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Tax Authority, Inc. v. Jackson Hewitt

May 31, 2006

THE TAX AUTHORITY, INC., PLAINTIFF-RESPONDENT, AND LEMAIRE-MCCUMSEY GROUP, INC.; INTEGRITY ACCOUNTING SERVICES, INC.; TAX PROS II, INC.; TAX PROS OF INDIANA, INC.; TAX PROS OF TENNESSEE, INC.; TAX PROS I, INC.; THE FAIRLINGTON GROUP, INC.; J/TAX ORLANDO, INC.; WING FINANCIAL SERVICES, LLC.; MID-ATLANTIC TAX SERVICE, INC.; SIRRAH, INC.; JACKSON HEWITT OF GREATER PITTSBURGH, INC.; THE SCHIESEL FAMILY, INC.; RED CENT EAST, INC.; RED CENT, INC.; NIGHT & DAY, INC.; SUPER TAX CORPORATION; THE TAX FIRM, L.L.C.; GALE YORK, INC.; MANDEEP SOBTI AND ANJEET SOBTI; 1040, INC.; CRESCENT CITY TAX SERVICE, INC.; ROSIE M. CONRAD AND MORRIS L. CONRAD; ROBERT FROST NICKERSON; TAX PREP, INC.; VALLEY CONSULTING, LLC; SPRAGGINS GROUP, INC.; TAX DOCTOR, INC.; JANET L. BUNCH; V.R. RAWLEY COMPANY, INC.; MAXIMUN DEDUCTIONS, INC.; PETRA ENTERPRISES, INC.; JOSEPH P. O'ROURKE; CRIMMEN & SEMLITSCH, INC.; THOMAS RYAN D/B/A A&S COMPANY; VISALLI ENTERPRISES, LLC; NORTHERN OKLAHOMA TAX & BUSINESS SERVICE, LLC; TAX PROFESSIONALS OF AMERICA, INC.; THE WHITTINGTON COMPANIES, INC.; JT FINANCIAL SERVICES, LLC; EVELYN R. MATHERNE; BRIAN M. DESIDERIO; THOMAS E. WEBB; ALABAMA FAST TAX, INC.; IT MAKES CENTS, INC.; CHESTAX COMPANY; RONALD P. WEBER; TAX PARTNERS, LLC; JHL TAX SERVICE, INC.; RICHARD RICHARDS, TRUSTEE OF RICHARDS FAMILY TRUST; TECHNOSOFT, INC.; DAVID LEE HENRY; FASTAX, INC.; JUDY HOOKER; MICHAEL E. KREMPP; GUNWANT S. REKHI; BHUPINDAR S. REKHI; JENNIFER CARR; H&T TAX SERVICE, INC.; GORBA, INC.; WE TAX & FINANCIAL SERVICES, LLC; DAC TAX SERVICE, INC.; BAYSIDE TAX SERVICE, INC.; MICHAEL R. DAUGHERTY; JAMES L. FULLERTON AND JEAN E. FULLERTON; KTRAIN, INC.; CINBERT, INC.; TKA VENTURES, INC.; FASTAX SERVICES, INC.; COMPREHENSIVE BUSINESS ACCOUNTING, INC.; INDIVIDUAL TAXES, ETC., INC., CAROLINA TAX SERVICE, INC.; CRCNS, INC.; SOFAR, INC.; MONEY MATTERS, LLC; CK VENTURES, INC.; PELICANS III, INC.; BRITS, INC.; CENTAX, INC.; JOHN R. MCCLASKEY; TODD R. FORESTER AND THERESE A. JEAN; BNS ENTERPRISES, INC.; GST AND COMPANY, LLC.; ACCOUNTING TO YOU, INC.; CAROLYN KOEHLER; MOORE TAX SERVICE, INC.; J.H. DEVELOPER'S, INC.; G. SCOTT LEADER; IVY ENTERPRISES, INC.; U.FILE, LLC.; SSC HOLDING COMPANY; KE FARMER ENTERPRISES, INC.; MELINDA MEGAHEE D/B/A TAXMAX; E TAX SERVICE, INC.; METRO COMPUTAX SERVICES, INC.; INCOME TAX OFFICE OF JOHN J. POLTONOWICZ, INC.; J AND C TAX SERVICE, INC., GERALD BREUNIG AND DIANE ROHRBACH D/B/A B-R TAX SERVICE; JUDY A. BENITSCHECK; MARAY, INC.; BUFFINGTON TAX SERVICE, INC.; IRVING R. MCMILLIAN; LEWIS & COMPANY, INC.; DON B. TAYLOR; TGW CORP.; METRO-EAST ACCOUNTING INC.; OLSEN & THOMPSON TAX SERVICE; JFB FINANCIAL SERVICES; LINDSEY ENTERPRISES, INC.; WILLIAM HALLUM AND LINDA HALLUM; UPSTATE TAX SERVICE INC.; JORDAN ANDERSON, INC.; ROBERT D. WILLIAMS; VNE CORPORATION; WISCONSIN TAX SPECIALIST, INC.; NUZZO ENTERPRISES, INC.; ARKAY RESOURCES, INC.; JH BUCKEYE, INC.; IV TAX INC.; TAX PROFESSIONALS, INC.; DEBORAH A. RENFRO; BARBOUR ENTERPIRSES, INC.; ROBERT B. NUNEMACHER; T&C TAX SERVICES, INC.; ANKIT PATEL AND RAJULA PATEL; ACCOUNTING ASSOCIATES, INC.; ELLE, INC.; ROBERT W. DUVALL; PHILLIP L. GRAHAM; BRATTAIN, INC.; CRAIG W. KOBYLASZ; TAXES UNLINITED, INC.; ASK TAX, INC.; IAI CORPORATION; LCB TAX ASSOCIATES, INC.; PIERCE PRINCIPLE VENTURES, INC.; CAMA ENTERPRISES, INC.; SPEED FILING INC.; SUNCOAST FINANCIAL SOLUTIONS, INC.; FONTAINE & ASSOCIATES, INC.; CAROL BAUMAN AND KENNETH ALLEN; STELLA G. MCANALLY; YOLANDA BROWN; JAMES W. COLLINS; KHJH, LLC; B. GREGORY WHALEY; MARYLAND SAMCO, INC.; MAURIN FINANCIAL SERVICES, INC.; KAREN LANCE; SCOTT E. ENTERPRISES, INC.; BABZE GROUP, INC.; JOSEPH A. TYSON, JR.; AND CERL, LLC, PLAINTIFFS,
v.
JACKSON HEWITT, INC. A VIRGINIA CORPORATION, DEFENDANT-APPELLANT, AND PACIFIC CAPITAL BANK, N.A., A NATIONAL BANKING ASSOCIATION D/B/A SANTA BARBARA BANK & TRUST, DEFENDANT.



On certification to the Superior Court, Appellate Division, whose opinion is reported at 377 N.J. Super. 493 (2005).

SYLLABUS BY THE COURT

(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).

The issue presented is whether our Rule of Professional Conduct 1.8(g) prohibits an attorney who represents more than one client from entering into an aggregate settlement of the clients' claims without each client's consent to the settlement after its terms are known. In this matter, Eric Karp, a Boston lawyer, agreed to represent 154 individual franchisee-plaintiffs in their claims against franchisor-defendant Jackson Hewitt, Inc.

Jackson Hewitt is a nationwide tax preparation service with franchises throughout the United States. As part of their operations, franchisees make refund anticipation loans to individual taxpayers. The loans are repaid when the tax refunds are received. Prior to the 2000 tax season, Jackson Hewitt distributed rebates arising out of these loans to eligible franchisees. Beginning in the 2000 tax season, Jackson Hewitt discontinued issuing the rebates. The franchisees believed that Jackson Hewitt breached the franchise agreement by failing to issue the rebates. Because the franchise agreement prohibited the franchisees from filing a class action lawsuit, the franchisees collectively retained Karp to represent them in a mass lawsuit. Each of the 154 plaintiffs entered into an identical retainer agreement Plaintiffs agreed that the matter would be pursued on a collective basis with fees being shared by each plaintiff and that the matter could be resolved by settlement upon the vote of a weighted majority. The retainer agreement also provided that a Steering Committee would make the decisions regarding strategic and procedural matters. Kenneth Leese, the owner and president of The Tax Authority, was one of the members of the Steering Committee.

In August 2002, Karp filed a single complaint against Jackson Hewitt, naming each of the 154 franchisees as plaintiffs. The parties agreed to mediate their dispute. Jackson Hewitt and the three-member Steering Committee represented by Karp negotiated a settlement in principle (the JAMS Settlement), which was conditioned on approval by plaintiffs and by Jackson Hewitt's Board of Directors. At some point, Leese began to challenge Karp concerning the settlement and resigned from the Steering Committee in August of 2003. Ultimately a weighted majority of plaintiffs approved the JAMS Settlement. Karp emailed every plaintiff and posted a website notice stating that any plaintiff who did not submit a response by a specified deadline would be presumed to have declined the settlement and that he would ask the court for leave to withdraw as counsel for parties declining the agreement. In December of 2003, Karp filed a motion seeking relief from representation of twenty-six of the 154 plaintiffs. The following day, Jackson Hewitt filed a motion to enforce the settlement agreement against all plaintiffs. By the time the trial court heard argument on the motions, only eighteen plaintiffs had not yet signed the settlement agreement.

The trial court granted both Karp's motion to withdraw as counsel for the non-signing plaintiffs and Jackson Hewitt's motion to enforce the settlement agreement. The Tax Authority was the sole plaintiff to appeal. In a reported opinion, the Appellate Division reversed, holding that an attorney-client agreement with a weighted majority provision for settlement of litigation was contrary to RPC 1.8(g) and unenforceable.

This Court granted Jackson Hewitt's petition for certification. The Court was informed at oral argument that except for the Tax Authority, the settlement has been executed and the monies disbursed to all other plaintiffs.

HELD: RPC 1.8(g) forbids an attorney from obtaining advance consent from his clients to abide by the majority's decision about the merits of an aggregate settlement; we apply this decision prospectively.

1. This Court has promulgated Rules of Professional Conduct that govern attorneys in New Jersey. Agreements concerning the client lawyer relationship generally are enforceable provided the agreements satisfy both the general requirements for contracts and the special requirements of professional ethics. An agreement that violates the ethics rules governing the attorney-client relationship may be declared unenforceable. (pp. 14-15)

2. The precursor to RPC 1.8(g) was DR 5-106. It is necessary to review the evolution of DR 5-106 and the case law interpreting it to better understand the meaning of RPC 1.8(g). (p. 15)

3. In 1971, New Jersey adopted the Disciplinary Rules of the Model Code. DR 5-106 governed the settlement of multi-party litigation. It provided that a lawyer who represents two or more clients shall not make or participate in the making of an aggregate settlement of the claims of or against his clients, unless each client has consented to the settlement after being advised of the existence and nature of all the claims involved in the proposed settlement, and of the participation of each person in the settlement. In 1975, in the seminal case interpreting DR 5-106, in Hayes v. Eagle-Ficher Industries, Inc., the Court of Appeals for the Tenth Circuit found that an agreement that authorized settlement of a case contrary to the wishes of the client and without the client's approving the terms of the settlement is opposed to the basic fundamentals of the attorney client relationship. (pp. 16-17)

4. In 1984, this Court adopted RPC 1.8(g) in place of DR 5-106. Recently, in 2004, the Louisiana Supreme Court reached the same result under RPC 1.8(g) as had Hayes under DR 5-106. Most scholars and commentators agree that a majority-rules provision is forbidden under RPC 1.8(g). In adopting a model rule promulgated by the ABA, this Court gives great weight to its Committee's interpretation of the rule as well as the ABA's interpretation of the rule. The Debevoise Committee's recommendation to this Court to adopt most of the ABA's Model Rules declared that RPC 1.8 (g) was substantially the same as DR 5-106. (pp. 20-23)

5. This Court concludes that RPC 1.8(g) forbids an attorney from obtaining consent in advance from multiple clients that each will abide by a majority decision in respect of an aggregate settlement. Before a client may be bound by a settlement, he or she must have knowledge of the terms of the settlement and agree to them. (p. 23)

6. The general rule is that judicial decisions will be applied prospectively. Even so, our tradition is to confine a decision to prospective application when fairness and justice require. This is the first opportunity for this Court to interpret RPC 1.8(g). The effort of plaintiffs' counsel to have all plaintiffs agree in advance to be bound by a weighted majority vote was a plausible interpretation of RPC 1.8(g). In addition, Jackson Hewitt was led to believe that the franchisees had agreed among themselves to be bound by a weighted majority vote and had relied on that in reaching settlement. The Tax Authority's president was a member of the Steering Committee, assisted in reaching the JAMS Settlement, and signed it. All of the other franchisees have consented to the settlement, and Jackson Hewitt has satisfied its terms with them. The prospective application of our holding, and thus enforcement of the settlement against the Tax Authority, is the appropriate and equitable disposition of this matter. (pp. 24-26)

7. The Court recognizes the various concerns that have been advanced in favor of permitting less than unanimous agreement in multi-plaintiff mass litigation. It refers the issue to the Commission on Ethics Reform for its review and recommendation to the Court. (p. 26)

The judgment of the Appellate Division is REVERSED and the case is REMANDED to the trial court to REINSTATE the judgment to enforce the settlement..

CHIEF JUSTICE PORITZ and JUSTICES LONG, LaVECCHIA, ZAZZALI, ALBIN, and RIVERA-SOTO join in JUSTICE WALLACE's opinion

The opinion of the court was delivered by: Justice Wallace, Jr.

Argued January 18, 2006

The issue presented is whether our Rule of Professional Conduct (RPC) 1.8(g) prohibits an attorney who represents more than one client from entering into an aggregate settlement of the clients' claims without each client consenting to the settlement after its terms are known. In the present case, an attorney agreed to represent 154 individual franchisee-plaintiffs in their claims against franchisor-defendant Jackson Hewitt, Inc.*fn1 Each plaintiff entered into an identical retainer agreement that provided for settlement of the matter if a weighted majority of plaintiffs approved the settlement. A Steering Committee of four plaintiffs was established to represent the interests of all 154 individual plaintiffs. After the Steering Committee negotiated a settlement in principle, a weighted majority of plaintiffs approved it, but eighteen others did not. Defendant sought to enforce the settlement against all plaintiffs, and the motion court granted that application. The Appellate Division held that the fee agreement violated RPC 1.8(g) because it required advance consent to abide by the majority's decision and reversed. Tax Auth., Inc. v. Jackson Hewitt, Inc., 377 N.J. Super. 493, 496 (2005). We hold that RPC 1.8(g) forbids an attorney from obtaining advance consent from his clients to abide by the majority's decision about the merits of an aggregate settlement. However, for the reasons expressed in section IV of this opinion, we apply this decision prospectively. We reverse and remand.

I.

Defendant Jackson Hewitt is a nationwide tax preparation service with its principal place of business in Parsippany, New Jersey. It has franchises throughout the United States.

Plaintiff The Tax Authority, Inc. is a franchisee of Jackson Hewitt with its principal place of business in Maple Shade, New Jersey.

As part of their business operation, franchisees make Refund Anticipation Loans (RAL) to individual taxpayers in anticipation of the taxpayers receiving refunds from the Internal Revenue Service. The loans are repaid when the refunds are received. Prior to the 2000 tax season, Jackson Hewitt distributed monetary rebates called "Performance Incentive Rebates" arising out of those loans to its eligible franchisees. Beginning in the 2000 tax season, Jackson Hewitt discontinued issuing those rebates.

The individual franchisees believed that Jackson Hewitt breached the franchise agreement by failing to issue rebates. Because the franchise agreement prohibited the franchisees from filing a class action lawsuit against Jackson Hewitt or its affiliates, the franchisees collectively retained attorney Eric H. Karp (Karp) of Witmer, Karp, Warner & Thuotte LLP in Boston to represent the group in a mass lawsuit. As part of that representation, each of the 154 plaintiffs entered into an identical attorney-client retainer agreement with Karp. Plaintiffs agreed that the ...


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