It is not often that you get decisions out of any of the second highest courts in the land that turn on application of an attorney ethics rule, so it can be important to highlight when such events occur.
Given how many lawyers and law firms overlook the interrelationship between RPC 1.5 and RPC 1.8(a), it is very important to highlight the Fifth Circuit’s ruling last week in Wiener, Weiss & Madison v. Fox. In Fox, the Fifth Circuit ruled that because a contingency fee agreement between the firm and its client violated Louisiana’s version of RPC 1.8(a), it was unenforceable.
The full opinion is a good read for most any lawyer or firm that dabbles in contingency fee work.
For readers here, there is only some bare-bones background necessary to understand what ended up being the court’s straightforward result:
- The firm’s representation of Fox started on an hourly rate basis in connection with Fox’s ex-husband’s bankruptcy proceedings, but because of tied up assets the firm agreed to seek those fees from the court paid out of the bankruptcy estate
- The firm actually got paid, on application with the court, an attorney fee in the amount of more than $1 million.
- There was more work to be done for Fox and the firm did not think the bankruptcy court would ever approve more fees, so the firm proposed a contingency fee agreement with Fox that the firm would get up to a 35% interest in Fox’s claims against the estate or as an equity owner in certain gambling entities tied up in the bankruptcy estate. Fox signed that agreement.
- The bankruptcy court approved a plan of reorganization and gave Fox 100% interest in a holding company coming out of the estate.
- Firm then claimed work was done and, if their client wanted them to continue, the client would have to sign a new contingency agreement that upped the percentage to 40%. Fox signed that agreement as well.
- A few years later, the firm decided it thought the existing agreement was “unwieldy” and asked Fox to execute a new one. This time, for the first time, the firm advised Fox to seek independent counsel about whether to enter into the agreement.
- She did, the independent counsel advised she shouldn’t sign, apparently also advised her that the earlier agreements were in violation of the rules, and the firm eventually sued Fox for breach of contract.
The Fifth Circuit, joined the analysis of a number of other courts in concluding that the 40% agreement was unenforceable because it provided the firm with a contingent interest in property owned by Fox and was, therefore, a business transaction with a client. Because the firm did not comply with RPC 1.8(a) as to that agreement, it was void.
Interestingly though, the Fifth Circuit should have been able to get to that conclusion without having to focus even one bit on the question of the property interest piece. This is because any renegotiation of a fee agreement with an existing client where the goal of the renegotiation is to improve the financial stake of the lawyer or law firm is a business transaction with a client requiring compliance with RPC 1.8(a).
In Tennessee, we make this clear in a comment to our version of RPC 1.8(a):
 …. It also applies when a lawyer seeks to renegotiate the terms of the fee agreement with the client after representation begins in order to reach a new agreement that is more advantageous to the lawyer than the original agreement….
Louisiana famously has adopted the ABA Model Rules but adopted no comments to those rules, The comment language to the ABA Model Rule does not spell out the answer on renegotiation the way that Tennessee’s does so the answer to this question under Louisiana’s rules required focusing on the property interest because the comment to the ABA Model Rules does include a reference to that concept.
The reason it is so important for lawyers to see these situations when they arise for what they are is that evaluation of a contingent attorney fee agreement becomes even more strict under RPC 1.8(a) than it would be under RPC 1.5(c). Not only does there become a hard-and-fast requirement of encouraging the client to seek out independent counsel for advice, but the rule requires that the new terms to be fair and reasonable from the perspective of the client. That sometimes can mean something different than merely being a reasonable contingency fee under RPC 1.5(c) and RPC 1.5(a).