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Category: Quantum Meruit

Law Firms Spar Over Attorney Fees Ahead of Trial

August 4, 2021

A recent Law 360 story by Celeste Bott, “Chicago Firm, Attys Spar Over Fees Ahead of Ex-Client’s Trial”, reports that Chicago law firm Wood Phillips and one of its former attorneys suing an ex-client for payment for their two decades of work in a patent case are embroiled in a contentious dispute over how potential recovery would be allocated between them, and the firm is asking an Illinois federal judge to weigh in on the applicability of its contingency fee agreements ahead of trial.

Wood Phillips Katz Clark & Mortimer and named partner John S. Mortimer are seeking to file either a pretrial motion to resolve whether the parties are bound by those agreements or, alternatively, to add a cross-claim against former Wood Phillips attorney Dean Monco for anticipatory breach of contract.

The case is set to go to trial early next year, as the firm and attorneys seek to be compensated for more than 20 years of work for carbon fiber manufacturer Zoltek Corp.  The firm and Mortimer argue, in their motion for leave to file, that it would be unfair and would create "chaos and confusion" to have the plaintiffs arguing amongst themselves at trial.

But U.S. District Judge Martha M. Pacold appeared skeptical of those proposed procedural avenues during a status hearing, pushing the parties to address how a Rule 16 pretrial motion could resolve a substantive issue such as the applicability of the firm agreements, how it would impact how the trial would be conducted and whether a potential cross-claim is premature given there's no recovery to divvy up yet.  The judge also questioned whether a cross-claim against Monco was fair given the late stage of the litigation.

Acknowledging that resolving the intra-plaintiff dispute could assist in a potential settlement, the judge said that there still needs to be a legal basis for resolving the issue, not just a practical one.  "I don't think I have a kind of free-ranging power, even if I wish I might, to just decide random stuff," Judge Pacold said.  "There has to be a legal basis and legal hook for really every issue that is teed up.  So I certainly understand all those practical considerations, there just has to be a legal framework for resolving it."

Lee Grossman, an attorney representing Mortimer and the firm, told the court the vehicle for the pretrial motion could entail a jury instruction telling jurors to conduct the recovery for Monco, Mortimer, and the firm based on the formula laid out in the firm agreements at issue.  As for whether a cross-claim is premature ahead of a potential recovery at trial, Monco has already stated in interrogatories that he doesn't intend to honor the firm fee agreements, Grossman said.

"One party has already said, 'I'm not going to follow that contract,'" Grossman said. "In the interest of judicial economy, or whatever economy is left, I don't think it's a practical way to go."  But Monco argued to the court that Wood Phillips has made multiple improper attempts to adjudicate an unfiled and disputed contract claim against any future quantum meruit recovery from Zoltek, and that his former employer can't use Rule 16 to skip the required steps of filing a pleading and then a motion for summary judgment.

Paul Vickrey of Vitale Vickrey Niro & Gasey LLP, representing Monco, said allowing that avenue would lead to a "sideshow" at trial and would only invite confusion and delay. The firm agreements have nothing to do with the elements for determining quantum meruit under Illinois law, Vickrey said, and the firm can later challenge the results in state court if they so choose.

The calculations laid out in the agreements at issue are "hotly disputed," said Patrick F. Solon, another attorney for Monco. The contract claim that the firm is now trying to pursue was never filed, and there's been no pleading, no answers and no discovery on the matter, he said.  But Grossman countered that the fee agreements have been a cornerstone in the yearslong case.  "There's no discovery needed on these agreements," he said.  "They've been talked about in this case from day one."

Also, before the judge is a conditional bid by Monco to disqualify Grossman as counsel. Monco contends that if the firm is allowed to pursue its claim for his "anticipatory breach" of firm agreements, "using Grossman as their counsel [...] would result in Grossman suing his own former client in this very action."  Judge Pacold didn't rule on the pending motions immediately, saying she would either issue a decision after reviewing the materials and arguments or schedule another hearing for further discussion.

According to the 2017 complaint, Zoltek had hired Monco and Mortimer in 1996 to represent the manufacturer in a lawsuit against the federal government alleging that the B-2 bomber, which was developed by aerospace company Northrop Grumman Corp., infringed its patented method to produce carbon fiber sheets that help military aircraft avoid being detected by radar. Japanese conglomerate Toray Industries Inc. acquired Zoltek in 2014.

The litigation, which proved "extremely contentious and difficult," lasted 20 years, with the attorneys spending almost 13,000 hours representing Zoltek, the firm said.  But after a July 2016 strategy meeting in St. Louis, which Monco and Mortimer said led to their termination as counsel, the manufacturer then allegedly refused to pay the attorneys for overdue legal bills.

The manufacturer eventually settled the previous litigation for $20 million, but Wood Phillips and the attorneys got nothing, according to the complaint.  In July 2019, an Illinois federal judge said Monco and Mortimer can't pursue fees out of that settlement and must instead raise their claims against the company, with whom they had the attorney-client relationship.

Article: A Double Attorney Fee Clause Is Held Not a Penalty in NY

February 6, 2021

A recent New York Law Journal article by Michael P. Regan, “A Double Attorney Fees Clause Is Held Not a Penalty, But What’s Next,” reports on a recent case in New York where the court held that a provision of a commercial contract requiring the payment of double the amount of attorney fees expended by the ‘substantially prevailing party” in a litigation between the contacting parties is not unenforceable penalty.  This article was posted with permission.  The article reads:

The Appellate Division, Second Department held in Loughlin v. Meghji, 186 A.D.3d 1633, on Sept. 30, 2020, that a provision of a commercial contract requiring the payment of double the amount of attorney fees expended by the “substantially prevailing party” in a litigation between the contracting parties is not an unenforceable penalty.  While some may believe that this particular provision is, in fact, a penalty, the court’s mode of analysis in reaching that result is the more important takeaway for commercial lawyers.

Instead of focusing on the more traditional factual inquiries in determining the enforceability of such provisions, the court in Loughlin invoked the simpler rule that sophisticated commercial parties should be held to the terms of the contract that they signed onto.  It remains to be seen whether Loughlin signals a growing shift in how New York courts treat such provisions in commercial contracts, and whether this new approach knows any boundaries.

The decision in Loughlin does not discuss Court of Appeals’ opinion in Equitable Lumber v. IPA Land Dev., 38 N.Y.2d 516 (1976), which is often cited in this context.  In Equitable Lumber, the Court of Appeals scrutinized the enforceability of a contractual provision establishing 30% as a reasonable attorneys’ fee to be paid in connection with any enforcement and collection efforts by the seller under the parties’ contract, and noted that courts routinely address the enforceability of similar clauses providing for attorney fees in a liquidated amount. See Equitable Lumber, at 522-24.

The court remitted for the resolution of traditional fact inquiries concerning the enforceability of a liquidated damages provision, to wit: (a) was a 30% fee reasonable in the light of the damages to be anticipated by a party in the seller’s position, or, alternatively, (b) was the fee commensurate with the actual arrangement agreed upon by this plaintiff and its attorney? See id. at 524.  Further, the court directed the lower court to determine “whether the amount stipulated was unreasonably large or grossly disproportionate to the damages which the [seller] was likely to suffer” in the event it did not rely on the liquidated damages clause and, if so, indicated that the provision should be voided as a penalty. Id.

Recent decisions from the Commercial Division, New York County, have followed the analysis set forth in Equitable Lumber.  For example, in Julius Silvert v. Open Kitchen 17, 2019 NY Slip Op 30394(U) (Sup. Ct. N.Y. Co.), Justice Cohen, citing Equitable Lumber, declined to enforce, on summary judgment, a contractual provision setting the amount of attorney fees at 33.33% of the balance due under the parties’ credit agreement. See Julius Silvert, at pp. 3-6.

The court held, inter alia, that “[f]ixing attorney’s fees at an arbitrary percentage of an unknown amount … acts as a kind of liquidated damages provision, one which may constitute an unenforceable penalty.” Id. at p. 4. In contrast to Loughlin, Justice Cohen declined to award attorney fees based solely “on the face of the [parties’ agreement],” and held that more information is required to determine whether such a payment for legal fees is fair and reasonable. Id. at pp. 5-6.

Likewise, in Maina v. Rapid Funding NYC, 2014 NY Slip Op 30952(U) (Sup. Ct. N.Y. Co.), Justice Sherwood held that a provision contained in a promissory note, entitling the lender to a payment of attorney fees in the amount of 20% of the principal and interest then due on the note, is an unenforceable penalty. See Maina, at *5, citing Equitable Lumber.  The court reasoned that a party is only entitled to such an attorney fees award “if it demonstrates that the quality and quantity of the legal services rendered were such to warrant, on a quantum meruit basis, that full percentage [provided for in the contract].” Id.

In contrast to Equitable Lumber and its progeny, the decision in Loughlin eschews the traditional method of analyzing the enforceability of a contractual provision requiring a payment of attorney fees based on a fixed, pre-determined percentage of fees incurred—in this case, a whopping 200% of such fees.  Instead, the court principally relies on the Court of Appeals’ holding in Vermont Teddy Bear Co. v. 538 Madison Realty Co., 1 N.Y.3d 470 (2004), which emphasizes the importance of enforcing commercial contracts according to their terms, especially in the context of real-estate transactions. See Vermont Teddy Bear Co., at 475.  But Vermont Teddy Bear dealt with the notice requirements of a commercial lease, not the enforceability of a liquidated damages provision—let alone in the context of awarding attorney fees.  Further, a provision which requires a payment based on a multiple of future, undetermined attorney fees, does not create the kind of “commercial certainty” that the court was seeking to achieve in Vermont Teddy Bear.

Further, the decision in Loughlin cites to the court’s prior decision in White Plains Plaza Realty v. Town Sports Int’l, 79 A.D.3d 1025 (2d Dept. 2010), another commercial-lease dispute, in which the contract provided for holdover rent at 200% of ordinary, monthly rent.  But whereas a multiple of holdover rent can be easily identified and calculated, a multiple of future attorney fees, yet to be incurred, is a more nebulous construct that has been recognized to be “particularly susceptible to abuse[.]” Julius Silvert, at p. 5.

The decision in Loughlin may be indicative of an increasing judicial reluctance to interfere with the bargain struck by commercial parties.  But under the mode of analysis utilized in Loughlin, it is unclear what restrictions the court would impose on even more extreme variations of such a clause, if any.  For instance, would a clause entitling the “substantially prevailing party” to a payment of 500% of incurred litigation fees be enforceable as between commercial parties?  Under the principle that commercial parties must adhere to the agreement they struck, at all costs, the bounds of such a provision seem endless.  And as set forth in Equitable Lumber and its progeny, good reasons exist to impose limits on the use of such provisions.  Indeed, provisions like the one in Loughlin dramatically alter the “American Rule,” employ the courts in creating financial windfalls to commercial parties, and act as a deterrent against the filing and prosecution of important claims.

Michael P. Regan is a litigation partner in the firm of Tannenbaum Helpern Syracuse & Hirschtritt LLP in New York.

The Nation’s Top Attorney Fee Experts of 2020

June 24, 2020

NALFA, a non-profit group, is building a worldwide network of attorney fee expertise. Our network includes members, faculty, and fellows with expertise on the reasonableness of attorney fees.  We help organize and recognize qualified attorney fee experts from across the U.S. and around the globe.  Our attorney fee experts also include court adjuncts such as bankruptcy fee examiners, special fee masters, and fee dispute neutrals.

Every year, we announce the nation's top attorney fee experts.  Attorney fee experts are retained by fee-seeking or fee-challenging parties in litigation to independently prove reasonable attorney fees and expenses in court or arbitration.  The following NALFA profile quotes are based on bio, CV, case summaries and case materials submitted to and verified by us.  Here are the nation's top attorney fee experts of 2020:

"The Nation's Top Attorney Fee Expert"
John D. O'Connor
O'Connor & Associates
San Francisco, CA
 
"Over 30 Years of Legal Fee Audit Expertise"
Andre E. Jardini
KPC Legal Audit Services, Inc.
Glendale, CA

"The Nation's Top Bankruptcy Fee Examiner"
Robert M. Fishman
Cozen O'Connor
Chicago, IL

"Widely Respected as an Attorney Fee Expert"
Elise S. Frejka
Frejka PLLC
New York, NY
 
"Experienced on Analyzing Fees, Billing Entries for Fee Awards"
Robert L. Kaufman
Woodruff Spradlin & Smart
Costa Mesa, CA

"Highly Skilled on a Range of Fee and Billing Issues"
Daniel M. White
White Amundson APC
San Diego, CA
 
"Extensive Expertise on Attorney Fee Matters in Common Fund Litigation"
Craig W. Smith
Robbins LLP
San Diego, CA
 
"Highly Experienced in Dealing with Fee Issues Arising in Complex Litigation"
Marc M. Seltzer
Susman Godfrey LLP
Los Angeles, CA

"Total Mastery in Resolving Complex Attorney Fee Disputes"
Peter K. Rosen
JAMS
Los Angeles, CA
 
"Understands Fees, Funding, and Billing Issues in Cross Border Matters"
Glenn Newberry
Eversheds Sutherland
London, UK
 
"Solid Expertise with Fee and Billing Matters in Complex Litigation"
Bruce C. Fox
Obermayer Rebmann LLP
Pittsburgh, PA
 
"Excellent on Attorney Fee Issues in Florida"
Debra L. Feit
Stratford Law Group LLC
Fort Lauderdale, FL
 
"Nation's Top Scholar on Attorney Fees in Class Actions"
Brian T. Fitzpatrick
Vanderbilt Law School
Nashville, TN
 
"Great Leader in Analyzing Legal Bills for Insurers"
Richard Zujac
Liberty Mutual Insurance
Philadelphia, PA

Client’s Acknowledgement of Fee Splitting is Not ‘Consent’ in CA

June 9, 2020

A recent Metropolitan News story, “Client’s Acknowledgement of Fee-Splitting is Not ‘Consent’” reports that a lawyer cannot collect an agreed-upon referral fee from another attorney where the client merely acknowledged receipt of a letter telling him of the arrangement and affirming that he understood, but without his expressing explicit consent, the Third District Court of Appeal held.

The client’s subsequent testimony that his acknowledgement indicated his approval of the fee was ineffective, Justice Louis Mauro wrote.  At the time of the arrangement, Rules of Professional Conduct, rule 2-200 was in effect.  It read: “(A) A member shall not divide a fee for legal services with a lawyer who is not a partner of, associate of, or shareholder with the member unless: (1) The client has consented in writing thereto after a full disclosure has been made in writing that a division of fees will be made and the terms of such division….”

To like effect is the current rule 1.5.1, which declares: “(a) Lawyers who are not in the same law firm shall not divide a fee for legal services unless: (1) the lawyers enter into a written agreement to divide the fee; (2) the client has consented in writing, either at the time the lawyers enter into the agreement to divide the fee or as soon thereafter as reasonably practicable, after a full written disclosure to the client of: (i) the fact that a division of fees will be made; (ii) the identity of the lawyers or law firms that are parties to the division; and (iii) the terms of the division….”

The opinion reverses a San Joaquin Superior Court judgment in favor of the referring attorney, Robert K. Reeve of Valley Springs (in Calaveras County), and against Stockton attorney Kenneth N. Meleyco.

A jury awarded Reeve $78,750, based on both his causes of action for breach of contract and under a quantum meruit theory, and San Joaquin Superior Court Judge Barbara A. Kronlund added an award of $49,364.35 in prejudgment interest.  Explaining the reversal as to contract damages, Mauro said: “We conclude the client’s written acknowledgement that he received and understood the letter did not constitute written consent to the referral fee agreement under former rule 2-200, and the client’s subsequent testimony did not remedy the deficiency.  The referral fee agreement is unenforceable as against public policy and Reeve cannot recover for breach of contract.”

The client signed and returned a copy of the letter from Meleyco apprising him of the arrangement with Reeve, with his signature appearing under the words, “I, JAMES G. LUOMA, acknowledge receipt of this letter and understand the contents.”

Mauro set forth: “Consent is different from disclosure or receipt, and it is also different from understanding….Written consent requires written words expressing agreement or acquiescence, not just words expressing receipt or understanding.  Luoma’s acknowledgement was deficient in this regard.

“We understand Reeve to suggest that Luoma’s acquiescence can be inferred from his receipt of the letter, his understanding of the letter, and his lack of objection to the referral fee.  But because consent must be expressed in writing, silence cannot convey written consent.”

The testimony by Luoma that he intended his signing of the letter to indicate assent was ineffective because there was no ambiguity to be resolved in light of the meaning of the language being clear.  Mauro also said Reeve cannot recover under a quantum meruit theory because the last of his services in the case occurred more than three years before he filed his complaint and the statute of limitations in two years.

Article: Fee Sharing Between Discharged Counsel and New Counsel in Contingent Fee Cases

June 5, 2020

A recent The Legal Intelligencer article by Sarah Sweeney and Thomas Wilkinson of Cozen O'Connor, “Fee Division Between Discharged Counsel and New Counsel in Contingent Fee Cases” reports on the division of attorney fees between discharged counsel and new counsel in contingency fee matters.  This article was posted with permission.  The article reads:

When a client terminates, without cause, its legal representation in a contingent fee matter and subsequently retains new counsel from a different firm, the Rules of Professional Conduct related to the division and disbursement of fees impose certain requirements on the successor attorney.  The American Bar Association recently issued Formal Opinion 487—ABA Formal Opinion 487 (Fee Division with Client’s Prior Counsel), June 18, 2019—to identify the applicable rules, and to clarify the duties owed to the client by the successor attorney.

The opinion explains that Model Rule 1.5(e) (or its state equivalent) has no application to the division of fees in cases of successive representation.  Model Rule 1.5(e) applies to the division of fees between lawyers of different firms who are representing the client concurrently or who maintain joint ethical and financial responsibility for the matter as a whole.  Such situations are governed by Rule 1.5(b)-(c), which according to the opinion, require the successor counsel to “notify the client, in writing, that a portion of any contingent fee earned may be paid to the predecessor attorney.”

Specifically, Rule 1.5(b) requires attorneys to communicate the rate or basis of legal fees, and Rule 1.5(c) requires that the written fee agreement include the method of determining the fee.  Both subsections are designed to ensure that the client has a clear understanding of the total legal fee, how it will be computed, and when and by whom it will be paid.  When a client replaces its original counsel with new counsel in a contingent fee matter, the discharged attorney may have a claim for fees under quantum meruit or pursuant to a clause in the contingency fee agreement; and the successor counsel’s failure to communicate to the client the existence of such claim would run afoul of Rule 1.5(b)-(c).  Therefore, even if the exact amount or percentage (if any) owed to the first attorney is unknown at the time, it is incumbent on the successor attorney to advise a contingency client of the existence and effect of the predecessor attorney’s claim for fees as part of the terms and conditions of the engagement from the outset.

While the foregoing ABA guidance is reasonable, Model Rule 1.5(b) and (c) do not provide the most compelling basis to obligate successor counsel to advise the client of predecessor’s possible fee claim.  As explained in Pennsylvania Bar Association Formal Opinion 2020-200: Obligations of Successor Contingent Fee Counsel to Advise Client of Potential Obligations to Prior Counsel, “a contingent fee agreement that fails to mention that some compensation may be due to, or claimed by, the predecessor counsel in circumstances addressed by this opinion is inconsistent with Rules 1.4(b) and 1.5(c),” which “mandate that successor counsel provide written notice that compensation may be claimed by Lawyer 1, and explain the effect of that claim on Lawyer 2’s contingent fee.” See also Philadelphia Bar Association Professional Guidance Comm. Op. 2004-1 (“In discharging the inquirer’s obligations under Rule 1.1 (competence) and Rule 1.4 (communication), the committee recommends that the inquirer have a thorough discussion with the client about the potentials for a fee and cost claim by the discharged attorney, and how such a claim, if made, might affect the inquirer’s representation of that client and/or the client’s ultimate distribution, if there is any recovery in the client’s case.”). Pennsylvania Rule 1.4(b) is identical to Model Rule 1.4(b).

The role of the successor attorney with respect to the discharged attorney’s claim for fees should also be set forth in the engagement agreement.  The opinion advises that the engagement agreement should expressly state whether the issue is one to be decided between the discharged attorney and the client or, alternatively, whether the successor attorney will represent the client in connection with the resolution of prior counsel’s fee interest.  If the latter, the successor attorney must obtain the client’s informed consent to the conflict of interest arising from his/her dual role “as counsel for the client and a party interested in a portion of the proceeds.” (emphasis in original)  In many situations, the fees paid to the discharged and successor attorneys may not affect the client’s ultimate recovery, and the client may make an informed decision to leave the matter for the two attorneys to determine among themselves.  In resolving any such dispute, both attorneys remain bound by Rule 1.6 confidentiality or pursuant to any confidentiality provisions in any underlying settlement agreement.

Upon recovery, the successor attorney must comply with Rule 1.15(d) by notifying the discharged attorney of the receipt of funds.  However, client consent is required prior to disbursement of any fees that may be payable to the discharged attorney.  If there is a disagreement about the discharged attorney’s claim or the amount owed, the successor attorney must hold the disputed fees in a client trust account under Rule 1.15(e) until the dispute is resolved.

The Disciplinary Board of the Pennsylvania Supreme Court (board) has proposed that the guidance in the opinion be incorporated into the comment supporting Pennsylvania Rule of Professional Conduct 1.5 governing fees.  Recognizing that the opinion is not binding precedent, the board’s published notice for comment dated Dec. 7, 2019 stated that the opinion represents “helpful guidance to successor counsel and predecessor counsel in this common situation.  The original lawyer in a contingency-fee matter will often assert a lien on the proceeds.  But if the client retains new counsel, that client may not understand there is a continuing obligation to pay the original lawyer for the value that lawyer contributed or was entitled to under the original fee agreement.”

The board has proposed amending Comment [4] of Rule 1.5 to expressly reference the opinion.  The comment period has expired, so practitioners should proceed on the assumption that the board’s recommendation will likely be approved by the Supreme Court.  While adoption of the new proposed comment will not make compliance with all aspects of the opinion mandatory, practitioners would be wise to include a written notice to clients that a portion of the fee may be claimed by predecessor counsel.  In addition, successor counsel should confirm in writing any undertaking to resolve the prior counsel’s fee interest.  Since the opinion characterizes this as involving a conflict of interest requiring the client’s informed consent to a waiver, the successor firm should also confirm that consent in writing.  In this respect the opinion goes further than previous bar association ethics guidance in Pennsylvania.

Inclusion of an express reference to an ABA or other ethics opinion in the text of a comment to a disciplinary rule is highly unusual.  An alternative would have been to instead include a concise summary of that guidance.  In any event, the Disciplinary Board presumably felt it appropriate to supplement the guidance on this important topic to lawyers handling contingent fee cases because lawyers often fail to engage in earnest efforts to resolve the respective fee interests promptly after successor counsel is retained, leaving the unsuspecting client exposed to complications, potential litigation and delays over the allocation of fees and costs following an award or settlement.

When asked by a prospective client to replace the client’s counsel in a pending contingency fee case, attorneys and firms should be mindful of the duties imposed by the opinion on successor counsel, as well as the specific Rules of Professional Conduct in the relevant jurisdiction and any other applicable substantive law or authority.  In many cases compliance with the new guidance will require updating contingent fee agreements, as well as ensuring the client is adequately informed of the prior counsel’s fee interest and how it will be addressed in the event of a recovery.

Sarah Sweeney is professional responsibility and compliance counsel at Cozen O’Connor.  She serves as co-chair of the Philadelphia Bar Association’s professional guidance committee.  Thomas G. Wilkinson is a leader of the legal professionals practice group at Cozen O’Connor.  He is a member of the professional guidance committee and the ABA standing committee on professionalism.