Paul Picone v. Gary Cruciani and McKool Smith
Date Filed2023-12-21
Docket05-22-00841-CV
Cited0 times
StatusPublished
Full Opinion (html_with_citations)
Affirmed and Opinion Filed December 21, 2023
In The
Court of Appeals
Fifth District of Texas at Dallas
No. 05-22-00841-CV
PAUL PICONE, Appellant
V.
GARY CRUCIANI AND MCKOOL SMITH, P.C. Appellees
On Appeal from the County Court at Law No. 4
Dallas County, Texas
Trial Court Cause No. CC-21-00300-D
MEMORANDUM OPINION
Before Justices Pedersen, III, Garcia, and Kennedy
Opinion by Justice Pedersen, III
Appellant Paul Picone appeals from the trial court’s June 28, 2022 final
judgment, which dismissed with prejudice his claims for legal malpractice, breach
of fiduciary duty, and fraud and awarded appellees Gary Cruciani and McKool
Smith, P.C. (together, McKool Smith) attorney’s fees, costs, and interest.1 In two
appellate issues, Picone contends the trial court erred in compelling arbitration and
1
The court’s judgment is titled “Order Granting Defendants’ Motion to Lift Stay and Confirm
Arbitration Award and Denying Plaintiff’s Motion to Reconsider Order Compelling Arbitration and Staying
Case.”
in confirming the arbitrator’s award in the absence of an agreement to arbitrate
between these parties. We affirm the trial court’s judgment.
Background
The lawsuit before us has complicated roots that involve these parties and a
number of others, who have become entangled in business and legal matters over a
number of years. For our purposes, we focus upon the legal disputes, representations,
and resolutions that lead to the lawsuit and arbitration below.
2006 Dispute between OSI and Picone and PIC
Picone owned a company named Photographic Illustrators Corporation (PIC)
that licensed his photographs to Osram Sylvania, Inc. (OSI). In 2006, a dispute arose
between the parties concerning OSI’s use of PIC’s photographs outside the scope of
the parties’ license agreement. Wolf, Greenfield & Sacks (WGS) represented PIC
and Picone in their efforts to resolve the dispute. The resulting agreement included
a release of claims against OSI, a payment by OSI of $50,000, and new licensing
terms by which OSI would pay a monthly royalty to PIC and PIC would provide
Picone’s photographic and imaging services to OSI (the 2006 Settlement
Agreement). The parties agreed to resolve any disputes relating to the 2006
Settlement Agreement through arbitration. An initial recital states that this is an
agreement between OSI and PIC, but—after signing for PIC as its president—Picone
also signed the following statement:
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INSOFAR as this Agreement calls for my personal services and/or
deals with rights and/or obligations that I may have personally, I, Paul
Picone[,] hereby acknowledge and agree to be bound by this
Agreement.
2016 OSI Arbitration with Picone and PIC
During the term of the 2006 Settlement Agreement, PIC became aware that
copies of PIC Images in which it owned the copyrights were appearing on internet
sites belonging to OSI’s customers without a PIC copyright notice or attribution.
PIC filed a number of copyright infringement actions against OSI’s customers in
federal courts; the suits were consolidated in Massachusetts. In January 2016, OSI
intervened in the consolidated action and moved to refer the contract and copyright
disputes between PIC and OSI to arbitration. According to Picone, WGS represented
Picone and PIC until approximately “mid-2016,” when WGS withdrew.
At approximately the same time, in June 2016, Picone “began to explore the
possibility of selling PIC,” and he began negotiating with Matt Fleeger to that end.
On October 5, 2016, Picone finalized the sale of PIC through a Stock Purchase
Agreement with Copyright Strategies, LLC (CSL), a company owned by Fleeger.2
The Stock Purchase Agreement contained a lengthy provision relating to resolution
of disputes between the parties. Initially, any controversy or claim that arose out of
the agreement was to be mediated. If the mediation was not successful, then the
parties were to proceed to arbitration:
2
Picone’s wife, Carolyn Picone, was also a party to the Stock Purchase Agreement. She is not a party
to this suit.
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[A]ny controversy or claim arising out of or relating to this Agreement,
including but not limited to the arbitrability of any such controversy or
claim, between or among the parties hereto and/or any of their
respective affiliates shall be resolved by binding arbitration in
accordance with JAMS Comprehensive Arbitration Rules and the
Federal Arbitration Act by JAMS in the County of the Respondent and
judgment upon any award arising in connection therewith may be
entered in any court of competent jurisdiction. An award rendered by
the arbitrator shall be final and binding.
The Stock Purchase Agreement also included a provision addressing certain claims
belonging to Picone and PIC that might not be completely resolved with third parties
by the time the sale became effective. The agreement provided that when those
claims were ultimately resolved, Picone was entitled to forty percent of the recovery.
Picone contends that “around” August 2016, “shortly after WGS withdrew,”
he hired McKool Smith to represent himself and PIC in the OSI arbitration. Our
record does not include a contract reflecting this representation. Although the Stock
Purchase Agreement was not effective until October 5, 2016, Fleeger signed his own
agreement with McKool Smith on August 21, 2016, for the firm to represent PIC in
the OSI arbitration (the 2016 Retention Agreement). PIC is named as the “Client” in
the 2016 Retention Agreement; Fleeger signed as the President of PIC. According
to Picone, he was completely unaware of the 2016 Retention Agreement until years
later, and Fleeger had no authority to enter into such an agreement when Picone was
the sole owner of PIC.
The dispute did proceed to arbitration, and the arbitrator signed his Partial
Final Award on November 20, 2017, awarding PIC more than $9.5 million for its
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breach of contract claims, plus attorney’s fees and costs. But the arbitrator made no
award for copyright infringement by OSI based on what he called WGS’s failure to
employ “language of conditions” when it drafted certain provisions in the 2006
Settlement Agreement. According to Picone, Cruciani told him at the close of the
arbitration that a legal malpractice claim existed against WGS based on the findings
of the arbitrator.
2019 WGS Malpractice Mediation
Picone asserts that sometime between June 1 and June 25, 2019, Cruciani
contacted him by telephone and offered to have McKool Smith represent him and
PIC on a contingency fee basis in pre-suit negotiations with WGS. Picone contends
that he hired McKool Smith on that phone call, but he was never provided a written
contract reflecting the representation. Picone also asserts that—after he had
interviewed and hired McKool Smith—he recommended that Fleeger sign a
retention agreement with the firm and that Fleeger pursue the malpractice claim
against WGS. Fleeger did sign a second retention agreement with McKool Smith.
The agreement called for the firm to act as settlement counsel for PIC—identified as
the “Client”—in return for a thirty percent contingency fee; it included a provision
requiring disputes to be resolved by arbitration (the 2019 Retention Agreement).
Before litigation was filed against WGS, a mediation of the malpractice claim
was held on March 12, 2020. Picone contends that Cruciani told him he was required
to attend the mediation. During the mediation, Picone and Fleeger argued over the
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distribution of any recovery from WGS: Picone claimed he was entitled to forty
percent of the recovery based on the Stock Purchase Agreement; Fleeger asserted
that Picone was entitled to nothing. Picone contends that throughout the mediation
he continued to believe McKool Smith was representing him individually. Picone
claims that Cruciani advised him that he was entitled to the forty percent share of
the settlement and that there was no need to reduce that understanding to writing. At
the end of the mediation, WGS agreed to settle with Picone and PIC for $15 million,
and Picone signed a term sheet to that effect. But the term sheet did not include an
express division of the recovery between him and PIC.
Shortly after the mediation, a personal attorney for Picone, David Fernberg,
contacted Cruciani; Fernberg asked McKool Smith to retain the WGS settlement
proceeds in its client account until Picone and Fleeger could work out their
respective shares of the settlement. In response, Cruciani informed Feinberg that
Picone was not a client of McKool Smith and that McKool Smith had played no role
in the Stock Purchase Agreement and did not wish to be put “in the middle.” Several
days later, Picone signed an agreement with CSL, which provided for payment of
$2.5 million to Picone as his share of the WGS settlement and which included a
broad release of claims by both parties (the 2020 Settlement and Release).
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Picone Sues Cruciani and McKool Smith
Picone sued McKool Smith, pleading claims for legal malpractice,
negligence, breach of fiduciary duty, and fraud and fraud in the inducement.3 The
petition attached Picone’s declaration, stating that “during a phone conversation with
Gary Cruciani, Esq., I hired Gary Cruciani, Esq. and McKool Smith as counsel to
represent me individually and PIC regarding the WGS legal malpractice claim.” This
oral agreement for representation provides the basis of Picone’s claim that he had an
attorney-client relationship with McKool Smith. Picone’s declaration and pleading
alleged eleven violations of McKool Smith’s duty to him related to its handling of
the WGS malpractice claim and mediation.4 The petition also set forth Picone’s
damages claim, stating:
3
Picone’s fraud pleading alleged that McKool Smith:
made misrepresentations of material facts to [Picone] regarding the representation of
[Picone] and the settlement to be signed by [Picone] with positive statements and with
concealment and failure to disclose facts when it had a duty to disclose such.
4
Picone alleged that McKool Smith failed to:
i. Advise me to obtain a writing confirming my entitlement to 40% of any recovery from
of the WGS legal malpractice claim per the October 5, 2016 Stock Purchase agreement and
Paragraph 10 above;
ii. Advise me to obtain a lawyer separate from that of Copyright Strategies, LLC and PIC
to represent my individual interests regarding the WGS legal malpractice claim;
iii. Advise me to enter into a separate, individual fee agreement with Gary Cruciani, Esq.
and McKool Smith separate from any agreement between PIC and McKool Smith;
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The Two Million Five Hundred Dollar ($2,500,000.00) PICONE
received was far less monies than PICONE was owed per Paragraph 11
[of the Stock Purchase Agreement] above.
a. $15,000,000.00 x 70% = $10,500,000.00
b. $10,500,000.00 x 40% = $4,200,000.00
McKool Smith answered Picone’s lawsuit and moved to compel arbitration,
denying that Picone was a client of McKool Smith in the WGS malpractice matter.
It argued that Picone’s claims had to be arbitrated because both those claims and
Picone’s purported damages depended upon two agreements that expressly required
arbitration: the Stock Purchase Agreement and the 2019 Retention Agreement.
iv. Advise me that Gary Cruciani, Esq. and McKool Smith were not representing me
individually but were only representing PIC;
v. Provide me, individually, any separate legal fee agreement with Gary Cruciani, Esq.
and McKool Smith;
vi. Enter into any separate legal fee agreement with Gary Cruciani, Esq. and McKool
Smith with me individually;
vii. Advise me that Gary Cruciani, Esq. and McKool Smith believed that Gary Cruciani,
Esq. and McKool Smith did not and would not represent me individually in the WGS legal
malpractice claim;
viii. Advise me that I would need a separate lawyer other than Gary Cruciani, Esq. or
McKool Smith for my individual protection regarding the WGS legal malpractice claim;
ix. Obtain or direct me to obtain from PIC or Fleeger any additional writings respecting
my entitlement to a percentage of the recovery in the legal malpractice claim against WGS;
x. Advise me regarding conflicts between my individual claims and the claims of PIC or
Fleeger; or
xi. Present me with a conflict waiver regarding my individual claims and the claims of PIC
or Fleeger.
–8–
Accordingly, McKool Smith argued that the doctrine of direct benefits estoppel
required that Picone’s claims be arbitrated.
The trial court granted the motion to compel arbitration on March 10, 2021,
based on the doctrine of direct benefits estoppel.5 The case proceeded to arbitration,
where McKool Smith filed a counterclaim, pleading that Picone’s suit against it was
a breach of the covenant not to sue in the 2020 Settlement and Release. The arbitrator
ultimately determined that Picone’s claims were barred by the release that Picone
gave in that 2020 Settlement and Release.
The trial court granted McKool Smith’s motion to lift the stay and to confirm
the arbitrator’s award and denied Picone’s motion to reconsider the propriety of
compelling arbitration. This appeal followed.
Discussion
Picone raises two issues based on the same straightforward legal argument: a
party seeking to compel arbitration must establish that the dispute in question falls
within the scope of a valid arbitration agreement. J.M. Davidson, Inc. v. Webster,
128 S.W.3d 223, 227 (Tex. 2003). Picone argues that because he never signed an
agreement to arbitrate disputes with McKool Smith, the trial court erroneously
compelled the parties to arbitration and erroneously confirmed the arbitrator’s
award. ‘“But sometimes a person who is not a party to the agreement can compel
5
Our record does not include this order. But at the post-arbitration hearing, the trial judge stated on
the record that she had ordered the case to arbitration based on direct benefits estoppel.
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arbitration with one who is, and vice versa.”’ Lennar Homes of Tex. Land & Constr.,
Ltd. v. Whiteley, 672 S.W.3d 367, 376 (Tex. 2023) (quoting Meyer v. WMCO-GP, LLC,211 S.W.3d 302, 305
(Tex. 2006)). We conclude that this is one of those times.
Compelling Arbitration
The Texas Supreme Court has recognized that when a litigant sues based on
a contract, it subjects itself to the contract’s terms, including an arbitration provision.
G.T. Leach Builders, LLC v. Sapphire V.P., LP, 458 S.W.3d 502, 527(Tex. 2015). The rule is an equitable one: a litigant cannot “on the one hand, seek to hold the non-signatory liable pursuant to duties imposed by the agreement, which contains an arbitration provision, but, on the other hand, deny arbitration’s applicability because the defendant is a non-signatory.”Id.
Thus, if a non-signatory claimant seeks “direct benefits” under a contract that contains an arbitration agreement, the claimant may be compelled to arbitrate under that contract.Id.
This standard is not met by a claim that merely “relates to” the contract that contains the arbitration agreement.Id.
Nor is the standard met by claims when liability arises solely from general obligations imposed by law.Id. at 528
. “[T]he claim must depend on the existence of the contract . . . and be unable to stand independently without the contract.”Id.
at 527–28. We determine whether a claim seeks a direct benefit from a contract containing an arbitration clause by analyzing the substance of the claim.Id. at 527
.
–10–
McKool Smith contends that Picone depends upon both the 2019 Retention
Agreement and the Stock Purchase Agreement to state his claim. Picone argues
that—at most—his claim against McKool Smith “relates to” these other agreements,
but the claim actually “arose from general obligations imposed by state law,
including statutes, torts and other common law duties.” See Jody James Farms, JV
v. Altman Group, Inc., 547 S.W.3d 624, 637 (Tex. 2018) (direct benefits estoppel
may not be implicated if substance of claim arises solely from general obligations
imposed by state law, including statutes, torts and other common law duties, or
federal law).
We first address the 2019 Retention Agreement between PIC and McKool
Smith. Picone asserted below and continues to insist in this Court that he does not
contend that he is McKool Smith’s client based on that 2019 Retention Agreement.
Instead, he claims client status based on the oral agreement he reached with Cruciani
in June of 2019. Picone’s pleading of his damages does begin with the understanding
that McKool Smith would be taking a thirty percent contingency fee from the WGS
settlement recovery. The record is not clear as to the source of Picone’s assumption
concerning the amount of McKool Smith’s contingency interest: perhaps he
employed the figure from the 2019 Retention Agreement, or perhaps it was the
percentage Picone agreed to in his oral agreement. Regardless, even if Picone’s
damages model draws its thirty percent contingency figure from the 2019 Retention
Agreement, we cannot conclude that this mere reference to a percentage amount in
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an agreement can suffice to bind Picone to the agreement’s arbitration clause. See,
e.g., G.T. Leach Builders, LLC, 458 S.W.3d at 527 (not sufficient to invoke direct
benefits estoppel when party’s claim merely “relates to” contract containing
arbitration agreement).
The parties’ relationship to the Stock Purchase Agreement is a different
matter. At the outset, Picone is a party to the agreement. And his claims against
McKool Smith do not merely refer to the Stock Purchase Agreement; they are in fact
dependent upon that agreement. Picone contends that he hired the firm to represent
him and PIC to attempt to settle the WGS malpractice claim. WGS’s malpractice
resulted in Picone’s and PIC’s being denied recovery for copyright infringement by
OSI. And although Picone no longer owned PIC in 2019, he claimed an individual
right to compensation based upon the term of the Stock Purchase Agreement
concerning later-resolved claims against third parties. Picone identifies no other
legal reason why he had a right to forty percent of his former company’s recovery
from WGS.
Just as the damages Picone claims in this suit are defined by the Stock
Purchase Agreement, so is the malpractice with which he charges McKool Smith.
Picone’s first allegation of the firm’s wrongdoing avers that it failed to:
[a]dvise me to obtain a writing confirming my entitlement to 40% of
any recovery from of the WGS legal malpractice claim per the
October 5, 2016 Stock Purchase Agreement.
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First and foremost, then, Picone alleges that McKool Smith breached its fiduciary
obligation to assist him in obtaining what he was due under the Stock Purchase
Agreement. His subsequent complaints speak to the firm’s failure to represent his
individual interests as opposed to those of PIC and its owner CSL, i.e., the entities
with competing interests to his own based on the Stock Purchase Agreement.
We are not tasked with resolving any of the many legal issues that underlie
these parties’ relationship and Picone’s claims. The question before us is a limited
one: did the trial court abuse its discretion in ordering these parties to arbitration?
Our resolution of the question is similarly limited by the facts and arguments before
us. We conclude that Picone’s lawsuit against McKool Smith seeks a direct benefit
of the Stock Purchase Agreement. His claims—and McKool Smith’s liability—
depend upon the existence of that agreement and are unable to stand independently
without it. See G.T. Leach Builders, LLC, 458 S.W.3d at 527–28. Accordingly,
Picone may not avoid the arbitration clause that governs the Stock Purchase
Agreement. The trial court did not abuse its discretion by ordering these parties to
arbitration. We overrule Picone’s first issue.
Confirming the Arbitration Award
Picone’s second issue argues that the trial court erroneously confirmed the
arbitrator’s award. His argument again is based on the absence of an agreement
between him and McKool Smith to arbitrate their disputes in this lawsuit. We have
concluded that the trial court did not abuse its discretion in ordering the parties to
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arbitration in the first instance based on the doctrine of direct benefits estoppel. We
address under this second issue the matters that arose during arbitration involving
the 2020 Settlement and Release.6
Initially, Picone complains that McKool Smith’s counterclaim involving the
covenant not to sue was made part of the arbitration. The 2020 Settlement and
Release does not include an arbitration provision. But McKool Smith argues that its
claim was a compulsory counterclaim, inextricably enmeshed with Picone’s
malpractice claims. See Gray v. Ward, No. 05-18-00266-CV, 2019 WL 3759466, at
*3 (Tex. App.—Dallas Aug. 9, 2019, no pet.) (claim is arbitrable if facts alleged
touch matters, have significant relationship to, are inextricably enmeshed with, or
are factually intertwined with agreement that includes arbitration provision). As we
have discussed, Picone hired McKool Smith to pursue the benefit he was due under
the Stock Purchase Agreement. He alleges that the firm committed malpractice
during this representation, specifically surrounding the mediation of that dispute.
McKool Smith, in turn, charges that Picone has violated the parties’ agreed
resolution of that mediation. We conclude that McKool Smith’s allegations are
factually intertwined with Picone’s malpractice claims. Accordingly, those
allegations were within the scope of the arbitration pending between the parties. See
6
Picone has not challenged the arbitrator’s decision that his claims are barred by the release in the
2020 Settlement and Release.
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Ascendant Anesthesia PLLC v. Abazi, 348 S.W.3d 454, 462 (Tex. App.—Dallas
2011, no pet.).
Picone’s final argument relies on the venue provision found in the 2020
Settlement and Release, which states:
Venue for any action arising under this Agreement shall be exclusively
in the courts (federal or state) located in Dallas County, Texas.
Picone characterizes this provision as a “dispute resolution agreement” that requires
claims based on the agreement to be decided by the trial courts of Dallas County. He
contends that this provision superseded any prior arbitration agreement that could
govern these parties’ disputes. We disagree.
Black’s Law Dictionary defines “venue” as:
1. The proper or a possible place for a lawsuit to proceed, usu. because
the place has some connection either with the events that gave rise to
the lawsuit or with the plaintiff or defendant. 2. The territory, such as a
country or other political subdivision, over which a trial court has
jurisdiction. 3. Loosely, the place where a conference or meeting is
being held. 4. In a pleading, the statement establishing the place for
trial. 5. In an affidavit, the designation of the place where it was made.
Venue, Black’s Law Dictionary (11th ed. 2019). The concept of venue speaks to the
place where a lawsuit is to proceed. See id. It does not speak to the manner in which
a dispute will be resolved. Nor is a provision calling for venue in Dallas County
courts mutually exclusive from an arbitration provision: even if the parties agree to
arbitrate their differences, a court must confirm the arbitrator’s award, and a venue
provision determines where that confirmation will take place. The venue provision
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in the 2020 Release and Settlement has no bearing on the arbitrability of any claim
between these parties.7
The trial court did not abuse its discretion by confirming the arbitration award.
We overrule Picone’s second issue.
Conclusion
We affirm the trial court’s judgment.
/Bill Pedersen, III//
220841f.p05 BILL PEDERSEN, III
JUSTICE
7
To underscore this point, we note that the Stock Purchase Agreement’s arbitration provision ends
with the following statement assigning venue for proceedings required to take place in court:
Notwithstanding anything in this Section 8.07 to the contrary, the parties hereto shall have
the right to commence litigation or other legal proceedings with respect to any claims
relating solely to: (i) emergency or injunctive relief, or (ii) enforcement of the dispute
resolution provisions of this Agreement and/or any arbitration award. Venue for any and
all such litigation shall be in the courts situated in the County of the Respondent.
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Court of Appeals
Fifth District of Texas at Dallas
JUDGMENT
PAUL PICONE, Appellant On Appeal from the County Court at
Law No. 4, Dallas County, Texas
No. 05-22-00841-CV V. Trial Court Cause No. CC-21-00300-
D.
GARY CRUCIANI AND MCKOOL Opinion delivered by Justice
SMITH, PC, Appellees Pedersen, III. Justices Garcia and
Kennedy participating.
In accordance with this Court’s opinion of this date, the judgment of the trial
court is AFFIRMED.
It is ORDERED that appellees Gary Cruciani and McKool Smith, PC
recover their costs of this appeal from appellant Paul Picone.
Judgment entered this 21st day of December, 2023.
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