Attorneys – Motion to Dismiss – Bar Disciplinary Decision – Privity – Quantum Meruit – Unclean Hands

A law firm cannot recover funds from intellectually disabled clients after a state bar determined that a partner at the firm acted unethically in entering into a retainer contract with the clients.

We affirm the district court’s grant of the clients’ motion to dismiss.

Michael Megaro, a partner in the plaintiff-law firm, entered into a retainer agreement with two intellectually disabled brothers who had been wrongfully imprisoned by the State of North Carolina for 31 years. Sometime after guardians were appointed for the clients, they hired replacement counsel. The law firm filed this action seeking to recover fees and expenses related to work they had performed for the clients.

On a motion to dismiss, the district court could take judicial notice of a decision by the North Carolina State Bar Disciplinary Hearing Commission. Moreover, that decision has now been upheld by the North Carolina Court of Appeals.

Collateral estoppel bars the re-litigation of the claims raised here. Megaro and the North Carolina State Bar actually litigated the question of whether the retainer agreement that Megaro signed on behalf of the firm constituted an unenforceable contract. Further, the facts that led to the Commission’s decision that the retainer agreement was invalid—the clients’ limited intellectual capacity, Megaro’s knowledge of those limitations and his decision to manipulate them into signing the agreement—were material, relevant and essential to the Commission’s findings of unethical conduct by Megaro.

Since Megaro was a partner in the firm and was acting on behalf of the firm in meeting with the clients about the retainer agreement, the firm was in privity with Megaro. Consequently, the firm is equally barred from re-litigating the claims decided by the Commission.

The firm’s equitable claims for unjust enrichment and quantum meruit are barred by the doctrine of unclean hands. Regardless of any discussion about the amount of work Megaro performed, the Commission concluded that “[b]y entering into a representation agreement with his clients when he knew they did not have the capacity to understand the agreement, [Megaro] engaged in conduct involving dishonesty, fraud, deceit or misrepresentation in violation of Rule 8.4(c) and engaged in conduct prejudicial to the administration of justice in violation of Rule 8.4(d).” The Commission also found that Megaro charged an improper fee by claiming an irrevocable interest in the clients’ potential financial payments from a civil rights action. And the Commission determined that collecting one-third of the North Carolina statutory award for the clients’ wrongful convictions was an excessive fee in violation of the North Carolina Rules of Professional Conduct since most of the work had been done before the firm was even involved.

Thus, we affirm the dismissal of the firm’s equitable claims based on the doctrine of unclean hands.

Affirmed in part, dismissed in part.

Halscott Megaro P.A. v. McCollum (Lawyers Weekly No. 001-052-23, 21 pp.) (Marvin Quattlebaum, J.) No. 22-1505. Appealed from USDC at Raleigh, N.C. (Terrence Boyle, J.) Jaime Torre Halscott for appellant; Matthew Higgins, Elliot Abrams, Liz Lockwood, Cathereine Stetson, Desmond Hogan, David Maxwell and Eric Roytman for appellees. United States Court of Appeals for the Fourth Circuit