The issue of a deduction for contingency fees that would have been paid in the underlying matter has far-reaching implications in legal malpractice claims. This is because it could potentially reduce the value of a plaintiff’s malpractice claim by a third or up to fifty percent. For instance, it is common in personal injury claims for a plaintiff to contract to pay his counsel one
Contingency fees sliced from the malpractice award.third of any recovery if the claim settles before a lawsuit. Contingency fee contracts also frequently provide for a high percentage recovery for the lawyer depending on how far through the litigation process the case must go. Some contingency fee contracts provide for a recovery to the lawyer of as much as fifty percent if a recovery is only made after appeal.

Notably, courts in three jurisdictions have adopted the view that the malpractice plaintiff’s damages are reduced by the hypothetical contingency fee that would have been paid if the case had been successful: South Dakota, Wyoming, and the federal First Circuit.* The Dallas Court of Appeals recently found that an award should not be reduced by contingency fees, because a plaintiff should not bear the cost of another set of attorney’s fees. (Akin, Gump, Strauss, Hauer & Feld, L.L.P. v. Nat’l Development and Research Corp., Case No. 07-0818.) The Texas Supreme Court refused to address this issue when the Akin Gump case came before it. The Texas Supreme Court instead ruled on other issues that it found outcome dispositive.

Nevertheless, the courts in three jurisdictions—New Hampshire, New York, and Minnesota—have adopted the view that the malpractice claimants damages should be reduced by the hypothetical contingency fee that would have reduced the plaintiff’s recovery if the claim had been properly handled. There is also a hybrid approach adopted by Tennessee, Indiana, and New Jersey, where damages are not automatically reduced by the amount of the contingent fee, but rather by the value of the services rendered to the client.

The moral to the story on allegedly mishandled plaintiff’s cases is to consider whether the damage claim is subject to a reduction for the contingency fee that would otherwise have been paid, if the underlying case had been properly handled.

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* I have removed Tennessee from the list of jurisdictions that support reducing a fee award for contingency fees. Both parties and the Dallas COA have incorrectly noted that four jurisdictions have adopted this view, by including Tennessee in the list. That no longer appears to be good law in Tennessee. In Silton v. Clements, 257 F. Supp. 63, 66(E.D. Tenn. 1966), the federal district court reduced a plaintiff’s award by the contingency fee he would have paid to his attorney. In 1985, the Tennessee Supreme Court held that a plaintiff’s damages are only reduced by the value of the services rendered to the client. Foster v. Duggin, 695 S.W.2d 526, 527 (Tenn. 1985).

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For more information on this topic see the article "Collectability, Deductibility, and Recoverability,"by Bruce A. Campbell. Texas Lawyer, June 9, 2009. For more articles on legal ethics, see Lawyer Conduct Issues.

Bruce A. Campbell is the managing shareholder in the law firm of Campbell & Chadwick, P.C. He has defended lawyers and other professionals on a variety of malpractice and other tort claims for more than 25 years in claims totaling more than $2 billion. Mr. Campbell may be reached by email or at 972-277-8585.

For about 20 years the Texas Disciplinary Rules have remained substantially the same. This year that is about to change. The Texas Supreme Court has issued proposed amendments to the Texas Disciplinary Rules of Professional Conduct. The amendments are broad and extensive. The last time the Rules underwent this level of sweeping changes was in January, 1990. After the 1990 revisions to the Rules, the number of disciplinary sanctions against Texas lawyers experienced a substantial increase approximately a year after the rules changed.   And, the number of sanctions had not returned to normal even nine years later. Lady or the Tiger? Opening the Door to Lawyer Discipline Standards, Campbell, Fla. Coastal L.J. Vol. 1, p.232-36 (1999). If there was one lesson to be learned from the last time the Rules were substantively amended, it is that it can take a decade or more for lawyers to conform their conduct to substantial changes in the Rules. Now would be a good time to start the process of helping your insureds become aware of the changes and hopefully conform their conduct to the amendments before it is too late. For more information on this topic, see Comment on Disciplinary Rules' Proposed Amendments, Texas Lawyer, December 28, 2009, and Staying Within the Lines: Proposed Rule Changes Could Blur the Lines for Attorneys.

Bruce A. Campbell is the managing shareholder in the law firm of Campbell & Chadwick, P.C. He has defended lawyers and other professionals on a variety of malpractice and other tort claims for more than 25 years in claims totaling more than $2 billion. Mr. Campbell may be reached by email or at 972-277-8585.

Center City-based Pepper Hamilton L.L.P., accused of negligence in its representation of a failed student-loan company, may not collect from two of its malpractice insurers because the firm did not disclose that it might be the target of a lawsuit, New York state's highest court has ruled.

The loan company, Student Finance Corp., went bankrupt after disclosures that it had manipulated its books to hide student-loan defaults. Its former president and founder, Andrew Yao of Bryn Mawr, was sentenced to five years in federal prison in February after his conviction on charges that he had fraudulently obtained financing for his company.

Pepper Hamilton had ceased its representation of the company in 2002, based on concerns about its operations. But the firm was sued by the bankruptcy trustee, who alleged that Pepper Hamilton had failed to ferret out information about SFC's fraudulent finances and for allegedly furthering the deception.

In a 10-page opinion issued Oct. 20, the New York State Court of Appeals said the firm should have informed its insurance carriers, Executive Risk Indemnity Inc. and Twin City Fire Insurance Co., of the risk that it might be sued at the time it renewed its coverage.

"The law firm's knowledge of its client's fraudulent payments prior to its application for excess coverage coupled with the fact that a reasonable attorney would have concluded that the law firm defendants would likely be included in the litigation . . . create an obligation for the law firm to inform its insurers," the Court of Appeals said.

Read the full story here on the Philadelphia Inquirer website.

With federal agents threatening to put his bank out of business, Allen Stanford turned to the powerhouse Miami law firm of Greenberg Traurig.

Stanford International Bank and other banks in Antigua were suspected of laundering money and were close to being cut off from the global banking community.

Not only did the firm save his bank, it helped Stanford eliminate his competition and become a top Antiguan regulator -- just years before prosecutors say he began stealing millions in one of the largest frauds in U.S. history.

Now a decade later, with Stanford charged in the massive criminal case, the law firm is being pulled into a widening inquiry of the $7 billion Ponzi scheme that wiped out thousands of investors.

Though not under criminal investigation, Greenberg Traurig is facing a legal review of its actions on this tiny island that was the center of his banking kingdom.

The court-appointed receiver trying to recover money for victims is demanding records of the legal work provided to the disgraced banker -- including that of Greenberg. The effort is the latest by the receiver to untangle the complex deals spun by Stanford as well as the conduct of his lawyers.

Read the full story here on the Miami Herald website.

The finger-pointing in Merrill Lynch's bonus troubles shifted to a new target on Monday in two courts that essentially said: blame the lawyers, The New York Times’s Louise Story reported.

Responding to questions posed by a federal judge, Bank of America and the Securities and Exchange Commission said the bank had relied on its outside lawyers to fill in the fine print in that firm’s controversial marriage with Bank of America.

That meant that lawyers at two firms — Wachtell, Lipton, Rosen & Katz as well as Shearman & Sterling — handled a decision to keep Merrill’s $3.6 billion in bonus payouts a secret from Bank of America’s shareholders, according to the filings.

It is unclear if the responses will satisfy the judge who requested them, Judge Jed S. Rakoff of the Southern District of New York. He has the power to decide whether to approve a $33 million settlement reached between Bank of America and the S.E.C. over the bank’s failure to disclose the bonuses to its shareholders.

The judge could hold a second hearing on the settlement, which he lambasted two weeks ago, or he could approve or reject it.

Read the full story here on the New York Times website.

Two former attorneys have been sentenced to decades in federal prison and ordered to pay $127 million in restitution for defrauding hundreds of clients in a diet-drug settlement.

U.S. District Judge Danny Reeves also on Monday ordered 58-year-old William Gallion and 54-year-old Shirley Cunningham Jr. each to pay a $30 million forfeiture.

Stanford Financial Group executive Laura Pendergest-Holt filed a $20 million legal malpractice lawsuit Friday against a lawyer she said caused her wrongfully to be accused of a crime.

Pendergest-Holt, chief investment officer of Stanford Financial, sued Thomas Sjoblom, who practices in New York and Washington, accusing him of legal malpractice and breach of fiduciary duty.

Pendergest-Holt faces a federal felony charge alleging she obstructed a Securities and Exchange Commission investigation into her employer by withholding information about her knowledge of company assets and her preparation for interviews by investigators.

Sjoblom accompanied Pendergest-Holt to a Feb. 10 meeting with the SEC that is central to the criminal charge. He was also at earlier meetings in Miami to discuss company assets before she spoke to the SEC.

REad the full story here on the Houston Chronicle website.