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Category: Fee Dispute Litigation / ADR

Judge Erred By Limiting Attorney Fees in Probate Matter in California

September 7, 2018

A recent Metropolitan News story, “Judge Erred By Limiting Fee to 10 Percent of Minors’ Recovery,” reports that the law firm founded by veteran personal injury Ian “Buddy” Herzog was shortchanged by a Los Angeles Superior Court who awarded it only 10 percent of the $18 million settlement it negotiated for its minor clients, despite a contingency fee agreement calling for 40 percent, the Court of Appeal for this district has held.

The unpublished opinion was filed Wednesday.  In it, Presiding Justice Frances Rothschild of Div. One noted that under Probate Code §3600 and §3601, a court, in approving the compromise of a minor’s claim, must determine what are “reasonable” attorney fees, and pointed to California Rules of Court, rule 7.955, which sets forth guidance for trial judges in determining reasonableness.  A 10 percent fee, she said, was unreasonable in light of the contingency fee agreement, the risk the company took in taking the case on a contingency basis, and other factors.

Herzog, Yuhas, Ehrlich & Ardell of Santa Monica represented the wife and four minor children of Rainer Schulz in a wrongful death suit, after the wealthy German businessman crashed his Cessna 750 jet while attempting to land at a small German airport.  The action against various companies was brought on a products liability theory.  Los Angeles Superior Court Judge William F. Fahey apportioned $1 to Schulz’s widow, Silke Schulz, and the remainder of the $18,125,000 to the couple’s four minor sons.

He did not credit the contingency fee agreement which the widow and the chief executive of a company the Schulzes owned negotiated with the Herzog firm.  Under it, the firm was to receive 31 percent of the proceeds if the case were settled at least 30 days before trial and 40 percent after that point.  Although settlement came a few days before trial, the Herzog firm indicated its willingness to accept a 31 percent share.

Fahey said:  “Turning to the issue of attorney’s fees, the Court is not bound by a contingency agreement when considering the best interests of the minors.  Attorney fees must be carefully scrutinized and adjusted if warranted.  Here, the attorneys hired by Silke did a good job in investigating this case.”  He added:“But paying these attorneys their requested $5 million in fees out of the settlement proceeds would be excessive, to the substantial detriment of Rainer’s sons and contrary to this Court’s duty [to] assure that no injustice is done to them.”

Two of the Schulzes’s sons have permanent disabilities as a result of being born prematurely.  Rule 7.955(a)(2) sets forth: “The court must give consideration to the terms of any representation agreement made between the attorney and the representative of the minor.…”

Rule 7.955(b) lists 14 non-exclusive factors for courts to consider when determining what fee will be reasonable, including the amount of the fee in proportion to the value of services, the experience of the attorney and the amount of time and labor involved.

Rothschild declared: “We conclude the trial court gave too little consideration to California Rules of Court, rule 7.955(a)(2).…In addition, the court did not acknowledge the factors listed in California Rules of Court, rule 7.955(b).  Although these factors are not mandatory, they provide a guide to the considerations relevant to determining whether a fee protects the interests of a minor while allowing an attorney to obtain a fair recovery.”

She continued: “All of these factors support a recovery greater than 10 percent.  One of the two attorneys who primarily worked on the case, Ian Herzog, had 47 years of experience in aviation accident cases, and the other, Thomas Yuhas, had 37 years of experience.  Both attorneys also have many years of experience as pilots, which undoubtedly gave them insight as to the causes of the crash.  In this case, both sides agree that the risk of loss was substantial.  When viewed from the perspective of the time it was signed, the representation agreement thus realistically evaluated the high risk that there could be no recovery at all or one substantially lower than was achieved.”

She noted that the firm advanced more than $300,000 in costs.  In determining the potential for a minor being taken advantage of, the rule counsels, the court should look to the “relative sophistication of the attorney and the representative of the minor.  Rothschild said that Silke Schulz is a highly sophisticated executive who took over the company after her husband’s death.  And who made an informed decision to enlist the services of a firm willing to take the case on a contingency basis.

The jurist noted that rule 7.955 had superseded prior local rules setting the baseline contingency award for minor clients, often at 25 percent.  She drew an analogy to class action attorney fee awards, which have a 25 percent starting point in the Ninth U.S. Circuit and some California courts.  She wrote: “We acknowledge that what is reasonable in applying the factors in California Rules of Court, rule 7.955 in any particular case may comprise a range of percentages.  Under the facts of this case, however, 10 percent was not within that reasonable range.  Although the trial court would be acting within its discretion to award less than 31 percent, we note that 31 percent is not out of line with awards in class actions, which, like this case, involve attorney fees to be paid by a protected class and that require court approval.”

The case is Schulz v. Jeppesen Sanderson, Inc., B277493.

Wachtell Billing Practices Come Under New Scrutiny in CVR Case

September 5, 2018

A recent New York Law Journal story by Christine Simmons, “Wachtell Billing Practices Come Under New Scrutiny in CVR Case,” reports that on raising the stakes in its long-running legal malpractice suit against Wachtell, Lipton, Rosen & Katz, CVR Energy is now alleging the elite law firm engaged in unethical billing practices by basing its legal fees on the amount charged by investment banks.  “This Kafkaesque method of billing was never disclosed to CVR and Wachtell has gone to great lengths to avoid scrutiny, by clients, the bar and the public of its billing practice,” CVR alleged in a proposed amended complaint that would seek punitive damages against the law firm.

CVR, a refining and fertilizer business controlled by Carl Icahn, is suing Wachtell for legal malpractice in the Southern District of New York.  In the 2013 suit, which Wachtell has strongly contested, CVR alleges the firm failed to advise that CVR would face claims by Deutsche Bank AG and The Goldman Sachs Group Inc. for $36 million under the terms of engagement letters with the banks.  CVR hired the banks as financial advisers in an unsuccessful attempt to fend off a 2012 acquisition by Icahn.  CVR’s counsel, Herbert Beigel, wrote to U.S. District Judge Richard Sullivan, seeking permission to add claims for breach of contract and breach of the covenant of good faith and fair dealing and to seek punitive damages.  He said the additions stem from information “we learned late in discovery.”

As American Lawyer previously reported, Wachtell has a unique billing structure.  Instead of charging by the hour, the firm charges fees for deals that range from 1 percent to 0.1 percent of the transaction amount, according to the 2012 fee agreement at issue in the malpractice case brought by CVR against Wachtell.  A “Billing and Retention Policies” document sent to CVR—and cited in CVR’s proposed new complaint—states that Wachtell provides a “distinctive service,” marked by extraordinary expertise and sophistication that doesn’t lend itself to hourly fees.

“We must base our fees not on time but on the intensity of the firm’s efforts, the responsibility assumed, the complexity of the matter and the result achieved,” the firm asserts.  The document adds: “While our fees are not based on the amount involved in a matter, experience indicates that merger and acquisition and takeover fees have typically ranged [from] 1 percent or more on matters under $250 million and 0.1 of 1 percent or less on matters over $25 billion.”

But CVR, in its new court papers, said contrary to the terms of its engagement letter, Wachtell billed CVR $6 million based on the amount of the success fees invoiced by Goldman and Deutsche in connection with the company’s response to Icahn’s 2012 tender offer, “resulting in a much larger fee than the law firm promised to charge or it was otherwise entitled to—and the firm did so without informing CVR.”  Under CVR’s argument, a $6 million fee would represent 16 percent of the banks’ $36 million fees to CVR.  However, this formula does not appear in CVR’s publicly filed court papers.  CVR’s amended complaint and Beigel’s letter to the court are redacted.

CVR’s court papers do say that Wachtell’s fees, like the fees of Goldman and Deutsche, were higher for failing than succeeding.  “Even though Wachtell is hired by its client to, among other things, get the best deal for its client when engaging investment bankers … for takeover ‘defense’ assignments, Wachtell is perversely incentivized to negotiate engagement letters that benefit the investment bankers, not its client, which is exactly what happened with CVR,” Beigel alleges.

CVR argues that the basis for Wachtell’s fee was unethical and in violation of the attorney ethics rules in that it was excessive and not aligned with CVR’s interests.  The more fees Goldman and Deutsche would receive, the higher Wachtell would bill for its services, “thus creating a material conflict of interest on the part of Wachtell,” the company claims.  CVR also claims Wachtell’s fee was not based on “the amount involved” in the Icahn tender offer, and contrary to the terms of its engagement letter, the fee was not based on “the result achieved” or the “responsibility assumed.”

The company said it’s entitled to the return of fees paid to Wachtell and to recover from Wachtell punitive damages, as its conduct “constituted gross, wanton or willful fraud.”

Wachtell has fought the malpractice allegations since the 2013 suit was first filed and even brought a state court suit against CVR and Icahn for abuse of process and breach of protective order.  In federal court last month, Wachtell’s counsel, Shuster, said the firm believes Icahn brought the case out of animosity.  “He does not like Wachtell.  It was brought as payback.”

NJ Court: Attorneys Must Advise Clients of Billing Options in Fee-Shifting Litigation

August 30, 2018

A recent New Jersey Law Journal story by Michael Booth, “Lawyers Must Advise Clients of Other Options Before Billing Hourly on Fee-Shifting Case, Court Says,” reports that a New Jersey appeals court voided a retainer agreement between a lawyer and his longtime friend, saying he did not properly disclose hourly fees he would be charging for representing her in a discrimination case.  The three-judge Appellate Division panel, in a published ruling, said Somerville solo Brian Cige did not adequately explain the arrangement, which provided for an hourly billing rate and litigation costs, to his client, Lisa Balducci.

The panel said lawyers who wish to charge hourly fees for work on discrimination or other fee-shifting cases must explain to their clients that there are other competent counsel who will accept those cases on a contingency basis, and who also will advance any litigation costs.

“Ethically then, must an attorney whose fee for undertaking an LAD case that includes an hourly rate component explain both the consequences on a recovery and the ability of other competent counsel likely willing to undertake the same representation based on a fee without an hourly component?  We conclude the answer is yes,” Appellate Division Judge William Nugent said.

The lawsuit filed by Balducci claimed she never fully reviewed the retainer agreement offered by Cige but was shocked when she began receiving bills for hourly services and costs, which included a $1 fee for reviewing incoming emails and sending responses, the court said.  Balducci eventually fired Cige and hired another attorney to represent her and her son in a Law Against Discrimination claim.  The decision didn’t reveal the details of that matter,

Nugent, writing for the court, said a Somerset County Assignment Judge Yolanda Ciccone properly found that Cige violated his professional responsibility to explain the agreement’s material terms to Balducci so that she could reach an informed decision as to whether to retain him.  Thus the retainer agreement was void.  “The hearing recording in this case includes adequate, substantial, credible evidence support the court’s decision,” said Nugent.  Judges Carmen Alvarez and Richard Geiger joined in the ruling.  “There is no dearth of competent counsel attorneys willing to litigate LAD and other fee-shifting cases that do not include an hourly component.

Balducci retained Cige in September 2012 to represent her and her child in the LAD case.  Cige presented her with what he said was a standard retainer agreement stating he could charge up to $7,500 up front, plus $450 an hour.  Balducci signed the agreement despite having “concerns,” according to the decision.  Balducci began complaining when she began receiving bills from Cige for hourly services plus expenses.  He told Balducci to not worry about the bills, because he was using them for purposes of a future fee petition he would demand at the conclusion of what he believed was a successful case.

“We are friends,” Balducci, in depositions, quoted Cige as saying, according to the decision.  “I was at your wedding.  I would never do this to you.  Ignore that.  Don’t worry about.  It is standard info.”  Balducci also complained that she was devoting her time to preparing for depositions while Cige was away attending chess tournaments, the ruling said.  Balducci fired Cige after she complained that it would be impossible for her to advance tens of thousands of dollar for expert witnesses.  Balducci filed a lawsuit against Cige, and he filed a counterclaim seeking more than $286,000 in fees for work he already had done.

“The trial court properly found the agreement was unenforceable and void,” Nugent said.  “There is no dearth of competent, civic-minded attorneys willing to litigate LAD and other statutory fee-shifting cases under fee agreements that do not include an hourly component.  The number of such cases litigated in our trial courts and reported in the case law evidence this, as does—at least as to numbers—advertising on television and radio, in telephone books and newspapers, and on billboards and other media,” Nugent wrote, noting that Balducci’s current counsel in the LAD case is not charging hourly fees.

Article: Deal with Billing Issues Mid-Year to Avoid Year-End Rush

August 29, 2018

A recent Daily Report article by Shari L. Klevens and Alanna Clair, “Yes, It’s Still Only August, But You Can Avoid the Year-End Rush on Billing Issues, reports on the fundamentals of effective fee collections.  This article was posted with permission.  The article reads:

Issuing bills and collecting fees can be a challenging task for many attorneys.  Some find it difficult to give billing issues the attention they need, given the demands of their law practice.  Often, attorneys may feel tempted to ignore billing issues until the year-end collections push.  However, by only focusing on billing at one time during the year, attorneys (and firms) may end up leaving earned fees on the table or could otherwise miss red flags that could indicate other problems with the representation.

Thus, many firms will encourage their attorneys to take a serious look at outstanding invoices, work in progress fees and overdue accounts prior to the year-end push.  Although December may be the appropriate time for the final push, summer can be the time to reinforce the fundamentals for effective fee collections.

Are Bills Being Paid?

Assuming that bills are sent regularly, if a client is not paying its invoices regularly or in full, this time of year can be a helpful time to investigate.  Waiting until December may leave the firm with fewer options and little time to deal with unpaid bills.  Clients have many options for how and when they pay bills.  Some clients review amounts or even appeal the invoices before paying.  Others may regularly let bills accumulate and pay them in full quarterly.  However, the failure of a client to pay over an extended period of time can indicate a problem, either with the client’s ability to pay, or, in some circumstances, with the relationship.

If bills are remaining unpaid, many attorneys will investigate to try to identify the source of the delay.  For example, the bills might have been sent to the wrong person or, it could be that the firm or the invoices are not in the client’s system.  On the other hand, it could be that a client is receiving the bills, but nonetheless is refusing to pay some or all of them.  When this happens, there are several potential explanations.

Some clients refuse to pay because they dispute the amount of the bill.  In such a circumstance, the attorney may choose to engage in some frank discussions regarding the work performed and anticipated future work and billings.  Getting everyone on the same page about both the amount of work a matter requires and the cost of that work is important to avoid even bigger disputes down the road.  The attorney may choose to discount or write-off amounts—as a client service issue—if the amounts exceed what was expected.

However, if the client is refusing to pay because the client is dissatisfied with the quality of work, then additional steps may be helpful.  Typically, ignoring such dissatisfaction does not make the issue go away and can get worse with time.  Most firms in this situation will confront the issues directly to determine whether the client is unfairly refusing to pay or if there is a more serious quality issue.

Most often, fee disputes reflect misunderstanding about what work the attorneys are doing and what costs are associated with that work.  If a client does not understand a bill or thinks they are being overcharged, it might be because the bill does not provide enough detail or because it is hard to read.  The solution could be as simple as revising billing entries so they provide more information.  Unfortunately, sometimes nonpayment means the client simply does not have the financial resources to pay.  It is always better to find that out sooner rather than later.

Are Bills Being Sent?

In taking inventory of accounts receivable and work in progress fees, law practices can also review whether their invoices are being sent on a regular basis.  Whether fees are being paid can be directly impacted by whether attorneys are getting their bills out with regularity.

Failing to send bills regularly can have direct and practical impact on the attorney-client relationship.  If bills are not sent regularly, sending an invoice that encompasses several months of work can come as an unpleasant surprise to a client.  A client may even begin to question the work that has already been completed if irregular bills suggest that the representation is unusually expensive.  Typically, an effective way to avoid that surprise is to ensure invoicing is timely.  Monthly, digestible bills reduce the risk of a fee dispute and increase the chances of prompt payment.  Regular invoices also help educate and confirm for clients what tasks are being completed in the matter.

In addition to ensuring good client relations, regular bills avoid the risk that the firm or practice has a substantial amount of fees invested before learning that it has a client problem or an objection to payment.  With frequent, regular bills, nonpayment or fee disputes typically involve a much smaller amount than disputes resulting from a single bill covering six months or a year of legal fees and expenses.  Issuing bills in regular (and therefore smaller) amounts reduce the risk of a dramatic hit to the bottom line if there is a dispute.

With all that said, one of the most important reasons for monthly or regular billing is to address one of the most common reasons why clients do not pay: they never received an invoice.  Systematic billing in regular intervals ensures that crucial step for getting paid by ensuring that bills are sent.

Billing is one way of informing the client of the work being done and the time being spent on their case.  By assessing billing issues at mid-year, attorneys can reduce the stress of the year-end collections crunch.

Article by Shari Klevens and Alanna Clair of Dentons US LLP, reprinted with permission of ALM Media Properties, LLC.  Shari L. Klevens is a partner at Dentons US in Atlanta and Washington and serves on the firm’s U.S. board of directors.  She represents and advises lawyers and insurers on complex claims and is co-chair of Dentons’ global insurance sector team.

Alanna Clair is a partner at Dentons US in Washington and focuses on professional liability and insurance defense.  Shari and Alanna are co-authors of “The Lawyer’s Handbook: Ethics Compliance and Claim Avoidance” and the upcoming 2019 edition of “Georgia Legal Malpractice Law.”

Law Firm Seeks $1.2M in Fees Against CFPB’s ‘Bad Faith’

August 27, 2018

A recent Law 360 story by Jon Hill, “CFPB’s ‘Bad Faith’ Merits $1.2M Atty Fees, Law Firm Says,” reports that a law firm that recently beat a Consumer Financial Protection Bureau (CFPB) lawsuit accusing it of illegal debt collection practices wants the agency to pay for its attorneys’ fees, asking an Ohio federal judge for more than $1.2 million because the agency “brought and prosecuted this case in bad faith.”  The CFPB was handed a rare defeat in July when U.S. District Judge Donald C. Nugent ruled against the agency in its suit alleging Weltman Weinberg & Reis Co. violated the Fair Debt Collection Practices Act and Consumer Financial Protection Act through the millions of collection letters it sent consumers. 

According to the CFPB, the letters gave the impression that attorneys were “meaningfully involved” in the debt collection process when they actually weren’t in most cases, but after a four-day trial before an advisory jury this spring, the judge ruled that the agency had “failed to prove its case by a preponderance of the evidence.”  But Weltman Weinberg argued that Judge Nugent should go further and sanction the CFPB for “abusing its unparalleled power to pursue a meritless case,” arguing that the agency knew its claims wouldn’t hold water long before it dragged the firm through more than a year of litigation.

“Though Weltman prevailed at trial, the bureau’s blind pursuit of its groundless case cost Weltman dearly, both in terms of the substantial expense Weltman incurred in its defense and the reputational harm that cost the firm valued clients and employees,” the firm said.  “Weltman, as the prevailing party, respectfully requests an award of its reasonable attorney’s fees of $1,207,481.25 … because the bureau brought and prosecuted this case in bad faith.”  The CFPB filed its suit against Weltman in April 2017, after what the firm said was more than two years of investigation that involved four civil investigative demands and extensive productions of documents and other materials.

“From that investigation, the bureau knew no consumer had been harmed, misled, or confused by Weltman’s practice of truthfully identifying itself as a law firm,” the firm said.  “Indeed, if the bureau had any evidence to support its claims, it surely would have presented it during motion practice or at trial.”

The complaint initially asserted six counts of FDCPA and CFPA violations, covering both the firm’s allegedly misleading collection letters as well as collection calls it placed to consumers.  According to the CFPB, these calls were also misleading because they referred to Weltman as a law firm, implying an attorney had reviewed a customer’s file beforehand when usually that wasn’t the case.  Yet the agency went on to drop its three claims related to the calls — half the case — as well as its request for disgorgement as the advisory jury trial cranked up, a move that Weltman argued underscored the CFPB’s awareness of how hollow its case was.

In July, Judge Nugent ultimately ruled in Weltman’s favor on the remaining three counts, finding that attorneys were meaningfully involved in the debt collection process and that there wasn’t any evidence showing the letters’ lawyerly trappings had improperly influenced anyone to make a payment.  But the damage was done, according to Weltman.  In addition to the legal expenses it incurred defending itself, Weltman said it lost clients and revenue from having its name dragged through the mud by the lawsuit, creating financial pressures that forced downsizing and layoffs at the firm.

“This case is the concrete example of what happens when the bureau ‘pushes too hard’ and subjects an innocent company to unwarranted scrutiny in an attempt to regulate by litigating, rather than by establishing rules before charging a company with allegedly breaking them,” Weltman said in its filing, alluding to CFPB acting Director Mick Mulvaney’s pledge earlier this year to shift the agency away from what he described as its “push the envelope” governing philosophy under former CFPB director Richard Cordray.

Cordray, who led the agency when the suit against Weltman was filed, knew about the firm’s debt collection practices from back when he was the attorney general of Ohio, according to Weltman  The firm said he approved very similar letters that it used to collect debts for the state.  “This court has the inherent authority to sanction the bureau for abusing its unparalleled power to pursue a meritless case, and the court should exercise that power to award Weltman its reasonable attorney’s fees,” the firm said.

The case is Consumer Financial Protection Bureau v. Weltman Weinberg & Reis Co., case number 1:17-cv-00817, in the U.S. District Court for the Northern District of Ohio.