Miss. SC sends Scruggs fee case to arbitration

Jessica M. Karmasek Apr. 7, 2011, 12:43pm


JACKSON, Miss. (Legal Newsline) -- The Mississippi Supreme Court is referring an attorneys fees dispute against disgraced plaintiffs attorney Richard "Dickie" Scruggs to arbitration.

The Court, in its March 31 opinion, reversed the decision of the Lafayette County Circuit Court in favor of Derek A. Wyatt.

In December 2006, Wyatt entered into an unwritten employment agreement with Nutt & McAlister, PLLC. Nutt & McAlister was a member of the Katrina Joint Venture, which also included the Scruggs Law Firm, PA.

The joint venture was created to bring lawsuits on behalf of those denied insurance coverage for property damage arising out of Hurricane Katrina. Per the joint venture's agreement, any dispute "arising under or relating to the terms of the agreement" were to be resolved by mandatory binding arbitration.

In April 2008, all Katrina Joint Venture attorneys and associates were disqualified from Mississippi federal court cases against State Farm Insurance Company in which they were involved, based on payments to material witnesses in hurricane-damage claims that were likely to become the subject of litigation.

Following that disqualification, Nutt & McAlister, despite Wyatt's protest, withdrew from the Katrina Joint Venture and relinquished its interest in all cases related thereto. Concurrently, Wyatt was engaged in a fee dispute with Nutt & McAlister regarding his claim to a 10 percent interest in Nutt & McAlister's share of Katrina Joint Venture fees.

Wyatt's first amended complaint was filed in the circuit court in June 2009 against Scruggs and SLF, Inc.

Two years prior, Scruggs and his son Zach, along with attorneys Sidney Backstrom and Timothy Balducci and former state Auditor Steven Patterson, were charged with attempting to bribe Lafayette County Circuit Judge Henry Lackey with $50,000 for a favorable ruling in another, separate dispute over Hurricane Katrina attorneys fees.

All five pleaded guilty, and Scruggs received a five-year prison sentence.

In his complaint, Wyatt asserted he is a "fee sharing participant" and a "fee sharing attorney" in the Katrina Joint Venture; that he has a "fee-sharing interest in the Katrina Joint Venture;" and that the defendants have a "fee sharing relationship" with him.

Wyatt further maintained that his employment with Nutt & McAlister was within the scope of the Katrina Joint Venture's business such that, as co-venturers, the Scruggs defendants were "jointly and severally liable with Nutt & McAlister for its breach of fiduciary duty and breach of its fee-sharing agreement with Wyatt."

In response, Scruggs and the other defendants filed a motion to compel arbitration and to stay pending completion of arbitration, asserting that Wyatt's claims against them related to "his alleged entitlement to fees collected in the course of" the Katrina Joint Venture. They maintained that such claims were within the "broad scope" of the joint venture agreement's mandatory binding arbitration provision.

Following a hearing, the circuit court found the arbitration provision "broad enough in scope to cover the instant controversy," yet overruled the Scruggs defendants' motion. The circuit court reasoned that "there is no agreement between (Wyatt) and the (Scruggs defendants) to arbitrate since (Wyatt) did not sign the (Katrina Joint Venture agreement) nor was his particular involvement foreseeable as a (third-)party beneficiary."

Following the ruling, Scruggs and the other defendants filed their notice of appeal with the state's high court.

The Court reversed the circuit court's denial of the defendants' motion, remanding it to the lower court with directions to stay proceedings and refer to arbitration. Justice Michael K. Randolph authored the Court's opinion.

Wyatt, the Court said, argues that because the Scruggs defendants "are seeking to enforce an arbitration clause that Scruggs previously entered into a criminal conspiracy to enforce in the (Jones, Funderburg) lawsuit," then they should be estopped from invoking that same arbitration provision in this case.

Scruggs and the other defendants respond that Wyatt did not present an "unclean hands" argument in the circuit court and that "for the unclean hands doctrine to bar recovery, the party seeking relief must be guilty of willful misconduct in the transaction at issue."

The Court said the doctrine prevents a complaining party from obtaining equitable relief in court when he is guilty of willful misconduct "in the transaction at issue," putting particular emphasis on the end phrase.

"This Court reiterates that Wyatt's lawsuit is premised upon his dispute with Nutt & McAlister over his fee share under an unwritten employment agreement. There is no allegation that the Scruggs defendants have engaged in criminal conduct like that for which they were sanctioned in Jones, Funderburg," it wrote.

"Therefore, the question becomes whether the Scruggs defendants are now categorically prohibited from enforcing the subject arbitration provision in all cases because of (Dickie) Scruggs' criminal conduct related to the Jones, Funderburg case.

The Court continued, "As the clean-hands doctrine focuses upon 'willful misconduct in the transaction at issue,' this Court finds it inapplicable here. Therefore, this Court concludes that no external legal constraints should foreclose the arbitration of Wyatt's claims against the Scruggs defendants."

From Legal Newsline: Reach Jessica Karmasek by e-mail at jessica@legalnewsline.com.

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