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Successor Counsel and Contingent Fees

By William Wernz posted 06-26-2020 11:22

  

Sometimes a client, having retained attorney A on a contingent fee agreement, discharges A and retains B, from another law firm, on a contingent fee agreement.  Attorney A will normally claim entitlement to a portion of any recovery made by the client. 

ABA Formal Opinion 487 (2019), titled, “Payment to Prior Counsel of Portion of Contingent Fee,” addresses successor counsel’s ethics duties.  Op. 487 explains that Rule 1.5(e) does not apply, because that rule governs fee-sharing between lawyers who work together on a matter, not fees of successive counsel.  Op. 487 notes that if successor counsel’s fees are disputed, Rule 1.15 may require the disputed portion to be held in trust.

Opinion 487 states that successor counsel has a duty, “to notify the client, in writing, that a portion of any contingent fee earned may be paid to the predecessor counsel.”  Here Op. 487 errs.  It is not a portion of B’s contingent fee that may be owed to A; rather, A’s entitlement may be to a portion of the recovery for the client.  The amount of A’s entitlement will be determined on a quantum meruit basis, pursuant to Minnesota case law, cited below.

Minnesota law allows an attorney to assert a lien for compensation.  Such liens – formerly called “charging liens” – are governed exclusively by statute.  The statute provides, “An attorney has a lien for compensation . . .upon the cause of action. . ..”[i]   The attorney who asserts a lien notifies the defendant, as well as the former client and successor counsel. [ii]  “Thus, the attorney has a lien on any recovery secured by a client resulting from the attorney’s services as security for attorney fees.”[iii]

Op. 487 cites authority for its position that a portion of successor counsel’s fee may be owed to prior counsel.  However, the cited authority does not support the position of Op. 487.  The authority states, “a contingency client should be advised by the successor attorney of the existence and effect of the discharged attorney’s claim for fees on the occurrence of the contingency as part of the terms and conditions of the employment by the successor attorney.”[iv]  The cited authority connects prior counsel’s fee claim to “the occurrence of the contingency,” not to successor counsel’s fee.

Sometimes attorney A’s fee will be paid out of B’s fee, rather than out of the recovery, either by agreement between A and B, or by court determination.  However, such arrangements and orders do not create a general ethics obligation that overrides the lien statute.

Op. 487 attempts to explain further, “A client cannot be exposed to more than one contingent fee when switching attorneys, given that under the Rule 1.5(a) factors, each counsel did not perform all of the services required to achieve the result.”  Again, Op. 487 errs.  When switching contingent fee attorneys, a client will often pay more in total than the amount that was reasonable if only one attorney was retained.

Op. 487 continues, “Thus, neither the predecessor nor the successor counsel ordinarily would be entitled to a full contingent fee.”  It is true that in many cases the total fee for two attorneys will be, and should be, no more than the fee if the first attorney completed the representation.  However, it is also often the case – not just in extraordinary circumstances -  that two attorneys’ reasonable fees will exceed what would have been the full fee of the first lawyer.  Op. 487 does not identify the factors that would change the “ordinary” one-fee-for-both paradigm.

The matter on which the attorneys were engaged may have changed materially between the dates on which the attorneys were engaged.  During the first attorney’s engagement, the value of the case may have decreased for a wide variety of reasons relating to factors such as liability, damages, evidence, and collectability.  The client may have omitted or inaccurately described material factors. With the value of the case diminishing, successor counsel could be justified in requiring a higher percentage fee than predecessor counsel. Indeed, Minnesota courts have considered many of these factors when awarding fees.[v]

It may also be that, although the first attorney’s work served one strategy for handling the case, successor counsel believes a different strategy is better.  In that circumstance, the usefulness of the first attorney’s work to the second attorney would be diminished.  Again, the total reasonable fee may exceed the fee that would have been paid to the first attorney if there had been no substitution of counsel.

The risk for successor counsel may well include working with a client who appears to be difficult.  Successor counsel may face a dispute over predecessor counsel’s fee.  Neither civil law nor ethics rules guarantees the client who hires and fires attorneys that the total fee charged by all attorneys will be no more than a fee that would have been reasonable for the first attorney.    

Under Minnesota case law, the amount of predecessor counsel’s fee is determinable on a quantum meruit basis, based on eight factors.[vi] Two cases are instructive on these issues.  In one case, the first lawyer, Kaler, had a 40% contingent fee agreement with Rector, the plaintiff.   Rector discharged Kaler after Kaler performed services for three years. Successor counsel Mahler had a 50% fee agreement. There were also substantial litigation costs. Mahler and Kaler agreed that Mahler would hold $100,000 from the final verdict of $714,000 (plus costs and disbursements) in trust, pending determination of Kaler’s attorney lien amount.

Rector “took the position that [Kaler’s] attorney fees should be paid from the attorney fees paid to [Mahler.”  In other words, Rector took the position of ABA Op. 487.  The district court and appellate court ruled against Rector.  On a quantum meruit theory, the courts found the $100,000 should be paid to Kaler.  After Mahler’s fee of approximately $380,000 and costs were paid, Rector received $76,693. Kaler shows that prospective successor counsel should carefully advise the client who has become dissatisfied with initial counsel, that changing lawyers mid-stream, in a contingent fee matter, may be very expensive, if counsel do not agree to divide a standard contingent fee.[vii]

In the second case, in 1996-97, the author represented an attorney, G, who sought advice on becoming successor counsel.  The prospective client, C, had retained six prior attorneys on contingent fee agreements and discharged them all in turn.  C had a substantial and meritorious claim.  C also suffered from mental illness. 

The author advised G that G could enter into a contingent fee agreement with C for one-third of the recovery, without any adjustment for fees claimed by A-F.  Because C was such a difficult client, the useful work product of attorneys A-F was limited.  If A-F had made substantial progress on the case, the amount of a reasonable fee for G would be reduced, but the reasonable fee could also be increased for the numerous difficulties that the case promised to (and did in fact) include.

G performed substantial services, culminating in a settlement agreement, approved by C, for a very large amount.  A mediator opined that the settlement was very much in C’s interest. Defendant signed the agreement, tendered the settlement amount, and requested the signatures of G and C.  In quick succession, C suffered a mental breakdown, was hospitalized, and attempted to rescind his oral agreement to the settlement. 

On G’s petition, the court appointed a special conservator, to sign the settlement agreement on C’s behalf, pay G’s one-third fee, negotiate of the fees of A-F, and pay the balance for C’s benefit.  The court appointed the conservator.  Over C’s objections, the conservator took the approved actions.  Substantial discounts in the fees of A-F were negotiated and paid – from the settlement, not from G’s fees.  Over C’s objection, the court approved the conservator’s account and discharged the conservator. 

C filed an ethics complaint and a breach of fiduciary suit against G.  The main issues related to confidentiality and to ethics duties and permissions when a client is under a disability.[viii] The compliant and suit were dismissed.

What would have happened if G was ethically required to share his fee with A-F?  G would never have taken the case.  Very likely, no other attorney would have taken the case.  C would not have obtained his substantial recovery – still sizeable even after subtracting all attorney fees.  In short, the position taken by Op. 487 would sometimes harm clients.

Kaler and the Case of the Seventh Attorney show that, whatever the reasonable fees of successor counsel, the fees of predecessor counsel may be paid out of the recovery, and not out of successor counsel’s fee, unless successor counsel agrees to payment out of his or her fee or a court so orders.

 

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[i] Minn. Stat. § 481.13, subd. 1(a)(1)-(2).

[ii] Minn. Stat. § 481.13,subd. 1(a)(2) (notice effective against third parties from the time of filing the notice).

[iii] Matter of Caswell, 905 N.W.2d 507, 511 (Minn. Ct. App. 2017) (emphasis added, citation omitted.)

[iv] Op. 487, citing San Francisco Bar Ass’n, Ethics Comm., Advisory Op. 1989-1 (1989). 

[v] Ashford v. Interstate Trucking Corp., 524 N.W.2d 500, 503 (Minn. Ct. App. 1994).

[vi] Faricy Law Firm, P.A. v. API, Inc. Asbestos Settlement Trust, 912 N.W.2d 652, 657 (Minn. 2018); Bonner v. Showa Denko K.K. (In re L-Tryptophan Cases), 518 N.W.2d 616 (Minn. Ct. App. 1994).

[vii] Kaler Doeling Law Office v. Rector, 2011 WL 6757466 (Minn. Ct. App. 2011).

[viii] Issues related to disability are discussed in the chapter on Rule 1.14 of William J. Wernz, Minnesota Legal Ethics (9th ed.).

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