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Category: Quantum Meruit

Read This Before You Go the Contingency Fee Route

March 3, 2017

A recent CEBblog article by Julie Brook, “Read This Before You Go the Contingency Fee Route,” discusses some of the pitfalls of contingency fees in California.  This article was posted with permission.  The article reads:

Among the several alternatives to the traditional hourly fee arrangement, contingency fees have been commonly used for decades.  Under a contingent fee agreement, the attorney and client agree that the attorney will receive a particular percentage of the client’s recovery or of the savings obtained for the client as a fee for legal services, if there is a recovery.  The attorney takes on the risk with the potential for significant reward.  Not surprisingly, there are statutory requirements for these types of agreements—and failing to comply with them is risky, too.

Follow these statutory requirements whenever you enter into a contingent fee agreement:

  1. Put it in writing. Contingent fee agreements must be in writing to be enforceable, except those for the recovery of workers’ compensation benefits or certain merchants’ claims. Bus & P C §§6147-6147.5.
  2. Include certain specific provisions.  In addition to a description of the contingencies entitling the attorney to a fee, the agreement must specify such matters as (Bus & P C §6147(a)):
    • The fee rate agreed on;
    • How the costs of prosecuting and settling the case will affect the fee and the client’s recovery (e.g., in the event of a structured settlement, whether the attorney is paid from first funds);
    • A statement as to what extent the client is required to pay compensation for related matters arising out of his or her relationship with the attorney that aren’t covered by the contingency fee agreement; and
    • A statement that the fee is negotiable.
  3. Follow additional requirements for medical malpractice claims.  If the claim is for medical malpractice and is subject to the maximum fee limits on contingent fees (see Bus & P C §6146), then the fee agreement must include a statement that the rates set out in §6146 are the maximum limits for the contingent fee arrangement and that the attorney and the client may negotiate a lower rate.  Bus & P C §6147(a)(5).  You may want to attach a copy of Bus & P C §6146 to the fee agreement to ensure that the client is informed of its content.
  4. Specify the contingent fee rate.  Contingent fee agreements must specify the contingent fee rate (Bus & P C §6147(a)(1)) and how disbursements and costs in connection with the prosecution or settlement of the claim will affect the contingent fee and the client’s recovery (Bus & P C §6147(a)(2)).  Unless the claim is for medical malpractice and the agreement is thus subject to Bus & P C §6146, the agreement must also include a statement that the fee isn’t set by law but rather is negotiable between the attorney and the client.  Bus & P C §6147(a)(4).
  5. Provide an hourly rate just in case.  The agreement should provide an hourly rate so that the attorney may establish a baseline to recover quantum meruit in the event the attorney is discharged by the client before the completion of the representation.  The hourly rate will also assist the attorney in providing a basis for attorney fee recovery in any potential attorney fee motion.
  6. Anticipate deferred payments or structured settlements.  Whenever payment of the recovery, or any part of it, may be deferred, the fee agreement should specify when the attorney fees must be paid and, when appropriate, how they should be calculated.  Otherwise, the agreement invites dispute and may be subject to being voided by the client for failing to fully comply with Bus & P C §6147.  If the award for future damages in an action for injury or damages against a health care provider is at least $50,000 and either party requests that the award be paid by periodic payments, then the court must order that the future damages be paid, in whole or in part, by periodic payments rather than by a lump-sum payment. CCP §667.7.  In that event, the court must also place a total value on the periodic payments and include that amount in computing the total award from which attorney fees are calculated for purposes of determining the statutory maximum fee. Bus & P C §6146(b).
  7. Provide for noncash awards.  When the award might be partially or entirely in a form other than cash (e.g., reinstatement in a wrongful termination action), the fee agreement should provide for that possibility.  This might be done by providing for a specified hourly fee if the award is not entirely in cash and a contingent fee if it is.  It may also be accomplished by providing for a method for valuing noncash awards.

Failure to include any of the required items makes the agreement voidable at the option of the client (but you would still be entitled to a reasonable fee). Bus & P C §6147(b).  See, e.g., Arnall v Superior Court (2010) 190 CA4th 360, 366 (failure to state in fee agreement that fees were negotiable rendered fee agreement void; fees recoverable by way of quantum meruit).

Judge Moves Fee Dispute from Arbitration to Court

February 17, 2017

A recent New York Law Journal story by Christine Simmons, “Boies Claims Win After Judge Moves Fee Fight to Court,” reports that a Manhattan judge has stayed an arbitration brought by Boies Schiller Flexner seeking legal fees from an ex-client, coffee machine manufacturer Scanomat A/S, citing language in the engagement letter that didn't provide for arbitration.

However, the judge, Supreme Court Justice Kathryn Freed, said Boies Schiller's counterclaims against Scanomat for $427,481 can proceed in litigation.  Boies Schiller partner and general counsel Nicholas Gravante said the firm was pleased with the result even though it had fought the stay, and "we look forward to the case proceeding full speed ahead."  He added that, in general, firms that want to have client disputes resolved through arbitration must make sure language in the engagement letter is bullet-proof.

According to arbitration papers filed in court, after the ex-client's CEO claimed to be friends with chairman David Boies, the firm moved quickly to handle the company's case.  But the client refused to pay, claiming it was "just a European company" with no understanding of the U.S. legal system, the firm said.  Scanomat filed suit against Boies Schiller in November to stay arbitration.

Freed ruled that the engagement letter provides that disputes between the parties "relating to any matter other than [the firm's] fees... shall be settled by binding, confidential arbitration."  The judge said the facts "strongly militate in favor" of granting the stay.  Freed also found Boies Schiller failed to include in its arbitration demand the requisite statutory language warning Scanomat that it had 20 days to move for a stay.

However, Freed said she recognized that staying the arbitration "will have a practical effect of impeding" Boies Schiller from collecting what it claims are legitimate fees, and she converted the breach of contract and quantum meruit counterclaims into their own lawsuit.

The Possible Consequences of Pursuing Outstanding Legal Fees

January 18, 2017

A recent New York Law Journal article, “The Possible Consequences of Pursing Outstanding Legal Fees,” by Sue C. Jacobs of Goodman & Jacbos LLP in New York, considers the consequences of pursuing clients for unpaid legal fees.  This article was posted with permission.  The article reads:

The attorney client relationship is not one that always ends well.  The client is able to discharge the attorney at any time, but outstanding legal fees must be addressed.  The retainer letter should address the issue of outstanding legal fees and expenses or the contingency fee arrangement.  Normally the retainer letter provides the client is responsible for all reasonable fees and expenses incurred to the termination date.  If the fee arrangement is changed during the representation, the court will closely scrutinize it.  The former client may not promptly pay the agreed-upon outstanding legal fees or may claim the revised fee or contingency schedule was made improperly or under duress.

After several requests for the fees and notice to the client pursuant to Rule 137 of Rules of the Chief Administrator of the Court, the client may agree to mediate or arbitrate the dispute.  If the client either ignores the correspondence or refuses to pay the fees, the attorney may determine to commence an action seeking the legal fees.  What follows is a long, unhappy, expensive experience for each party.

The attorney, generally acting pro se, commences an action, the client retains counsel and alleges a counterclaim for legal malpractice with a demand for money damages and/or causes of action for breach of contract, breach of fiduciary duty and other possible causes of action a creative lawyer conceives.

The Account Stated

In a typical case the plaintiff law firm sues for unpaid fees.  Defendant, the former client, answers and denies the fees are due and asserts at least one counterclaim based on legal malpractice.

The relationship may have extended over several months or years.  The complaint will allege the fees sought are reasonable and the work done was necessary.  The complaint will probably allege either the fees were explicitly or implicitly approved.  If so, the law firm alleges the fees sought are for an "account stated," or counsel is entitled to fees on a theory of quantum meruit.  For an "account stated" to be established there must be an agreement, either express or implied from the retention of the account or invoice rendered that remains without objection for an unreasonable amount of time or generally prior invoices were paid.

The client may contest there is an account stated by claiming he never approved the invoices or the work was unnecessary.  The law firm may allege the client either approved of the invoices or failed to timely object after receiving them.  In two matrimonial actions in which the attorneys sought and were denied summary judgment the clients each claimed they signed the invoices to signify approval only under duress.  The courts held that the former client's affidavit, alleging counsel told them work would not continue until the invoices were signed, raised an issue of fact as to whether the defendant "acquiesced in the correctness of the invoices."

Counterclaim for Malpractice

The defendant's answer will frequently contain at least one counterclaim for malpractice.  In order for the malpractice claim to be effective the client will have to establish that "but for" the attorney's negligence he would have prevailed in the underlying action; the negligence was the proximate cause of the loss and the client suffered actual and ascertainable financial damages.  Base legal assertions of malpractice will not suffice and are not presumed to be true.

In one action, the law firm was not liable for legal malpractice in a matrimonial action after the client established the law firm negligently failed to timely respond to discovery demands.  The law firm proved that plaintiff was not precluded from introducing certain evidence at trial after the discovery responses were provided during a deposition.

Fiduciary Duty, Contract Claims

Courts look at claims of breach of contract and fiduciary duty to determine if they are duplicative of the cause of action for malpractice.  One court recently permitted a cause of action for breach of fiduciary duty based on allegations that the attorney disclosed confidential information in the complaint to recover legal fees.

Unconscionable Conduct

In an occasional case, the parties may agree to a new fee schedule or contingency fee arrangement during the representation.  Courts will look at these revisions with special scrutiny.  In In Re Lawrence, the Graubard Miller firm (Graubard) represented the defendant's wife, Alice Lawrence (Lawrence), and her children in estate litigation for more than 20 years after Sylvan Lawrence, a well-known real estate developer, had died.  Lawrence maintained she was very sophisticated, "tough," intelligent and knowledgeable about real estate and litigation.  She claimed she managed her own investment portfolio and "'never' consulted with her attorneys or children about business matters but rather kept her own counsel and 'trusted nobody.'"

After she unsuccessfully tried to negotiate a settlement directly with the executor's children, Lawrence complained to Graubard about the law firm's hourly legal fees to date, totaling more than $18 million.  She requested that the fee arrangement be altered.  The law firm suggested a contingency fee arrangement, a draft which the firm provided to Lawrence.  After Lawrence and her accountant reviewed it, she suggested an additional paragraph that the law firm accepted.

The parties signed the agreement with a contingency fee of 40 percent of any proceeds collected.  Soon after the contingency agreement was signed evidence described as a "smoking gun" emerged indicating malfeasance by the executor, and the estate settled for $100 million.

Graubard sued Lawrence in Surrogate's Court after Lawrence refused to pay her share of funds based on the revised retainer agreement.  Lawrence then sued Graubard in Supreme Court, claiming that the revised retainer was unconscionable and sought its rescission.  After many appeals, the Court of Appeals held the agreement was not unconscionable but stated the courts, "give particular scrutiny to fee arrangements between attorneys and clients," placing the burden on attorneys to show the retainer agreement is "fair, reasonable, and fully known and understood by their clients[.]"

The court acknowledged that fee arrangements revised during the representation are to be reviewed "with even heightened scrutiny, because a confidential relationship has been established and the opportunity for exploitation of the client is enhanced."  It is the attorney's burden to establish the validity of the changed fee agreement.

The court based its decision on a number of findings.  It held that the new agreement was not procedurally unconscionable since the evidence showed Lawrence "fully understood" its terms.  The court noted Lawrence was involved in "every detail" of her case; had submitted a draft of the new agreement to her accountant to review; and that the estate's expert witness testified that Graubard had provided Lawrence with "'a tremendous amount of detail'" concerning her claims, "including their likelihood of success and potential recoveries."  That expert confirmed that Graubard had given Lawrence "a lot" of the information she needed at the time the new agreement was being negotiated.

To determine whether the revised retainer was "unreasonably excessive" and substantially unconscionable, the court looked "primarily" at the risk borne by the attorneys and the value of those services in proportion to the overall fee.  The court determined that Graubard had considerable risk, since Lawrence frequently fired and threatened to fire her attorneys and a client may terminate the representation at any time leaving the attorneys only to recover in quantum meruit.

The court also noted that the value of Graubard's service was to be judged not merely by the time devoted to the representation but also by the result.  Lawrence ultimately recovered $111 million.  The court emphasized Graubard's diligent work in uncovering the "smoking gun" evidence.  Although the Court of Appeals held the 40 percent contingency fee agreement was not unconscionable, it was not complimentary about the parties' conduct.

Conclusion

The action for attorney fees is one in which all the parties' dirty laundry is aired.  An attorney who sues for fees can expect to litigate a malpractice claim.  If the fee arrangement is revised during the representation, the agreement is subject to heavy scrutiny to determine if the client fully understood the changes and whether the attorney's fees were out of proportion to the attorney's degree of risk and the result obtained.

Sue C. Jacobs is a member of Goodman & Jacobs. Howard M. Wagner, an associate at the firm, assisted in the preparation of this article.

PA Court: Email Can Memorialize Contingency Fee Agreement

August 23, 2016

A recent Legal Intelligencer story, “Court: Email Can Cement Contingent Fee Arrangement,reports that an email sent by an attorney to his client memorializing a contingent fee arrangement was enforceable, despite the now-former client's protests that there was never a signed document, the state Superior Court ruled.

A three-judge panel in Flaherty Fardo v. Keiser unanimously affirmed an Allegheny County trial court's nearly $40,000 judgment in favor of Pittsburgh personal injury firm Flaherty Fardo, finding that the firm had an enforceable contingent fee agreement with its former client, Thomas A. Keiser.

Keiser claimed an email sent to him by Flaherty Fardo memorializing the fee arrangement was invalid because it was not signed by him, but Senior Judge Eugene B. Strassburger III said the basis for this argument was incorrect.

"In support of this contention, Keiser cites to two Pennsylvania Supreme Court cases, both of which hold that in the context of the statute of frauds, a writing is not valid unless it is signed by the parties," Strassburger said.  "Importantly, Keiser points us to no case law that indicates that a contingent fee agreement must comply with the strict requirements of the statute of frauds."

Keiser was a financial advisor for Citigroup Inc., according to Strassburger's opinion.  When he joined the company, he was given an employee forgivable loan of about $1.5 million under a nine-year arrangement in which Citigroup agreed to deduct a portion of what Keiser owed on the loan for every year he continued to work there.

Keiser left the company after only three years, however, and Citigroup sued to recover the remaining $1,032,000, plus interest and attorney fees, according to Strassburger.  Keiser retained Flaherty Fardo to represent him in the suit.

While Keiser initially agreed to pay the firm on an hourly basis, he eventually realized that arrangement would be too expensive and instead proposed a contingent fee arrangement in which he would pay a $32,000 flat fee up front, plus 10 percent of any savings the firm was able to realize for him from the total amount Citigroup was demanding in arbitration, Strassburger said.

Flaherty Fardo's managing partner, Noah Fardo, memorialized the fee arrangement in an Oct. 31, 2011, email, according to Strassburger. Keiser issued a $32,000 check to Flaherty Fardo in December 2011.

The arbitration hearing was delayed until 2014 and lasted four days, at the end of which Citigroup was still asking for $1,032,000 on the principal loan amount, plus nearly $400,000 in interest and attorney fees, Strassburger said.

The arbitrators eventually awarded Citigroup the entire $1,032,000 but no interest or attorney fees.  Flaherty Fardo, believing it had successfully saved Keiser about $400,000, sent him an invoice for about $40,400, which included 10 percent of the savings plus litigation costs, according to Strassburger.

In March 2014, Keiser fired Flaherty Fardo as his attorney.  That April, the firm  filed a complaint against Keiser in the arbitration section of the Allegheny County Common Pleas Court for breach of contract and quantum meruit in the alternative, Strassburger said.  In September 2014, arbitrators awarded the firm $19,000 and Keiser appealed to the trial court, which entered a verdict in the firm's favor for about $39,680.

On appeal to the Superior Court, Keiser argued that Fardo's email memorializing the contingent fee arrangement was unenforceable because it was not a "'signed writing to reflect the terms of the parties' agreement,'" according to Strassburger.

Keiser relied on Pennsylvania Rule of Professional Conduct 1.5(c), which states that a "'contingent fee agreement shall be in writing and shall state the method by which the fee is to be determined, including the percentage or percentages that shall accrue to the lawyer in the event of settlement, trial or appeal, litigation and other expenses to be deducted from the recovery, and whether such expenses are to be deducted before or after the contingent fee is calculated.'"

But Strassburger said this argument failed because, under the state Supreme Court's 1984 ruling in In re Estate of Pedrick, the Rules of Professional Conduct do not have the effect of substantive law but are instead to be used only in disciplinary proceedings.

Regardless, even if an alleged violation of the rules could form the basis of a civil action, Keiser's argument would still fail, Strassburger said, because he did have the contingent fee agreement in writing—Fardo's email.

Keiser's attorney, James R. Cooney of Pittsburgh, said he was unhappy with the ruling but doubted he and his client would appeal to the Supreme Court.

"The Rules of Professional Conduct require a written agreement when there’s a contingent fee.  We thought that means exactly what it says," Cooney said, adding that typically the requirement of a writing means there has to be a signed document, not merely an email.

NJ Panel: Anticipated Legal Fees Constitute an Asset

August 19, 2016

A recent Law 360 story, “Future Attys’ Fees Can Be Security Interest, NJ Panel Says,” reports that the New Jersey Appellate Division for the first time clarified that anticipated legal fees constitute a valid security interest under the Uniform Commercial Code, handing a victory to a bankrupt attorney’s creditor who challenged the distribution priority of the attorney’s assets.

In a published opinion on an issue of first impression in New Jersey courts, a three-judge panel upended a lower court’s ruling that creditor OKS Realty could collect on its $125,000 loan to former attorney Diane Marie Acciavatti only after two other creditors got paid because Acciavatti didn’t yet have a true interest in the fees she pledged to OKS as collateral.

The panel rejected the lower court judge’s reasoning that because Acciavatti secured the loan with anticipated counsel fees from a malpractice lawsuit, they were an asset that didn’t exist at the time it was promised.  The lower court judge’s reasoning “clearly ignored” the language of the security agreement between OKS and Acciavatti, which identified the counsel fees as collateral for the loan, the panel said.

The anticipated fees indeed qualified as an account and therefore an asset of Acciavatti’s, under the secured transactions provision of UCC guidelines, the panel ruled.  OKS further complied with UCC requirements to “perfect,” or ensure, the security interest by filing a financing statement covering the collateral of Acciavatti's anticipated counsel fees, the opinion said.  The December 2010 statement was filed before the other creditors, accounting firm Rotenberg Meril Solomon Bertiger & Guttilla PC and the law firm Gourvitz & Gourvitz LLC, entered their own liens against Acciavatti.

“As such, OKS's security interest was perfected before Gourvitz or Rotenberg obtained their liens and, therefore, OKS enjoyed priority over both,” said the opinion, which remanded the distribution issue back to court for further proceedings. 

While no other New Jersey case has considered whether an attorney's pledge of an anticipated counsel fee can be considered a receivable under UCC Article 9, the panel said, other courts have uniformly held that contracts for legal fees, including pending ones, are considered accounts for Article 9 purposes.

The panel cited as examples the First Circuit’s 2001 decision in Cadle Co. v. Schlichtmann, which held that amounts to be paid under contingent-fee agreements are accounts, and In re: Holstein Mack & Klein, a 2000 decision by the Seventh Circuit that determined fees to be earned from personal injury suits and class actions are considered receivables.

The security agreement between OKS and Acciavatti identified as "collateral" the legal fees owed to Acciavatti in a malpractice matter in which she represented a client, John Giovanni Granata, suing Broderick Newmark & Grather PC over its representation in Granata’s whistleblower lawsuit against Prudential Insurance Co. of America.

While Granata’s case was pending, Acciavatti left her law firm and an attorney-trustee was appointed for her practice.  The Granata case settled in January 2014 for $840,000, after which OKS, Gourvitz and Rotenberg Meril claimed liens upon any legal fees owed to her from her work on the case, the opinion said.  Acciavati filed for bankruptcy in March 2014.

Acciavatti’s October 2010 loan agreement with OKS included a promissory note indicating that monthly payments would begin on Dec. 1, 2010, and required Acciavatti to pay the full amount on the loan either when she received legal fees from the Granata case or on Nov. 1, 2013, according to the opinion.

The Gourvitz lien stemmed from Acciavatti’s representation of a Gourvitz client in 2009 in the firm’s suit against the client for unpaid counsel fees as well as the client’s own malpractice suit against the firm, the opinion said.  “For reasons that are not clear in the record,” Acciavatti agreed to pay Gourvitz $82,500 from fees she expected to receive in the Granata v. Broderick matter.

The Gouvritz client was also ensnared in litigation with Rotenberg Meril, according to the opinion.  Rotenberg Meril sued the client for unpaid fees and she in turn filed claims relating to its accounting practices.  Rotenberg Meril prevailed, and Acciavatti signed a $75,000 settlement agreement assuming the client’s debt to Rotenberg, the opinion said.  A judge later entered a $133,652 default judgment against Acciavatti, the opinion said.

OKS intervened in the Granata v. Broderick litigation and claimed that the trial judge erred in placing it last in priority among Acciavatti's creditors, arguing it had a perfected security interest in legal fees owed to Acciavatti before the Gourvitz or Rotenberg liens were filed.

The appeals panel’s opinion also maintained the award of $279,000 in counsel fees in the Granata v. Broderick case, which Granata had appealed because of how the fees would be distributed.  Granata, who ended up filing a malpractice case against Acciavatti over her representation in his case against Broderick, argued that any consideration of claims by Acciavatti’s creditors should await the outcome of his malpractice case against Acciavatti, the opinion said.

“Given our narrow scope of review, we are satisfied that the motion judge was presented with abundant, unchallenged evidence to support his quantum meruit findings, and Granata has failed to demonstrate any procedural irregularities that would require reversal of the order granting attorney's fees to Acciavatti,” the panel said.

The cases are John Giovanni Granata v. Edward F. Broderick Jr. Esq. et. al., case numbers A-2928-14T2 and A-3036-14T2, in the New Jersey Appellate Division.

Law Firms Battle Over Attorney Fees

June 2, 2016

A recent Delaware Law Weekly story, “Two Wilmington Firms’ Battle Over Attorney Fees Rolls on Fees,” reports that a heated fee dispute between two Wilmington law firms will continue to play out...

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