Friday, September 30, 2011

Indiana Supreme Court on the reasonableness of a contingency fee

A few days ago, I spent some time discussing contingency fees with my students.  Among other things, we talked about whether the reasonableness of a contingency fee should be evaluated based on the terms of the agreement, the circumstances at the time the agreement is reached, the end result (the amount recovered) or a combination of all of them.

Just a day too late for our discussion, but almost right on cue, the Legal Profession blog is reporting today on a new case in which the Indiana Supreme Court imposed a suspension of at least 120 day for "misconduct by collecting a clearly unreasonable and exploitive [contingecny] fee."

In this case, a client approached a recently admitted attorney [which is relevant since the rules list the lawyer's experience as one of the factors used to evaluate the reasonableness of a fee] asking for help to get access to money that was in a trust.  The lawyer agreed to help based on a contingency agreement.  Another lawyer who had been serving as the trustee of the trust agreed to resign as trustee, and the new lawyer took over.  After the transition, the new lawyer paid himself one-third of the funds held in trust, nearly $15,000. The client got nearly $30,000, which presumably was quickly spent.

The trust had been created to protect the client and "to prevent rapid depletion by [the client's abusive, substance abusing boyfriend]."

In support of the view that a contingency fee should be evaluated based on the circumstances at the time of the agreement, the court emphasized that a contingent fee is not unreasonable "every time a case turns out easier or more lucrative than contemplated by the parties at the outset."

However, the court added that a fee that is not unreasonable at the outset may become unreasonable in light of later developments:

...Respondent may have reasonably believed at the outset that removing Ross as trustee would be contested (despite documentation indicating Ross was willing to step aside in favor of a qualified successor). He may have even reasonably questioned the amount of money in the trust upon which his fee would be calculated and collected (despite documentation that $42,500 had been deposited in it just a few months earlier). But within two or three days, Ross agreed to resign as trustee in favor of Respondent, and Respondent had assumed control over the trust, knew the balance in the trust account, had gained access to those funds, and had cut himself a check for his fee. At this point, he knew the case did not involve any complex issues, prolonged time commitment, risk of no recovery, or even any opposition.
The case is called In the Matter of Powell and it is available here.

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