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Recovering Attorney’s FeesIMPORTANT NOTICE: This article is provided solely for research and archival purposes. MCLE self-study credit is no longer available. Even if you follow the instructions and submit payment you will not be granted MCLE self-study credit. Please note that low-cost MCLE is provided by the California Lawyers Association, pursuant to Business and Professions Code section 6056. Benefits of ethical practices in fee agreements, billing and collection: Doing what’s right and getting paid By Ellen R. Peck
With a huge sigh, Meryl Terpitude collapsed into the easy chair in front of California Joan’s desk on the first day after returning from the New Year’s holiday. “Why so glum, Meryl?” Cali queried her perennially beleaguered partner. “I have a number of cases for which I have not been paid! People who stiff you tend to come up with ethical reasons why a fee recovery should be barred. I thought,” Meryl gave her a hopeful glance, “that you might evaluate these cases, find any ethical issues and help me fix any potential ethical transgressions.” “In these depressing economic times, ensuring ethical practices regarding fee agreements, billing and collection is not only the right thing to do, but also eliminates a bar to fee recovery,” Cali encouraged Meryl. “In this first case,” Meryl started, “I agreed to represent Larry Louse in a lawsuit, wherein I would get a flat fee of $75,000 if it settled before trial and 40 percent of any recovery after trial started. Our written agreement complied with statutory fee agreement requirements.” (Bus. & Prof. Code, §6147.) “I really did well and Louse’s case settled for $600,000 before trial. Before the settlement, I asked Louse to pay me a 50 percent contingency. Louse signed a written modification to our fee agreement that stated: ‘I, Larry Louse, promise to pay Terpitude and his firm $75,000 out of any settlement and understand that this is contingent upon Terpitude being paid $225,000 directly by opposing party, for total attorney’s fees of $300,000.’ “Four days later, Louse signed another handwritten document that stated: ‘I, Larry Louse, agree to pay Terpitude and his firm $300,000 out of my $600,000 settlement.’ Louse also signed a client settlement sheet, itemizing the anticipated distribution of the settlement proceeds, including the proposed $300,000 in fees. “Before we distributed the money, Louse then objected to our getting any fees over $75,000. We have kept the remaining $225,000 we claim as disputed fees in the firm’s client trust account pursuant to CRPC 4-100 (A) and have distributed the undisputed portion of the settlement to Louse pursuant to CRPC 4-100(B)(4). I want to sue Louse for the remaining portion and feel that I have a good case since I have three writings confirming his agreement to the modification.” Meryl stopped, sensing Cali had some bad news. “Meryl, based upon the recent case of Stroud v. Tunzi (2008) 160 Cal.App.4th 377, 379-380 (Stroud), you will probably be limited to the $75,000 from your first contingency fee. On virtually identical facts, the Court of Appeal held that a modification to a contingency fee agreement that made material changes to the fee must comply with Business & Professions Code §6147. The court held that the modifications were unenforceable because (1) the attorney did not sign the agreement; (2) the agreement did not state the contingency fee rate (but like yours, just the amount of the total fee); (3) did not address how costs affect the attorney’s fees and the client’s recovery; and (4) did not state that the attorney’s fees are negotiable and not set by law.” (Stroud, at p. 383-384.) “But my first agreement did all of those things. Why must they be repeated in the modification?” Meryl quizzed. Cali explained that §6147 applies “at the time the contract is entered into.” Since a material amendment for a greater fee in essence creates a new “contract,” full compliance with §6147 is required. Noting that fundamental reasons of public policy prohibited an attorney from frustrating the statute’s purposes through modification, the court concluded that material changes to a contingency fee agreement must comply with §6147. (Stroud, p. 382-383) “If the modifications are not enforceable for non-compliance with §6147, can I at least recover more than $75,000 for the reasonable value of my services under §6147(b)?” Meryl asked. “According to Stroud, no,” Cali replied (Stroud, p. 385). Like Stroud, the modification did not affect the validity of the first contingency fee agreement. Because the first contract was still valid and enforceable, the lawyer was limited to the contract price and not the reasonable value of the services. “Based upon Stroud, I believe that your modifications will be held unenforceable and that the firm’s recovery of attorney’s fees will be held to $75,000 under the first contingency fee agreement, without the ability to collect the reasonable value of any other fees. “As a matter of risk management, all material fee modifications are going to comply not only for my contingency contracts under §6147, but also all other written contracts under §6148. I’ll be ready if another court decides that fee modifications in other contracts should also comply with §6148,” Meryl vowed. “Remember that fee modifications when a client is in a vulnerable or emotional state may be considered overreaching, constituting moral turpitude warranting discipline.” (See Matter of Conner (2008) __5 Cal.State Bar Rptr. ___[2008 WL 3976193]; In the Matter of Brockway (Review Dept.2006) 4 Cal. State Bar Ct. Rptr. 944, 959.) “My next action,” Meryl said, “arises out of an engagement to advise the limited partners of a limited partnership about the extent of their personal exposure in fraud litigation against the partnership and the partners. The limited partnership has refused to pay my fees. I want to sue one of the limited partners for unpaid fees based on Corporations Code §15903.03, which places liability on a limited partner for debts of the partnership, where that partner controls partnership operations and business. I will allege that I reasonably believed that the limited partner was the general partner. Any problems?” he asked. “A recent case, Shimko v. Guenther (9th Cir. 2007) 505 F3d 987, held, based upon an Arizona statute similar to Corps. C. §15903.03, that a lawyer cannot sue the limited partner for the legal fees owed by the limited partnership,” Cali explained. “The court reasoned that a lawyer hired by the limited partnership actually knew or should know that the limited partner was not the general partner. As a fiduciary and as a matter of competence, the lawyer should have reviewed the core documents, including any documents which designated general and limited partners. “Because of these duties, the lawyer’s claimed belief that the limited partner was the general partner could not have been reasonable, because the lawyer could not have been misled as to the limited partner’s role. The Ninth Circuit precluded the lawyer’s recovery from the limited partner (Shimko, pp. 991-992). “Because of the similarity of the California and Arizona statutes, it is likely that a California court would adopt the interpretation and reasoning of the Ninth Circuit,” Cali pointed out. “Isn’t there anything I can do?” Meryl asked plaintively. “You can still try to recover fees from the partnership and you can seek fees from limited partners for legal services to each of them as individuals,” Cali said. “Although the limited partners are not personally liable for the debts of the limited partnership or other limited partners, they remain liable for any legal fees properly charged by you for legal services performed for them as individuals.” (Shimko, pp. 992-993) “I will try those options,” Meryl said. “My third case involves a probate case. I represented Ellie Executor regarding her duties as the executor of her mother’s estate. At the conclusion of the probate matter, I requested attorney’s fees from the probate court, which awarded all but one category of my fees. That category was denied because the court found that the fees had been generated by legal services rendered to Ellie personally, not as the executor of the estate. I did not appeal the ruling because I did not think I would win. “I want to sue Ellie directly for the reasonable value of my services to her as an individual. Ellie’s lawyers warn me that they will have the fee claim tossed out on collateral estoppel grounds, since the court has already ruled on my fees. Are they right?” “On this one, I have good news,” Cali answered. “Your case is strikingly similar to Miller v. Campbell, Warburton, Simmons, Smith, Mendell & Pastore (2008)162 Cal. App.4th 1331, 1339-1343, 76 Cal.Rptr.3d 649. There, the Court of Appeal held that the lawyer in your situation could pursue the executor for the reasonable value of legal services rendered to her in her personal capacity. The court reasoned that the fee action was not barred by the doctrines of collateral estoppel or res judicata because the probate court’s ruling on fees was limited to an award of fees payable out of the estate and not by the executor personally. “The court further noted that the lawyer presented evidence supporting an inference that the client-executor understood she would have to pay for the legal services rendered to her in her personal capacity out of her own pocket if the probate court denied payment by the estate.” (Id., pp. 1344-1346) Meryl brightened. “We had some conversations wherein the executor agreed to pay my fees for those personal services. I think that I can plead and prove her agreement to pay my fees from her own pocket.” Cali nodded. “The Miller and Shimko cases are important reminders: when representing a representative (executor, trustee, limited partner, board director, etc.) to whom you may render individual services, get that person’s written agreement to be personally responsible. “Lawyers should, and many times have a duty, to clarify whether an attorney-client relationship has been formed, the scope of the relationship, and its termination. And don’t forget to make conflict of interest disclosures pursuant to CRPC 3-310(C), when providing individual services to multiple parties in the same matter (like the Shimko case). All of these matters are crucial for risk avoidance, fee collection, professional liability and disciplinary purposes.” “My fourth case,” Meryl continued. “Lawyer Robyn Hoode had a contingent fee agreement to represent John Little and Bill Scarlet in litigation against Nottingham Corpora-tion. Hoode retained me to assist in the personal injury matter; she promised to pay me 35 percent of any fees she obtained and that she would make the disclosures and get the client consent required by signatures of the clients required by CRPC 2-200. “After working for a year on the cases, Hoode fired me. Thereafter, she obtained a $550,000 recovery, but refused to pay me. I would like to sue her former clients, Little and Scarlet, for their share of my fees. Will this fly?” Meryl asked. “This is exactly the situation in Strong v. Beydoun (2008) 166 Cal. App. 4th 1398, 83 Cal.Rptr.3d 632,” Cali said. “The Court of Appeal affirmed a dismissal of the case against former clients, holding that because the fee sharing agreement was with the attorney and violated CRPC 2-200, the agreement could not be enforced against the former clients. (Id., pp. 1402-1404) It observed that a quantum meruit claim against clients must demonstrate that the services were rendered under some understanding or expectation of both parties that compensation would be paid by the client. The burden is on the lawyer making the quantum meruit claim to show not only the value of the legal services but also that they were rendered at the request of the person to be charged.” (Id., p. 1404) “I think that Little and Scarlet always thought that I would get the fees from Hoode. Since I cannot meet this burden against the former clients, what can I do to recover my fees?” Meryl was downcast. “Your remedy is to sue Hoode for quantum meruit (Id., p. 1404),” Cali replied. “Too many lawyers who are retained to assist on contingency cases find themselves in your situation. If you work on a matter under a fee sharing arrangement, do not perform substantial legal services without having your own agreement with the clients or having a copy of the fee-sharing agreement in compliance with CRPC 2-200. Do not rely upon the other lawyer to obtain the client’s agreement to the fee sharing arrangement. “Furthermore, in class action matters, compliance with CRPC 2-200 is not enough. The recent case of Mark v. Spencer (2008) 166 Cal.App.4th 219, 82 Cal.Rptr.3d 569, 574-575 pointed out that class action lawyers must provide a copy of the agreement to the court approving the class action settlement or deciding upon fees pursuant to California Rule of Court 3.769. Failure to do so bars enforcement of the fee sharing agreement. “Lawyers who bring quantum meruit claims are permitted to prove the reasonable value of their services by reconstructing their bills and testifying about estimated hours (Mardirossian & Assocs. Inc. v. Ersoff (2007) 153 Cal.App.4th 257, 269 [rev. den. 10/10/07]). “Be careful that your reconstruction and testimony does not backfire, constituting disciplinary culpability for submission of false billings (moral turpitude under Bus. & Prof. C., §6106). Some tips about what not to do can be found in Matter of Conner (2008) __5 Cal.State Bar Rptr. ___[2008 WL 3976193 at pp. 9-10] (pet. for rev. den.) which ordered disbarment:
“I’ll be careful in making my quantum meruit claims,” Meryl said as he charged off to his next adventure. “My 2009 resolution is to be more proactive in having fee agreements and modifications that are compliant with ethical duties and with alternate persons that I believe should be responsible for the payment of my fees.” • Ellen R. Peck, a former State Bar Court judge, is a sole practitioner in Escondido and a co-author of The Rutter Group California Practice Guide: Professional Responsibility. Certification
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