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Category: Ethics & Professional Responsibility

Third Circuit: No Attorney Fees After ‘Outrageously Excessive’ Fee Request

September 12, 2018

A recent Legal Intelligencer story by PJ D’Annunzio, “3rd Circ.: Judge Was Right to Award Nothing After ‘Outrageously Excessive’ $1M Fee Request, reports that a federal appeals court has upheld the denial of a $1 million fee request by a Scranton attorney in an auto insurance case that produced a verdict almost a tenth of the requested legal compensation.  In its denial, the U.S. Court of Appeals for the Third Circuit, joining other circuit courts, also held that it is within a judge’s discretion to award no attorney fees at all, especially if the fee request is deemed “outrageously excessive.”

The ruling stems from plaintiff Bernie Clemens’ bad-faith case against New York Central Mutual Fire Insurance over its handling of his auto accident case.  The claims went before a jury and ended with a $100,000 punitive damages award.  The defendants had settled Clemens’ uninsured motorist claim for $25,000.

The case was handled by Mike Pisanchyn of the Pisanchyn Law Firm in Scranton.  After the case was resolved, Pisanchyn asked the court to award the seven-figure fee amount.  However, U.S. District Judge Malachy Mannion of the Middle District of Pennsylvania was taken aback by the sheer size of the number—so much so that he awarded Pisanchyn and his firm nothing and referred Pisanchyn for disciplinary review.

Reached for comment, Pisanchyn disagreed that his firm’s fee request was excessive.  “In essence, despite us obtaining a $100,000 award on a zero written offer case while we represented the plaintiff over eight to nine years of litigation, the court has determined the plaintiff’s attorney should be awarded nothing,” he said in an email.  “However, we do take comfort in the fact that our clients have been compensated and are extremely happy with our representation of them through this almost decade of litigation.”

James Haggerty of Haggerty, Goldberg, Schleifer & Kupersmith in Philadelphia represented Clemens on appeal.  “The decision is important in that it addresses an issue regarding the award of counsel fees which had not heretofore been considered by the Third Circuit,” Haggerty said, “The court issued a well-reasoned and well written opinion, finding that the district court did not abuse its discretion in refusing to award counsel fees to trial counsel following his successful recovery of bad faith damages from the defendant insurer.”

Mannion’s 100-page opinion went line-by-line through the request, slashing billed fees he deemed vague, duplicative and excessive.  Mannion also took issue with how the firm recreated its timesheets, saying that, while recreating timesheets is allowable if the attorneys did not make them contemporaneously, a number of the entries appeared to be based on guesswork.

The Third Circuit agreed with Mannion’s handling of the request, which found that Pisanchyn and his firm were entitled to recover only 13 percent of the fees they asked for.  “In light of that substantial reduction, the district court deemed Clemens’s request ‘outrageously excessive’ and exercised its discretion to award no fee whatsoever,” Third Circuit Judge Joseph Greenaway wrote for the panel, which also included Judges Luis Felipe Restrepo and Stephanos Bibas.

“Although it was unusual, we cannot say that this decision was an abuse of discretion,” Greenaway added.  ”Review of the record and the district court’s comprehensive opinion makes clear that denial of a fee award was entirely appropriate under the circumstances of this case.  Counsel’s success at trial notwithstanding, the fee petition was severely deficient in numerous ways.”  Mannion had said one of the most “egregious” requests included billing 562 hours for trial preparation, with the plaintiffs attorneys entering between 20 and 22 hours per day on some days.  The Third Circuit examined that figure in detail.

“All the more troubling is the fact that counsel’s (supposedly) hard work did not appear to pay off at trial.  As the district court explained, counsel had ‘to be repeatedly admonished for not being prepared because he was obviously unfamiliar with the Federal Rules of Evidence, the Federal Rules of Civil Procedure and the rulings of th[e] court,” Greenaway said.  “Given counsel’s subpar performance and the vagueness and excessiveness of the time entries, the district court did not abuse its discretion in disallowing all 562 hours.”

Greenaway continued, “Aside from the problems with the hours billed for individual tasks, counsel also neglected their burden of showing that their requested hourly rates were reasonable in light of the prevailing rates ‘in the community for similar services by lawyers of reasonably comparable skill, experience, and reputation.’”

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.”

Fee Agreement Issues in Opioid Litigation in Some Texas Counties

August 23, 2018

A recent Forbes story by Daniel Fisher, “Lawyers for Texas Counties in Opioid Cases May Not Have Valid Contracts, reports that a number of Texas counties including Montgomery County, a sprawling suburb north of Houston, may have invalid contracts with their outside lawyers because they haven’t been approved by the Texas Comptroller as required under state law.  More than a dozen counties represented by the law firms Haley & Olson and Harrison Davis Steakley Morrison Jones filed suit without first obtaining the Comptroller’s approval for their contingency fee contracts.  Months later, those contracts still haven’t been approved, possibly putting the suits in peril.

In a 2012 decision involving similar litigation by counties over the mortgage crisis, a federal court stated the requirements under Texas law “must be satisfied before a Texas county can retain outside counsel on a contingency fee basis.”  In another decision that year, a Texas state court judge declared the contract between Harris County and its contingency fee lawyers void because it hadn’t been approved.

Texas passed extensive reforms to its rules on hiring outside lawyers starting in 1999, after private attorneys caused a political uproar by collecting $3.3 billion in fees for representing the state in its lawsuit against the tobacco industry.  Former Texas Attorney General Dan Morales ultimately went to prison for illegally attempting to divert $500 million of those fees to a friend.

The new rules in Texas included a maximum contingency fee of 35%, strict requirements for keeping time and expense records, and a hybrid method of calculating fees that includes a “base fee” determined by actual hours worked times a multiplier of up to four to reflect the risk of taking on the case.  The final fee charged to the government must be the lower of the percentage of the award or the base fee and multiplier, and the fee can only reflect work done by partners and employees of the contracting firms.

Texas legislators were concerned about the possibility of excessive fees and political payoffs in the wake of the scandals surrounding the tobacco litigation and Morales’ criminal trial, said Charles Silver, a professor at the University of Texas Law School and prominent legal affairs expert.  Most trial lawyers in Texas are Democrats and the governor at the time was George W. Bush, a Republican.  “The legislature was dominated by Bush and the Republicans, and they just didn’t want to be supporting plaintiff attorneys who were supporting the Democratic party,” Silver said.

Regardless of the motivating factors, comptroller approval and billing records are the law in Texas, and even considered public records.  Montgomery County’s lawyers seem to agree: The contract says they will comply with Section 2254.104(a) of the Texas Government Code, including maintaining “current and complete written time and expense records” that will be available to county or state officials “at any time upon request.”

Despite this requirement, Montgomery County Assistant District Attorney John J. McKinney, in an Aug. 14 letter, said “no documents exist that are responsive” to a request for billing records.  It’s not surprising counties might balk at complying with the recordkeeping requirements of Section 2254, Silver said.  “Lawyers don’t like others knowing how much time and effort they’re expending, whether on the plaintiff or defense side,” he said.

The hours compiled to calculate the base fee could be an issue in opioid litigation, however.  Unlike many lawsuits in which a law firm represents a single government entity suing over a single claim, opioids law firms have bundled large numbers of municipal clients and are working closely with national law firms that control the federal multidistrict litigation in the court of U.S. District Judge Dan Aaron Polster in Ohio.

One sign of the cooperation among law firms is Montgomery County’s lawsuit, filed Dec. 13 in federal court in Houston.  It is an almost word-for-word copy of the lawsuit filed by three different law firms, including Dallas-based Simon Greenstone, on behalf of Bowie County more than two months before.

A close examination of the billing records might reveal how much time Montgomery County’s lawyers spent in the early stages of the litigation, and whether that is justified given evidence they used a borrowed complaint.  The other 12 counties might also want to compare their base fee calculations with each other to make sure their lawyers aren’t double-billing hours across the entire group.

Other Texas counties including Dallas and Harris have obtained Comptroller approval of their contracts.  And an attorney retained by Clay County (another client of Haley & Olson and Harrison Davis Steakley Morrison Jones) said they would submit the contract to the state during a January meeting when Clay County Commissioners Court approved hiring the firms. Clay County’s contract has not yet been approved.

The stakes for the counties could be high if defendant companies challenge the status of their representation.  When private lawyers representing several Texas counties attempted to assemble a statewide class action in litigation against Merscorp, a mortgage registry, the federal judge who examined Texas law said it wasn’t possible because each county needed the Comptroller’s approval before joining the class.  Under the law of the Fifth Circuit, which includes Texas, so-called “opt-in” class actions aren’t allowed under Rule 23 of the Federal Rules of Civil Procedure.

The Texas judge who declared Harris County’s contract with private lawyers void nevertheless allowed the case to proceed because the complaint was also signed by the county attorney’s office. Montgomery County’s complaint is signed only by the private lawyers.