98-6.

• Case Date: September 25, 1998
• Court: Kansas

Kansas Ethics Opinion 1998. 98-6. September 25, 1998KBA Legal Ethics Opinion No. 98-6September 25, 1998 TOPIC: Subject Matter Contingent fee contracts DIGEST: Contingent fee contracts regarding a reasonable percentage of the property that is the subject of litigation, or corporate stock that is the subject of litigation, are not per se unethical, depending on the circumstances in the case. However such contracts are subject to close judicial scrutiny because, unlike ordinary personal injury-based contingent fee contracts, subject matter contingent fee contracts involve questions concerning both the value of the services and the lawyer's special knowledge of the value of the property. Such contracts are difficult to reconcile with peculiar parts of the Kansas rule on fee contracts and may void malpractice insurance coverage. We believe entering into such contracts would violate MRPC 1.8(h) absent scrupulous adherence to the rule's requirements of independent consultation and representation by the client. Date of Request: April 27, 1998 Reference: MRPC 1.2, 1.5, 1.7, 1.8 Legal Ethics Opinion 80-50, Legal Ethics Opinion83-8 Various cases cited herein Withdrawn: KBA Legal Ethics Opinion 80-50 The function of the Kansas Bar Association's ethics advisory service is to respond to inquiries from Kansas-licensed lawyers concerning proposed conduct. The limitations on the service do not allow us to render an opinion regarding past conduct or the conduct of someone other than the requesting attorney. The following constitutes only the opinion of the Committee on Professional Ethics-Advisory Services, and is not in any way intended to be a guarantee of a particular result or a conclusion by appropriate authorities. Further, this document constitutes the Committee's opinion based on the facts and information contained in correspondence above referenced. It is based on a review of the disciplinary rules, model rules of professional responsibility and conduct, and applicable case law. This opinion is not a grant of immunity from any form of legal or disciplinary proceeding. The opinion herein is that of a KBA committee without official government status. The Kansas Bar Association expressly disclaims any liability in connection with issuing this opinion. FACTS Civil litigation firm states various scenarios where because of penurious corporate clients they may need to seek a contingent fee agreement where the "res" is not money from another litigant but rather the subject matter of the litigation itself. QUESTIONS Four questions are posed: 1. May a law firm take a reasonable percentage interest in disputed commercial real estate if the conveyance of such interest is contingent on the attorney helping the client successfully obtain title to the real estate? 2. May the firm take a reasonable interest in corporate stock the defendant was to have conveyed to the firm's client but did not, the interest being contingent on successful prosecution of the lawsuit for specific performance? 3. May the law firm help a new client corporation defend itself in a lawsuit if the firm receives in lieu of a fee a reasonable stated percentage of the corporation's stock to be paid whether or not the lawyer is successful in the representation? 4. May the law firm help a new corporation defend itself in a lawsuit if the firm receives in lieu of a fee a reasonable stated percentage of the corporation's stock contingent on a successful defense of the lawsuit under criteria for success set forth in the fee agreement. ANALYSIS This committee has not visited such questions since the 1988 change from the Kansas Model Code to the Model Rules. There is an abundance of case law and opinions indicating that, if the contract is otherwise reasonable under the circumstances and other rules are complied with, such fee arrangements are not per se improper. [1] However, we also begin from the premise that Model Rule 1.8 prohibiting transactions with clients is the chief guiding principle in this area, not MRPC 1.5 regulating fees. Venue We begin our analysis by assuming that the questions are for a Kansas attorney and Kansas client using a fee contract made in Kansas, regardless of the situs of the litigation. New case law indicates that in such situations, Kansas MRPC 1.5 applies to the construction of the reasonableness of the fee. [2] If the venue of the fee contract is not Kansas, this analysis may not be appropriate due to the unique nature of MRPC 1.5 in Kansas. MRPC 1.5 and the Element of Risk If the firm wants to continue with the subject matter contingent fee, it must understand the greatest criticisms levied against the modern contingent fee comes when there is little or no contingency to the fee. [3] If such fees result in abnormally high hourly rates on a comparison basis and when there is little time or risk in the case, the fees are considered to be unreasonable. [4] Fundamental to our discussion here is the two-fold requirement in MRPC 1.5 that the fee agreement, however calculated, must be reasonable under the circumstances and based on an element of risk. There is attractiveness in corporations being able to offer a contingent fee arrangement to attract outside counsel. Contingent fees in corporate settings allow stockholders to off-load some of the risk of litigation onto law firms. When the object of the representation is to obtain funds from another party owed to the corporation and from which a contingent fee can be taken, that is one thing. When the object of the representation is such that the lawyer is paid in corporate stock, then issues of acquiring a proprietary interest in the matter are raised. The Comment to MRPC 1.5 specifically recognizes alternative contingent fee contracts: "A lawyer may accept property in payment for services, such as an ownership interest in an enterprise, providing this does not involve acquisition of a proprietary interest in the cause of action or subject matter of the litigation contrary to Rule 1.8(j). However, a fee paid in property instead of money may be subject to special scrutiny because it involves questions concerning both the value of the services and the lawyer's special knowledge of the value of the property." (Emphasis added) The rules allow use of contingent fees in matters where the litigation does not produce a common fund or res. Unfortunately, neither MRPC 1.5 nor its comment discusses when the line between legitimate fee and proprietary interest is crossed. Professor Charles Wolfram has stated this determination is a "subtle" enterprise. [5] We believe it important to note from the outset the distinction between subject matter contingent fee contracts involving litigation and those involving the use of noncash property to compensate an attorney for office advice or transactions not amounting to potential litigation. We do not opine on those nonlitigation instances, since no such question was asked of us. The Risk/Reasonableness Analysis The requirement of reasonableness in subject matter contingent fee agreement must be augmented by some element of risk that there will be no success in the representation. If there is little or no risk of nonrecovery, the fee should be on some non-contingent basis. Thus in a land partition action, where a client will end up with some part of the land which has value, the attorney might take a surety interest in that portion of the land...