CONTINGENT FEES AND THE DISCHARGED LAWYER
by
Susan Strauss Weisberg
Fee issues continue to be a major source of complaints to bar counsel’s office. In previous articles, we have provided general guidance on fees, fee disputes, and fee arbitration at the option of the client. We have also addressed specific issues including record keeping and accounting requirements for retainers under the recent revisions to Mass. R. Prof. C. 1.15, the unauthorized appropriation of fee payments from funds received for unrelated purposes, prohibitions on “non-refundable” fees, and limitations on taking credit card payments for legal fees. This article reviews the vexing and recurring problem of fee payments to prior and successor lawyers in a contingent fee case.
Mass. R. Prof. C. 1.5 sets forth minimum requirements that must be met before a lawyer can charge or collect a contingent fee. The rule does not, however, deal with how fees are allocated, and by whom the fees are paid, when a client in a personal injury or other contingent fee case discharges his first lawyer in midstream and hires another lawyer who brings the matter to a successful conclusion.
Take the common scenario where a client who changed lawyers had signed a one-third contingent fee agreement with each lawyer. The second lawyer, who resolved the case, is holding the client’s proceeds and wants to take her full contingent fee from those proceeds before making distribution to the client. But the discharged lawyer, whose work on the case contributed to the successful outcome, also wants to be paid for his services. The discharged lawyer most likely cannot collect a contingent fee. He is, however, entitled to be paid in quantum meruit for the reasonable value of his services, typically figured on an hourly basis. Opert v. Melios, 415 Mass. 634, 636-637 (1993); Salem Realty Co. v. Matera, 384 Mass. 803, 804 (1981).
This situation raises several questions. How does the first lawyer get paid, especially where he cannot establish a charging lien on the proceeds under G.L. c. 221, § 50, because the case was never put in suit? Can both lawyers enforce their fee claims in full even if the client will end up paying more than the one-third originally contemplated? Or must the payments to both lawyers be limited to a total of one-third of the gross recovery as specified in each lawyer's contingent fee agreement? If so, how is the fee apportioned between the two lawyers, and is the second lawyer responsible for paying the discharged lawyer from her own share?
Although there are no definitive answers to these questions in Massachusetts, the Supreme Judicial Court provided some guidance in Malonis v. Harrington, 442 Mass. 692 (2004). Malonis, the discharged lawyer, had started a lawsuit for his client, done considerable investigation and discovery before his discharge, and “contributed materially to the resulting $57,500 settlement” obtained by the second lawyer, Harrington. Id. at 699. Indeed, the tortfeasor, a self-insurer, had already decided to offer that amount before the client terminated Malonis’s services, although that offer was not communicated to Malonis.
Malonis noticed a lien under G.L. c. 221, § 50, after the discharge but then failed to respond to Harrington's requests for an itemized statement of services and charges. When Harrington subsequently settled the case, he assured the tortfeasor’s lawyer that he would “take care of” Malonis. Malonis v. Harrington, supra at 695. As a result, the tortfeasor issued settlement checks to the client and Harrington but did not include Malonis as a payee. Harrington claimed a fee of $17,500, representing a small reduction from the one-third specified in his fee agreement with the client.
Malonis claimed hourly fees of about $10,300. Malonis, the client and the tortfeasor all understood that Harrington had assumed responsibility for compensating Malonis from his contingent fee. Harrington nevertheless refused to pay anything to Malonis and further refused Malonis’s offer to resolve the dispute through fee arbitration. Malonis then sued Harrington, the client and the tortfeasor to recover his fee, although the client and the tortfeasor were later dropped from the action.
The Court reaffirmed that, although a lawyer’s right to collect under his contingent fee agreement is generally terminated by his discharge, the client ordinarily retains an obligation to compensate the discharged attorney for the fair and reasonable value of his services. Malonis v. Harrington, supra at 696 697, 701 n. 12. Here, however, the Court determined that Harrington had actually assumed this obligation and, on that basis, ordered Harrington to pay Malonis from his own fee.
In determining that Harrington was directly liable to Malonis, the Court emphasized that its holding did not announce new law but rather was limited to the specific circumstances presented, including, in particular, the reasonable expectation of all the affected parties that Harrington had taken responsibility for paying Malonis. Malonis v. Harrington at 696-698. The Court also stressed that Malonis’s work had contributed substantially to the resulting settlement and that Malonis’s claim was based on conservative estimates of his time and services. Id. at 699.
The Court recognized but, due to Harrington’s assumption of liability, declined to answer the larger question of who, as between the client and successor counsel, typically should bear the cost of paying the discharged lawyer. Id. at 693, 700. The Court called upon its Standing Advisory Committee on the Rules of Professional Conduct (SACRPC) to study the issue and, after comment from the bar, report on whether a rules change is warranted. Id. at 702-703. In the meantime, the Court provided some general instruction, grounded in large measure on existing ethical rules, as follows.
- The discharged lawyer, as part of the obligation under Mass. R. Prof. C. 1.16(d) to take all reasonable steps to protect the interests of the client upon withdrawal from the case, should discuss the consequences of the discharge with the client, including the expectation of compensation. In addition, the discharged lawyer should respond to inquiries about his compensation from successor counsel, even if the precise dollar amount cannot be ascertained until the conclusion of the case. Malonis v. Harrington. at 699 n. 9, 701.
- Before taking over representation, the new lawyer should also have a full and frank discussion with the client about the compensation issue, provide adequate information to allow the client to ascertain the client's best interests, and reach a specific agreement with the client on who will be responsible to pay the former lawyer. This discussion is required as part of the new lawyer’s obligations to provide advice sufficient for the client to make fully informed decisions about the representation, as required by Mass. R. Prof. C. 1.4(b), and to communicate adequately the basis for the fee under Rule 1.5(b). The agreement about the prior lawyer's fee should be in writing and should unambiguously identify the party responsible for payment. Id. at 700, 701-702.
- Both lawyers must assure that their fees are reasonable. Id. at 702; see also Mass. R. Prof. C. 1.5(a), prohibiting fees that are “clearly excessive.” The Court recognized that "[the] client should never be made to pay twice." Id. at 702. The reasonableness of the fees will depend on such factors as the amount of time spent by each lawyer on the case, the impact of the lawyer’s services on the outcome, and the amount of the ultimate recovery for the client. Id. at 699 n. 9, 702; see Mass. R. Prof. C. 1.5(a). These factors apply to the payment sought by the second lawyer under her contingent fee agreement as well as to the compensation owed to the discharged attorney. Thus, the compensation specified in the second lawyer’s agreement is no guarantee that she will be entitled to collect a full one-third of the recovery or whatever percentage is called for. The first lawyer's contribution to the outcome is a significant factor in ascertaining the reasonableness of the second lawyer’s fee. [See Admonition No. 98-43, 14 Mass. Att’y Disc. R 887 (1998) (successor lawyer admonished for attempting to collect a full one-third fee without taking into account the relative value of the prior attorney’s services, among other misconduct)]. In any event, the total fees claimed by both lawyers must be reasonable under the circumstances. Where, as in Malonis, the discharged lawyer did meaningful work on the case, it is unlikely to be reasonable for the second lawyer to collect the full amount of her contingent fee.
- In wrestling with these obligations, both lawyers must always keep in mind their overriding fiduciary duty to the client. The discharged lawyer must assure that his disclosures about his fees do not turn into coercion, either explicit or implicit, against changing attorneys or other infringement on the client's unconditional right to seek other counsel. And the new lawyer must be alert to possible conflicts of interest in advising the client about paying the former lawyer or settling the case in light of the payment obligation. Lawyers who ignore these issues do so at their peril because, absent express discussion and agreement, the client will simply assume that both lawyers will be paid out of the same contingent fee without any appreciation of the potential for a larger obligation. Id. at 701-702.
Finally, if the lawyers can at least come to an agreement to share a single contingent fee that is within the percentage agreed to by the client, then they can arrange to have the balance of the proceeds remitted to the client immediately and "agree to disagree" about subsequent apportionment between them. The Massachusetts Bar Association's Legal Fee Arbitration Board is available for fee disputes between lawyers if necessary. Even if the lawyers cannot agree on sharing the contingent fee, they must assure that the undisputed proceeds are promptly remitted to the client.
Getting the client paid and out of the mix quickly is obviously good for the client. It could also be good for the lawyers, who may then reserve their own dispute for a later, calmer day and resolve it without the pressure of satisfying the client.
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