Friday, March 7, 2008
Ninth Circuit Rules Law Firm Must Pay Firm That Withdrew From Case Under Agreement
By a MetNews Staff Writer
A Texas law firm must tender additional payments to an Arizona firm on the Texas firm’s recovery from a class action settlement under the terms of their agreement, the Ninth U.S. Circuit Court of Appeals ruled yesterday.
Affirming the district court’s interpretation that the word “recovery” as used in the agreement indicated a gross recovery – not a net recovery – the appellate court held that the Arizona firm was entitled to the additional payment the parties had agreed the firm would receive if the Texas firm recovered more than the $2.9 million it had already paid the Arizona firm.
The two firms entered into the agreement after approximately 900 claimants in the Phoenix area joined a class action against Motorola for alleged environmental contamination in 1991. After the firm bringing the action dissolved, the Houston, Texas firm of John M. O’Quinn & Associates L.L.P. took on representation of most of the claimants.
Each client agreed that O’Quinn would receive a contingent fee of 40 percent of the total sum collected from trial or settlement of the action, and that each client would receive 60 percent of the total recovery or settlement, less the costs and expenses of litigation. The attorneys’ salaries were not reimbursable from the client’s 60 percent share of the total recovery.
O’Quinn later engaged the services of Brown & Bain, P.A., a Phoenix law firm, to assist in the action. The two firms agreed that Brown & Bain would receive payment at a hourly “discount rate” until the termination of the action, at which time it would be entitled to an additional payment for each hour worked.
The contract provided that the additional payment would not be made “until an amount equal to the discount rate payments previously paid to [Brown & Bain] are recovered by [O’Quinn] and the other plaintiffs’ counsel working on the matter (in the aggregate) from the proceeds of the litigation.”
Five years later, Brown & Bain wrote O’Quinn that it was “time for Brown & Bain to step aside gracefully,” and recommended another Phoenix lawyer to replace it as local counsel. Neither O’Quinn nor the clients objected to Brown & Bain’s motion to withdraw as counsel.
After Motorola and the clients reached a settlement of over $26 million, O’Quinn paid the clients $2,467,335.12 and retained $10,106,988.61 for itself. Brown & Bain then asked to be paid the addition payments provided by the engagement letter, but O’Quinn refused.
Brown & Bain filed a state law action for breach of contract, and O’Quinn removed
the action to federal court and filed a counterclaim for repudiation. Arizona District Judge Susan R. Bolton granted partial summary judgment in favor of Brown & Bain, but reserved the question of whether the additional payments were due.
Two years later, Arizona District Judge Roslyn O. Silver ruled that O’Quinn was obligated to make the additional payments and entered summary judgment in favor of Brown & Bain.
O’Quinn appealed, contending that the additional payments were not due unless it had recovered all the expenses it had absorbed. Based on its own accounting, O’Quinn claimed that it had not made any net recovery, but had suffered a loss of $3,195,174.19 after deducting its costs reimbursements from its gross recovery.
But the appellate court disagreed, concluding that O’Quinn had not established its loss.
Regardless, wrote Judge John T. Noonan, “[i]t is the total gross amount received by the lawyers that acts as the trigger for the ‘additional payments’ to Brown & Bain.”
“Unquestionably, when O’Quinn received an amount of over $10 million from the settlement, it had recovered several times the $2.9 million it had disbursed.”
Noonan pointed out that O’Quinn in its client letters had equated what was received in a settlement to “the total recovery” and provided for the deduction of costs and expenses, but that in the engagement letter, the firm had simply promised to pay Brown & Bain the additional fees after O’Quinn recovered “an amount equal to the discount rate payments…from the proceeds of the litigation.” He also noted that that nothing in the contract—which omitted language allowing cost reimbursements to be deducted from determination—stated that the proceeds involved were only the net proceeds.
Noonan also wrote that, “[t]he case is not without interest for the professional responsibility of lawyers inter se.”
Although Arizona Rules of Professional Conduct ER 1.5 prohibits unreasonable attorney fees, this rule only governs the relation between lawyer and client, not between lawyer and lawyer. While Brown & Bain was attempting to get a total fee of $6.2 million, tendering the additional payment to the firm would not affect the fees already paid by the clients.
Even though O’Quinn had absorbed some expenses instead of billing them to the clients, Noonan wrote, “O’Quinn’s necessity of putting something on the table for the clients does not determine the reasonableness of the allocation of charges among the lawyers themselves.”
Noonan also rejected O’Quinn’s claim that Brown & Bain had abandoned the contract and was thus not entitled to further compensation.
The Restatement (Third) of the Law Governing Lawyers, § 32, Comment c provides that a lawyer “ordinarily should see [a representation] through to the contemplated end” if his failure to do so would burden the client. But Noonan wrote, “[i]t was part of O’Quinn’s defense to show that the withdrawal of Brown & Bain had burdened the clients. O’Quinn did not do so.”
Judges Sidney R. Thomas and Jay S. Bybee joined Noonan in his opinion.
O’Quinn’s attorney, Neil McCabe, said:
“When a hired hand walks off the job and then comes back years later after the boss loses money, can he really expect a bonus? That can’t be what the contract meant.
“The court said a contract is a contract and it doesn’t matter to this case that we may have lost money. I think it’s an unfortunate way of reading the contract.
“The question now is if we try for a rehearing or a rehearing en banc. Those are possibilities.
McCabe opined that different language would have produced a different outcome, and that “[w]e’ll certainly never have another contract like this, that can be so interpreted, or misinterpreted, as we’d like to say.… Live and learn.”
Brown & Bain’s attorney, Lawrence A. Kasten, had not discussed the case with his client and declined comment when contacted by the MetNews.
The case is Brown & Bain v. O’Quinn, No. 06-15931.
Copyright 2008, Metropolitan News Company