North Carolina Business Litigation Report
NC Court of Appeals Rules in Law Firms' Fight Over Contingent Fees
There's invariably a fight between lawyers over the division of a fee when a lawyer who left the firm generates a fee at his new firm from a preexisting contingent fee relationship. There's at least one case of that type in the Business Court (Mitchell, Brewer, Richards, Adams, Burge & Boughman, PLLC v. Brewer), and the Court of Appeals tangled with one last Tuesday, in Crumley & Associates, P.C. v. Charles Peed & Associates.
The Crumley Firm had an employment agreement with Snyder, an associate who left the firm. The agreement said that Snyder would pay it 70% of the fees he realized from clients who followed him from the Firm. He was also required to reimburse the Crumley Firm for any funds it had advanced to the clients.
Approximately 30 clients followed Snyder with their workers' compensation claims to his new firm, Peed & Associates, and substantial fees (more than $300,000) were generated. After the Crumley Firm sought its 70% cut, Snyder went to the NC State Bar, asking for an opinion on the enforceability of the agreement. In a Formal Ethics Opinion, 2008 FEO 8, the Bar ruled the agreement unenforceable, and said it was in violation of Rule 5.6 of the Rules of Professional Conduct.
That wasn't the end of the matter. The Crumley Firm then sought recovery on a quantum meruit basis. The trial court awarded the Crumley Firm $147,946.53 as its reasonable share of the fees. Both sides appealed. Crumley wanted more from Peed's hide, but Peed wanted to pay less, including getting out from under a $1.00 judgment against it for constructive fraud. That must have hurt Peed's pride more than its pocket.
Note that the opinion gives no guidance on how the fees should have been allocated. The two firms stipulated to the amount due the Crumley Firm.
I haven't read the appellate briefs, but they were apparently sharply worded. Chief Judge Martin of the Court of Appeals admonished both sides for their tone. He said that in both their briefs and their oral arguments, they:
freely trade suggestions and outright allegations that the other has engaged in unprofessional and even unethical conduct, perhaps hoping thereby to persuade the Court toward deciding for the party engaging in the least egregious conduct. Those questions are better left to the State Bar and the parties’ peers, and we reject their attempts, in exchanging affronts, to obfuscate the purely legal issues their dispute has presented, first to the trial court, and now to this Court.
Op. at 6.
There are very few people in this world around whom I have to struggle to be civil, but none of them are on our Court of Appeals. Be on good behavior in Raleigh, even if it is against your nature.
After that admonishment, Judge Martin considered Peed's argument that the Crumley Firm had unclean hands because the employment agreement violated the Rules of Professional Conduct, and that this barred any recovery of fees whatsoever.
He rejected that argument, saying that it was of "no consequence." He said that the law "is settled in North Carolina" that:
counsel, who has provided legal services pursuant to a contingency fee contract and is terminated prior to a resolution of the case and the occurrence of the contingency upon which the fee is based, has a claim in quantum meruit to recover the reasonable value of those services from the former client, or, where the entire contingent fee is received by the former client’s subsequent counsel, from the subsequent counsel
Op. at 7-8.
Judge Martin held that the doctrine of unclean hands "is only available to a party who was injured by the alleged wrongful conduct." Op. at 9. Since the Crumley Firm had contingent fee agreements with its former clients, it was entitled to the reasonable value of its fees regardless of the supposed dirtiness of its hands with regard to Snyder and Peed.
The Court shot down the Crumley Firm's argument that Peed had a fiduciary duty to hold the fees owed to the Crumley Firm in trust. Peed had spent the fees in the course of its ordinary operations, and the Crumley Firm said that this amounted to constructive fraud. The primary basis for the claimed fiduciary obligation was RPC 1.15-2(g), which says that “if [a] lawyer’s entitlement [to fees] is disputed, the disputed amounts shall remain in the trust account or fiduciary account until the dispute is resolved.”
But the ethical rule didn't create a fiduciary obligation. The Court said that a violation of a Rule of Professional Conduct "does not give rise to civil liability in North Carolina." Op. at 12, and it reversed the one dollar judgment finding Peed liable for constructive fraud.
There's obviously no love lost between these two PI firms. They have been fighting over these fees for the past five years.
Brooks Pierce, LLP
2000 Renaissance Plaza
230 North Elm Street
Greensboro, NC 27401
1600 Wachovia Capitol Center
150 Fayetteville Street
Raleigh, NC 27601