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Category: Third-Party Payer

Article: The Ethics of Crowdfunded Legal Fees

October 8, 2023

A recent Law 360 article by Hilary Gerzhoy and Julienne Pasichow, “Avoiding The Ethical Pitfalls of Crowdfunded Legal Fees”, reports on the ethics of crowdfunding for legal fees.  This article was posted with permission.  The article reads:

Within two days of being charged with manslaughter in the death of Jordan Neely, Daniel Penny had crowdfunded over $1.5 million to cover his legal fees.  Penny was charged with killing Neely, a Michael Jackson impersonator, on a New York City subway after placing him a fatal chokehold.  The case was widely covered and highly politicized.

Democrats, including Rep. Alexandria Ocasio-Cortez, D-N.Y., and New York Gov. Kathy Hochul, called for charges against Penny and justice for Neely's family.  Republicans, including Florida Gov. Ron DeSantis, Rep. Marjorie Taylor Greene, R-Ga., and Rep. Matt Gaetz, R-Fla., voiced their support for Penny.

Crowdfunding legal services is a relatively new phenomenon.  It's most often used to fund litigation involving individuals — as opposed to corporate entities — that implicates human rights issues, the environment and judicial review.

In one widely publicized case, two Yemeni refugees with valid immigrant visas were intercepted at Dulles International Airport, handcuffed and sent out of the country — the result of former President Donald Trump's temporary seven-country travel ban, which had been signed just a few hours earlier while the brothers were en route.  The crowdfunding campaign raised $36,600 in its first week.

While crowdfunding legal services provides a way for many to access lawyers when representation would otherwise be unaffordable, it also comes with a bevy of ethics risks.  This article will examine the key ethical rules governing crowd-sourced legal funds and the steps lawyers can take to mitigate their risk.

The Daniel Penny Case

In May, the Manhattan District Attorney's office charged Penny, a 24-year-old U.S. Marines veteran, with second-degree manslaughter after he killed Neely on a New York City subway earlier that month.  For more than three minutes, Penny placed Neely in a fatal chokehold leading to his death.  Penny claimed self-defense, stating that Neely was threatening passengers on the train.  It was later learned that Neely had been suffering from a mental health crisis and was experiencing homelessness at the time he was killed.  Penny was released on $100,000 bond.  On June 28, he appeared in court in Manhattan to plead not guilty.

The law firm representing Penny — Raiser & Kenniff PC — arranged for a fundraiser on the Christian crowdfunding site GiveSendGo to cover Penny's legal fees.  As of Sept. 29, the fundraiser has collected nearly $3 million.  How can Penny's legal team use those crowd-sourced funds? What restrictions are imposed by the ethics rules?

This article will examine the critical steps to ensure compliance with the American Bar Association's Model Rules of Professional Conduct, which are largely adopted in most jurisdictions.

Confidentiality Runs to the Client, Not the Funders

Perhaps the most fundamental feature of the lawyer-client relationship is the protection of client confidences.  Model Rule of Professional Conduct 1.6 prohibits a lawyer from revealing "information relating to the representation of a client unless the client gives informed consent, the disclosure is impliedly authorized in order to carry out the representation or the disclosure is permitted [under certain enumerated circumstances]."

A lawyer must make reasonable efforts to prevent inadvertent or unauthorized access to the information, a standard that is highly fact-dependent and considers the sensitivity of the information and the extent to which additional safeguards would enhance security versus hinder the representation.  Lawyers who organize fundraisers, manage crowdfunded donations and apply them toward legal fees must ensure that they neither represent nor imply that they will provide information about the representation to donors in exchange for donations.

It is best to obtain informed consent for any information that will be disclosed to donors and to steer clear of "providing specific information about how the funds will be used to effectuate the legal strategy," as articulated by the D.C. Bar in a 2018 ethics opinion.  To avoid any ambiguity, lawyers should note in the narrative section of the fundraiser that they will not provide any information about the objectives of the representation, actions taken, specific uses of the funds or developments in the case.

When donors fund a lawyer's representation of a client through crowd-sourcing, they must do so with the understanding that they will receive no information about the representation.  We recommend including the proposed narrative language for the fundraiser in the engagement letter signed by the client, which should also describe the fundraising arrangement and the fact that the collected funds will be applied to legal fees and expenses as they are earned or incurred.

There may be instances in which a client wants a lawyer to provide case updates to donors or specific individuals.  To do so, the lawyer must obtain informed consent from the client.  This requires that the lawyer explain the risks of disclosure to the client and have the client approve of the exact information to be disclosed.

Most importantly, the client must understand that disclosing privileged and confidential information about the representation to third parties will destroy the attorney-client privilege and prevent the lawyer from later claiming privilege over the disclosed information.  The same warning should also be given to a client who is managing the fundraiser themselves and wishes to disclose case information or updates to donors.

Crowd-sourced Funds Cannot Interfere with a Lawyer's Professional Independence

Before accepting crowd-sourced funds as payment for legal services, a lawyer must obtain informed consent from the client.  This is true regardless of whether the lawyer is self-administering the funds as they are earned or whether the client is paying the lawyer's invoices using crowd-sourced funds.  Lawyers should consider including relevant language providing for this arrangement in their engagement letter with the client.  Under the Model Rules, even if such an arrangement is in place, a lawyer may not, under any circumstances, allow the person or persons paying the lawyer's fees to "direct or regulate the lawyer's professional judgment in rendering such legal services."

While donors' generosity often enables a client to pursue legal claims or defenses where it would otherwise be financially impossible, donors cannot control how the fundraised money is used within the representation.  Only the client determines the objectives of the representation and whether to follow the lawyer's recommended strategy.

Ensuring that the narrative statement on the fundraising website contains language informing donors that they will not be permitted to exert control or influence over the objectives of the representation or the methods by which they are carried out — in addition to not being entitled to case information — may prove helpful in warding off donors who believe that their dollars earn them a say in the representation.  There may be situations in which the donors' interests differ from those of the client — for example, where donors may wish to minimize the amount spent on the representation to get more for less or avoid taking steps in the representation that may be costly.

In circumstances where the lawyer is aware of divergent interests between the donors and the client, the lawyer cannot accept the representation or continue the crowdfunded payment arrangement unless the lawyer is certain that they can exercise independent judgment and will not allow the donors to interfere with their professional decision making.

Be Circumspect About Trial Publicity

Crowdfunded cases are often those that are highly publicized, political and involve public figures. They tend to come with an increased public desire for publicity and insider information.  Many of these cases go to trial, which further extends the period in which the public remains interested and heightens public intrigue.

Model Rule 3.6 governs trial publicity and warns lawyers against making statements that are likely to prejudice the proceedings in any way.  This is all the more true in highly publicized cases, where a lawyer's statements about a case are likely to be widely disseminated.  While media attention on a case does not change lawyers' confidentiality obligations under Model Rule 1.6, Model Rule 3.6 provides that lawyers can provide concrete facts about the case if they are unlikely to cause prejudice.

Lawyers can reveal basic information about the claim at issue, people involved, public records, the existence of a pending investigation, the scheduling or results of litigation, and requests for help in obtaining evidence, and they can offer warnings of danger to an individual or to the public.  In criminal cases, lawyers can provide additional information to the public, including, among other things, information about the residence and occupation of the accused, and the location, time and place of the arrest.

Where a client has suffered prejudice due to recent bad publicity, the lawyer can make statements to mitigate that prejudice.  A lawyer should not speak publicly about a case, however, without the consent of their client after the client weighs the risks and benefits of such disclosures.

Treat Cowdfunded Legal Fees as Advanced Fees, Safeguarding Them in a Trust Account

The two most prominent ethics opinions to address crowdfunded legal fees, a 2015 Philadelphia Bar opinion and a 2018 D.C. Bar opinion, emphasize the importance of safeguarding crowdfunded fees in a trust account and not moving them over to an operating account until they are earned.

As the D.C. Bar opinion notes, because crowdfunding can "trigger areas of confusion that may not be present in a traditional client-self pay situation," lawyers should establish, in a written fee agreement, the rate of their fees, the scope of the representation and specific plans for crowdfunded money, such as the ownership of excess crowdfunds and responsibility for payment if the crowdfunds do not fully cover legal fees and expenses.

Critically, funds collected by a lawyer on a client's behalf through crowdfunding should be treated as advanced fees and placed in a trust account for the client.  In the crowdfunded legal fees context, lawyers need to be especially cognizant of their duty not to charge excessive fees under Rule 1.5.  For example, if a matter resolves quickly, a lawyer would be hard-pressed to claim all of the proceeds of the fundraiser as fees.

Conclusion

The crowdfunding of legal fees represents an exciting opportunity to provide access to legal services to those for whom it might be otherwise unattainable.  With a principled approach — paying special attention to your obligations to maintain confidentiality and your professional independence, and safeguarding funds in a trust account — you can protect yourself from ethics mishaps while serving a wider array of clients.

Hilary Gerzhoy is a partner and vice chair of the legal ethics and malpractice group at HWG LLP.  Julienne Pasichow is an associate at the firm.

Does New Texas Law Cut Out Attorney Fees?

October 6, 2023

A recent Law.com story by Adolfo Pesquera, “Does New Insurance Law Cut Out Attorney Fees? High Court to Decide”, reports that the Texas Supreme Court justices responding to a federal appellate certified question appeared perplexed about the lack of guidance on how or if attorneys could get paid on property-damage insurance claims.  The justices heard oral argument on Rodriguez v. Safeco Ins. Co. of Indiana, a case that came to them from the U.S. Court of Appeals for the Fifth Circuit.  A federal trial court granted the insurer summary judgment and the homeowner appealed.

The appeal argued that when Safeco invoked the policy appraisal provision after litigation began, and paid damages and interest, a Texas insurance law created by the legislature in 2017 did not intend to eliminate attorney fees.  In examining the 2017 Texas Prompt Payment and Claims Act, the Fifth Circuit decided it could not interpret the law and asked the Supreme Court to weigh in on the issue.

Melissa W. Wray of Daly & Black, arguing for the homeowner, said the intent of the law is to promote prompt payment of insurance claims by imposing liability for statutory interest, attorney fees and prejudgment interest on insurers who do not pay claims in accord with the act’s deadline.

“Safeco asks the court to adopt an interpretation of the statute that would, in the context of attorneys fees, ignore the claim payment deadlines that the legislature has put in place and effectively redefine prompt payment of a claim to mean payment of a claim at any time up until the moment before the trial judge enters the final judgment,” Wray said.

Throughout the hearing, the justices grappled with a phrase in the law—”the amount to be awarded in the judgment”—and Justice Brett Busby began by referring to caselaw, Ortiz v. State Farm Lloyds (Texas 2019), where the supreme court said there is no claim for breach of contract when the insurer pays the appraisal award.  “So, wouldn’t the ‘amount to be awarded’ in the judgment for your claim under the insurance policy be zero?” Busby asked.

Wray drew a distinction, moving away from a breach of contract claim, to argue damages was not necessarily relevant to an “amount to be awarded,” because the only defined term in the statute was a “claim.”  “Safeco wants to interpret that as the amount of unpaid policy benefits for which the insurer remains liable at the time of judgment.  Those words aren’t used in the statute,” Wray said.

When Safeco’s representative, Mark D. Tillman of Tillman Batchelor, rose to speak, the justices repeatedly tried to pin him down on when the language of the statute allegedly read attorney fees out of the act.  “There has to be the possibility that a plaintiff can obtain a judgment,” Tillman argued.  “The legislature clearly tied the ability to award attorney’s fees to, in the future, obtain a judgment. That simply cannot happen here.”  Justices Busby, Jeff Boyd and Evan Young took turns arguing that point.

Boyd said Tillman was embracing the absurd argument that, speaking hypothetically, a $50 million building could be destroyed and insurance company disagrees with the amount damages claimed.  “You have five years of litigation, finally get to a jury trial, the jury finds for the insured, and you file your JNOV and the judge denies it and the judge says ‘send me an order.  I’m going to sign a final judgment awarding all this money,’ and your client at that moment can write a check and avoid all attorney’s fees,” Boyd said.

Busby jumped in, “You’re getting back to my question then.  Where is the moment … when you’re looking at what is ‘to be awarded?’  To Boyd’s point, it’s not the day before the judgment is signed.  So in the life of the case, when is it?”

Tillman said that in this particular case, the appraisal amount was paid immediately.  “I understand, but we have to write the rule not just for your case,” Busby said.  Justice Young asked, “What will inform the answer to that question if it’s not in the text of the statute?”  Tillman finally said he did not know.  Then we go right back to Justice Boyd’s hypothetical.  I’m with him.  I don’t understand where the line is if that’s the only thing the statue says and the only thing we’re guided by,” Young said.

Tillman argued Boyd’s hypothetical scenario was an extreme case and one he had never encountered in the real world.  He told the court not to “throw the baby out with the bathwater” using an extreme example to overturn a statute intended to curb abuses by trial attorneys that led to its passage in the first place.  “Then why not just embrace it and say, ‘Yeah, that’s an extreme hypothetical, not going to happen, but the statute says it and if it’s a problem there’s no judicially discernable way to draw that line, leave it to the legislature to fix that,” Young suggested.

SBF Sues Insurer Over Coverage of Defense Fees and Costs

October 4, 2023

A recent Law.com story by Jane Wester, “Sam Bankman-Fried Sues Insurer to Cover Defense Costs in New York Criminal Trial, Other Litigation”, reports that indicted FTX founder Sam Bankman-Fried sued an insurance firm for assistance with his defense costs, one day before jury selection began in his fraud trial in Manhattan.  Bankman-Fried’s attorneys at Lewis & Llewellyn and Cohen & Gresser argued that the Continental Casualty Co., also known as CNA, has breached its contractual obligation to pay Bankman-Fried’s defense costs “on a current basis, without regard to whether payments may exhaust the policy limit.”

According to the complaint, Bankman-Fried’s companies held a CNA policy as a second-layer excess policy offering “a $5 million limit of liability, which attaches upon exhaustion of the $10 million in aggregate limits of the underlying insurance.”  The primary insurance policies and the first-layer excess policies have both been exhausted, according to the complaint, so Bankman-Fried is seeking reimbursement from CNA through the court after “numerous” requests for payment were unsuccessful.

The suit comes less than a year after FTX collapsed and filed for bankruptcy in November.  Bankman-Fried was arrested in the Bahamas in December at the request of U.S. officials and agreed to come to the United States to face charges; he spent approximately eight months on house arrest at his parents’ home in California before he was remanded to Brooklyn’s Metropolitan Detention Center for allegedly attempting to tamper with witnesses.

While Bankman-Fried’s current criminal trial is expected to last approximately six weeks, the insurance suit noted that that case is not the full extent of his legal troubles.  He is set to face another criminal trial for a group of severed charges in 2024 and is “further involved in more than a dozen civil and regulatory actions relating to FTX,” his attorneys noted.

His attorneys argued that CNA’s alleged breaches of the policy “have caused, and threaten to cause, substantial and irreparable harm” to Bankman-Fried, including the impairment of his defense.  They argued that Bankman-Fried has already incurred more than $75,000 in monetary damages for his efforts to obtain CNA coverage and out-of-pocket defense costs.  The suit seeks unspecified damages for CNA’s alleged breach of contract and alleged bad faith conduct, along with a declaration that CNA has a duty to pay Bankman-Fried’s defense costs “on an ongoing basis.”

Texas Court Rules in Insurer’s Right to Control Defense Fees

September 7, 2023

A recent Law.com story by Adolfo Pesquera, “3 Lawyers? One’s Enough, Court Rules in Insurer’s Fight Over Attorney Fees”, reports that a Texas state district court was found to have erred in denying an insurer’s summary judgment motion in an attorney fees dispute, where plaintiffs alleged more than one attorney was needed to avoid a “potential” conflict of interest.

The Ninth District Court of Appeals reversed a ruling of the Montgomery County 457th District Court in a case where a government entity and two elected officials depended on a Directors and Officers policy from Mid-Continent Casualty Co. to provide for their defense when a losing candidate filed suit alleging election irregularities.

Insurer Right to Control Defense

The reversal hinged on Mid-Continent’s right under the policy to control the defense, and whether there was an actual conflict of interest that the insurer formally recognized.  In the underlying suit, third-place candidate Edgar Clayton sued Harris County Municipal Utility District No. 400 and the two candidates who placed ahead of him, Ann Marie Wright and Cheryl Smith.

The court ultimately dismissed the lawsuit with prejudice, but the parties disagreed about how many lawyers the insurer should provide the district.  James Stilwell of Stilwell, Earl & Apostolakis, based in The Woodlands, Texas, and acting for the district responded to Mid-Continent’s letter agreeing to defend but preserving its reservation of rights.  Stilwell told Mid-Continent that was a “possibility of a conflict of interest in representation regarding Mid-Continent’s desire to have a single attorney represent all three defendants.”

Stilwell and the district were informed by a claims adjuster for Mid-Continent that it was the opinion of coverage attorney Brent Cooper of Cooper & Scully that Mid-Continent had the right to select defense counsel “because the facts to be adjudicated are not necessarily the same facts that control coverage,” and the Houston attorney Britt Harris had been retained by Mid-Continent as their counsel.

Instead, Stilwell’s subsequent correspondence informed Mid-Continent that the elected officials would be represented by Houston-area attorneys and Bruce Tough and Kenna Seiler, and the district by its general counsel, Chris Skinner of Schwartz, Page & Harding.

Conflict of Interest?

Stilwell asserted the potential conflict had to do with Wright and Clayton having run on the same slate against Smith, as well as the district’s desire to defend the election through trial, whereas the individual directors possibly wanting a do-over or settlement.

Mid-Continent attorney Mark Lewis cut a check made out to the district for $4,290 in attorney fees, which covered the period up to Mid-Continent’s offer to assume the defense.  Stilwell, in a pre-suit demand letter asked for attorney fees of $151,750 for the Clayton suit defense, plus $5,600 attorney fees for defending the wrongful denial.

Referring to the Texas Disciplinary Rules of Professional Conduct, the Ninth District court noted a lawyer may only represent multiple clients if he reasonably believes each client will not be materially affected, and each client consents after full disclosure of possible adverse consequences of common representation.

The deposition testimony and affidavit generally averred that the defendants discussed material conflicts at a board meeting and would not waive those conflicts, and they requested separate counsel, the opinion stated.  Nevertheless, the Ninth District held that the district’s “arguments are without merit.”

“We note that the information on which appellees rely falls outside the eight-corners of the pleadings and the insurance policy,” the court said.  In addition, the court said Stilwell’s responses to Mid-Continent referred only to “potential” conflicts, but never stipulating actual conflicts.

“We conclude that Clayton’s petition did not allege facts that would necessitate separate counsel. Clayton does not allege anything in his petition that would make the interests of Wright, Smith, or MUD 400 adverse to the interests of each other,” the court said.

Insurer Says It Controls Defense Fees/Costs in Asbestos Injury Case

June 6, 2023

A recent Law 360 story by Hope Patti, “Insurer Says It Controls Defense in Fox’s Asbestos Injury Row,” reports that Twentieth Century Fox must allow an AIG unit to select defense counsel in an underlying asbestos injury suit, the insurer told a California federal court, saying it has a right to control the defense of a suit that it has agreed to cover.  National Union Fire Insurance Co. of Pittsburgh, Pa., said in a complaint that Twentieth Century Fox Film Corp. has retained a law firm that lacks experience in handling asbestos litigation and "charges considerably more than what is reasonable for defense of these lawsuits in the jurisdiction in which they are filed."

The insurer is also seeking a declaration that Fox Television Studios Inc., which was named in one of three underlying asbestos suits at issue, is not an insured under National Union's policies.  According to the insurer, Twentieth Century Fox hired Newmeyer & Dillion LLP to review potential insurance coverage after the company was named in the underlying asbestos suits filed in Los Angeles County Superior Court.  The firm then tendered the suits to National Union in September.

National Union said it agreed to defend Twentieth Century Fox, subject to a reservation of rights, under three primary liability policies issued by the insurer in the 1980s but declined to defend Fox Television.  Twentieth Century Fox "has refused to permit National Union to assign defense counsel even though National Union has the right to control the defense, including selection of defense counsel," the insurer said.  The insurer also asserted that invoices from Newmeyer & Dillion reflect time performing tasks other than defending the asbestos suits, as well as work that is not necessary to the defense of Twentieth Century Fox.

"Newmeyer Dillion includes in its invoices amounts that are block billed, contain vague descriptions as to the work performed, reflect duplication of efforts, include administrative tasks and are not reasonable or necessary to the defense of the asbestos lawsuits," the insurer said.  As such, National Union is seeking a declaration that it is only required to pay reasonable and necessary defense costs along with reimbursement from Twentieth Century Fox for amounts that the insurer has overpaid or had no obligation to pay.  "In addition, National Union seeks an order confirming it has no duty to defend Fox Television and an order requiring [Twentieth Century Fox] to reimburse any amounts National Union paid on Fox Television's behalf," the insurer said.

Article: What is a Legal Fee Audit?

October 7, 2021

A recent article by Jacqueline Vinaccia of Vanst Law LLP in San Diego “What is a Legal Fee Audit?,” reports on legal fee audits.  This article was posted with permission.  The article...

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Harvard Sues Insurer Over Attorney Fees

September 20, 2021

A recent Law 360 story by Eli Flesch, “Harvard Sues Insurer For Legal Fees in Affirmative Action Suit,” reports that Harvard University sued Zurich American Insurance Co. for excess coverage of...

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