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LOUISVILLE/JEFFERSON COUNTY METRO GOVERNMENT, Appellant v. Brent T. ACKERSON, Attorney; Brent T. Ackerson, P.S.C.; David Yates, Attorney; David Yates, PLLC; John Morgan; and Jonathan Johnson, Appellees
Louisville/Jefferson County Metro Government (Metro) appeals from a summary judgment by the Jefferson Circuit Court denying its motion to disqualify Brent T. Ackerson (Ackerson) and David Yates (Yates) as counsel for the plaintiffs in the underlying litigation. Metro argues that Ackerson and Yates have impermissible conflicts of interest as serving members of the Louisville Metro Council. Consequently, Metro contends that Ackerson's and Yates's contracts with their clients should be declared void, they should be disqualified as counsel in this matter, and they should forfeit any liens for attorney fees in the proceeds of the settlement of this litigation.
We agree with the trial court that the provisions of KRS 1 61.220(1) are not applicable to this matter. Consequently, Metro is not entitled to challenge the validity of the contracts for representation. Disqualification of counsel remains an appropriate remedy. Nevertheless, Metro must prove an actual conflict of interest arising from Ackerson's and Yates's representation of their clients. Metro has failed to meet this burden. Metro had a potential subrogation right against the settlement proceeds, which would present a potential conflict of interest. But to meet its burden to disqualify counsel, Metro must show Ackerson's and Yates's representation was materially adverse to its asserted subrogation rights. By failing to timely assert a subrogation claim, Metro waived that right. Therefore, Ackerson and Yates were not representing interests which were materially adverse to Metro. Since no actual conflict of interest arose, the trial court did not err by denying Metro's motion for summary judgment and by allowing Ackerson and Yates to assert their liens against the remaining proceeds. Hence, we affirm.
I. Facts and Procedural History
The facts giving rise to this action are not in dispute. On June 24, 2014, two Louisville Metro employees, John Morgan (Morgan) and Jonathan Johnson (Johnson), were operating an ambulance in the course of their employment. The ambulance was struck by another vehicle driven by Donald O'Bryan (O'Bryan), who was operating the vehicle in the scope of his employment with Standard Auto Company (Standard). O'Bryan was killed in the accident and Morgan and Johnson were seriously injured.
Morgan and Johnson submitted workers’ compensation claims to Metro for medical expenses, lost wages, and diminished capacity. Between the two employees, Metro expended $1,744,314.42 in payment of claims. Neither remains employed by Metro.
Morgan and Johnson also separately pursued claims against the third-party defendants. Morgan was represented by Ackerson and Johnson by Yates. Both attorneys are elected members of the Louisville Metro Council. O'Bryan's estate lacked sufficient assets to pay a judgment. Likewise, Standard had no assets. However, Standard maintained a $1,000,000.00 liability insurance policy with Occidental Fire & Casualty Company. Occidental agreed to pay those proceeds into court for a release of the claims against its insured.
There were multiple claims against these insurance proceeds. In addition to Morgan's and Johnson's injury claims, there was a claim asserted for property damage to a crane struck during the accident (the crane claim).2 Metro asserted a claim for property damage to the ambulance (the ambulance claim). Lastly, and most significant to this action, Metro has a statutory subrogation claim for workers’ compensation benefits paid on its behalf. In 2016, Yates contacted Metro's Office of Management and Budget to inquire whether Metro would be willing to waive its subrogation liens.
In response, on March 16, 2016, Metro (through the Jefferson County Attorney) sent a letter to Ackerson and Yates advising that Metro would be asserting a subrogation claim against the insurance proceeds. The letter further advised Ackerson and Yates that Metro considered their continued representation of Morgan and Johnson to be materially adverse to Metro's interests. Metro stated that this conflict of interest required Ackerson and Yates to withdraw their representation in this matter.
Thereafter, Ackerson, Yates, and Metro's primary counsel, Civil Division Director Matthew Golden (Golden), met to discuss the situation. In an agreement memorialized by a letter dated May 5, 2016, Metro agreed to allow the insurance proceeds to be paid into court and for Morgan and Johnson to file their third-party complaint. The letter further acknowledged Metro's ethics concerns. Based on those concerns, Ackerson and Yates agreed to seek an ethics opinion. In addition, or in the alternative, Ackerson and Yates would seek outside counsel for the negotiation or adjudication of Metro's claim to the proceeds.
In accord with this agreement, the third-party actions were filed on June 1, 2016, against Standard Auto and O'Bryan's estate. Metro filed intervening complaints in these actions. In July 2016, Yates, Ackerson, and Metro agreed to settle the crane claim for $6,000.00. In July, Ackerson filed a request with Metro's Ethics Commission seeking an opinion regarding the alleged conflict of interest. On July 21, the Ethics Commission issued an opinion stating that Ackerson's representation of Morgan did not create a conflict of interest.
The parties engaged in further negotiations over settlement of the remaining claims. In March 2017, Metro advised the parties that it valued the ambulance claim at $16,552.70 and would settle that claim for that amount. At a status conference hearing on July 5, 2017, Ackerson and Yates proposed that Metro be stayed from the proceedings while the plaintiffs engaged in binding arbitration over their pain and suffering claims. Metro's counsel objected to this proposal to the extent that it might affect Metro's subrogation claim. Metro also argued that the dispute demonstrated that Ackerson and Yates had a conflict of interest in their representation over this claim. Nevertheless, Metro agreed to allow the arbitration to proceed. Metro also acknowledged that its subrogation claim was contingent on the valuation of Morgan's and Johnson's pain and suffering claims.
On July 18, Metro's counsel sent a letter agreeing to the arbitration proposal but reserving its right to assert the conflict of interest on the subrogation claim. However, counsel stated Metro's position that the materiality of the conflict depended on the outcome of the arbitration proceeding. Thereafter, on July 26, the trial court issued an Agreed Order staying the proceedings to allow Morgan's and Johnson's requested arbitration. The Agreed Order further provided that:
[u]pon the arbitrator's valuation of such claims, the Plaintiff's [sic] shall submit such a finding to this Court and the stay shall be lifted so that this matter may proceed to resolution, including any potential subrogation claims of LOUISVILLE METRO GOVERNMENT.
The matter then proceeded to arbitration, in which Metro did not participate. On December 2, 2017, the arbitrator issued findings valuing Morgan's and Johnson's claims for past and future pain and suffering at $5,600,000.00 and $2,900,000.00, respectively. As all parties had anticipated, this amount was in excess of the policy limits previously paid into court. Upon lifting of the stay, the matter returned to the trial court for distribution of the funds. Metro moved to distribute the funds directly to Morgan and Johnson free and clear of attorney fees and liens. Metro argued that Ackerson's and Yates's representation contracts are void as violative of KRS 61.220 and as against public policy. Consequently, Metro asserted that Ackerson and Yates should forfeit any interest in the proceeds of the settlements benefitting their clients. In a reply brief, Metro further argued, for the first time, that it was entitled to an apportionment of its subrogation claim against the proceeds. Metro contended that this right created a conflict of interest which required the disqualification of Ackerson and Yates as counsel.
In response, Ackerson and Yates argued that KRS 61.220 does not apply because the statute only prohibits Council members from becoming interested in a claim against the Metro Government. They argued that Metro's potential subrogation claim against the proceeds of the settlement was not a claim within the meaning of the statute. Furthermore, they argued that there was no actual conflict of interest because Metro made no showing that its interests would be adversely affected by their representation of Morgan and Johnson. Finally, Ackerson and Yates argued that Metro is estopped from raising the alleged conflict of interest due to its failure to timely raise the issue until they substantially completed their work representing Morgan and Johnson.
Following additional pleadings and arguments, the matter was submitted to the trial court on Metro's motion. On May 24, 2018, the trial court issued an opinion and order denying Metro's motion to remove Ackerson and Yates as counsel for Morgan and Johnson. The court first found that KRS 61.220 did not bar their representation in this matter. The court further found that there was no actual conflict of interest. In the alternative, the court also agreed with Ackerson and Yates that Metro is estopped from raising the alleged conflict of interest.
As the Court recalls it, Metro agreed to accept 100% of its $16,522.70 property damage claim, agreed to allow the crane company to receive 100% of its $6000 claim, and agreed to walk away from its workers compensation subrogation claim once an arbitrator set a reasonable value on the uncompensated claims of Morgan and Johnson (presuming, as everyone did, that those claims would total many millions of dollars). Arranging all of this took effort and legal knowledge. Now that Ackerson and Yates have provided that effort and knowledge to their clients, Metro would like to deprive them of any compensation for same. The law does not support such an inequitable argument. And simply saying you are reserving an argument of conflict of interest until later doesn't really remove the problem for Metro.
Order and Opinion, May 24, 2018, Record on Appeal (ROA) at Vol. III, p. 499.
The trial court expressed the view that Ackerson and Yates would likely have a conflict if the property damage claims had not been settled. Since those claims were settled and Metro was not seeking any recovery on its subrogation claim, the court found that Metro's interests had not been adversely affected by their representation in this matter. To the contrary, the court suggested that Morgan and Johnson may ultimately recover slightly less because Metro received its full amount on its property damage claim. Accordingly, the court directed the parties to suggest solutions to address the reduction in Morgan and Johnson's recovery.
Metro filed a motion to reconsider, CR 3 59.05, reiterating that it reserved its rights to raise the conflict of interest pending the outcome of the arbitration claim. Metro further stated that it never agreed to waive its derivative claim against the settlement proceeds. Metro again asserted that it was entitled to an apportionment of its subrogation claim against the proceeds. Since Ackerson's and Yates's fees would come out of those proceeds, Metro reiterated that this created an actual conflict of interest.
In an opinion and order entered on July 3. 2018, the trial court denied the motion to reconsider. The court acknowledged Metro's reservation of its rights but concluded that Metro's encouragement of arbitration and its prior agreements to settle the property damage claims at full value effectively waived the conflict of interest. The court noted that settlement of those claims was appropriate since the cost of litigation would have exceeded the limited amount of insurance proceeds available. Consequently, the court stood by its initial conclusion that Metro was not adversely affected by Ackerson's and Yates's representation of their clients in this matter. The court separately entered an order directing that the remaining $358,118.30 be disbursed for attorney fees, case costs, and remaining net awards to the escrow accounts of Morgan's and Johnson's respective counsel.4 Metro now appeals from these orders. Additional facts will be set forth below as necessary.
II. Summary Judgment Standard
Our standard of review on appeal of a summary judgment is “whether the trial court correctly found that there were no genuine issues as to any material fact and that the moving party was entitled to judgment as a matter of law.” Scifres v. Kraft, 916 S.W.2d 779, 781 (Ky. App. 1996) (citing CR 56.03). Summary judgment shall be granted “if the pleadings, depositions, answers to interrogatories, stipulations, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” CR 56.03. The trial court must view the record “in a light most favorable to the party opposing the motion for summary judgment and all doubts are to be resolved in his favor.” Steelvest, Inc. v. Scansteel Serv. Ctr., Inc., 807 S.W.2d 476, 480 (Ky. 1991). Summary judgment is proper only “where the movant shows that the adverse party could not prevail under any circumstances.” Id.
Summary judgment is an extraordinary remedy that should be “cautiously applied and should not be used as a substitute for trial.” Id. at 483. Instead, summary judgment is only appropriate “to terminate litigation when, as a matter of law, it appears that it would be impossible for the respondent to produce evidence at the trial warranting a judgment in his favor and against the movant.” Paintsville Hosp. Co. v. Rose, 683 S.W.2d 255, 256 (Ky. 1985) (quoting Roberson v. Lampton, 516 S.W.2d 838, 840 (Ky. 1974)). “Impossible,” of course, should be interpreted in “a practical sense, not in an absolute sense.” Perkins v. Hausladen, 828 S.W.2d 652, 654 (Ky. 1992).
An appellate review of summary judgment does not involve fact-finding since only legal questions must be resolved. Davis v. Scott, 320 S.W.3d 87, 90 (Ky. 2010) (citing 3D Enterprises Contracting Corp. v. Louisville and Jefferson County Metro. Sewer Dist., 174 S.W.3d 440, 445 (Ky. 2005)). Moreover, an appellate court need not defer to the trial court's decision on summary judgment and reviews the issue de novo because only legal questions and no factual findings are involved. See Lewis v. B & R Corp., 56 S.W.3d 432, 436 (Ky. App. 2001).
III. Effect of Ethics Opinion
As an initial matter, we do not consider the July 2016 opinion by the Metro Ethics Commission to be relevant to this matter. As noted, the May 2016 agreement provided that Ackerson and Yates would seek an ethics opinion to determine whether their clients’ interests in the settlement proceeds would be adverse to Metro's interests. However, Metro did not specifically agree to be bound by that opinion. In fact, Metro took the position that Ackerson and Yates should seek outside counsel to negotiate or adjudicate its claim against the proceeds regardless of the conclusions of the ethics opinion.
In any event, this Court is not bound by the conclusions reached in the ethics opinion. Although Ackerson and Yates may have reasonably relied on the ethics opinion in continuing their representation, the issues of conflict of interest and disqualification merely require the application of law to the agreed facts of this case. Therefore, we will not address this issue further.
IV. Application and Scope of KRS 61.220(1)
Metro first argues that Ackerson and Yates have a conflict of interest under KRS 61.220(1), which provides as follows:
Any member of the fiscal court, or any mayor or council member of a consolidated local government, who becomes interested, directly or indirectly, in any contract for work to be done or material to be furnished for the county or any district thereof, or who becomes interested in any claim against the county shall be fined not less than five hundred dollars ($500) nor more than five thousand dollars ($5,000) for each offense.
The purpose of KRS 61.220(1) is to prevent a member from using his position to obtain a pecuniary gain for his own advantage and against the interest of the county. See Knox Fiscal Court v. Davis, 267 Ky. 155, 101 S.W.2d 409, 410 (1936).5 A contract made by a public officer is void if it interferes with the unbiased discharge of his duty to the public in the exercise of his office, or if it places him in a position inconsistent with his duty to the public, or if it has a tendency to induce him to violate such duty. Logan Cty. v. Edwards, 206 Ky. 53, 266 S.W. 917, 918-19 (1924). Consequently, bad faith or fraud is not an element of the criminal offense charged under the statute, although equitable estoppel may apply to a civil action where the local government seeks recovery of monies. Sigmon v. Commonwealth, 207 Ky. 786, 270 S.W. 40, 41-42 (1925).
Since a public officer cannot lawfully contract with himself for the performance of services, Metro contends that any such contract is void as a matter of law. Logan County, 266 S.W. at 919. However, this rule specifically prohibits members “from being interested, either directly or indirectly, in any contract for work to be done or material to be furnished for the county or any district thereof, and that members of the fiscal court are forbidden to purchase claims against the county.” Id. at 918.
There is no Kentucky case law concerning what constitutes a “claim against the county” for purposes of KRS 61.220(1). Indeed, KRS 61.220(1) does not address a situation where a member of a fiscal court or consolidated local government is a practicing attorney who seeks to represent a client with a claim affecting the county. And we find no authority, either in KRS 61.220(1) or otherwise, which would allow Metro to challenge the validity of contracts to which it is neither a party nor a third-party beneficiary. Therefore, we conclude that Ackerson's and Yates's representation of Morgan and Johnson is not an “interest” in a claim against Metro within the meaning of KRS 61.220. Consequently, we agree with the trial court that the statute is not applicable to this situation.
V. Conflict of interest under SCR 3.130
Rather, Metro's remedy is to disqualify Ackerson and Yates as counsel in this case due to their conflicts of interest in this matter. Metro concedes that Ackerson and Yates are permitted to privately practice law so long as their representation of clients do not interfere with their duties as Metro Council members. Thus, we agree with the trial court that the controlling issue is whether Ackerson and Yates are burdened with conflicts of interest under SCR 6 3.130 (Rule 1.7(a)), which provides as follows:
(a) Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if:
(1) the representation of one client will be directly adverse to another client; or
(2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer's responsibilities to another client, a former client or a third person or by a personal interest of the lawyer.
Metro is not a “client” of Ackerson and Yates. However, Ackerson and Yates owe duties to Metro by virtue of their positions as Metro Council members. As a result, the relevant inquiry is whether these duties are adverse to Metro's interests in this case and, if so, whether the alleged conflict of interest should disqualify Ackerson and Yates as counsel for Morgan and Johnson.
VI. Standard for Disqualification
When a party asserts that opposing counsel should be disqualified due to a conflict of interest, the trial court must hold an evidentiary hearing to resolve the question. Marcum v. Scorsone, 457 S.W.3d 710, 718 (Ky. 2015). Since a litigant has a right to counsel of his or her choice, counsel should not be disqualified merely for an appearance of impropriety. Id. Rather, the complaining party must show that an actual conflict exists and the trial court must so find. Id.
Metro argues that the conflict of interest arises from its statutory subrogation right under KRS 342.700 against the proceeds of any settlement in favor of Morgan and Johnson. We agree that Metro has a potential subrogation right. The Workers’ Compensation Act provides the exclusive remedy for an employee to recover against an employer for on-the-job injuries. But if “some other person than the employer” may be legally responsible for the worker's on-the-job injuries, the worker may assert a tort claim against that other person and attempt to recover damages. KRS 342.700(1). An employer or other party who has paid compensation under the Act has a subrogation interest in any recovery of that action to the extent that it duplicates amounts paid under the Act. Beaver v. Oakley, 279 S.W.3d 527, 530 (Ky. 2009) (citing KRS 342.700).
VII. Metro failed to prove the existence of an actual conflict of interest.
The more significant question, however, is whether this subrogation interest has ripened into an actual conflict of interest with respect to Ackerson and Yates. Metro's statutory subrogation right did not arise until Morgan and Johnson recovered on their third-party claim. See Whittaker v. Hardin, 32 S.W.3d 497, 499 (Ky. 2000). For much of the litigation below, both parties and the trial court operated under the assumption that Metro was not entitled to reimbursement until Morgan and Johnson has been “made whole” for all economic and non-economic losses incurred as a result of the injury. Metro points out that the Kentucky Supreme Court rejected the application of the “made whole” doctrine to workers’ compensation subrogation in AIK Selective Self Insurance Fund v. Bush, 74 S.W.3d 251, 256-57 (Ky. 2002). Rather, the Court held that “KRS 342.700(1) expresses a legislative purpose that the employer or insurer is entitled to recoup from the third-party tortfeasor the workers’ compensation benefits it paid to the injured worker; thus, the common law ‘made whole’ rule cannot be applied to preclude that recovery.” Id. at 257 (citing Wine v. Globe American Cas. Co., 917 S.W.2d 558, 562 (Ky. 1996)).
Based on this holding, Metro argues that the trial court erred by applying the “made whole” rule to prevent it from seeking subrogation against the recovery by Morgan and Johnson. And since those subrogation rights are inherently in conflict with Ackerson's and Yates's duties to their clients, Metro further concludes that they had an actual conflict of interest which required their disqualification. Under the circumstances presented in this case, we disagree for several reasons.
First, the Kentucky Supreme Court later qualified the holding in Bush. In AIK Selective Self-Insurance Fund v. Minton, 192 S.W.3d 415 (Ky. 2006), the Court explained that, while the “made whole” doctrine may not be employed to undermine the statutory subrogation scheme, its underlying principles remain relevant when explicating the statute's primary functions. Id. at 418-19. Thus, the worker's right to receive the maximum recovery under the statute must take priority over the right of the employer or insurer to receive reimbursement for the benefits which it was already obligated to pay by contract. Id. at 419. The Court noted that KRS 342.700 specifically requires that all of the employee's attorney fees and expenses be deducted from any recovery subject to subrogation. Id. at 418. The Court further noted the long-standing rule that any portion of the recovery which is not duplicative of workers’ compensation benefits, such as pain and suffering, is also not subject to a statutory subrogation claim. Id. at 419. See also Mastin v. Liberal Markets, 674 S.W.2d 7, 12 (Ky. 1984).
As a result, Minton precludes Metro from exercising its subrogation rights against any portion of the recovery attributable to either pain and suffering or attorney fees and costs. Contrary to the holding in Bush, Minton held that some form of the “made whole” doctrine remains applicable to workers’ compensation subrogation under KRS 342.700. However, the application of the “made whole” principle remains somewhat unclear given these conflicting holdings.
In the current case, as noted, there was no recovery available from the tortfeasors. The only recovery available was from the $1,000,000.00 liability insurance policy, which represents less than all of the damages incurred by Morgan and Johnson. Furthermore, Occidental paid its liability limits under the policy without any allocation of damages. Until those amounts were paid into court, Metro had no right to assert any claim against the proceeds. Moreover, any potential conflict of interest did not ripen into an actual conflict until Metro asserted its right to apportion the recovery between amounts subject and amounts not subject to subrogation.
In the case of a settlement with no allocation to specific categories of damages, the employer is entitled to an independent allocation of damages. Whittaker, 32 S.W.3d at 499. The burden of proving entitlement to a credit rests on the employer. Id. Where the employer was a party to an agreement to settle the worker's suit against a third-party tortfeasor and the agreement did not allocate the proceeds among items of damage, the issue of allocation must be resolved within the workers’ compensation system. Id. On the other hand, when the rights of the employee in a pending claim are not at stake, the circuit court has jurisdiction to resolve the question of allocation. Custard Insurance Adjusters, Inc. v. Aldridge, 57 S.W.3d 284, 288 (Ky. 2001).
Metro emphasizes that it consistently reserved its rights to raise the conflict of interest issue. The record clearly reflects this reservation of rights. But as noted, the existence of conflict requires proof that Metro has an actual subrogation interest against the settlement proceeds. We first note that Metro engaged in settlement negotiations with Ackerson and Yates over the ambulance claim. And in fact, the parties agreed to pay Metro the full amount of that claim out of the settlement proceeds. Consequently, we agree with the trial court that Metro waived any conflict of interest with regard to that claim.
And with respect to the subrogation claim, Metro's position has been inconsistent. At the July 5, 2017, hearing, Metro agreed to stay its subrogation claim while the matter was submitted to binding arbitration over the value of Morgan's and Johnson's pain and suffering claims. During this hearing, Metro's counsel acknowledged that Metro's subrogation claim was contingent on the valuation of Morgan's and Johnson's pain and suffering claims. Metro's counsel stated on the record:
AIK v. Bush says that if you folks resolve, settle, get a judgment, do whatever, then those awards are such as to eliminate a subrogator's rights. And you can do that. I mean, that's the nature – that's the state of the law. I'm fine with however you-all want to do it. But I do need, I guess, either an arbitration judgment, something of that nature that would foreclose those – it would foreclose those derivative claims.
The trial court asked the parties to formalize this understanding in writing. In the July 18, 2017, letter Metro's counsel acknowledged this agreement, stating:
My client is only entitled to receive a payment of proceeds should its employees be “made whole” under Kentucky law. That is, until Mr. Morgan and Mr. Johnson are compensated for their pain and suffering and similar damages, Metro is not entitled to payment. Wine v. Globe Association, Ky, 917 S.W.2nd 558 (1996) [sic]
The letter goes on to emphasize Metro's position that a “conflict obviously exists here,” but notes that there remains a question of “whether the conflict is ‘material’ as required by Rule 1.7. As I stated before, this cannot be known until Mr. Johnson's and Mr. Morgan's competing claims are proven.”
Based upon counsel's representations at the July 5 hearing and in the July 18 letter, Metro agreed that its subrogation interest in the proceeds would not arise until there had been an independent determination of the value of the pain and suffering claims. Metro expressed no interest in participating in the arbitration. Since the arbitrator determined that those claims exceeded the settlement, Metro had no right to assert a subrogation claim against the proceeds.
In its CR 59.05 motion and on appeal, Metro argued that it is entitled to its pro rata share of the settlement proceeds even though Morgan and Johnson have not been made whole.7 However, in its February 14, 2018, motion, Metro argued that all of the settlement proceeds belong to Morgan and Johnson free and clear of any liens for attorney fees. Metro specifically stated, “So long as the public officers do not share in these funds, Louisville Metro will waive any additional claims against the insurance proceeds.” (Emphasis in original.)
A party may be estopped from taking inconsistent positions in judicial proceedings when it has persuaded the trial court or another party to act in reliance on the earlier position to his detriment. See Hisle v. Lexington-Fayette Urban Cty. Gov't, 258 S.W.3d 422, 434-35 (Ky. App. 2008). In this case, Metro's counsel made repeated statements that Metro did not intend to assert a claim against the proceeds unless the settlement proceeds exceeded the value of Morgan's and Johnson's pain and suffering claims. Metro's counsel acquiesced to the arbitration proceedings which allocated the entire recovery to pain and suffering. In addition, the entire recovery in this action occurred through the efforts of Ackerson and Yates, with effectively no participation by Metro.
Metro contends that it should not be bound by its prior position because all parties were operating under a mutual mistake regarding the law of subrogation and apportionment. As discussed above, it is not entirely clear that the recovery would have been subject to subrogation given that Morgan's and Johnson's pain and suffering damages and attorney fees exceeded the amount of the recovery. In any event, Metro bore the burden of asserting its subrogation claim and proving its right to a subrogation credit. Whittaker, 32 S.W.3d at 499. The actions by Metro led Morgan and Johnson to believe that it did not intend to assert these rights unless their pain and suffering damages were found to be less than the entire recovery. And since the existence of an actual conflict of interest is contingent upon Metro's assertion of its right to allocation of damages, Metro's waiver of that right likewise precludes a finding that Ackerson and Yates were burdened by an actual conflict of interest.
We must emphasize that our conclusions are based on the facts of this particular case. By accepting representation of Morgan and Johnson, Ackerson and Yates took the risk that Metro's potential subrogation right could ripen into an actual conflict of interest. It is clear from the record that Ackerson and Yates were aware that a conflict of interest could arise since at least March 2016, when Metro raised the possibility of asserting a subrogation claim. Metro also repeatedly raised concerns that their representation could become directly adverse to Metro's interests. Ackerson and Yates took the risk that they could be disqualified as counsel at any point thereafter. Consequently, we seriously question their continued participation given the strong appearance of a conflict of interest. Therefore, this opinion should not be taken as approval of a sitting council member representing a party who is pursuing a direct claim against a county or consolidated Metro government.8
We conclude that the current case does not present that situation. Metro's potential subrogation right never ripened into an actual claim against the settlement proceeds. Although Metro indicated that it planned to assert a subrogation claim, it never actually did so until after the arbitration proceedings allocated the entirety of the recovery to pain and suffering. If Metro had asserted its right to an independent allocation of damages prior to the arbitration, then Ackerson and Yates would have been disqualified because their duties to their clients conflicted with the duties they owed to Metro.
But Metro did not assert its right to an independent allocation of damages until after the arbitration. Metro actively negotiated with Ackerson and Yates over the crane and ambulance claims. And Metro specifically agreed to allow Morgan and Johnson to pursue arbitration to determine the value of their pain and suffering claims. Morgan and Johnson acted in reasonable reliance upon Metro's pre-arbitration representations. Likewise, Ackerson and Yates relied upon Metro's representations by remaining as counsel through the arbitration proceedings.
Thus, we must conclude that Metro waived its rights to allocation and subrogation. By extension, Metro also waived any conflict of interest by Ackerson and Yates in their representation of Morgan and Johnson. Therefore, the trial court properly denied Metro's motion to disqualify Ackerson and Yates as counsel, and they remain entitled to assert their liens against the proceeds.
Accordingly, we affirm the judgment and orders of the Jefferson Circuit Court.
1. Kentucky Revised Statutes.
2. The crane claim was asserted as a subrogation claim by Scottsdale Insurance Company on behalf of its insured (and the owner of the crane), L.L. Brown Construction, Inc.
3. Kentucky Rules of Civil Procedure.
4. The court's order directed payment of $224,712.05 to be paid to Ackerson's escrow account and $133,406.25 to Yates’ escrow account. ROA at Vol. III, p. 577.
5. As originally written, this section only applied to members of county fiscal courts. Kentucky Statutes (KS) § 1844. Through subsequent amendments, the statute was extended to members of other county governing bodies, including a council member of a consolidated local government.
6. Kentucky Supreme Court Rules.
7. Metro contends that the 2018 amendment to KRS 342.700(1) allows it to recover a pro rata share against the settlement proceeds, thus giving it an actual subrogation interest. 2018 Ky. Acts Ch. 40 (HB 2) § 12(1). However, the amended statute was not effective until July 14, 2018. Moreover, the Act specifically provides that “Sections 1, 3, and 12 of this Act shall apply to any claim arising from an injury or occupational disease or last exposure to the hazards of an occupational disease or cumulative trauma occurring on or after the effective date of this Act.” Id. at § 20(1) (emphasis added). Since the injuries occurred prior to the statute's effective date, the amendments do not apply in this case.
8. Metro points to another case in which Yates represented clients who had brought an action against the Louisville Metro Police Department and a number of Metro police officers. The circuit court in that action found that Yates had an actual conflict of interest which required his disqualification as counsel. We express no opinion as to that holding. However, the facts of that case are clearly distinguishable since Yates's representation directly implicated Metro's liability and conflicted with his duties as a council member.
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Docket No: NO. 2018-CA-001067-MR
Decided: April 24, 2020
Court: Court of Appeals of Kentucky.
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