A Toronto lawyer is suing four of his former associates in a case alleging they were “unjustly enriched” by the transfer of contingency fee files when they started up their own practice.
In a statement of claim filed on Aug. 17, Frank Loreto asks for $3 million in damages related to more than 200 personal injury cases transferred from his firm, Loreto Little Morello, to Little Morello Vettese Segreto LLP.
The new firm was formed by Ian Little, Dianna Morello, John Vettese, and Piera Segreto, the lawyers who ran the personal injury practice at Loreto Little Morello that generated about 95 per cent of the billings there.
The lawsuit, which also names four law clerks who jumped ship to the new firm as defendants, is just the latest salvo in an increasingly bitter battle between the parties since their acrimonious split in the summer of 2008.
Superior Court Justice Edward Belobaba has already dismissed a claim by Loreto that the four lawyers breached their fiduciary duty to him when they approached clients on behalf of the new firm.
Many of the files have paid out handsome settlements, with the terms of the contingency fee agreements typically reserving 30 per cent of the payout for the law firm’s fee.
But the defendants say Loreto is only entitled to fees for the billable hours of work done on the files before the transfer, regardless of the size of the final settlement.
But Loreto counters that he hasn’t yet received a penny on most of the cases and wants to see the whole file before he decides what he should charge for his portion.
Loreto also alleges the new firm has breached the terms of the transfers by failing to hold funds in trust for his benefit until the dispute is settled. At the same time, Loreto has delivered accounts to 192 clients.
His actions include 14 Small Claims Court matters and 26 assessments currently underway. The rest of the clients have received bills for $100,000 from Loreto as he attempts to gain access to their files.
None of the allegations have been proven in court.
For his part, Loreto says the new firm has kept clients in the dark about their obligations to him. “I don’t want to sue the clients,” he tells Law Times.
“The clients have paid the fees. I tell them, ‘It’s not you I’m after.’ But everybody’s got their money except Frank Loreto. And Frank Loreto’s the guy who paid all the bills.
“I incurred all the disbursements. I paid these people every two weeks come rain or shine, and you know you don’t make money on every file. These are files that I carried for nine or 10 bloody years. I just want to get my money and move on.”
But Little says his firm has no obligation to advance money to Loreto and calls his 192 separate actions a “scorched-earth approach.” In his view, it would be impractical to hold money in trust until the parties resolve the dispute because Loreto has to be paid out of client funds.
“We cannot hold client money in trust indefinitely for some imprecise or indeterminate claim,” he says. “It’s a messy situation, and our goal all the way through this has been to keep the clients out of it. Two-and-a-half years later, it’s still hanging out there. We want to move on.”
The dispute goes all the way back to the night of June 11, 2008, when the four defendant lawyers approached Loreto with a partnership agreement. Although Loreto Little Morello had been a general partnership since 1997, there was no profit-sharing and the lawyers were essentially Loreto’s employees.
Loreto felt angry and ambushed by the proposed agreement, which he says would have entitled the partners to 40 per cent of fees paid.
As a result, the situation quickly escalated. In Belobaba’s judgment issued in February of this year, he found that two of the lawyers, Vettese and Segreto, were fired as the situation boiled over in the firm’s boardroom.
Loreto constructively dismissed the other two - Little and Morello - Belobaba ruled. In a recording of part of the explosive meeting, Loreto can be heard inviting the lawyers to leave and start their own firm, according to the ruling.
That’s exactly what they did a week later after meeting to decide how to go forward. In the meantime, they approached the Law Society of Upper Canada for advice on how to solicit old clients. It advised them to give clients three options: stay with Loreto, come to the new firm or find another lawyer.
Loreto claims the new firm cherry-picked the lucrative files, leaving him with “all the dog’s breakfasts.” He believes the four lawyers were motivated by “ambition and greed” when they presented him with the partnership agreement and says he would have been happy to give them even more files if they had asked to leave for business reasons. “We used to be a family here,” he laments.
According to Little, he and his colleagues entered the night of the blow-up with an air of optimism. “We were sitting down to present an agreement on moving the firm forward as a partnership and we walked out the door being constructively dismissed and fired,” he says. “We were out on the street.”
Belobaba also found that the terms of Loreto Little Morello’s retainer agreements limited the amount Loreto can claim to time spent on matters before termination “and not on the amount of any eventual financial recovery.” Loreto disputes that, saying some of the older files had much more open-ended retainers that could link his fees to final settlements.
Loreto appealed Belobaba’s judgment partly, he says, because he couldn’t afford the $70,000 costs award made against him. He notes he has had to borrow $1.4 million to keep his practice going while pawning off expensive watches bought in happier times to help make the rent for his office in Toronto’s west end.
In the meantime, the defendants have brought a motion to have all of the assessments stayed, while Loreto has asked for all of the proceedings to be consolidated and allowed to proceed.
The defendants again won that motion when Superior Court Justice Thomas Lederer stayed the assessments pending a decision on Loreto’s now-abandoned appeal of Belobaba’s ruling.
Lederer compared the situation to Hamlet, with Loreto taking on the role of the king, although he admitted he still wasn’t sure who was playing Hamlet in seeking revenge for his attempted removal from the kingdom. It could be any one or all of the defendant lawyers, he wrote.
Nevertheless, Lederer raised the spectre of Hamlet’s bloody final scene in which everyone dies as a warning to all parties about potential twists in the next act of this tragic drama. “This is an unhappy situation,” he wrote.
“It cannot help, or reflect well, on any of those involved. If a resolution is not found, all of them will be hurt by it. It often seems easier to fight on. No good can come of this.”
Lederer later returned to Shakespeare as he made his costs endorsement for the motion, this time using a quote from The Merchant of Venice to characterize the actions of the defendant lawyers: “And if you wrong us, do we not revenge? If we are like you in the rest, we will resemble you in that.”
Loreto may have brought many of his problems on himself, Lederer wrote, but “the problems continue, in part, because the defendants seem more intent on revenge than finding a reasonable solution.”
At the same time, he rejected the defendants’ claims that the public perception for the administration of justice was the primary concern behind the motion as “more than a bit disingenuous.”
“The parties on these motions were concerned with their own interests and driven by the acrimony between them,” Lederer wrote.
Between Lederer’s hearing of the motions and the release of his judgment, Loreto launched his unjust enrichment claim, which included new allegations that the four lawyers had held off on settling claims so they could cash in after the split and that they had used his law clerks to trick him into accepting small fees for transferred files that eventually resulted in large windfalls for Little Morello Vettese Segreto.
Little denies those allegations, none of which have been proven in court. He says it’s common for lawyers to transmit offers to clients without finalizing settlements and claims there could be no premeditation because the events of that summer night had caught all of the defendant lawyers off guard.
“We worked out of a freaking mailbox for a while, in our bedrooms, with a little thermal fax machine that someone found in their basement. If we were going to do something, we would have at least had an office on standby or something.”
Along with a motion for direction on how to proceed with the assessments that’s scheduled to be heard today, the defendant lawyers have also asked the court to dismiss Loreto’s new lawsuit as “frivolous, vexatious, and an abuse of process.”
In yet another twist, Little says Loreto served the materials himself, which prompted the four lawyers to pay a trip to a Newmarket, Ont., justice of the peace to seek an application for a peace bond against their former boss for threatening behaviour.
Loreto, on the other hand, thinks he has a case for malicious prosecution. “They’re obviously trying to outlast me,” he says. “They’re so pissed off because I’m still going. Guess what, Frank Loreto’s loud and he’s a survivor. I’ll be fine.”