What Every Estate and Trust Attorney Needs to Know About Contingent Fee Representation

• Publication year: 2009
• Author: By Noël M. Lawrence

WHAT EVERY ESTATE AND TRUST ATTORNEY NEEDS TO KNOW ABOUT CONTINGENT FEE REPRESENTATION

By Noël M. Lawrence^*

I. INTRODUCTION

Times are tough. According to the United States Department of Labor, Bureau of Labor Statistics, employment in the U.S. continued to decline throughout the spring of 2009, another 267,000 jobs were lost in July, and as of the end of that month, employment stood at 9.4 percent nationwide. The situation is significantly worse in the Golden State. As of the end of July 2009, the Employment Development Department of the State of California reported that well over two million Californians are jobless and that the unemployment rate statewide had reached 11.9 percent. California's current rate of unemployment exceeds that of all other states with only four exceptions: Michigan (15 percent), Nevada (12.5 percent), Rhode Island (12.7 percent) and Oregon (tied with California at 11.9 percent).

And, as most California lawyers are well aware, the economic crisis is being felt severely within the legal community. The Los Angeles Times cites "lackluster spending" in certain areas, including "legal services," which has "left California's economy listless, just about guaranteeing that the state's ... unemployment [rate] will march upward at least until the end of the year...."¹

According to the New York Times Editorial Observer, Adam Cohen, "[t]he economic downturn is hitting the legal world hard .... Top firms are rapidly thinning their ranks and several - including Heller Ehrman, a venerable 500-plus-lawyer firm founded in 1890 - have closed...."²

In particular, the downturn has resulted in a reexamination of the manner in which attorneys charge for their services. As observed in a recent New York Times article, "Lawyers are having trouble defending the most basic yardstick of the legal business -the billable hour. Clients have complained for years that the practice of billing for each hour worked can encourage law firms to prolong a client's problem rather than solve it. But the rough economic climate is making clients more demanding, leading many law firms to rethink their business model."³ The article quoted Evan R. Chesler, of Cravath, Swaine & Moore: "[I]nstead of paying for hours worked, more clients are paying flat fees for handling transactions and success fees for positive outcomes."⁴

There will always be good clients with meritorious cases who are unable to compensate their attorney currently and out-of-pocket. The present economic crisis can only have swollen their ranks.

For the attorney who is in a position to assume some degree of risk, a contingent fee offers a way of addressing the problem of a would-be client who lacks the means of paying for legal services, and of the attorney who has seen a slowdown in demand for legal services brought about by the current economic crisis.

This article will discuss the practicalities of assuming representation of a client on a contingent fee basis in estate and trust litigation matters. This article will review the rules applicable to contingent fee arrangements in general, as well as the statutory and case law unique to contingent fee arrangements entered into by the personal representative of an estate or by a beneficiary of an estate or trust.

II. THE LAW GOVERNING CONTINGENT FEE CONTRACTS

Witkin defines a contingent fee contract as "one providing for a fee the size or payment of which is conditioned on some measure of the client's success."⁵ Under a contingent fee agreement, the attorney's right to receive the fee is conditioned on obtaining a successful outcome for the client. Typically the attorney agrees to provide legal services in return for a percentage of the client's recovery. If no recovery is made, the attorney does not receive a fee. The justification for the contingency fee arrangement is that it allows individuals who might not otherwise be able to afford legal representation an opportunity to protect their legal rights.⁶ Contingent fee arrangements are common in actions on behalf of persons claiming interests in estates, and their validity is well established.⁷

A. Professional Ethics Rules

The basic requirements for a fee agreement between a lawyer and his or her client are set forth in California Business & Professions Code section 6148. That section is, however, expressly inapplicable to contingent fee arrangements. Instead, Section 6147 sets forth special requirements for a contingent fee agreement.

Section 6147 begins by requiring that the attorney provide the client (or the client's guardian or representative) a duplicate copy of the contingent fee agreement, signed by both the attorney and the client (or signed by the client's guardian or representative). The statute further provides, in pertinent part, that such a contract must include all of the following:

(1) A statement of the contingency fee rate that the client and attorney have agreed upon.
(2) A statement as to how disbursements and costs incurred in connection with the prosecution or settlement of the claim will affect the contingency fee and the client's recovery.
(3) A statement as to what extent, if any, the client is required

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to pay any compensation to the attorney for related matters that arise out of their relationship not covered by the contingency fee contract. This may include any amounts collected for the plaintiff by the attorney.
(4) Unless the claim is subject to the provisions of Section 6146 [having to do with contingent fee cases against health care providers and therefore not applicable to estate and trust litigation], a statement that the fee is not set by law, but is negotiable between attorney and client.⁸

Failure to comply with any provision of Section 6147 renders the agreement voidable at the option of the client.⁹ In that event, the attorney is entitled to collect a reasonable fee.¹⁰ Where only part of the agreement fails to comply with Section 6147, the client can void part, but not all, of the contingency fee contract.¹¹ And, not surprisingly, modifications to a contingency fee contract also must comply with Section 6147.¹²

The American Bar Association expressly approves contingent fee agreements and provides the following guidance in its Model Rules of Professional Conduct, rule 1.5, Fees:

(a) A lawyer shall not make an agreement for, charge, or collect an unreasonable fee or an unreasonable amount for expenses. The factors to be considered in determining the reasonableness of the fee include the following:
. . .
(4) the amount involved and the results obtained.
. . .
(8) whether the fee is fixed or contingent.
. . .
(c) A fee may be contingent on the outcome of the matter for which the service is rendered, except in which a contingent fee is prohibited [in domestic relations cases and in criminal cases].

Similarly, the California Rules of Professional Conduct, rule 4-200 provides that a member shall not charge an unconscionable fee. Among the criteria for determining whether a fee is unconscionable are the following:

1. The amount of the fee in proportion to the value of the services performed.
. . .
5. The amount involved and the results obtained.
. . .
9. Whether the fee is fixed or contingent.
10. The time and labor required.

When entering into a contingent fee contract, practitioners should also be mindful of California Rules of Professional Conduct, rule 3-300:

A member shall not enter into a business transaction with a client; or knowingly acquire an ownership, possessory, security, or other pecuniary interest adverse to a client unless each of the following requirements have been satisfied:

(A) The transaction or acquisition and its terms are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner which should reasonably have been understood by the client; and

(B) The client is advised in writing that the client may seek the advice of an independent lawyer of the client's choice and is given a reasonable opportunity to seek that advice; and

(C) The client thereafter consents in writing to the term of the transaction or the terms of the acquisition. (Emphasis added.)

B. The Customary Contingent Fee Percentage

There are no hard and fast rules concerning the permissible contingent fee percentage. The California Court of Appeal, in Hendricks v. Sefton, gave voice to the commonly held view that a contingent fee of one-third of the recovery is common and is fair and equitable, and noted that "[c]ontracts calling for a greater percentage have been upheld."¹³

In Swanson v. Hempstead, the court allowed for the possibility of a contingent fee of 50 percent of the recovery. The court refused to characterize a fee of 50 percent as "unconscionable" and went on to describe an unconscionable contract as one "such as no man in his senses and not under a delusion would make on the one hand, and as no honest and fair man would accept on the other."¹⁴

The court in Estate of Raphael observed that a "contingent fee contract, since it involves a gamble on the result, may properly provide for a larger compensation than would otherwise be reasonable" and that "[c]ontingent fees of 50 per cent have been upheld in this state and by many other courts." A few years later, the Court of Appeal ruled that a 50 percent contingent fee and assignment of claims was not unconscionable.¹⁵

A contingent fee equal to more than 50 percent of the recovery will probably be very difficult to enforce. According toWitkin, "if the services are slight, or though substantial, the amount of the fee is more than one-half, a court may refuse to enforce the provision."¹⁶

C. Treatment of Out-Of-Pocket Costs

The manner in which out-of-pocket costs will be paid should be articulated in the fee agreement. Specifically, Business and Professions Code section 6147(a)(2) requires that the contingency fee contract state how case-related disbursements and costs will affect

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the client's net recovery and the attorney's total fee.

California Code...