“It’s not the money, it’s the principle.” When lawyers hear these words, they generally figure it’s really about the money. So, too, when it comes to successive lawyers getting paid at the end of a contingent fee representation: there are principles to keep in mind, but at bottom, it’s generally about the money.

The Indiana Court of Appeals just decided a case involving the related questions of if and how successive lawyers should be paid when compensation is based on a contingent fee agreement. Carr v. Pearman, 854 N.E.2d 380 (Ind. Ct. App. 2006).  In that case, Pearman initially represented Sison, who had been in a one-car accident.  The focus of the representation was on the design of the vehicle Sison was driving.  There was a general understanding that Pearman’s compensation would be in the form of a contingent fee, but contrary to Rule of Professional Conduct 1.5(c), the fee agreement was not in writing.  Pearman worked on the matter by documenting the damages and developing aspects of the claim, but never filed suit for Sison, in part because of a lack of funds to hire an expert witness.

Later, Sison hired a new lawyer, Foelber, and signed a contingent fee agreement with Foelber acknowledging Pearman’s previous work and agreeing to cooperate in determining fair compensation for Pearman’s efforts. Pearman gave Foelber his file on the matter and proposed a fee-sharing agreement whereby Pearman would be co-counsel and receive one-half of the fees in the case.  Foelber countered that Pearman should receive one-third of the fees, at which point, negotiations broke down and Pearman no longer participated in the case.

Foelber filed suit against the car manufacturer and brought Carr, another attorney, into the case. Carr’s compensation was not an issue in the case, but lawyers should take note of the fact that the Rules of Professional Conduct governing the division of fees between lawyers who are not in the same law firm have been tightened since January 1, 2005.  The client must be fully informed of the fee-sharing arrangement, including the share of the fee that each lawyer will receive.  The client’s agreement to a fee sharing arrangement must be confirmed in writing.  See Indiana Rule of Professional Conduct 1.5(e).

The case eventually settled for $2 million, at which point the fee agreement called for Foelber and Carr to receive 40% or $800,000 in fees. Pearman sued Foelber and Carr for the value of the work he had previously performed, seeking one-third of the $800,000.  After a jury verdict for Pearman in the amount of $100,000, Carr appealed.  Foelber did not.

The issues on appeal were essentially whether Pearman, who had no written fee understanding with the client, or any specific fee understanding with successor counsel, was entitled to a fee. Carr argued that Pearman was entitled to no fee because a contingent fee agreement can be established only by a writing, not by implication.  The court of appeals held that Pearman didn’t need a writing because his right of compensation was not based on a contractual relationship directly with the client.  Instead, he was entitled to compensation as a third party beneficiary to the contract between Sison and Foelber (and, later, Carr).  That contract demonstrated an intent to compensate Pearman for his services.  Because the means of determining the amount of Pearman’s compensation was not set forth in the contract, Pearman was entitled to the reasonable value of his contribution to the total effort.

Carr also complained on appeal that Pearman failed to establish with sufficient evidence the value of his services, except to contend that he was entitled to a percentage of the total fee recovery. The court of appeals pointed out that Pearman did provide proof of his activities in support of Sison’s claim and offered expert testimony that Pearman’s work was necessary to a favorable recovery for Sison.

Lastly, Carr argued that compensating Pearman under these circumstances would violate public policy, including the policy incorporated into the Rules of Professional Conduct that contingent fee agreements must be in writing. The court rejected this argument, citing its decision in Major v. OEC-Diasonics, Inc., 743 N.E.2d 276 (Ind. Ct. App. 2001), trans. denied, which held that, even in the absence of a written contingent fee agreement, a lawyer was entitled to quantum meruit compensation for the value of the legal services provided to the client.

Carr follows the Supreme Court’s decision of several years ago in Galanis v. Lyons and Truitt, 715 N.E.2d 858 (Ind. 1999), which dealt generally with the subject matter of how counsel should be compensated in contingent fee cases where one lawyer starts the case and another finishes it.  In brief, Galanis held that, “[I]n the absence of express written fee agreements providing otherwise (1) a lawyer retained under a contingent fee contract but discharged prior to the contingency is entitled to recover the value of services rendered if there is a subsequent settlement or award;  (2) the fee is to be measured by the proportion of the total fee equal to the contribution of the discharged lawyer’s efforts to the ultimate result;  and (3) a subsequent lawyer under a contingent fee agreement who knew of the previous lawyer’s representation is responsible for paying the predecessor’s fee out of the subsequent lawyer’s fee.  These are default settings the law supplies in the absence of fee agreements providing otherwise and parties and lawyers are not prevented from making other reasonable fee arrangements.”  Id. at 860.

Problems like those in Carr and Galanis arise primarily because the lawyers fail to anticipate the problem of how they will be compensated until after the case settles and there’s real money to fight over.  These problems can and should be avoided.  All of the lawyers have a responsibility to the client to see that the matter of lawyer compensation is settled to the extent possible at the time of transition.  This is a component of the lawyer’s responsibility to make sure that the client understands the basis for the fee.  Rule of Professional Conduct 1.5(b).

In Galanis, the Supreme Court held that the client who changes lawyers should be responsible for only one contingent fee.  715 N.E.2d at 853, quoting Saucier v. Hayes Dairy Products, Inc., 373 So.2d 102, 118 (La.1979).  The lawyers should be able to agree that they will share a single contingent fee so that the balance of the recovery can be promptly paid to the client.  Even if the lawyers cannot agree on precisely how the fee should be divided between them, they can at least get the client paid and reserve the dispute over the division of the fee until later without having to involve the client.

At the time of discharge, the first lawyer should discuss the consequences of the discharge with the client, including how the lawyer expects to be paid. The first lawyer should also communicate with successor counsel about her expectation of payment and be responsive to successor counsel’s requests for information.

Before taking over a case, the new lawyer should make sure the client has a clear understanding of the fee situation, including the first lawyer’s financial interest in the case. The client and the new lawyer should have a clear understanding about who will be responsible for paying the first lawyer.  “In a system of professional responsibility that stresses clients’ rights, it is incumbent upon the lawyer who enters a contingent fee contract with knowledge of a previous lawyer’s work to explain fully any obligation of the client to pay a previous lawyer and explicitly contract away liability for those fees.” Galanis, 715 N.E.2d at 863.

The worst outcome of a fee dispute between lawyers is when the client becomes burdened by it, whether because delivery of a portion of the recovery to the client is delayed by the dispute or because the client is drawn into it as a witness or a party, as was the case in Galanis.  “Lawyers, as professionals, should be able to resolve these issues by agreement.  If they cannot, they, not the client, should bear the cost of resolving a dispute over their relative contributions.” Galanis, Id.  One hopes that lawyers will be able to approach these matters with Solomon-like wisdom and avoid a fight over whether and how the fee baby gets split.