A recent Law 360 story by Carolyn Muyskens, “Mich. Blasts $5M Fee Ask in Flint Water Case as ‘Overreach’”, reports that the state of Michigan is urging the judge presiding over Flint water crisis litigation to deny residents' request for $5 million in settlement funds to be set aside for the future litigation expenses, with the state saying the settlement "was never intended to be a litigation fund for plaintiffs' counsel."  In a filing, the state opposed plaintiffs' requests for fee distributions from the $626 million settlement, which resolved claims against the state government and the city of Flint for their roles in the disaster set off when the city, under a state-appointed manager, changed its water source to save money.

The state said attorneys' new batch of fee requests, which follows their first payout from the settlement fund, were either premature or not authorized by the agreement.  Class counsel and liaison attorneys got the first payment from the settlement fund approved in May, when U.S. District Judge Judith E. Levy ordered a distribution of $40 million as a common benefit award to the attorneys, with an additional $7 million for litigation expenses.  Although the settlement was approved in November 2021, appeals have held up distribution of the funds until recently.

In June, the attorneys filed a motion for additional fees and expenses. The motion seeks reimbursement for post-settlement litigation expenses, a $5 million fund for future litigation expenses, and interest that had accumulated on the $47 million already disbursed — as well as on any awards moving forward.  It also seeks the disbursement of an already-approved fee award of 10% of the programmatic relief fund, which is a subcategory of money to be used for special education services for school children exposed to lead.

The state blasted the request, calling it an "egregious overreach" and saying settlement dollars should not be put toward the plaintiffs' litigation against the remaining defendants in the case — Veolia North America and Lockwood Andrews & Newnam PC. LAN said last week it had reached a tentative settlement with the plaintiffs.  The settlement is "not a litigation fund for plaintiffs' counsel's expenses pursuing non-settling defendants," the state said.

In its motion seeking expenses incurred since February 2021 and the $5 million fund, the residents said the settlement agreement stated plaintiffs' counsel "shall be reimbursed and paid solely out of the FWC qualified settlement fund for all expenses and fees, including but not limited to: attorneys' fees [and] past, current or future litigation and administration expenses," highlighting that the deal explicitly provided for future expenses.

The plaintiffs cited an Eastern District of Michigan case, In re Packaged Ice Antitrust Litig., in which the court "authorized class counsel to utilize up to $750,000 of the settlement fund to pay expenses incurred in the litigation going forward, including 'in prosecuting the claims against the remaining non-settling defendants.'"  The Flint plaintiffs said the judge would have oversight to approve any disbursements from the $5 million fund and that any money leftover that wasn't used for litigation expenses would revert to the settlement fund.

"Plaintiffs' counsel have incurred millions in additional lodestar in continuing to prosecute this case but are not presently seeking any additional award of attorneys' fees, nor requesting a disbursement related to future reasonable litigation expenses," the lawyers said.  "When additional common benefit expenses are incurred and become known, and in consultation with the special master, plaintiffs' counsel may make further applications for disbursements from the $5 million portion of the FWC qualified settlement fund requested herein to be set aside for continuing reasonable litigation expenses," they added.

The state also opposed the request for a 10% fee award from the special education services fund, arguing it can't be calculated until the claims administrator finalizes the list of claimants and the value of the main qualified settlement fund is determined.

The state also said the attorneys aren't entitled to interest on their fee awards, pointing to a provision in the settlement agreement that "requires that all interest earned by the FWC qualified settlement fund or the sub-qualified settlement funds become and remain part of each such fund and may be used to pay any fees and expenses incurred to implement this settlement agreement."

The state argued this provision means interest that accrues in the settlement fund should be put toward the costs of the administration process, not attorneys.  "If any interest remains after implementation of the settlement is complete, then those funds should enure to the benefit of the claimaints," the state argued.  Lawyers for the class are ultimately expected to receive about $200 million for their work on the case.

A recent Law360 story by Jeannie O’Sullivan, “Sills Cummis Accused of Overbilling in Rock Musician Suit,” reports that the former manager for Nile Rodgers has accused Sills Cummis & Gross PC of overbilling him in connection with contract claims against the musician and then abandoning the case, according to an amended complaint filed in New Jersey state court.  In a filing, Peter Herman said Sills Cummis and firm member Joseph B. Fiorenzo failed to honor negotiated bill corrections, charged "patently unreasonable fees" for unnecessary outside work and then withdrew from the matter, leaving him to fend for himself in court.

The firm has since demanded that the $315,000 settlement in the underlying matter be held in escrow to settle its claim against Herman for fees, according to the complaint, filed in Essex County Superior Court.  "As of the date of this complaint, Herman has received nothing of the settlement proceeds," the complaint said.  Herman hired Sills Cummis under a $20,000 retainer agreement that set forth hourly fees for the lawyers assigned to the case, according to the complaint.  Herman claimed he informed the firm that he only had $100,000 for legal fees.

The firm charged Herman "in excess of" $618,000 in connection with the civil matter and sought to collect on the whole amount, despite an agreement in which the parties had negotiated reductions, the complaint said.  The rates charged "far exceeded rates for similarly situated New Jersey based law firms," the complaint said.  Herman alleged that Fiorenzo informed him that the firm would no longer work on his file and would move to withdraw, forcing Herman "to negotiate directly with Nile Rodgers and accept a settlement far less than what was reasonable."  That settlement is now tied up in escrow, the complaint said.

The seven-count complaint says that the firm violated professional conduct rules requiring attorneys "to charge fair and reasonable fees and disbursements," and that the retainer agreement, which includes an arbitration clause, is "null, void and of no force and effect."  The fact that the settlement is escrowed constitutes a breach of the firm's agreement with Herman, and the firm's failure to cap its fees amounts to converting Herman's assets for its own benefit, the complaint says.

Herman also claimed that Fiorenzo made false statements "regarding his extensive experience and personal involvement" with the matter. The bills showed Fiorenzo "spent little time on the matter," the complaint said.  The complaint goes on to say that a conflict of interest arose when the defendants demanded Herman pay the fees or face a motion to withdraw.  Their service to Herman would be "materially affected by defendants' interest in their fee claim," the complaint said.  Herman wants compensatory and punitive damages, release of the escrow funds, and attorney fees and other costs. 

A recent Law 360 article by John Bair, “What Attorneys Should Know About Fee Deferral,” reports on attorney fee deferrals.  This article was posted with permission.  The article reads:

With current high-profile lawsuits like those involving product liability claims stemming from the use of Johnson & Johnson talc powder and 3M Co. earplugs, any dollar amounts plaintiffs are ultimately awarded in settlement will be widely publicized and discussed.  And rightfully so — monetary verdicts or settlements are a major win for those affected by any defective products.  Lawyers, however, will likely also have another dollar amount on their minds: attorney fees.

It's common knowledge that for every corporate defendant brought to justice, the plaintiff trial lawyers who went up against them have earned themselves a payday in the form of attorney fees.  But what may not be such common knowledge is the fact that the IRS has afforded contingency fee attorneys the ability to make their fees work for them with attorney fee structures.  And even if you've heard of this strategy before, read on, because the fee-structuring landscape is ever-changing.

What is an attorney fee structure?

An attorney fee structure is an investment strategy that allows contingency fee attorneys to decide how and when they receive their fees.  By implementing a pre-planned schedule of periodic payments, attorneys can elect to defer all or a portion of their fees, which are not taxed until receipt.  Attorneys can defer an unlimited amount or portion of fees into an attorney fee structure, affording them tax advantages and income control.

For the purposes of this article, attorney fee structure, fee deferral and all variations of the like are synonymous.  Traditionally, attorney fee structures have been executed in the form of fixed indexed, traditional and/or secondary market annuities.  While these are still viable and stable options for fee structures, new options have been gaining popularity in recent years, including investment-backed structures, permanent whole life insurance and even private wealth portfolios.  Each option touts unique benefits based on an attorney's personal goals.

Attorney fee structures are made possible for all contingency fee attorneys in the U.S. due to a series of court rulings in the 1990s, including the 1996 ruling in Childs v. Commissioner of Internal Revenue from the U.S. Court of Appeals for the Eleventh Circuit.  Their feasibility is based around the concept of constructive receipt — until an attorney physically receives her fees, they are not taxable as income.

In order to structure her fees, an attorney must ensure that the terms of settlement include the creation of a periodic payment obligation for some or all of the attorney's contingency fee, as well as direction for the fee to be paid into a previously established qualified settlement fund, or QSF.  As long as the money is initially directed to this fund, the attorney can plot out how and when she'd like to receive her income in the years to come.  Once the funds are issued directly into the QSF, the fee is considered deferred.  And while it sits in the QSF waiting to be distributed, it can be invested and can grow tax-free.

Why should attorneys consider fee deferral?

There are countless benefits to structuring your attorney fees.  First, as mentioned above, it allows for unlimited tax deferral and, ultimately, the ability to pay less taxes.  Until the money is physically received in the attorney's bank account, she is not taxed on that income.  Structuring out a given fee into a years-long payment plan enables the attorney to stay in her existing tax bracket every year and never be taxed on the gross lump sum.

Another benefit is access to professional or self-directed investment management.  As the money sits in the QSF awaiting distribution, attorneys can designate a financial adviser to manage and invest the funds into a diversified portfolio made up of equity-backed assets — think Apple Inc. or Google Inc. stock, the S&P 500, etc.

A final benefit of structuring attorney fees is the prioritization of security over assets.  Note that the nuances of this benefit may vary based on the protections your financial adviser puts in place.  Some things to look out for include the ability to cancel or void your agreement should you ever need to, as well as protections in the case of a debt event.

Are there instances where an attorney fee structure is not advisable?

Let's start with the caveat that it is always prudent to consult with your financial adviser when exploring a new wealth management strategy.  Only they — and you — know your complete financial picture and are able to make recommendations and decisions accordingly.

Next, it's important to note that fee deferral is best suited for attorneys with excess income.  If you need your fees now or in the immediate future to pay off bills or pay down debts, a fee deferral or structure likely isn't for you at this time.  Structuring your fees means exchanging liquidity for tax deferral, a unique option that all attorneys should know about, but only those who are financially established can truly take advantage of it.

Finally, if you are receiving a fee that is on the smaller side and would not catapult you into a higher tax bracket for the year, it may make sense to take the lump sum instead of deferring and structuring.  Remember, this is a wealth and tax management strategy and should be utilized as such.

What do you need to know when exploring attorney fee structures for yourself?

If you are receiving a larger fee, the questions you're asking should be more about what type of attorney fee structure would best help you meet your goals.  It's important to identify your personal and professional aspirations and use that information to inform your decision-making.

Here are some points to consider when determining which fee structure option would best suit you: If you have a specific financial adviser you've used for years and love, consider a fee deferral in the form of a private wealth portfolio.  With this option, you can retain your long-term financial planner and engage an administrator willing to work in professional collaboration.

Permanent whole life insurance could be your best deferral option if you're financially established and want to begin setting aside wealth for your children and grandchildren.  You can incorporate your estate plan and reap the benefits of permanent whole life insurance's dividend-paying histories.

If you're a conservative investor with the luxury of time, consider fixed indexed, traditional or secondary market annuities as your strategy.  This approach relies on advantages inherent in the marketplace, making it both a low-risk and low-maintenance wealth planning option.

In conclusion, proper implementation of attorney fee structures can help firms and their attorneys achieve long-term financial freedom, security and success.  Often, the greatest barrier to adoption is lack of knowledge that this option exists.

John Bair is the founder and CEO of Milestone Consulting LLC.

A recent Law 360 story by Kevin Penton, “Law Firm Accused of Not Sharing $30M Fee in Syngenta MDL,” reports that Heninger Garrison Davis LLC is refusing to honor an oral agreement to share two-thirds of the $30 million it received in fees from multidistrict litigation involving Syngenta's genetically modified corn, two other law firms are alleging.  Crumley Roberts LLP and Burke Harvey LLC allege that they struck a deal with Heninger Garrison to split three ways any fees the firms received from the litigation, but that the defendant is not meeting its end of the agreement, according to a complaint filed last month in Illinois state court that Heninger Garrison removed to the Southern District of Illinois.

Crumley Roberts and Burke Harvey allege that as part of the arrangement that originated in early 2015, they brought clients to the litigation and personally handled them, while Heninger Garrison dealt directly with the courts and defendants in the underlying dispute, according to the complaint.  After deducting any referral fees to other firms, the three firms were to then split the remaining money three ways, Crumley Roberts and Burke Harvey contend.

"Plaintiffs are entitled to distribution of their one-third each of the partnership's assets, which consist of the amount of the total fee award," the complaint reads.  "Notwithstanding repeated requests, [Heninger  Garrison] has failed and refused to pay this amount to plaintiffs."

The dispute arises from years of litigation over allegations that Syngenta should have delayed launching the corn seeds that were genetically modified to be pest-resistant until Chinese authorities — controlling a major corn market for U.S. growers — approved importing the GMO corn.  When China discovered a strain of corn with a mix of varieties in November 2013, it rejected American corn cargo and shut down the Chinese market for U.S. corn, costing the domestic U.S. industry more than $1 billion, some of the farmers in the litigation contended.

Syngenta agreed in March 2018 to a $1.51 billion settlement in the nationwide class action, with a plethora of law firms in the litigation receiving approximately a third of the amount, according to court documents.  Heninger Garrison on Friday urged the Southern District of Illinois to pause the proceedings in the attorney fees case to give the Judicial Panel on Multidistrict Litigation time to weigh the firm's request for a shift to the multidistrict litigation in the District of Kansas handling fee disputes.

"The plaintiffs' claims directly implicate the fee award to [Heninger Garrison] and seek the large majority of that award, which subjects the claims to the jurisdiction of the MDL in accordance with certain provisions in the class settlement agreement," reads Heninger Garrison's motion to stay.