Contingent Fees Earned After Firm Breakup Belong to Entity, Not to Individual Lawyers

By Samson Habte  


Absent an agreement to the contrary, fees earned on contingent fee cases that were pending when a law firm broke up must be shared as partnership assets and do not belong solely to the lawyers who finished up the cases, the full Pennsylvania Superior Court ruled Nov. 26 (Huber v. Etkin, Pa. Super. Ct. (en banc), No. 3356 EDA 2010, 11/26/12, on rehearing in 27 Law. Man. Prof. Conduct 539).

The court's 7-2 en banc ruling affirmed a panel decision which held that unrealized contingent fees are firm assets that cannot be unilaterally claimed by a departed partner who completed the cases after the firm dissolved, unless there is an agreement that says so.

Writing for the majority, Judge David N. Wecht noted that the contingent fee cases at issue here were “obtained with partnership resources” before the firm dissolved and entered its winding-up phase. “Therefore, they were partnership assets,” Wecht said, and it “does not matter whether the contingency fees were realized at the time of dissolution, because the partnership business had yet to wind down.”

Two dissenting judges noted that the clients whose cases produced the fees chose to have the departing lawyer continue their representations. The majority applied the Uniform Partnership Act “in a manner that erroneously supersedes the right of each client to determine his or her representation,” they said.

Breaking Up.

Ronald A. Huber and Michael A. Etkin formed Etkin & Huber LLP in 2002. Later that same year, their firm partnered with Jack Yankowitz to form Yankowitz, Etkin and Huber LLP.

Huber decided to leave in 2007, and the partners sent letters to firm clients informing them that they could choose which lawyer they wanted to continue representing them.

A fight over the division of partnership assets ensued. Huber sued Etkin over approximately $203,000 in pre-dissolution profits that he claimed he was owed. Etkin counterclaimed for a share of contingent fees that Huber earned on cases that were open when the firm dissolved and that he completed elsewhere.

The partnership agreement was silent as to how to divide unrealized contingent fees, Wecht said, and the parties held “diametrically opposed views” on the issue.

“[Huber] believed that he should receive his share of the partnership assets as of the date of dissolution, and that anything earned after dissolution belonged to his new firm regardless of when the case had begun,” the court said, while Etkin contended that “any case that was initiated during the partnership belonged to the partnership and that any sums earned from those cases, regardless of when earned and regardless of which attorney the client chose upon dissolution, were partnership assets.”

After a bench trial, Huber was awarded $163,902 in pre-dissolution profits. The trial court rejected Etkin's counterclaim for a share of the fees that Huber received after completing the cases of the clients who followed him after his departure.

However, the court subsequently concluded that it erred in ruling against Etkin on the issue of whether the partnership was entitled to post-dissolution fees from the contingent fee cases. Accordingly, it granted Etkin's motion for a new trial.

A three-judge superior court panel affirmed; Huber requested, and was granted, en banc review.

UPA Controls.

In affirming the panel's ruling, the full court noted that the absence of a contractual agreement as to how to distribute the fees meant that the default rule in the Uniform Partnership Act controlled.

Under the UPA, a partnership is not terminated at dissolution and continues its existence until the affairs of the business are wound up.

It is at that point that the division of surplus partnership property is determined, Wecht explained, and thus Huber was wrong in arguing that, absent a contractual agreement, distribution could have been accomplished at the time of dissolution.

Most jurisdictions hold that post-dissolution contingent fees are assets of the partnership.
Judge David N. Wecht

The court acknowledged that “the UPA's definition of partnership property does not speak directly to contingency fees.” However, its provisions do “indicate that unrealized contingent fees are subject to the continuing [fiduciary] duty to the partnership during winding up,” Wecht added. That suggests that Huber was obligated to share his fees with his former partners, he said.

“Other jurisdictions have reached similar results, generally holding that contingency fees are assets of the partnership,” Wecht noted. He acknowledged, however, that “at least one jurisdiction does not agree,” citing Welman v. Parker, 328 S.W.2d 451, 26 Law. Man. Prof. Conduct 718 (Mo. Ct. App. 2010).

What About the Clients?

The majority further rejected the dissenters' argument that the court's holding would interfere with clients' right to choose their attorney. “[T]he client's right does not diminish or change the fiduciary duties of the partners,” it declared.

Judge Sallie Updyke Mundy, joined by Judge Cheryl Lynn Allen, strongly took issue with that conclusion.

Mundy noted that clients who followed firm lawyers out the door signed new contingent fee agreements and that the firm's letters asking the clients to choose whom they wanted to represent them did not indicate that their choice would have a “continuing partnership obligation.”

“In these circumstances, I conclude the clients' choices did extinguish that continuing duty,” Mundy wrote.

Huber was represented by Edward J. Kelbon Jr. of Reger Rizzo & Darnall, Philadelphia. Etkin was represented by Robert B. White Jr. of Philadelphia.

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