CALIFORNIA ATTORNEY'S FEES

Ethics, Quantum Meruit: Illinois Appellate Court Affirms Award Of Zero Fees To Contingency Attorneys Obtaining $25 Million Award For Clients Based On Failure To Substantiate Fees And On Certain Fiduciary Breaches To Client

However, Clients Had To Reimburse Certain Hard Costs To Attorneys.

            Although we generally do not post on out-of-state cases, Vandenberg v. RQM, LLC, No. 10 L 003188, 2020 Ill. App. (1^st) 190544 (Ill. App. June 26, 2020) is a sobering reminder of what contingency attorneys must do to obtain substantial fees where a settlement is obtained under suspicious circumstances and the lawyers then fail to support a quantum meruit recovery with substantiating evidence.

            Boiled down to essential facts, plaintiffs sued a deep pocket defendant, with plaintiffs’ counsel doing so under a contingency agreement.  Before a jury verdict was obtained during trial, the defense offered a $25 million settlement, but there were suspicious circumstances showing the plaintiff’s main attorney obtained “insider” information from a court clerk that a defense verdict might be upcoming so as to prompt an acceptance of the offer.  After a lot of adversarial hearings and an appeal, the settlement stood.  However, a lower court eventually awarded zero dollars to plaintiffs’ counsel under a quantum meruit theory, although the appellate court did allow recovery of some hard litigation expenses. 

            The “zero dollars” award was affirmed.  The overriding issue was that plaintiff’s counsel relied solely on the contingency arrangement and provided no support for its work effort under a quantum meruit recovery.  Huge, huge mistake—this lack of evidence cemented the lower court’s decision to award nada.  Consistent with the California case of Sheppard, Mullin et al. v. J-M Manufacturing Co., Inc., 6 Cal.5^th 59 (2018), Illinois case law authority does not prevent quantum meruit recovery for attorneys engaging in ethical violations unless they are so egregious as to require forfeiture.  However, the nature of the ethical breaches here was a factor to weigh in deciding if zero dollars was the proper remedy.  But the failure to substantiate the fees was the real dagger in fee recovery in this particular case—a bitter pill for plaintiffs’ counsel to swallow, as they had to.

Quantum Meruit, Referral Agreements: Client Only Signing A Disclosure And Acknowledgment Understanding Letter Section Did Not Give Written Consent As Required Under Former Rule 2-200 Of State Bar Rules Of Professional Conduct For Referral Agreements

Result Was Reversal As A Matter Of Law Of Jury Verdict Based On Contractual Breach And Quantum Meruit, Because Contract Was Unenforceable And QM Claim Was Time Barred.

            Reeve v. Meleyco, Case No. C085867 (3d Dist. Mar. 24, 2020) (published) is an ethics reminder to all practitioners to get an express written consent from a client to a referral fee arrangement.  If not, the attorney has no contractual claim, being left to a quantum meruit claim which has a shorter two-year statute of limitations.

            What happened here is that plaintiff attorney sued defendant attorney after he refused to pay a referral fee, with a jury find in attorney’s favor on both a breach of contract and a quantum meruit theory relating to a $900,000 settlement (although finding that plaintiff had sued too late to get a referral fee for a $3.375 million settlement).  The jury awarded plaintiff $78,750 on both theories, with the trial judge adding another $49,364.35 in prejudgment interest.  Defendant prudently appealed, and it all went POOF! based upon a reversal as a matter of law.

            Justice Mauro, the authoring justice for a 3-0 panel of the Third District, decided that the facts did not show a compliant written consent required under former rule 2-200 of the State Bar Rules of Professional Conduct (now rule 1.5.1).  The writing was defendant’s letter informing client “that the twenty-five percent (25%) referral fee that I [the referred-to attorney] am paying to [plaintiff referring attorney] will come out of my fee and will not increase the fees to either you or your daughter.” Client signed the writing as well as signed a pretyped acknowledgement stating: “I, JAMES G. LUOMA, acknowledge receipt of this letter and understand the contents.” In signing the acknowledgment, client merely confirmed that he received the writing and that he understood what it said.   The Third District did not believe this was actual consent, finding consent way different from dictionary definitions for disclosures, receipt, or understanding.  That meant that the contract was unenforceable such that the contract claim verdict could not stand.

            That brought the appellate court to the quantum meruit verdict, with the claim having a two-year statute of limitations.  The problem here was that plaintiff sued over three years after the settlement money was distributed, way too late.  Plaintiff argued that the four-year limitations for written contracts applied, but this was swept away because quantum meruit is not based on a contract (especially one which is unenforceable).  The judgment was reversed as a matter of law, including the prejudgment interest award.

Arbitration, Nonsignatories, Quantum Meruit, Retainer Agreements: Judgment Confirming Arbitration Award Of $1,273,765.91 In Fees Owed To Two Law Firms Plus Another $508,678.82 For Fees And Costs Incurred In The Arbitration Affirmed

Arbitration Was Properly Ordered Because The Claims Between Client And The Two Law Firms Arose Out Of The Underlying Retainer And Arbitration Agreements Client Signed With The First Law Firm.

            Client retained a law firm to represent her in an ongoing dissolution action – signing a Retainer Agreement and a binding Arbitration Agreement.  During the next 15 months, the law firm billed Client more than $4.5 million in fees and costs, which included fees/costs incurred for the first 23 days of trial (with an estimated 45 additional trial days to follow).  Around this time, the trial court denied the law firm’s request for an award of $1 million in interim attorneys’ fees to continue representing Client.  That same day, an attorney from the law firm notified Client that the law firm had dissolved and that he was forming a new law firm where the same staff would be available to continue working on her case.  He requested Client sign an acknowledgment that the new firm would represent her under the same terms as the Retainer and Arbitration Agreements from the first firm.  She refused to sign, but requested the new firm represent her.  The new firm and Client did not sign a retainer agreement.

            About a week-and-a-half later, the attorney filed a motion to withdraw as Client informed him she would not make additional payments until completion of the trial.  Client opposed the motion – stating she had “no irreconcilable differences with [the attorney]” and only disputed his demand for additional fees.  A year after the motion to withdraw was granted, the attorney, dissolved firm, and the new firm collectively filed a lawsuit against Client for breach of contract – among other causes of action – resulting from the unpaid fees.  On the same day, Client filed a lawsuit against the attorney and firms alleging breach of fiduciary duty, breach of contract, and legal malpractice – based on representations Client alleged were made to her when she agreed to retain the now dissolved law firm.

            The trial court related the two lawsuits, and attorney/firms successfully moved to compel arbitration of all claims raised in both lawsuits based on the Arbitration Agreement signed between Client and the now dissolved firm.  Several months after completion of the multi-day arbitration, the arbitrator issued written award in favor of the firms – awarding the now dissolved firm $1,037,719.16 in unpaid fees and costs, plus interest, under breach of contract; awarding the second law firm $236,046.75 for the reasonable value of its services, under the theory of quantum meruit, using the same billing rates outlined in the Retainer Agreement signed with the now dissolved firm; and awarding an additional $508,678.82 to the “prevailing party” attorney/firms for fees/costs incurred in the arbitration.  After the trial court confirmed the arbitration award, Client filed a motion for a new trial – arguing the trial court erred in granting the petition to confirm the arbitration award.  Upon denial of that motion, Client appealed.

            On appeal, Client argued that none of the claims concerning the new law firm arose out of the obligations created by the Retainer Agreement and Arbitration Agreement signed with the now dissolved firm, and that she never signed such agreements with the new firm.  The 2/3 DCA in Kolodny v. Wondries, Case No. B293985 (2d Dist., Div. 3 November 25, 2019) (unpublished) disagreed. 

            Citing Strasbourger Pearson Tulcin Wolff Ins. v. Wiz Technology, Inc. (1999) 69 Cal.App.4^th 1399, 1404, the 2/3 DCA found “an attorney-client relationship can be created by an express or implied agreement; the terms of an implied agreement ‘are manifested by conduct’.”  Here, although Client refused to sign anything with the new law firm, she requested that the attorney continue representing her through the new firm.  She never proposed different terms, nor did she ask to negotiate a different retainer agreement, when she requested the continued representation.  Further, Client pursued claims against the new law firm based on obligations originating out of the Retainer Agreement signed with the now dissolved firm.  Therefore, the trial court was correct in determining that the original Retainer and Arbitration Agreements were the source of the attorney-client relationship between Client and new firm, and that the disputes between the law firms and Client arose from those original agreements.

Liens For Attorneys Fees/Quantum Meruit: 2/5 DCA Sorts Through Various Standing And Statute Of Limitations Issues In Attorney’s Lien/Quantum Meruit Dispute

 

End Result Is Declaratory Relief Action Based On Attorney’s Lien Did Survive Based On Longer Four-Year SOL Relating To Written Contracts.

     In Younessi v. Munoz, Case No. B265750 (2d Dist., Div. 5 Jan. 25, 2017) (unpublished), prior discharged counsel, both the individual lead attorney and the law firm, in a contingency-based personal injury case sued both client and subsequent attorneys settling client’s case. Client successfully demurred out claims by the prior individual attorney and the prior law firm representing her based on standing and statute of limitations arguments.

     Those determinations were affirmed in part and reversed in part, with a remand on the reversed portions on appeal.

     The appellate court found no difficulty in concluding that the individual attorney had no standing to sue because he was not a party to the contingency fee agreement, as opposed to the law firm. However, a different result occurred with respect to the law firm which was a party to the contingency agreement. The firm brought a declaratory relief claim based on an attorney’s lien provision in the contingency agreement. That was subject to a longer four-year statute of limitations (based on the written contract SOL relating to the attorney’s lien) such that the lower court’s SOL ruling was erroneous in nature. (There is a nice discussion of quantum meruit and attorney’s lien issues relating to a firm’s rights after discharge from a contingency fee relationship.) So, the matter was remanded for a reconsideration of the attorney’s lien declaratory relief count.

Liens For Attorney Fee/Quantum Meruit: Discharged Attorneys In Class Action Not Entitled To Pursue Conversion Or Common Counts Against Successor Attorneys Without First Proving Entitlement To Attorney’s Lien Against Client

 

Court Of Appeal Found Instructive The Reasoning In Mojtahedi Decision.

    In this next case we post on, predecessor, discharged counsel was found to have sued the wrong party—successor counsel, rather than properly suing client to establish the validity and amount of an attorney’s lien in a retainer agreement under a “reasonable value of services” (quantum meruit) measure of recovery after predecessor counsel was discharged.

    Duke Gerstel Shearer, LLP v. Pusiano, Case No. D068633 (4th Dist., Div. 1 Dec. 13, 2016, received for posting Dec. 16, 2016) (unpublished) involved a situation where plaintiff law firm entered into a written contingency agreement in a construction defect class action.   After the death of the lead attorney occurred unexpectedly, another law firm attorney left and the class action plaintiffs discharged first law firm and retained departing attorney’s firm, which latter firm and other attorneys litigated the class action for another 5 years before resolving it through a settlement.  Successors counsel moved to recover pursuant to a similar contingency arrangement with plaintiffs, a motion approved by an Arizona court in awarding successor attorneys a total of $1.2 million of the settlement.  However, plaintiff predecessor firm submitted no fee submissions or request in the Arizona proceedings.  Later, predecessor firm sued successor attorneys on various tort claims and a common count (money had and received), largely premised on the theory that predecessor firm had an attorney’s fees lien as set forth its contingency agreement with class representatives such that it was entitled to $1.1 million.  The lower court sustained a defense demurrer without leave to amend, a ruling which was affirmed in part and reversed in part in a prior appeal.  There, the appellate court determined that prior firm should be allowed an opportunity to plead conversion and money had/received claims if it could allege a valid attorney lien giving it a right to a share of the contingency fee received by successor attorneys.  Prior law firm did file such another complaint with these two claims, but the lower court granted successor attorneys summary judgment because prior firm did not establish the enforceability and amount of the lien on which is based both its causes of action.

    In the second appeal by prior law firm, the 4/1 DCA affirmed the summary judgment ruling.

    Because prior law firm had been discharged, the proper measure of recovery for it was quantum meruit, which was further buttressed through a provision in the retainer agreement between clients and prior firm agreeing to (1) the quantum meruit recovery, and (2) submit the matter to binding arbitration.  The reviewing court found Mojtahedi v. Vargas, 228 Cal.App.4th 974, 977-978 (2014) [discussed in our July 13 and August 8, 2014 posts] instructive, where a prior firm lost a suit to obtain fees based upon an attorney lien from successor counsel because discharged counsel did not establish the existence, amount, and enforceability of the lien in an independent action against the clients before suing successor counsel.  Prior firm in Pusiano principally argued that Mojtahedi was distinguishable because an Arizona court had already awarded fees to class counsel, which was the necessary “independent action.”  The 4/1 DCA disagreed because prior law firm did not submit fee billings or file a motion to recover fees in Arizona court, with the Arizona court never passing on the validity of its attorney’s lien.  In fact, prior firm should have followed the retainer agreement procedure by trying to resolve the reasonable value of its services with clients and then submit the issue to binding arbitration as required under the retention contract.  Because prior firm did not sue client to determine the validity of and amount of its attorney fees lien, it was premature to sue the successor attorneys for claims based on the claimed lien which necessarily had to be adjudged first vis-à-vis the former clients.

Quantum Meruit: Discharged Contingency Attorneys Entitled To Quantum Meruit Recovery, Not Pro Rata Distribution Where Contingency Award Could Satisfy All Fee Claims

 

Fracasse, Not Cazares, Test Applied.

     When a contingency attorney is discharged, the general measure of recovery is quantum meruit--the reasonable value of attorney’s services rendered to the time of discharge. (Fracasse v. Brent, 6 Cal.3d 784, 790-792 (1972).) This rule is reinforced, yet again, in Mann v. Hernandez, Case No. B240546 (2d Dist., Div. 2 Nov. 5, 2013) (unpublished).

     Discharged contingency attorneys in Mann argued they were entitled to pro rata recovery based on number of hours billed under Cazares v. Saenz, 208 Cal.App.3d 279 (1989), rather than based on the Fracasse test.

     Nope, said the appellate court in much more eloquent reasoning.

     Cazares is distinguishable because it did not involve successively retained attorneys, but attorneys who expressly agreed to share a contingent fee. Mann involved a successively retained attorney situation. Especially given that the contingent fee was sufficient to satisfy the fees of all attorneys involved, the traditional Fracasse rule applied--only when the contingent fee is insufficient does the lower court distribute the contingent fee among all discharged and existing attorneys in proportion to the time spent on the case by each attorney. (Spires v. American Bus Lines, 158 Cal.App.3d 211, 216 (1984).)

     Fracasse ruled in this one.

Costs/Fee Clause Interpretation/Section 1717: Quantum Meruit Is Not “On A Contract” Under Section 1717 And Prevailing Attorney Entitled To Routine Costs, But Not Fees Under Ambiguous Fees Clause

 

     In Siciliano v. Singh, Case Nos. E052352/E053582 (4th Dist., Div. 2 Oct. 5, 2012) (unpublished), one attorney won quantum meruit fees based on a voided contingency fee agreement, with both client and attorney seeking recovery of attorney’s fees and costs (even though, ultimately, attorney did beat out--barely--a CCP § 998 offer once routine costs were included in the damages award). Both sides were denied fees and costs, prompting appeals by each.

     Affirmed mainly, but reversed on the denial of a routine costs award to attorney.

     The lower court did issue an advisory ruling that, if Civil Code section 1717 applied based on a fees clause in the contingency agreement with client, that client did prevail. However, the lower court determined that quantum meruit was not “on the contract” under section 1717. The appellate court agreed that quantum meruit was an equitable claim, although noting that there was no authority addressing the precise issue of whether quantum meruit was “on the contract” under section 1717. Because it was equitable, it was not “on a contract” so as to entitle client to fees.

     However, different deal with respect to denial of costs to attorney. She did prevail, and the routine costs award statutes make it mandatory to award costs to one receiving a net monetary recovery. (Code Civ. Proc., § 1032(a)(1), (b).) Also, she did win some routine costs to beat client’s 998 offer on this point.

     Finally, attorney was not entitled to fee recovery because the contingency fee agreement was ambiguous and had to construed against the drafter (i.e., the attorney). The fee recovery allowed “under the Agreement” (the voided contingency arrangement) was not broad enough to encompass the quantum meruit claims.

Arbitration/Costs/Res Judicata/Retention Agreements: Fee Award Against Losing Party In Arbitration Not Binding On Attorney-Client In Subsequent Quantum Meruit Lawsuit

 

However, Attorney Did Prevail in Lawsuit, So Costs Should Have Been Awarded.

     Attorney sued a former client in a dispute over attorney’s fees for services provided in an arbitration. Attorney, who replaced another attorney in an owner-contractor construction defect dispute, did win a $1,034,297, plus $40,125 attorney’s fees, award from an arbitrator, although the bulk of the award resulted from a settlement agreement negotiated by the prior attorney. After the fact, client (the owner) noticed that the costs memo submitted in the arbitration was “all wrong,” because successor attorney did not do all that much work. However, attorney then filed a lawsuit against client to recover fees because the $40,125 was set aside in a blocked client account. The jury awarded attorney $29,000 in quantum meruit fees, even though the trial court refused to award costs.

     Attorney appealed in Shumake v. Mirisola, 2012 WL 695473, Case No. B227383 (2d Dist., Div. 2 Mar. 5, 2012) (unpublished). Except to gain a remand because the client conceded attorney prevailed after a jury trial for purposes of being entitled to routine costs, attorney didn’t get any added mileage on appeal.

     His principal argument was that the $40,125 fee arbitration award was res judicata and had binding effect on client in the subsequent attorney-client lawsuit over what fee should be awarded. Nope, said the panel in more eloquent language that we use here. Attorney was not an “arbitral party” such he could not argue res judicata applied as against client in the ensuing lawsuit. (Grinham v. Fielder, 99 Cal.App.4th 1049, 1054 (2002).)

Construction: Plaintiff Awarded Quantum Meruit Recovery, But Suffering Defeat On 5 Out of 6 Other Claims, Was Not A Prevailing Party

Fee Denial Affirmed by Fourth District, Division 2.

     Cannan Construction v. Majewski, Case No. E048784 (4th Dist., Div. 2 Dec. 16, 2010) (unpublished) demonstrates that the trial court has substantial discretion in determining who is a “prevailing party” under fee shifting statutes.

     In this one, plaintiff won quantum meruit recovery from defendant, but also suffered some defeats--a directed verdict on 5 of 6 claims and an indemnification declaratory relief claim relating to unlicensed contractor disgorgements.

     Plaintiff cross-appealed from a trial court’s refusal to award it attorney’s fees. The appellate court agreed with the fee denial ruling. The reason was simple: the jury found there were no contracts between the parties (which gutted a Civil Code section 1717 fee claim), and plaintiff was not the “prevailing party” given the mixed results notwithstanding the quantum meruit recovery gained by plaintiff.

Retainer Agreements: Quantum Meruit Award of $22,670.24 To Discharged Contingency Fee Attorney, After Offsets, Is Affirmed On Appeal

Fourth District, Division 2 Construes “Recovery” Fee Retainer Language Against Drafting Attorney.

     The next decision demonstrates that practitioners need to be careful how they draft retainer agreements. Because the drafter is usually an attorney, any ambiguity will likely be construed in favor of the client. That is what occurred in the next case, involving a discharged contingency fee attorney hoping to get more than a quantum meruit award under a contingency fee agreement. It did not happen.

     In Strickland v. Mason, Case No. E044910 (4^th Dist., Div. 2 Apr. 10, 2009) (unpublished), attorney entered into a contingency fee arrangement with client to recover loans client had made to her daughter and daughter’s boyfriend between a 5 year period of time. Client agreed to certain contingency arrangements “of any money recovered” at various points of the legal proceedings, with attorney granted a lien on “any recovery [client] may obtain in the court action ….” In the discharge and withdrawal provisions of the retainer agreement, client could discharge attorney at any time, with attorney entitled to the reasonable value of her services at a $200 hourly rate “payable upon any collection of funds in this matter.”

Retainer Agreements: Unhappy Lawyer Loses Potential $2 Million Contingency Fee Award Based On Noncompliance With Business and Professions Code Section 6147

Fourth District, Division 3 Affirms Trial Court’s Quantum Meruit Award of $364,110 to Attorney Instead.

     For attorneys entering into contingency fee arrangements with clients, it is essential to comply with Business and Professions Code section 6147, which requires that contingency fee agreements specify (1) the agreed-upon contingency fee rate, (2) the manner in which disbursements and costs will impact the contingency fee and the client’s recovery, (3) the manner in which the client would have to pay compensation for related matters not directly covered by the contingency arrangement, (4) the fee is not set by law but negotiable between attorney and client, and (5) the MICRA limits for health care provider cases. The penalty for noncompliance is that the client can void the contingency fee arrangement, which relegates the attorney to collecting a reasonable fee. (Bus. & Prof. Code, sec. 6147(b).) The next case illustrates how noncompliance can cause bitter resentment and financial setback for even a contingency attorney successfully representing the client in “long shot” litigation.

Ellen Peck's January 2009 Article In California Bar Journal Has Nice Tips For Recovering Fees in Contingency, Limited Partner, Executor, and Client Fee Sharing Representations

 

Ms. Peck Reviews Stroud, Shimko, Miller, and Strong Decisions.

     Ellen R. Peck, a former State Bar Court judge and Encino solo practitioner, has written a fine article in the January 2009 edition of the California Bar Journal with astute tips of upfront, prophylactic actions that can be taken for successfully recovering fees in diverse client representation situations. We summarize them here:

QUANTUM MERUIT AWARD TO UNPAID ATTORNEY GOVERNED UNDER SIMILAR TEST USED IN AWARDING REASONABLE ATTORNEYS’ FEES

Fourth District, Division One Affirms Award of Fees to a Very Forbearing Attorney, Some Under a Quantum Meruit Theory of Recovery.

            Farina v. Wedbush, Case No. D050926 (4^th Dist., Div. 1 June 16, 2008) (unpublished) is must reading for those that think that the “no good deed goes unpunished” adage always happens to materialize.  Not in this case.

            Boiling down the facts, Former Attorney took on a case by Former Clients to relocate above-ground utility lines against well known phone and gas Utilities.  Fee letters and amendments were sent as the matter expanded from mere investigation into a formal lawsuit. The litigation was hard fought, with Former Attorney defeating Utilities’ summary judgment motions.  However, after a nine-day bench trial, the trial judge found in Utilities’ favor.  Former Attorney helped Former Client find appellate counsel and worked on the appeal, which resulted in a reversal of the judgment for Phone Utility.  Former Clients did not pay the balance of Former Attorneys’ billings, resulting in a lawsuit by Former Attorney to collect the unpaid receivable.  The trial judge awarded Former Attorney almost $106,000, a recovery affirmed on appeal except for a minor reduction for a clerical error. 

            Former Attorney rebuffed Former Client’s challenges on appeal.  They were:

·       Former Attorney’s “estimate” of the fees to be incurred was not the equivalent of a “cap” such that $105,000 more was recovered based on the twists and turns in the litigation and Former Clients’ awareness of the changing circumstances.

·       Former Clients did not submit any expert testimony to back up their allegation that Former Attorney performed below the standard of care, a fatal omission.

·       Former Attorney’s fees were not unconscionable, because she agreed to a reduced rate, testified to the complex nature of the litigation, and often wrote off items to reduce the amount of the bills.

·       Former Attorney’s agreement to defer some of her fees depending on the appellate result did not bar recovery when she correctly predicted that the appellate court would reverse—this type of bargain was fully enforceable by its terms.

·       Former Attorney was allowed quantum meruit for certain work, valuing her time at $300 per hour.  Citing Mardirossian & Associates, Inc. v. Ersoff, 153 Cal.App.4^th 257, 272 (2007), the Fourth District in Farina set forth the nonexhaustive factors for evaluating the reasonableness of attorney’s fees for purposes of quantum meruit recovery:  (1) the nature of the litigation; (2) the difficulty of the litigation; (3) the amount involved; (4) the skilled required in its handling; (5) the actual skill employed; (6) the attention given; (7) the success or failure of the attorney’s efforts; and (8) the attorney’s skill and learning, including his/her age and experience in the particular type of work demanded.  Former Attorney’s hourly rate was deemed reasonable under this test.

Except for a typographical correction of a small amount, Former Attorney—by having good records and showing a willingness to take the stand for purposes of explaining the overall litigation efforts—won a substantial fee award from Former Clients who, while disgruntled, apparently did not rebut that the performed services should be paid.