The Indiana Supreme Court recently decided two lawyer discipline cases involving attorney fees that should be of great interest to lawyers.
Changing the Rules of the Game
One of the cases, decided by a brief order and not a per curiam opinion, deals with renegotiation of fee agreements. Matter of Hammerle, 2011 WL 4089970 (Ind. September 12, 2011). The lawyer represented a client in the defense of a serious criminal case. Greater background on the representation can be found in the appeal of a related civil malpractice and unjust enrichment case brought by the client. Blinn v. Hammerle, 945 N.E.2d 831 (Ind. 2011).
The lawyer’s initial fee understanding with the client was that the client would pay $35,000 as a “retainer/fixed fee,” except that, if trial lasted more than five calendar days, services would be billed on an hourly basis. There seems to be considerable uncertainty about what a “retainer/fixed fee” is. The Court of Appeals’ majority, over a lengthy dissent by Judge May, affirmed a summary judgment ruling that $35,000 was not a flat fee, but an estimate of what it would cost on an hourly fee basis to handle the case up through a fifth day of trial.
It Seemed Like a Good Idea at the Time
In any event, after seven months of representation, the lawyer wrote the client and proposed to modify the fee agreement because the case had taken and was anticipated to take much more time than expected at the outset. Both lawyer and client fully expected the case be tried over the course of several weeks. The lawyer expected trial to lead to a conviction and wanted the assurance of being paid. The client was presumably happy to have fee exposure, that could have gone well beyond $20,000, capped. The lawyer and client negotiated a modification of the fee agreement and eventually agreed the client would pay an additional sum of $20,000 on top of the $35,000 as full compensation for the entire representation regardless of how long the anticipated trial would last. Unexpectedly, the client pled guilty, so the case never did go to trial. The client unsuccessfully appealed the sentence using the same lawyer’s services.
The client thereafter undertook a campaign to obtain a refund of the additional $20,000 he had paid in fees, culminating in a suit against the lawyer. The Court of Appeals’ opinion affirmed a grant of summary judgment in favor of the lawyer essentially using traditional contract law and equity analysis. While the Court of Appeals majority and dissenting opinions are fascinating reading in their own right, it is the Supreme Court’s order in the companion lawyer discipline case that I find to be of import to all lawyers. What is especially noteworthy was the Court’s finding that the lawyer believed (the Court doesn’t say, but probably reasonably) that the modified fee agreement would be more beneficial to the client than the original one because of how long the trial was expected to last. In other words, a total fee of $55,000 would probably have been less than the fee under the terms of the original fee understanding was going to be. However, with the client’s unanticipated guilty plea, there was no trial and the $55,000 fee became less advantageous to the client than the fee under the original agreement would have been.
Because the renegotiated fee agreement could have been (and, in fact, turned out to be) disadvantageous to the client, the Court found that the lawyer was required to comply with the provisions of Rule of Professional Conduct 1.8(a), which governs any transaction between a lawyer and client in which their economic interests are adverse. Rule 1.8(a) does not say that fee renegotiations are forbidden, merely that the they must be accompanied by specific client protections, including: (1) the renegotiated fee must be objectively fair and reasonable, (2) the terms must be fully disclosed to the client in writing in a manner the client can understand, (3) the client must be advised in writing of the desirability of seeking independent legal advice in the transaction, (4) the client must be given a reasonable opportunity to secure independent advice, and (5) the client must give informed consent to the essential terms of the transaction in a signed writing.
The client’s signed consent must disclose the lawyer’s role in the transaction “including whether the lawyer is representing the client in the transaction.” This last clause has always puzzled me. In a transaction with a client where the lawyer’s economic interests are adverse, how could the lawyer possibly claim to represent the client in the transaction? If that is not a non-consentable conflict of interest, I’ve never seen one.
Lawyers don’t naturally think of Rule 1.8(a) as applying to fee renegotiations, but it does. A sentence in Comment  to Rule 1.8 says so: “Paragraph (a) applies when a lawyer seeks to renegotiate the terms of a fee arrangement with the client after representation begins in order to reach a new agreement that is more advantageous to the lawyer than the initial fee agreement.” The corresponding comment to ABA Model Rule 1.8 does not include that language, but a brand new advisory ethics opinion by the ABA Standing Committee on Ethics and Professional Responsibility largely comes out at the same place. ABA Formal Opinion 11-458 (August 4, 2011).
Crystal Ball Gazing
For being so short, Hammerle is a rich opinion. It establishes a new point of law. The idea that lawyers need to take steps to protect their clients’ interests when they renegotiate fees to their relative advantage has been well established since at least Matter of Hefron, 771 N.E.2d 1157 (Ind. 2002). But Hammerle goes a step further and requires that lawyers invoke the same client-protective mechanisms if there is even a chance that the fee agreement will disadvantage the client, even though both lawyer and client don’t believe it will.
A last point on Hammerle. In addition to finding that the lawyer violated Rule 1.8(a), the Court found that he also violated Rule 1.5(a), by charging an unreasonable fee. Rule 1.5(a) includes a list of eight non-exclusive factors that should be considered in deciding whether a fee is unreasonable. None of those factors have anything to do with how the fee understanding is reached with a client. All of which makes the following language from the Court’s opinion so puzzling: “Respondent’s violation of Rule 1.5(a) is based solely on Respondent’s charging a fee in excess of the original fee agreement. The Commission does not contend that the total fee the client paid to Respondent would have been unreasonable if Respondent had complied with Rule 1.8(a) in modifying the fee agreement.” In other words, if the lawyer had charged the client a fixed fee of $55,000, there would have been no violation of Rule 1.5(a) (or Rule 1.8(a) for that matter). Keep in mind that this order was the product of an agreement between the parties, meaning that there was no one involved in the matter to address a very basic question: How can an otherwise reasonable fee be unreasonable simply because the way it was reached violated some other Rule of Professional Conduct?
Monday Morning Quarterbacking
A more recent and equally interesting fee opinion is Matter of Powell, 2011 WL 448991 (Ind. September 29, 2011). The facts are somewhat complicated and I refer you to the opinion for the details. In sum, and to somewhat simplify the facts, Lawyer 1 assisted a client in recovering a $42,000 personal injury settlement and worked with the client to secure the settlement proceeds in a special needs trust in order to keep them out of the hands of some individuals who had taken financial advantage of her in the past. Lawyer 1 accepted the role of trustee. Soon, the client demanded access to the funds. Lawyer 1 was unwilling to facilitate that because he believed this demand was the product of exploitation by others. Lawyer 1 stated a willingness to relinquish his role as trustee in favor of a successor. The client consulted with Powell, Lawyer 2, who agreed to assist the client for a fee of one-third of the trust funds if they were released. The fee agreement was quite explicit in informing the client that she could pay for his services on an hourly fee basis if she wanted (which she could not afford) and that the agreement could result in a substantial fee for Lawyer 2 for little work. Upon being contacted by Lawyer 2, Lawyer 1 resigned as trustee and signed a document designating Lawyer 2 as successor trustee. By the end of day on which the trustees changed, the funds were removed from trust with one-third ($14,815.55) going to Lawyer 2 and the balance going to the client. The hearing officer calculated that the value of the lawyer’s services at an hourly rate of $200 would have been $3,000.
Reasonable Is As Reasonable Does
The Court held that Lawyer 2 charged and received an unreasonable fee. Given the facts, this seems like a reasonable result and unremarkable in itself. There were many reasons to believe the lawyer was exploiting a vulnerable client. What makes the opinion so interesting is this: the Court conceded that at the outset of the representation, Lawyer 2 could have reasonably believed that removing the trustee would be contested and that the amount to be collected was not readily known (it could have been less than $42,000). In other words, at the time the fee agreement was structured, the terms could have been understandably viewed as reasonable. But once the matter resolved quickly, with little effort and for an ascertainable amount (and fee), Lawyer 2 should have realized that his fee was unreasonable and done something about it. The Court was clearly saying that a contingency fee that appears reasonable at the outset may nonetheless become unreasonable in light of the amount of the recovery and what was required to obtain it.
I think this is a new idea in Indiana. The Court cited a somewhat similar case, Matter of Gerard, 634 N.E.2d 51 (Ind. 1994), as providing guidance in the matter. And it is true that Gerard shares some similarities with this case. On the other hand, it was possible to understand Gerard, as I had, as creating an ethical obligation to reform fees after-the-fact when the initial fee agreement was only reasonable because of a mutual mistake of fact. Equity will step in to reform a contract based on a mutual mistake of fact, so it is not surprising that lawyers would have an affirmative ethical duty to do so under similar circumstances. The Powell result does not as readily lend itself to being explained this way. Unlike in Gerard (where both lawyer and client apparently believed, incorrectly, that the client’s money had been wrongly taken from a bank), in this case, the basic facts surrounding the client’s legal problem were known to both lawyer and client and were not in any material sense mistaken.
Thus, the Court seems to have extended Gerard to require lawyers who do contingency fee work to look back in every case once the recovery is obtained and engage in some type of post hoc reasonableness calculation. The Court did seem to understand that this idea has to have limits, because it said: “We do not suggest that a contingent fee must be reduced every time a case turns out to be easier or more lucrative than contemplated by the parties at the outset. But collection of a fee under the original agreement is unreasonable when it gives the attorney an unconscionable windfall under the totality of the circumstances.”
What is unsettling about this case is the uncertainty about where the line is between a generous fee and an unconscionable windfall. But in the end, that is what a lot of legal ethics is about—making honest and good faith judgments about what is fair under the circumstances. The settlement of a contingent fee case is one occasion for lawyers to take a hard look at the circumstances, perhaps aided by someone without a direct interest in the fee, and ask whether the fee seems fair.
Hammerle and Powell make for an interesting contrast. They demonstrate that reforming fee agreements with clients is one-way street. When a fee deal is bad for the lawyer, the deal can be restructured only by complying with robust client protections. When a fee deal is too good for the lawyer, the lawyer may be under an ethical duty to restructure it in the client’s favor. While this might seem unfair, it is only superficially so. That is the way fiduciary relationships work.
Avoidance of lawyer financial windfalls is an important foundational concept for understanding unreasonable fee jurisprudence. This is consistent with another important disciplinary case involving fees decided earlier this year by the Supreme Court that is essential reading. Matter of O’Farrell, 942 N.E.2d 799 (Ind. 2011). It was clearly the driving consideration in the Powell case. Hammerle does not fit so neatly into this framework. According to the Court and the Commission, he obtained no windfall. Yet, we also know from Hammerle that how one gets to a fee understanding with a client is important. Adding a Rule 1.5(a) violation merely serves to confuse the situation.