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Tax Authority, Inc. v. Jackson Hewitt

May 17, 2005


On appeal from Superior Court of New Jersey, Law Division, Morris County, L-2776-02.

The opinion of the court was delivered by: Weissbard, J.A.D.



Submitted November 29, 2004

Before Judges Cuff, Weissbard, and Hoens.

Plaintiff The Tax Authority, Inc. (TA) appeals from a December 19, 2003 order enforcing a settlement of litigation between it, other plaintiffs, and defendant Jackson-Hewitt, Inc. (JHI). The settlement was negotiated on behalf of all plaintiffs by a Steering Committee and was submitted for approval to the individual plaintiffs consistent with their individual but identical retainer agreements with the same attorney. Those agreements contained a provision whereby each individual plaintiff agreed to a settlement approved by a weighted majority of plaintiffs. Defendant filed a motion to enforce the settlement when such a weighted majority of plaintiffs accepted the settlement. We hold that the retainer agreement containing the weighted majority provision for settlement of the litigation is contrary to RPC 1.8(g) of the Rules of Professional Conduct (RPCs) and is unenforceable. Consequently, the order enforcing the settlement over plaintiff's objection is reversed.

The plaintiffs in the underlying litigation were 154 entities that own and operate franchises of JHI, a nationwide tax preparation service. As part of their business, plaintiffs make loans to tax filers in anticipation of the filer receiving a refund from the Internal Revenue Service. Thus, during the 2002 tax season, plaintiffs processed over $25 million in Refund Anticipation Loans (RALs). Plaintiffs' amended complaint stated:

Prior to Tax Season 2000, an established course of dealing was created between the parties by which the defendants distributed monetary rebates, called "Performance Incentive Rebates," to the plaintiffs and other eligible JHI franchisees following each and every Tax Season in which a positive balance of funds remained in a reserve account, known as the "Risk Pool," after all delinquent RALs had been paid. In fact, JHI and SBBT [Santa Barbara Bank & Trust]*fn1 and/or other participating banks distributed those funds to the plaintiffs and other eligible JHI franchisees in the form of Performance Incentive Rebates following each and every Tax Season prior to Tax Season 2000 in which the defendants announced that a positive balance of funds remained in the Risk Pool after all delinquent RALs had been paid.

Despite their extensive course of dealing with the plaintiffs and despite repeatedly making specific oral and written representations that such Performance Incentive Rebates would continue to be paid following each and every Tax Season in which a positive balance of funds remained in the Risk Pool, beginning in Tax Season 2000, the defendants quietly discontinued their pattern and practice of issuing Performance Incentive Rebates. Instead of distributing rebates to JHI franchisees, on information and belief, the defendants converted the balance of funds that remained in the Risk Pool following Tax Seasons 2000, 2001 and 2002 to their own respective accounts and/or the accounts of their respective affiliates.

On information and belief, as much as $26 to $32 million remained in the Risk Pool after all delinquent RALs had been paid following the 2002 Tax Season alone. The defendants have refused to fully disclose their respective revenue or that of their respective affiliates in connection with JHI's Bank Product Programs, and the defendants have failed to provide an accounting concerning the Risk Pool and other funds generated from the sales of RALs during Tax Seasons 2000, 2001 and 2002.

Essentially, plaintiffs' complaint was that they were entitled to share in rebates from the Risk Pool "to the extent that funds remained in the Risk Pool after delinquent RALs had been paid following each Tax Season beginning in Tax Season 1994 . . . to each of the plaintiffs that maintained or maintains a low RAL delinquency ratio during the Tax Season." Plaintiffs' three causes of action against JHI were based on breach of express contract, contract implied-in-fact, and contract implied-in-law.

In their individual franchise agreements, plaintiffs had agreed that any legal action against JHI would not be in the form of a class action. As a result, the complaint named each of the 154 franchisees individually as a plaintiff. The plaintiffs collectively hired Eric Karp, Esq. of Witmer, Karp, Warner & Thoutte (Witmer Karp) of Boston, to represent them. Each plaintiff entered into an attorney-client fee agreement with the firm on or about May 30, 2002. Each fee agreement provided that "the Matter will be pursued by the Attorney on a collective basis with other similarly situated franchisees (hereafter the 'Co-Plaintiffs') of Jackson Hewitt, Inc."*fn2 The fee agreement also appointed a Steering Committee, consisting of four individuals: Robert Phillips, Robert Schiesel, George Alberici, and Kenneth Leese. Leese is the owner of TA, the sole appellant on this appeal. "In order to streamline the matter," the Steering Committee was "empowered to make decisions for the Co-Plaintiffs on all strategic and similar procedural matters other than the decision to settle the matter [as provided in the agreement]." According to a certification of Karp, "[t]he terms and provisions of the fee agreement, including the development of the voting mechanism, were the subject of much discussion and negotiation" between he and the Steering Committee, discussions in which Leese "took the lead."

As to settlement, the fee agreement provided that "[t]he client agrees that the Matter may be resolved by settlement as to any portion or all of the Matter upon a vote of a weighted majority of the Client and all of the Co-Plaintiffs," a quorum being 60% of the votes eligible to be cast. The weighting came about as a result of a provision in the agreement which allowed "[e]ach Plaintiff . . . [to] have one vote for each funded RAL for the 2002 Tax Season," and provided that a plaintiff was only eligible to vote if it was current on all its payments pursuant to the fee agreement.

The fee agreement went on to provide for specific circumstances in which the attorney and his firm could terminate their representation of the client, but did not, however, set out the circumstances under which a client could terminate the relationship. Finally, the agreement also provided that:

The Client has been given the opportunity to consult with an attorney outside the Firm about any aspect of this Agreement prior to signing. The Client acknowledges having read this Agreement and signs it freely and voluntarily and accepts the terms hereof. Plaintiffs collectively filed their complaint in August 2002. That same month, Schiesel passed away. His position on the Steering Committee was not filled as the fee agreement did not provide for any such substitution. None of the plaintiffs contested the issue.

The parties subsequently agreed to mediate the dispute. The mediation took place on June 30 and July 1, 2003 and was mediated by Eric Van Loon (the mediator), an attorney at a Boston firm, JAMS. On July 1, 2003, JHI and the Steering Committee agreed to a settlement in principle, embodied in a single-page agreement (the JAMS Settlement), setting out thirteen specific items comprising the settlement. JHI's representatives and the Steering Committee members, including Leese, signed the JAMS Settlement that same day. Consistent with the attorney-client fee agreement, the JAMS Settlement provided that it was "subject to Plaintiffs Steering Committee obtaining plaintiffs' overall approval as per their agreement," as well as to approval by JHI's Board of Directors. In its brief, JHI asserts that "[d]uring the mediation, JHI was informed of the existence of the 'Majority Rules Agreement' when its representatives expressed concern about ensuring that all plaintiffs would be bound by any settlement."

After July 1, Leese asserted that his "involvement with Mr. Karp and the Steering Committee changed," continuing as follows:

6. I began to challenge Mr. Karp regarding certain issues concerning the settlement in principle.

7. Once I began to challenge Mr. Karp, I learned that the remaining members of the steering committee were meeting with Mr. Karp without my knowledge.

8. As a result, I believe that the plaintiff body did not have full representation once the steering committee began meeting without my knowledge or participation.

9. When I learned of this development, I terminated my relationship with Mr. Karp and was no longer a ...

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