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Category: Ethics & Professional Responsibility

NY Bar Issues Opinion on Splitting Fees with Non-NY Attorneys

January 4, 2019

A recent Law 360 story by Andrew Strickler, “NY Bar Issues Opinion on Splitting Fees with Non-NY Attys,” reports that a New York-admitted lawyer can’t split fees with another attorney who also lives in the state but is admitted elsewhere if any of the work performed would be deemed unauthorized practice as a matter of law, according to the latest ethics guidance from the New York state bar. Despite previous opinions blessing New York attorneys partnering with non-New York lawyers, the Committee on Professional Ethics said on Jan. 2 that those contemplated a “common enterprise” in which all the lawyers would render some kind of legal services “within the confines of their jurisdictional limitations.”

In the present scenario, the bar looked at a New York-admitted lawyer hoping to team up with an out-of-state lawyer who also happens to be admitted in a New York federal court. That second lawyer would drum up business, attend initial client meetings and take a cut of fees, but leave all the actual legal work to the New York-admitted lawyer. That kind of affiliation, the bar said, could run up against Rule 5.5(b), which prohibits out-of-jurisdiction practice and aiding non-lawyers to do so. It may also implicate Rule 7.3 on soliciting and referring clients; New York’s version of the rule explicitly applies to lawyers “not admitted to practice in this state who shall solicit retention by residents of this state.”

“It would not be proper for the inquiring New York attorney to affiliate with, and share fees with, a solely out-of-state-licensed attorney, resident in New York, for matters to be solicited and originated by the out-of-state-licensed attorney, based upon the New York resident out-of-state-licensed attorney’s admission to New York federal courts” if the client solicitation or fee sharing would constitute unauthorized practice, the bar said. The committee said that guidance was “not inconsistent” with a 2006 opinion on a similar affiliation in which a New York-admitted lawyer proposed to split fees with an out-of-state lawyer who worked in a New York office but limited work to things permitted to a paralegal or other non-lawyers.

That opinion concluded that the out-of-state attorney could either be engaged in unauthorized practice in New York or “acting in a quasi-paralegal capacity” as a non-lawyer, and thus steer clear of the unauthorized practice rule. The bar also noted in the 2006 opinion that defining what exactly constitutes unauthorized practice is a matter of “statutory interpretation” rather than conduct rules, thus putting a key component of the current analysis outside of the committee’s purview.

But the bar noted a Connecticut federal bankruptcy case from 1994, known as In re Peterson, that addressed a similar situation as the current scenario. In that case, the court found a New York-admitted lawyer working in Connecticut had engaged in unauthorized practice by giving legal advice over the phone from his Stamford, Connecticut, office.

“The ultimate question being one of law, we leave to the inquirer to resolve the import of Peterson and like cases on the proposed arrangement, with the caution that, were Peterson to control, then the inquirer would run afoul” of the New York rule against unauthorized practice, the opinion states. The opinion is Ethics Opinion 1160, from the New York State Bar Association Committee on Professional Ethics.

Fifth Circuit ‘Stunned’ Over Fee Request in FDCPA Case

November 19, 2018

A recent Texas Lawyer story by John Council, “5th Circuit ‘Stunned’ Over $130,000 Fee Request by 2 Texas Lawyers in $1,000 FDCPA Case, Awards Them Zero,” reports that the U.S. Court of Appeals for the Fifth Circuit has slammed two Texas lawyers and their client in a recent decision, writing that it was “stunned” by the trio’s $130,000 attorney fee request in connection with a $1,000 Fair Debt Collection Practices Act award concerning a $107.29 unpaid water bill.

According to the decision in Davis v. Credit Bureau of the South, Crystal Davis filed the suit in an Eastern District of Texas federal court, alleging that the debt collection agency had violated the federal debt collection law, with its fee-shifting provision, in contacting her over the water bill because it has misrepresented itself as a “credit bureau,” which it isn’t.

A U.S. magistrate judge later ruled in Davis’ favor, awarding her $1,000 in statutory damages after finding the defendant had violated federal law.  Davis later filed an opposed motion requesting $130,410 in attorney fees based on her status as a prevailing party in the litigation.  But the magistrate judge ruled against Davis and awarded her lawyers nothing, explaining that he was “stunned” by the request, noting there were duplicative and excessive fees charged by the attorneys, Jonathon Raburn and Dennis McCarty.  The magistrate judge also noted that the case was simple and on point, and the nearly 300 hours spent on the case at an hourly rate of $450 demanded by the lawyers was “excessive by orders of magnitude.”

Davis later appealed the attorney fees request to the Fifth Circuit, where it was met by equal disbelief.  “As an initial matter, we join the magistrate judge’s stunned reaction to Davis’ request for $130,000 in attorneys’ fees and concur that the record reflects neither the quality of legal work necessary for the requested hourly billing rate ($450.00 per hour), nor the quantity of work to support the 156.55 hours claimed by Jonathon Raburn and the 133.25 hours claimed by Dennis McCarty,” the Fifth Circuit wrote in a per curiam opinion.

“The pleadings filed by McCarty and Raburn, including the brief on appeal, are replete with grammatical errors, formatting issues, and improper citations, and is certainly not the caliber of work warranting such an extraordinary hourly rate,” the decision noted.  While the FDCPA gives courts little option but to award attorney fees to prevailing parties unless there are extraordinary circumstances, the Fifth Circuit agreed with the lower court that the lawyers should be awarded nothing.  The decision notes a U.S. District Court judge’s finding of bad-faith conduct on the part of Davis and her attorneys, in which he concluded that it appeared that the cause of action “was created by counsel for the purpose of generating, in counsel’s own words, an ‘incredibly high’ fee request.”

“The record suggests that McCarty and Raburn—in an attempt to receive an unwarranted and inflated award—impermissibly treated the $130,410 fee request as an ‘opening bid’ in an attempt to negotiate the attorney’s fee award,” according to the decision.  “This simply cannot be tolerated.  Bottom line: the FDCPA does not support avaricious efforts of attorneys seeking a windfall.  Because grossly excessive attorney’s fee requests directly contravene the purpose of the FDCPA, these tactics must be deterred,” the court concluded in its decision.

In a statement, McCarty and Raburn said they were disappointed in the ruling but respect the Fifth Circuit’s decision.  “We know these judges would not be in the position they are without outstanding legal careers.  However, we want to be clear that we did not file this lawsuit in bad faith.  It was over a debt collector using an illegal name that is prohibited by the FDCPA,” the lawyers said.  “We feel that it is a sad day for the consumer as this ruling may encourage debt collectors to break the law without any fear of consequence other than a statutory fine,” the statement notes.  “Because the majority of FDCPA cases do not carry damages, we feel that attorneys will be hesitant to take on these cases, which leaves the consumer exposed to bad debt collection practices.”

Labaton Sucharow to Return $4.8M in Attorney Fees in Securities Class Action

October 11, 2018

A recent ABA story by Debra Cassens Weiss, “Labaton Sucharow Agrees to Return $4.8M in Attorney Fees After Attorney Finder Fee is Revealed,” reports that Labaton Sucharow has agreed to return $4.8 million in attorney fees to plaintiffs and other law firms in a securities class action against State Street Corp.  The payment resolves allegations of double billing and a failure to disclose a $4.1 million finder fee to a lawyer who helped introduce Labaton to the lead plaintiff, the Arkansas Teacher Retirement System, report Law.com and the New York Times.  The lawyer who received the fee is Damon Chargois of Texas.

According to a supplemental report filed with a Boston federal court, Labaton should have disclosed the payment to Chargois, who “did not commit to work on, nor accept responsibility for, the representation of ATRS in the prosecution of the State Street case.”  But the report said the payment itself “did not violate the rules of professional misconduct or constitute intentional misconduct.”

Columbia Law School professor John Coffee Jr. told the New York Times that the agreement shines a light on the “rather sordid market of buying and selling plaintiffs” in securities class actions.  “I think the whole arrangement was under the table and dubious,” he said.

The lawsuit against State Street Corp. had alleged the bank overcharged its customers in connection with certain foreign exchange transactions.  State Street agreed to a $300 million settlement, and U.S. District Judge Mark L. Wolf of Boston awarded $75 million in attorney fees to several law firms.

After a Boston Globe report alleged double billing by Labaton and two other law firms, Wolf appointed retired U.S. District Judge Gerald Rosen as a special master to investigate.  Rosen learned of the finder fee payment.

Labaton’s agreement to return the $4.8 million is part of an agreement with Rosen.  Labaton and two other law firms also agreed to pay $3.8 million to cover the cost of the special master probe.  Labaton also agreed to internal reforms, including the appointment of a new general counsel and a chief compliance officer.  The law firm also agreed to hire former U.S. District Chief Judge James Holderman of Chicago for a year to ensure that fee agreements comply with “emerging best practices.”

Labaton also said it had adopted a policy banning “bare referral” arrangements with other lawyers.  Bare referral refers to a fee paid for no work, according to this law review article.  Labaton said in a statement that the payment to Chargois “was outside the norms of a traditional case-specific referral fee” and its disclosure “fell short of emerging best practices.”  But the firm said the special master concurs “that the payment made to referring counsel did not violate any rules of professional misconduct.”

“The master’s recommendation that we maintain our role as lead counsel and that our client Arkansas Teacher Retirement System continue to serve as class representative are important elements of the agreement and hopefully reflect our collective achievement in the substantial recovery secured for the class,” the statement said.

Bankruptcy Attorney Sanctioned for Improper Billing Practices

September 25, 2018

A recent BNA story by Daniel Gill, “Bankruptcy Attorney Sanctioned for Sloppy, Improper Billing,” reports that a consumer bankruptcy attorney has to return client payments in 17 Chapter 7 cases where he improperly billed for services and failed to provide appropriate required disclosures, an Oklahoma bankruptcy judge ruled.

Attorney J. Ken Gallon failed to properly disclose his compensation to the court or the source of such payments; he charged unreasonable fees; and he allowed legal fees to be paid before case filing fees were paid in full, Chief Judge Terrence L. Michael of the U.S. Bankruptcy Court for the Northern District of Oklahoma wrote in his Sept. 4 opinion.

At the center of the court’s problems with Gallon’s practices was his use of what the court called the “BK Billing Model.”  BK Billing is a Utah company that factors receivables for consumer bankruptcy attorneys.  It essentially buys the attorneys’ receivables for about 75 percent of their face value.  BK Billing was created to benefit debtors who lacked the resources to pay all their attorneys fees for filing a Chapter 7 prior to filing the case, the company’s president, Sean Mawhinney, previously told Bloomberg Law.

Many, including the American Bankruptcy Institute’s Commission on Consumer Bankruptcy, have highlighted the problem of access to Chapter 7 for consumers unable to pay fees up front, because an attorney can’t collect on a pre-petition debt after the case is filed.  Currently many of these debtors are compelled to file Chapter 13, which allows for paying attorneys fees over time, but which is also significantly more expensive, time consuming (up to five years for Chapter 13 compared to less than one for Chapter 7), and far less successful in discharging, or wiping out, debts.

BK Billing proposes a system where the debtor enters into two separate agreements with his bankruptcy attorney—one for services rendered prior to the filing and another for post-filing, or post-petition, services.  The first contract would be for no or little money, with the bulk of the attorneys’ fees loaded into the post-petition agreement.  As a post-petition debt, the Chapter 7 attorney wouldn’t be barred from collecting.

“If debtors had the money upfront to afford a bankruptcy attorney they would pay upfront,” Mawhinney said in a Sept. 5 email to Bloomberg Law.  "[B]ifurcation of services allows desperately-needed Chapter 7 cases to be filed quickly without debtors resorting to filing an unnecessary Chapter 13 case, or facing a continued wage garnishment, with no relief in sight,” he said.  But it remains unclear whether courts will ultimately approve of the bifurcating of a Chapter 7 case to pre- and post-petition services.

Gallon had sloppy record keeping, the court said. The required disclosures he filed were often inaccurate and failed to indicate when he was paid from advances by BK Billing, which would subsequently collect monthly payments from the client.  Worse, the court was “troubled by Gallon’s practice of charging a higher fee to his clients that use the BK Billing Model than to his conventional clients.”  BK Billing cautions lawyers not to charge clients a premium when they use the company’s services, Mawhinney said.

Attorneys’ fees must always be reasonable and properly disclosed, Mawhinney told Bloomberg Law.  He suggests that attorneys can avoid problems by filing a motion for approval of the fee agreement, or by stipulating with the U.S. Trustee’s office in advance or at the beginning of the case, he said.

While expressing reservations regarding the validity of bifurcating fees in Chapter 7, Judge Michael declined to make a ruling on the issue, instead finding that Gallon failed in his duties to properly disclose the details of his fee arrangement with his clients, as required by the Bankruptcy Code and applicable rules.  The court voided Gallon’s post-petition contracts and ordered him to return whatever the debtors wound up paying to BK Billing. He could keep the funds that were paid by the clients directly to him, it said.

The case is In re Wright, 2018 BL 318559, Bankr. N.D. Okla., 17-11936, 9/4/18.

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.’”