rule 4

The criteria in Rule 4 have been substantially satisfied, to the extent they are germane to this specific representation. For example, as previously noted, Mr. Hoiles was admittedly only interested in a contingent fee arrangement, so discussing other arrangements would have been an idle act. Likewise, Mr. Hoiles was fully apprised of all the financial obligations he was assuming and has never testified otherwise. Certainly, Rule 4 has a well founded purpose; however, those purposes were served in this representation, and there is no factual basis for earnest protest. The focus of the Court's inquiry in this context should be on whether Mr. Hoiles was prejudiced in any way by the failure to include any particular provision in the fee agreement. D. The Fee Agreement Substantially Complies with Rule 5

Likewise, the criticisms of the fee agreement under Rule 5 amount to nitpicking. Mr. Hoiles understood the nature of the retention all too well, and to claim that he did not know what was meant by "Freedom Communications Matter" is revisionist history. Moreover, that Mr. Alioto's approach to the representation contemplated the filing of and/or threat of litigation is not a limitation. Certainly, Mr. Alioto is a litigator and was approached by Mr. Hoiles as such. Additionally, the threat of litigation and preparing for litigation were key causative links in the chain of events that led to share liquidity. But the representation took a tortuous path as the threat of litigation triggered other events and actions, and Mr. Alioto's representation and contribution continued, adapting to each new circumstance. At no time did Mr. Hoiles ever object to the changing complexion of the relationship; in fact he encouraged it and continued to rely on Mr. Alioto. The goal of the representation was to obtain liquidity of Mr. Hoiles's shares. Mr. Hoiles understood that Mr. Alioto was entitled to 15% of the value of those shares upon liquidation. Mr. Hoiles should not be heard to split hairs after the fact over whether this amounted to a "settlement or judgment" when he freely relied on Mr. Alioto's services without objection until liquidity was achieved. That this representation had a few peculiarities that separate it from the

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overwhelming majority of litigations does not mean that the parties did not fully understand the terms of the retention. In fact, the undisputed evidence shows that they did. III. PAROL EVIDENCE IS ADMISSIBLE TO AID IN CONSTRUCTION OF A FEE AGREEMENT A contingent fee agreement is like any other agreement, subject to the same rules governing interpretation, albeit with an emphasis on what the client reasonably understood. The Restatement of the Law Governing Lawyers (3d) § 18, Comment h (2000) states: Under this Section, the principle that the contract is construed as a reasonable client would understand it governs the construction of the contract in the first instance. However, this section does not preclude reliance on the usual resources of contractual interpretation such as the language of the contract, the circumstances in which it was made, and the client's sophistication and experience in retaining and compensating lawyers or lack thereof. There is, as noted above, no factual dispute about what Mr. Hoiles understood, regardless of his posture in this litigation. Construction of an unambiguous contract is a judicial function, as is determining the existence of ambiguity. Parol evidence is inadmissible only if it is offered to contradict or vary the terms of the written agreement. In order to determine whether an agreement is ambiguous, a court may consider parol or extrinsic evidence to put itself in the same position as the parties so it can understand what they meant by the terms they used. Lazy Dog Ranch v. Telluray Ranch Corp., 965 P.2d 1229, 1236-37 (Colo. 1998); see also Lobato v. Taylor, 71 P.3d 938, 947 (Colo. 2002) (question of whether agreement is ambiguous may be answered by reference to extrinsic evidence). "It is sometimes said that extrinsic evidence cannot change the plain meaning of a writing, but meaning can almost never be plain except in context." Restatement (Second) of Contracts 212 cmt. b.; see also 3 Arthur Corbin, Corbin on Contracts 579, at 421-22 (1960) (admitting extrinsic evidence for the purpose of discovering the meaning of an agreement's terms does not violate the parol evidence rule because such evidence "does not vary or contradict

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the written words; it determines that which cannot be varied or contradicted"). Lazy Dog Ranch, 965 P.2d at 1237. The Court should examine how the parties treated, in practice, their obligations under the agreement, and to the extent there is perceived ambiguity, attempt to eliminate it through consideration of secondary evidence.6 If the Court determines there is no material ambiguity, then it construes the agreement as a matter of law. If the Court finds material ambiguity, then there may be an issue for the finder of fact; however, to reiterate, ambiguity is not determined or resolved simply by looking at the words of the writing, but by looking at the totality of the circumstances surrounding the entire agreement. IV. HOILES MISAPPREHENDS THE CONCEPT OF CAUSATION Hoiles claims in essence that performance is tantamount to causation, confusing elements from the respective domains of contract law and tort law. Under the contingent fee contract, "performance" was the consideration given by Mr. Alioto. The occurrence of the contingency is what is known as a "condition precedent" under the contract which must occur in order to trigger Mr. Hoiles's obligation to perform See 13 Williston on Contracts § 38:7 (4th ed. 2004) ("A condition precedent in a contract is the typical kind. It must be performed or happen before a duty of immediate performance arises on the promise which the condition qualifies. A condition precedent is either an act of a party that must be performed or a certain event that must happen before a contractual right accrues or contractual duty arises." (footnotes omitted)). The concept of "Causation," on the other hand, is primarily an element of a tort claim and generally refers to "proximate cause," which is the resultant connection between a wrongful act and injury or

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Merely because a particular word or term is not defined in the agreement does not render the contract ambiguous. In such a situation, the Court first turns to secondary sources to resolve the issue. Heller v. Fire Ins. Exch., 800 P.2d 1006, 1009 (Colo. 1990).

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damage. See, e.g., English v. Griffith, 99 P.3d 90, 93 (Colo. App. 2004) (noting that "[t]he elements of a negligence claim are a legal duty, a breach of the duty, causation, and damages," and citing Casebolt v. Cowan, 829 P.2d 352, 356 (Colo. 1992), which formulates the elements of a negligence claim as "a duty owed by the defendant to the plaintiff, a breach of that duty, injury to the plaintiff, and a proximate cause relationship between the breach and the injury"). In attempting to connect performance and causation, Mr. Hoiles makes an admission in his discussion of substantial performance on page 24 of his memorandum, for he asserts that substantial performance occurs if "the conditions of the contract have been deviated from in trifling particulars not materially detracting from the benefit the other party would derive from a literal performance." Hoiles brief at 24 (quoting Western Distrib. Co. v. Diodosio, 841 P.2d 1053, 1058 (Colo. 1992). Mr. Hoiles acquired liquidity of his stock (at a price more favorable than he ever imagined), which was understood by Mr. Hoiles to be the intended goal of the representation; hence, he received substantial performance from Mr. Alioto. V. CONCLUSION The contingent fee agreement between Mr. Alioto and Mr. Hoiles substantially complies with Colorado statutory requirements in all material respects. Mr. Alioto performed his obligations thereunder and the agreed-upon contingency occurred. Mr. Hoiles has failed to raise a justiciable issue that there were deficiencies in actual performance or the benefit received, which are the primary considerations in determining substantial compliance. Because the substantial compliance issue is a legal one, as is construction of the contract in general, the breach of contract claim principally turns on issues to be determined by the Court.

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Dated: June 27, 2005

Respectfully submitted,

/s/Ian L. Saffer___________________________ Ian L. Saffer Chad E. King Townsend and Townsend and Crew, LLP One Tabor Center 1200 Seventeenth Street, Suite 2700 Denver, Colorado 80202 (303) 571-4000 (303 571-4321 (fax) [email protected] (E-mail) Maxwell M. Blecher John E. Andrews Blecher & Collins, P.C. 611 West Sixth Street, 20th Floor Los Angeles, California 90017-3120 (212) 622-4222 (213) 622-1656 (fax) [email protected] (E-mail) Daniel R. Shulman Gray, Plant, Mooty, Mooty & Bennett, P.A. 500 IDS Center 80 South Eighth Street Minneapolis, MN 55402 (612) 632-3335 (612) 632-4335 (fax) [email protected] (E-mail) Attorneys for Defendant and Counterclaim Plaintiff Joseph M. Alioto

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CERTIFICATE OF MAILING I hereby certify that on this 27th day of June, 2005, I electronically filed JOSEPH M. ALIOTO'S RESPONSE BRIEF REGARDING IDENTIFIED ISSUES with the Clerk of Court using the CM/ECF system which will send notification of such filing to the following email addresses: Daniel R. Shulman Gray Plant Mooty 500 IDS Center 80 South Eighth Street Minneapolis, MN 55402 Fax: (612) 632-4335 Maxwell M. Blecher John E. Andrews BLECHER & COLLINS, P.C. 611 West Sixth Street, 20th Floor Los Angeles, California 90017-3120 Fax: (213) 622-1656 Scott Levin Fisher, Sweetbaum & Levin 1331 Seventeenth Street, Suite 100 Denver, CO 80202 Fax: (303) 296-7343 E. Glen Johnson Bart A. Rue Frank Pierce Greenhaw IV Kelly Hart & Hallman 201 Main St., Suite 2500 Fort Worth, TX 76102 Fax: (817) 878-9280 (and via Federal Express)

William T. Hankinson Kenneth B. Siegel Katherine D. Varholak Sherman & Howard LLC 633 17th Street, Suite 3000 Denver, CO 80202 Fax: (303) 298-0940 (and via Hand Delivery) and I hereby certify that I have mailed or served the document or paper to the following non CM/ECF participants in the manner indicated by the non-participant's name

Via First Class, U.S. Mail Joseph M. Alioto 555 California Street, Suite 3160 San Francisco, CA 94104 Fax: (415) 434-9200

/s/Louisa Boyte Louisa Boyte
60525033 v1

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