Attorneys' Fee Lien Enforcement Traps
LACBA Update, March 2016
By David R. Krause-Leemon, a partner at Beaudoin & Krause-Leemon, LLP, is a trial attorney who focuses on business and real estate litigation. He is also an adjunct professor of property law at Glendale University College of Law. His current professional activities include membership in LACBA's Professional Responsibility and Ethics Committee and the State Bar's Administration of Justice Committee. The opinions expressed in this article are his own.
Lawyer A represents a client in making a claim for personal injuries arising out of an automobile accident. Lawyer A has a contingency fee agreement with the client that provides for Lawyer A to receive 35 percent of any amount received in settlement if a settlement demand is made prior to the termination of the lawyer-client relationship. The fee agreement provides further that if the attorney-client relationship is terminated before a settlement demand is made, Attorney A is entitled to be paid $350 per hour for all work performed on the case up to the time of termination. The fee agreement includes a provision that Attorney A shall be entitled to a lien against any recovery by the client, whether in the form of settlement or judgment. Because the agreement is, at heart, a contingency fee agreement, Attorney A does not perceive any conflict in the fee arrangement and does not inform the client in writing that the client should seek independent legal counsel about the lien arrangement before entering into the agreement.
The client terminates the relationship with Attorney A before a settlement demand is made and hires new counsel, Attorney B. Attorney A later learns of the new representation and contacts Attorney B to inform Attorney B of Attorney A's lien. Attorney B requests that Attorney A provide support for the lien in the form of the lien agreement and evidence of the time spent by Attorney A on the client's matter. Is Attorney A's lien enforceable and, if it is, should Attorney A provide the requested information?
There is no question that an attorney can include a provision in his or her fee agreement with the client to provide for a lien against the client's recovery in the action in order to secure payment to the attorney. Where the attorney seeks to secure payment of hourly fees, the attorney's fee agreement must comply with California Rule of Professional Conduct 3-300. Specifically, because a charging lien to secure payment of hourly legal fees is potentially a security interest adverse to the client, the attorney must advise the client in writing that the client can seek independent legal advice regarding the advisability of entering into the lien agreement and the attorney must provide the client a reasonable opportunity to seek such advice. Where the attorney seeks to secure payment of a contingency fee, however, compliance with Rule 3-300 is not necessarily required.
In the hypothetical above, Attorney A had both a contingency agreement and a "fallback" hourly arrangement. In entering into such an arrangement, Attorney A appears to be attempting to "backstop" the quantum meruit or "lodestar" analysis that would take place to determine what portion of any eventual recovery the terminated attorney would be entitled to if the client recovers after hiring replacement counsel. By providing for an alternate hourly rate in the event of termination, the attorney can presumably short circuit the need to engage in a quantum meruit analysis and instead apply a straightforward hourly rate to the time spent on the matter prior to termination. But, does the inclusion of the hourly fee alternative in the event of termination require that the attorney comply with Rule 3-300 when compliance might not otherwise be required if the agreement provided only for a contingency?
At least one unreported case has answered that question in the affirmative. In Yagman v. Galipo, the original attorney had a fee agreement providing for a contingency fee. However, the fee agreement provided that if the attorney was terminated prior to recovery, then the attorney would be compensated on an hourly basis if the client later recovered. The attorney argued that Rule 3-300 did not apply because the agreement was, at heart, a contingency fee agreement. However, the district court concluded that because the agreement provided for an hourly fee in the event of termination, Rule 3-300 applied and the attorney could not enforce a lien based on the agreement because the attorney had failed to provide written notice to the client of the client's right to seek outside advice (and a reasonable opportunity to in fact do so) before entering into the fee agreement providing for a charging lien. The court made it clear that the ability of the attorney to recover fees was not at issue, but the lien was not enforceable.
The district court's reasoning seems sound, because when the alternate hourly fee arrangement is triggered by the attorney's termination, and the attorney seeks to enforce a lien based on the alternative hourly fee arrangement, the California Supreme Court decision in Fletcher v. Davis becomes directly applicable. Thus, in order to enforce a lien based on alternative fee provisions (and before asserting such a lien), an attorney should comply with the requirements of Rule 3-300 and be sure to advise the client in writing of the client's right to seek independent counsel and an opportunity to actually seek such counsel before agreeing to the lien arrangement. Because Attorney A did not do so in the hypothetical above, it appears that Attorney A's lien is not enforceable.
Assuming that Attorney A's lien was enforceable, Attorney A should be prepared to provide Attorney B with evidence to support Attorney A's lien claim. Whether a lien to secure payment of hourly fees is perfected through compliance with Rule 3-300 or whether an attorney has a lien on a contingency recovery for which the attorney will recover on a quantum meruit basis, the underpinning support for payment in both circumstances will start with an analysis of the amount of time spent by the attorney on the client's matter. Thus, an attorney who seeks to assert or enforce a lien in either circumstance should be prepared to provide evidence of the amount of time spent. While such evidence can be supplied through testimony, as opposed to billing records, evidence of the time spent will nonetheless be required, because the burden of proof in establishing the right to payment is on the attorney.
Accordingly, attorneys should be prepared to respond to client requests for information about the amount of time spent on the client's matter prior to termination. Where a client is attempting to make an informed decision about whether to settle a matter or not, the client needs to be able to understand and evaluate the amount of the prior attorney's lien and the impact that lien might have on the net amount to be realized by the client in settlement. Where, for example, the attorney's lien is based on an hourly rate for time spent on the matter and the client requests that an attorney provide the client with an explanation of the attorney's time on the matter, the attorney had better be prepared to do so or be willing to release the lien claim.
LACBA's Professional Responsibility and Ethics Committee welcomes new inquiries from LACBA members regarding ethical issues or concerns about professional responsibilities. The identity of the inquirer is kept confidential within the committee. The committee, however, does not publish formal opinions that are the subject of any pending litigation involving the inquirer. If you have an ethical question that you would like the committee to consider, you can mail your written inquiry to Los Angeles County Bar Association, Professional Responsibility and Ethics Committee, P.O. Box 55020, Los Angeles, CA 90055-2020, or e-mail your inquiry marked "Confidential" to Member Services at firstname.lastname@example.org.