Law Firms Must Return Fees Collected From Judgment That Was Later Reversed

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By Samson Habte  

Nov. 19 --Lawyers who are statutorily or judicially authorized to take their compensation from the proceeds of a trial judgment in their clients' favor may be compelled to pay back that money if the judgment is later reversed, the Indiana Court of Appeals held Nov. 7 (Minott v. Lee Alan Bryant Health Care Facilities, Inc., 2013 BL 308791, Ind. Ct. App., No. 49A05-1305-PL-213, 11/7/13).

Writing for the court, Chief Judge Margret G. Robb acknowledged the long-established common law principle that litigants who lose at trial but prevail on appeal are entitled to restitution from opposing parties or other judgment creditors who were paid before a reversal.

However, the court noted the authority is less clear as to whether restitution may be demanded from lawyers who have collected fees from the proceeds of a subsequently reversed judgment.

Addressing that issue, the court held that a lawyer will be on the hook for reimbursement if the fees that a vindicated judgment debtor seeks to reclaim were “a result of a court ordered award” or a “statute specifically granting direct payment to the [lawyer].”

Attorneys' fees obtained through a “client-directed payment” will not be subject to restitution, Robb added.

Give It Back

Several residential care facilities sued the Indiana Family and Social Services Administration over budget cuts that allegedly contravened that agency's statutory authority. The providers were awarded nearly $177,000 after a bench trial.

The state appealed and asked that the judgment be stayed. The trial court and an appellate panel denied that request. The state then tendered the damages award to a court clerk. Two law firms that represented the plaintiffs filed attorneys' liens. Two banks also intervened, claiming interests in the judgment proceeds as creditors of the plaintiffs.

The providers submitted an agreed order authorizing the release of the judgment proceeds. The order, which was entered as requested, stipulated that the law firms would receive about $72,400 and the banks would split the balance.

The appeals court reversed the underlying judgment seven months later. That decision did not indicate whether the state was entitled to restitution of proceeds that had already been disbursed.

On remand, the trial court granted the state's motion to enter a new final judgment and vacate its original award. But the court also denied a motion to set aside the order apportioning the proceeds from the now-vacated judgment, and it declined to mandate that the law firms and banks return those disbursed funds.

The state argued that the trial court erred in denying the request for restitution. The appeals court agreed.

Restatement Battle

Robb observed that the “equitable principle of restitution considers the issue in this case: payment of a judgment subsequently reversed on appeal.”

However, she acknowledged that application of the common law principle is less certain where restitution is sought from nonparty lawyers.

Robb cited Section 74 of the Restatement (First) of Restitution (1937), which addresses restitution obligations that arise when the reversal of an adverse verdict gives a judgment debtor retroactive title to funds that may have already been disbursed.

Restitution will clearly be required from an opposing party in this scenario, the court said. However, the Restatement indicates that “liability for restitution may extend beyond the named parties in the suit,” Robb noted. She pointed to a comment which states that nonparties who are considered “judgment creditors” along with a litigant may also be required make restitution.

The state argued that the law firms were judgment creditors.

The firms disagreed, pointing to another comment to Section 74 stating that an “attorney or other agent of the judgment creditor … is under no duty to repay money which he received on account of the judgment creditor and which he retains as payment for services or for a debt owed by the judgment creditor to him since he received the money as a bona fide purchaser.”

Agents, or Creditors?

The key issue on appeal, Robb said, “is whether the Law Firms were judgment creditors or merely entities which received payment from a judgment creditor (the Providers) for services rendered.”

Under the circumstances here, the court concluded, the law firms “were judgment creditors or their lawful equivalent and are therefore liable for restitution.”

The court pointed to a Black's Law Dictionary entry defining a “judgment creditor” as a “person in whose favor a money judgment is entered or a person who becomes entitled to enforce it.”

“Liens filed against the Providers' judgment entitled the Law Firms to the judgment proceeds,” Robb explained. Noting that “an attorney's lien take[s] priority over the rights of other creditors, including the judgment creditor,” she added: “If the [law firms'] rights to the judgment were greater even than the Providers' rights, we see no logical reason to treat them differently for the purposes of restitution.”

That conclusion is bolstered by the fact that the law firms were granted an order that “gave [them] the right to enforce the judgment,” Robb continued.

But a different result might be warranted if the law firms did not have “the power to enforce the judgment in their own favor,” Robb said.

The law firms, she explained, would not be liable for restitution if they were “paid at the voluntary direction of the Providers,” their clients, rather than through a “court ordered award” or a “statute specifically granting direct payment” of attorneys' fees.

Todd A. Richardson, Joseph P. Rompala and Kevin A. Morrissey of Lewis & Kappes P.C., Indianapolis, appeared for the law firms.

The state was represented by Attorney General Gregory F. Zoeller and Deputy Attorney General Frances Barrow, Indianapolis.

To contact the reporter on this story: Samson Habte in Washington at shabte@bna.com

To contact the editor responsible for this story: Kirk Swanson at kswanson@bna.com


Full text at http://www.bloomberglaw.com/public/document/Minott_v_Lee_Alan_Bryant_Health_Care_Facilities_Inc_No_49A051305P.

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