Contingent Fee Realized After LLC's Demise Belongs to Firm, Not Lawyer Who Kept Case

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By Joan C. Rogers  

A contingent fee recovered in a case that settled after a two-lawyer firm organized as a limited liability company dissolved belongs to the firm rather than the lawyer who completed the case and must be divided equally between the two former members in accordance with their oral agreement to share equally in all the firm's profits, the Colorado Court of Appeals decided Feb. 16 (LaFond v. Sweeney, Colo. Ct. App., No. 10CA2005, 2/16/12).

The court adopted what it described as the majority view: a contingent fee earned during the winding-up of a defunct law firm is subject to the fee-sharing arrangement that existed at the time of the firm's dissolution. This proposition applies not just to law partnerships but also to firms organized as LLCs, the court decided.

In his opinion for the court, Judge Steven L. Bernard drew heavily on partnership law except in one respect—the issue of compensation for the lawyer who completed the contingent fee case.

Because the Colorado LLC statute, unlike modern partnership statutes, does not authorize compensation to former members who wind up the firm's business, the lawyer who completed the contingent fee case is not entitled to compensation beyond his share of the contingent fee, the court ruled.

‘Great Primer.'

The court's opinion is “a great primer on sharing fees when a firm dissolves,” law professor Robert W. Hillman of the University of California, Davis, told Bloomberg BNA.

What's most notable about the case, he said, is the thoughtfulness of the court's analysis and the effort Bernard made to explain the court's reasoning. “It's a very impressive opinion,” said Hillman, author of Hillman on Lawyer Mobility (2d ed. 2011) and co-author of The Revised Uniform Partnership Act (2011-2012 ed.).

Hillman said that the court's ruling on sharing of post-dissolution fees is “in line with many, many other law firm dissolution cases”—yet lawyers often seem surprised that the law requires the sharing of post-dissolution fees where there is no agreement to the contrary.

“This case tells us what we've known for a century—the partnership continues until you wrap up the work,” he said.

Lawyers can avoid this result, Hillman noted, by including a provision in their partnership agreement stating that if the firm dissolves each lawyer keeps the fees generated in cases which that lawyer completes after dissolution.

Many firms are including these provisions, known as “anti-Jewel” agreements, in their partnership agreements, Hillman said. The name refers to Jewel v. Boxer, 203 Cal. Rptr. 13 (Cal. Ct. App. 1984), a seminal opinion on this issue which held that former partners in a firm were entitled to their partnership share of income generated by the work of other former partners on cases that were active upon the firm's dissolution.

As illustrated in recent cases such as the bankruptcy proceeding of the defunct Heller Ehrman firm, Hillman said, judges may be hostile to anti-Jewel agreements if they are made on the brink of the firm's collapse. (See 27 Law. Man. Prof. Conduct 501 regarding unfinished-business “clawback” claims in the Heller bankruptcy proceeding.)

Instead of waiting until the last minute, lawyers should think about this issue and take action while their firm is still strong, Hillman recommended. He identified two provisions lawyers should consider for their partnership agreements:

• a statement that a lawyer's withdrawal from the firm does not cause a dissolution; and

• an anti-Jewel provision that governs if the firm actually does dissolve.

Other Facets

Another important aspect of the case, Hillman said, is the court's application of partnership principles to a firm organized as a limited liability company, an approach that other courts have used as well.

As for additional compensation for winding-up services, Hillman said his view is it makes no sense that the Colorado LLC statute, which the court found doesn't allow reasonable compensation for such work, differs on this issue from the Colorado partnership statute, which does allow it.

Under the Revised Uniform Partnership Act, adopted in a majority of states, partners are entitled to reasonable compensation for winding up partnership business after dissolution, Hillman pointed out. And in most states, he noted, the LLC statute likewise allows reasonable compensation for winding-up services. This compensation is roughly akin to quantum meruit, he noted.

Attorneys in LLCs in Colorado need to realize that without an agreement to the contrary, they will not be entitled to reasonable extra compensation for work they undertake on pending cases if the firm dissolves.

Lawyers Went Their Own Ways

The LaFond case involved two lawyers, Richard C. LaFond and Charlotte N. Sweeney, who when they formed an LLC orally agreed to share equally in the firm's profits without regard to who brought cases into the firm or who did work on them. When the firm dissolved on June 1, 2008, several cases were pending, including a False Claims Act lawsuit in which the firm was representing a qui tam whistleblower.

LaFond continued to represent the plaintiff after the firm dissolved. When Sweeney lodged a notice of attorneys' lien, LaFond filed a declaratory judgment action to determine how the fee that might be generated by the qui tam case should be distributed.

The trial court calculated the value of the case through a form of quantum meruit analysis by multiplying the hours worked on the case up to the date of the firm's dissolution and an hourly billing rate. Sweeney would be entitled to half of that value at most if a contingent fee is recovered in the case, the trial court decided. (A settlement was subsequently reached in the underlying case, generating a contingent fee.)

The court of appeals disagreed with this ruling. It sided with Sweeney and held that the entire contingent fee to which the firm was entitled must be divided equally, not just the hourly value of the case as of the date of dissolution.

Bernard said there was some indication in the record that LaFond and Sweeney may have reached an agreement about dividing the fee. If so, the trial court should implement that agreement on remand, he directed.

Three Key Principles

As a general rule, Bernard observed, the distribution of a dissolved LLC's assets is governed by statutes and any relevant written agreement that its members have approved. When the LLC here dissolved, however, there was no written agreement that described how the firm's assets should be distributed between the two members or how the contingent fee generated from the disputed case should be distributed.

Bernard grounded his analysis on three key principles. First, he examined the professional obligations that attorneys owe clients, and from that examination he distilled the principle that “cases belong to clients, not to attorneys or law firms.” Clients have a nearly unfettered right to choose who will represent them, and any decision about the distribution of a firm's assets must protect the interests of the firm's clients, he said.

Second, Bernard evaluated the nature of attorney-client fee agreements and concluded that “when attorneys handle contingent fee cases to successful resolution, they have enforceable rights to the contingent fee.”

Third, his analysis of the law of LLCs generated the , principle that “a contingent fee may constitute an asset of a dissolved law firm organized as an LLC, which is to be divided among the firm's members once it is dissolved.”

Winding-Up Fees

En route to this third principle, Bernard drew heavily on decisions from other jurisdictions, as Colorado had no case law addressing the distribution of a dissolved LLC's assets.

In cases involving the allocation of contingent fees following a law firm's dissolution, the court said, other jurisdictions have applied principles of partnership law to professional associations, professional corporations, law corporations, and LLCs. The law of partnerships is suitable under Colorado law for analyzing the issue of distributing fees after an LLC's dissolution, Bernard decided.

Members of LLC firms owe each other fiduciary duties, the court said. After dissolution an LLC remains in existence to wind up its unfinished business, such as completing its representation of a client in a pending contingent fee case, Bernard said. An attorney who carries on the representation of a client on an existing case after a law firm dissolves does so on the firm's behalf, he stated.

Bernard also emphasized that Colorado's LLC statutes require members to account for any property or profit derived in winding up the firm's business, and obligate them not to act as an adversary to the LLC in winding up its business.

Thus, he stated, “any income received by a member from winding up unfinished business belongs to the dissolved firm, and any attempt by the member to convert such business solely to his or her own business violates the duty owed to the dissolved firm.”

These two concepts—that a pending contingent fee case constitutes unfinished business of a dissolved firm and that a former LLC member who completes the case necessarily does so on behalf of the firm—lead to the conclusion, Bernard said, that “the fee ultimately earned in such a case is an asset that belongs to the firm.”

Majority Rule

As for how that asset should be apportioned among the members of an LLC going out of business, Bernard said: “The great majority of states have concluded that contingent fees ultimately generated from cases that were pending at the time of dissolution of a law firm must be divided among the former law partners according to the fee-sharing arrangement that was in place when the firm dissolved.”

As authority, he cited the Jewel case and decisions to similar effect from other jurisdictions.

Thus, Bernard said, “absent a contrary agreement, a contingent fee earned during the winding up of an LLC is subject to the fee-sharing arrangement that existed at the time of dissolution.”

While agreeing with the majority view, Bernard distinguished between a pending contingent fee case as unfinished business to be completed in winding up a firm, and the fee generated by that case as property of the firm. Cases belong to clients, not lawyers, but when an attorney fulfills his bargain in a contingent fee case the client is obligated to pay the fee, and the fee is an asset of the law firm, he explained.

For several reasons, the court declined to follow Welman v. Parker, 328 S.W.3d 451, 26 Law. Man. Prof. Conduct 718 (Mo. Ct. App. 2010), which held that a dissolving law firm loses the right to collect its contingent fee and is limited to quantum meruit recovery when a client terminates his relationship with the firm and follows one of its lawyers to her new place of practice.

Welman clearly is the minority view, and it conflates contingent fee cases and the attorneys' fees they produce, Bernard said.

No Extra Compensation

The court also decided that in Colorado an attorney who winds up a contingent fee case on behalf of a dissolved LLC law firm is not entitled to compensation beyond a share of the contingent fee.

In reaching this conclusion, Bernard emphasized that Colorado's LLC statute does not expressly authorize payment of compensation to former members who wind up the LLC's business. The LLC differs in this regard, he noted, from Colorado's uniform partnership statute, which provides that partners are entitled to receive reasonable compensation for services rendered in winding up the partnership's business.

Bernard also observed that Jewel and other cases reject the concept of awarding an attorney additional funds for winding up a contingent fee case. Jewel pointed out that partners may make an agreement if they wish to avoid the obligation to wind up partnership business without earning extra compensation for such work, he said.

Equal Division, Absent Agreement

The court concluded that the contingent fee allocated to LaFond in the contingent fee case is the law firm's asset, and that because LaFond and Sweeney orally agreed to share equally in all of the firm's profits, without regard to who brought cases into the office or who did work on them, each is entitled to an equal share of the contingent fee obtained by LaFond in the case.

On remand, the court directed, the trial court must award one-half of the entire fee to LaFond and one-half to Sweeney, unless the two lawyers have reached some other agreement about the division of the fee.

If there is some such agreement, the trial court must incorporate that agreement into its division while preserving the equal division of the entire contingent fee to the greatest extent possible, the court instructed.

Dean Neuwirth of Dean Neuwirth PC, Denver, represented LaFond. Jennifer M. Osgood, Burn Figa & Will, Greenwood Village, Colo., represented Sweeney.

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