October 2023 Ethically Speaking - The Ethical Parameters of Disputes Among Successive Attorneys Over Lien Rights and Contingent Fees

by Robert K. Sall

Contingent fee representation is an important factor in access to justice, as injured parties often are without the resources to advance their own claims. In contingent fee cases, however, clients sometimes change lawyers midstream, which may lead to disputes over how to compensate them when the recovery later occurs. When the case is over, lawyers who have been discharged are generally entitled to compensation from the recovery for the reasonable value of their legal services. But how is that determined?

Disputes arise often over the existence and amount of a former counsel’s lien rights and entitlement to fees. While these disputes center on the determination of the reasonable fee that must be paid to a former counsel, there may also be controversy over the validity of the discharged lawyer’s claim of a lien on the proceeds. In the absence of an agreement between the client and all the counsel involved, these disputes can add years to the ultimate resolution, during which clients are often deprived of the prompt receipt of portions of a recovery until the existence and amount of the claim for a reasonable fee is determined. This article addresses the common problems in such disputes and the lawyers’ respective ethical obligations.

We know from Code of Civil Procedure section 284 and the California Supreme Court’s landmark decision in Fracasse v. Brent, 6 Cal. 3d 784, 790-91 (1972), that the client has at any time the absolute right to terminate the services of a contingent fee lawyer, with or without cause. Assuming the existence of a valid lien, when Lawyer 1 has been discharged by the client prior to the occurrence of a recovery, Lawyer 1 retains an inchoate claim that ripens upon the receipt of a recovery. At that time, the attorney is entitled to enforce such lien against the proceeds, to the extent of the reasonable value of the services performed up to the date of discharge. Weiss v. Marcus, 51 Cal. App. 3d 590, 598 (1975).

The client’s discharge of Lawyer 1 is not actionable as a breach of contract because the law implies a term, by reason of the special relationship between attorney and client, that the client may terminate the contract at will. No cause of action lies for the contingent fee lawyer who has been discharged until the contingency—the recovery—has occurred. While this usually results from the involvement of a successor counsel who brings in the recovery, there are instances where the client discharges Lawyer 1 and then resolves the case without engaging a new attorney. Even these require determination of a reasonable fee for the discharged lawyer. DiLoreto v. O’Neill, 1 Cal. App. 4th 149, 156-57 (1991).

When the contingency occurs, the discharged lawyer is normally entitled to a reasonable fee based not upon the percentage originally provided in the discharged lawyer’s fee agreement, but rather for the reasonable value of the lawyer’s services up to the time of discharge. Fracasse, 6 Cal. 3d at 792. Assuming a validly created contractual lien, the discharged lawyer’s lien survives the discharge and may thereafter be enforced when the contingency occurs. Weiss, 51 Cal. App. 3d at 598. There are exceptions, of course, such as where the discharged lawyer withdrew without good cause, in which instance, the contingent fee lawyer may have forfeited an entitlement to any fee. Rus Miliband & Smith v. Conkle & Olesten, 113 Cal. App. 4th 656, 672-77 (2003).

Sometimes there will be multiple claimants to the settlement pie, such as where the client has changed counsel multiple times. Prior lawyers who worked on the case may claim the reasonable value of their services. Fracasse tells us that to the extent the first lawyer’s discharge was followed by the retention of another attorney, the client will be required to pay the former attorney for the reasonable value of his services. “Such payment, in addition to the fee charged by the second attorney, should certainly operate as a self-limiting factor on the number of attorneys so discharged.” 6 Cal. 3d at 791. While the entitlement of discharged attorneys to be paid fees from a share of the client’s recovery should be a self-limiting factor on multiple terminations of counsel, clients do not always understand the complexities that are likely to result from doing so. There is an unresolved legal question of whether a client can be made to pay the reasonable fee claims of multiple previously discharged lawyers in addition to a full contingent fee to the lawyer who finally resolved the case. What happens where the fee agreement of the last lawyer in line provides for a full contingent fee and obligates the client to be responsible for the payment of fees to all prior lawyers? May the client be obligated to pay in the aggregate what may be more than one reasonable fee? In these circumstances questions of unconscionability may arise under Rule 1.5 of the California Rules of Professional Conduct (CRPC).

In circumstances where multiple attorneys were claiming a reasonable fee, Spires v. American Bus Lines, 158 Cal. App. 3d 211 (1984), held that where “the contingent fee is insufficient to meet the quantum meruit claims of both discharged counsel and existing counsel, the proper application of the Fracasse rule is to use an appropriate pro rata formula which distributes the contingent fee among all discharged and existing attorneys in proportion to the time spent on the case by each. Such a formula ensures that each attorney is compensated in accordance with work performed, as contemplated by Fracasse, while assuring that the client will not be forced to make a double payment of fees.” Spires, 158 Cal. App. 3d at 216. Spires also states: “Fracasse teaches that distribution of a contingent fee to discharged and current counsel must be based upon a quantum meruit theory, [citation omitted] for the reasonable value of services rendered rather than the amount due under contract.” Id. at 216. This suggests that there should in the aggregate be only one contingent fee and that all lawyers share in it. It leaves unresolved the question whether a fee agreement would be unconscionable to the extent that it requires the client to pay a full contingent fee to the last lawyer while insulating that lawyer from a multiplicity of reasonable fee claims of the discharged lawyers. The author has found no published decisions that address the question whether provisions in the last lawyer’s fee agreement allowing that lawyer to receive an entire contingent fee and burdening the client with the fees due to prior counsel would be unconscionable. That remains an issue for another day—or another article.

We still face the question of how the discharged lawyer establishes the reasonable fee to which that lawyer may be entitled. In practice, the process of determining the reasonable value of the services of one or more discharged contingent fee attorneys is not simple. Each of the discharged lawyers will typically assert a lien claim for the reasonable value of their services, and often specify an amount. Although prudent to do so, many contingent fee lawyers do not maintain time records, complicating the calculation of a reasonable fee because the amount of time spent is one of the principal factors considered. Quantum meruit may be proved, however, even in the absence of time records, by the lawyer’s testimony as to the services performed, estimates of the amount of time spent, and the results obtained prior to discharge. Precise calculations are not required. Mardirossian & Assocs., Inc., v. Ersoff, 153 Cal. App. 4th 257, 269 (2007). Other relevant factors to be considered include the nature of the litigation, its difficulty, the amounts involved, the skill that was required to handle it, the attention given, the degree of success or failure of the lawyer’s efforts, the lawyer’s particular skills, experience, and learning. Id. at 272. This necessarily requires, in the absence of all parties reaching agreement, that lawyers must establish their entitlement to quantum meruit through the presentation of evidence. These factors frequently pit the client, the discharged lawyers, and the successor lawyer against each other to establish what portion of the successful claim was a product of each lawyer’s efforts.

The law that has developed around attorney liens and calculation of a reasonable fee among competing claimants has come to be quite complex. An attorney’s lien is not created by the mere fact that an attorney has performed services in a case. Carroll v. Interstate Brands Corp., 99 Cal. App. 4th 1168, 1172 (2002). Such a lien is created only by contract with an express provision for a lien, or by implication in the retainer agreement that the attorney will be paid for services rendered from the judgment itself. Id. Unfortunately, the client gets dragged into these disputes. Where the amount is disputed, the attorney who wishes to collect against the recovery must bring a separate, independent action against the client to establish the existence of the lien, its amount, and to enforce it. Id. at 1173. One case has held that the lien is only enforceable after the attorney adjudicates that value and validity of the lien in a separate action against the client, even where the client has no dispute and it is only the attorneys haggling the division of their fee. Mojtahedi v. Vargas, 228 Cal. App. 4th 974, 978 (2014) (emphasis added). Regrettably, this may draw the client into litigation even where the client has no interest in how the attorney fee pie is divided.

When the recovery comes in, one of the first issues is that of obtaining endorsement from the client and each lawyer who is named as a payee of the proceeds. There may be disputes over who has a lien, who will hold the funds in trust and the amount to be held subject to each claim of lien. Lawyer 1, Lawyer 2, Lawyer 3, and the client may each have vastly different views on the value of a given lawyer’s contribution to the case. The discharged lawyers sometimes assert claims of lien far greater in amount than the client is willing to pay, or expose the client to fee claims that exceed one contingent fee.

Too often, someone will object to the proposal as to where the funds will be held in trust, and the conditions of such arrangement, and therefore refuse to endorse the check. When this occurs, each attorney must promptly take appropriate, substantive steps to resolve the dispute in order to disburse funds to the client. In the Matter of Kroff, 3 Cal. State Bar Rptr. 838 (Rev. Dept. 1998). Where the parties cannot agree to division of the fee, or the means by which the fund will be held in trust pending determination of the fee, the requirement of prompt distribution to the client imposes an affirmative obligation on the lawyer to seek arbitration or judicial determination of the respective interests of the lawyers and the client in the disputed funds. Los Angeles County Bar Assn. Formal Opn. No. 438.

Rule 1.15 (d) requires a lawyer in receipt of client funds to promptly notify the client of the receipt of funds, account in writing to the client, and promptly distribute the undisputed funds in the possession of the lawyer that the client is entitled to receive. A discharged contingent fee attorney has an ethical obligation to account to the client for the services performed, which includes an obligation to quantify the amount of lien. A discharged contingent fee attorney “continue[s] to owe [client] a fiduciary duty of utmost good faith and fair dealing with respect to, at least, that subject matter of [the attorney’s] prior representation [of client], including [the attorney’s] express lien for his attorney’s fees.” In re Feldsott, 3 Cal. State Bar Ct. Rptr. 754, 757 (Rev. Dept. 1997). In situations where the settlement check is made jointly payable to the client and several lawyers, it is necessary to obtain endorsement of the check so that the undisputed portion of proceeds due the client are available for distribution. When the discharged attorney asserts a lien at the time of settlement, the client and the successor counsel need to know the amount claimed, its calculation, and quantification of the asserted lien. Whether that is based upon time records, or some other method of calculation, the discharged attorney should promptly respond with information sufficient to quantify the amount claimed. A failure to do so may well constitute a failure to account and result in disciplinary proceedings. Similarly, the successor attorney who receives the settlement funds in trust has a similar duty to account to the client and the former counsel. Friedman v. State Bar, 50 Cal. 3d 235, 240-41 (1990).

The State Bar of California’s Standing Committee on Professional Responsibility and Conduct (COPRAC), citing Carroll, 99 Cal. App. 4th at 1176, opines that where the client, the former attorney and the successor attorney cannot agree to a method for endorsing the check and holding the funds in trust pending resolution of a determination of the reasonable fee to which the former attorney is entitled, “the unfortunate effect . . . is that [t]he settlement proceeds will thus be tied up until everyone involved can agree on how the money should be divided . . . or until one or the other brings an independent action for declaratory relief.” Cal. Bar Formal Opn. 2009-177, at 2. As a practical matter, either attorney or the client bringing a declaratory relief action only compounds the expense for each and adds to the delay as that proceeding must wind its way through the courts. Sometimes, these disputes are presented to the Mandatory Fee Arbitration programs of various County Bar Association, but not all of them will accept jurisdiction over attorney-to-attorney disputes. Without the cooperation of all concerned, there is no swift way to obtain prompt resolution of disputes over endorsing the settlement check, selecting a mutually agreeable depository, and determining the amount of a discharged counsel’s reasonable fee. That conundrum results in delay and potentially deprives the client of prompt receipt of portions of the settlement to which the client would be entitled but for the lien claims of discharged attorneys.

Under rule 1.15, the client is entitled to prompt distribution of that portion of the recovery to which the client is entitled. Lawyers should make every reasonable effort to minimize delays in distribution resulting from disputes over lien claims, the division of contingent fees and the calculation of quantum meruit. To the extent reasonably possible, lawyers should cooperate with one another to keep clients out of disputes among lawyers over the allocation and division of a contingent fee. The situation calls out for an established procedure for the prompt resolution of these disputes so that the client does not become a victim of delay when a lawyer attempts to claim a larger than reasonable fee. In my opinion, the legislature should establish a procedure, similar in import and scope to Mandatory Fee Arbitration under Business & Professions Code sections 6200 et seq., for expedited determination of disputes of this nature between successive contingent fee lawyers and their clients. Procedures are needed to promptly and inexpensively determine (1) the preservation of lien rights when lawyers are called upon to endorse a check, (2) the validity of the lawyer’s claim of lien, and (3) the quantum meruit value of the lien, without a multiplicity of litigation. In the absence of such procedures, clients’ distributions are sometimes unfairly delayed for years.

Robert K. Sall is a shareholder with Sall Spencer Callas & Krueger in Laguna Beach. A Certified Specialist in Legal Malpractice Law by the State Bar of California’s Board of Legal Specialization, he lectures frequently for the OCBA on lawyer conduct, fee disputes, and legal ethics. He can be reached at rsall@sallspencer.com.