CARAWAY, J.
In this dispute over the validity of an attorney-client fee contract, the clients claim that the fee contract obligated them to pay the attorneys hourly fees throughout the course of extensive litigation to recover their family's property and mineral rights. Despite the clients' payment of considerable hourly fees over three years during such litigation, the attorneys then elected a one-third contingency fee under the terms of an additional option extended to them in the fee contract. With this suit, the clients assert as a matter of law that the fee arrangement with the attorneys,
In January of 2005, the late John C. Skannal sought legal advice from attorney John S. Odom, Jr., of the firm Jones & Odom, LLP (hereinafter "J & O"), regarding the validity of nine transactions Skannal had entered into with his former business partners, the Bamburgs. In March of 2005, Odom prepared a power of attorney for Skannal's execution in favor of his son, John Barron Skannal ("Barron"), due to Skannal's worsening health and mental decline. Thereafter, Barron and his brother, A.C. Skannal, III ("A.C."),
The Fee Agreement forms the basis of this dispute and appeal. Paragraph II of the agreement reads as follows:
The Fee Agreement goes on to give a present assignment to J & O of a one-third interest in the subject matter of the suit, as permitted by La. R.S. 37:218.
Skannal paid J & O a $150,000 retainer in accordance with the Fee Agreement. The following day, March 14, 2005, J & O instituted suit against the Bamburgs to rescind nine agreements on the grounds of incapacity and fraud.
The record shows that between March of 2005 and August of 2008, the Skannals paid J & O hourly fees totaling approximately $900,000. The Skannals admit to experiencing cash flow problems and falling behind on payments by August 8, 2008, when invoice No. 1807 was sent to them in the amount of $59,120.74.
Enclosed with the letter were copies of a proposed amendment to the Fee Agreement (hereinafter "Amendment") which was finalized by the parties on October 9, 2008. The Amendment changed the first paragraph of II.(C) of the original Fee Agreement to add the following language:
Otherwise, the contingency fee option as originally expressed in 2005 remained the same.
By June of 2009, an appeal of Skannal I was granted.
The Fee Disbursement Agreement calculated J & O's contingency fee as a total of 33.33% of the $902,801.66 ($300,903.79) money judgment; in addition, a 33.33% share of "all the funds received from the various oil and gas companies" that were held in suspense since November 12, 2005; plus 33.33% of "future oil and gas revenues attributable to the interests of John C. Skannal" recovered as a result of Skannal I; and 33.33% of the stock of the company and membership interest in an L.L.C. recovered as the result of the suit. Further, in addition to the contingency fee matter calculated above, the Fee Disbursement Agreement stated that "the repayment obligation of Attorneys shall be fulfilled by Client taking a credit against the Attorneys' 33.33% share of the oil and gas reserves previously held in suspense." Additionally, J & O sought "out of the proceeds of the oil and gas revenues previously held in suspense," the sum of $59,075.74, $26,987.71, and $56,418.99, which were the amounts of unpaid invoices Nos. 1807, 2009, and 2639, for a total of $142,482.44. The Fee Disbursement Agreement also indicated that fees related to the appeal of Skannal I would be "handled
J & O had begun contacting oil and gas companies in the summer of 2009 to remit suspended royalties. By August 18, 2009, J-W Operating Company paid $1,139,136.11 to the Skannal Succession and on August 31, 2009, Chesapeake remitted $1,108,480.29 directly to Barron. After Chesapeake's payment, the Skannals forwarded J & O payment of $142,482.22 in hourly fees and expenses, representing the past due invoices.
Nevertheless, on September 18, 2009, the Skannals instituted this suit against J & O. Specifically, the Skannals alleged that they had paid "the Firm over $1,000,000 in legal fees, costs and expenses" as of the date of the petition and were "current in their payments on Firm invoices." The Skannals challenged the validity of the contingency fee provisions of the Fee Agreement, asserting that the agreement "did not require [J & O] to bear any risk of loss in exchange for the contingency fees." The Skannals requested a declaration of their rights with respect to "the validity and enforceability" of all three agreements "to the extent they purport to provide for and require payment of a contingency fee," and were "unreasonable, excessive and unearned." Further, the Skannals argued that J & O improperly took an interest in the subject matter of the lawsuit. On July 7, 2010, Rice filed a petition of intervention naming the Skannals and J & O as defendants and seeking payment of "a contingent attorney's fee" due him.
On March 29, 2011, the Skannals filed a motion for partial summary judgment wherein they sought a judgment declaring the contingency fee option invalid and unenforceable and annulling and rescinding the Fee Agreement. The Skannals argued that under Louisiana Rule of Professional Conduct 1.5(c) (hereinafter "Rule 1.5(c)"), the contingency fee in this case was invalid on its face.
In support of the partial summary judgment, the affidavit of Barron conceded that he signed both the Fee Agreement and the 2008 Amendment. Barron stated that between March of 2005 and August of 2008, the Skannals paid the firm more than $800,000 in hourly fees and that in July 23, 2009, J & O claimed the contingency fee by executing the Fee Disbursement Agreement. The three referenced documents and the September 18, 2008 letter from J & O to Barron and A.C. were attached to Barron's affidavit.
J & O opposed the partial summary judgment, arguing that the issue of the risk of the outcome of the matter was fact based, which must be evaluated in terms of the reasonableness of the firm's fee under Louisiana Rule of Professional Conduct 1.5(a) and was inappropriate for summary judgment. J & O characterized the Fee Agreement as a hybrid contract, which was "negotiated in an arm's length transaction with the Skannals receiving and relying on the advice of independent counsel, Carl Rice." J & O argued that the firm "risked a multitude of possible losses" that "became a colossal risk," especially upon the Skannals' failure to pay hourly fees.
The affidavits of Odom and Jones were filed by J & O in its opposition to the motion for partial summary judgment. The attorneys testified that their hourly rate for litigation services was $250-$275 and not the $200 rate employed in the Fee Agreement. Regarding the selection of the 33.33% contingency, Odom stated that J & O had initially sought the higher percentage
The affidavits also discussed the events of 2008 when the Skannals became delinquent in paying the invoiced fees. After the trial court's initial ruling in 2008, Rice asked for J & O to stop sending monthly bills because the Skannals "were broke." This led to Odom's letter proposing the Amendment to the Fee Agreement. Regarding the parties' execution of the Fee Disbursement Agreement in the summer of 2009, Odom's affidavit indicates that the firm expected to receive its $300,903.79 share of the money judgment and that the "credit back" of the previously paid invoiced fees would be accounted for out of the suspended royalties. J & O was to seek a court order in the Skannal Succession authorizing payment of those fees.
Odom also reported that in July of 2009, J & O filed a second lawsuit against the Bamburgs on behalf of the Skannals. In that connection, he received an email from Barron, in which Barron stated that "you're entitled to 1/3 of the minerals and Sligo Hills both, so don't you agree as part owner that we need to stay after Bamburg and keep the heat on."
At the conclusion of the hearing on the motion for partial summary judgment, the trial court denied the motion on October 9, 2012. The court found "many disputed facts" but stated "[w]hether or not they are pertinent as to the legality of the contract or that clause of the contract is not clear as a matter of law." Thereafter, this court granted a supervisory writ of review to consider the Skannals' claim of nullity of the contingency fee option of the Fee Agreement.
The Louisiana Supreme Court explained its powers to regulate the practice of law in Succession of Wallace, 574 So.2d 348 (La.1991), as follows:
Thus, under its inherent judicial power and its original jurisdiction, the Supreme Court of Louisiana has exclusive authority to regulate the practice of law in this state. La. Const. art. V, § 5(B); O'Rourke v. Cairns, 95-3054 (La.11/25/96), 683 So.2d 697; Mire v. City of Lake Charles, 540 So.2d 950 (La.1989). This broad grant of regulatory power includes the responsibility to exert control by adjudicatory means of individual cases as they arise, including those relative to discharge of counsel and regulation of fees, whether by contingency contract or otherwise. Saucier, supra.
Although the basic relationship between client and lawyer may be contractual, that association is nonetheless subject to the inherent authority of the Louisiana Supreme Court to positively affect that fiduciary relationship through its power to regulate the practice of law. Chittenden v. State Farm Mut. Auto. Ins. Co., 00-0414 (La.5/15/01), 788 So.2d 1140. Therefore, any dispute relative to an attorney-client relationship is subject to the close scrutiny of the Louisiana Supreme Court and is resolved under the codal provisions as illuminated by the Louisiana Rules of Professional Conduct. Id. Additionally, this court has stated that the Rules of Professional Conduct require "a thorough `education' of a client by his or her lawyer about the fee and an explanation of why the lawyer recommended to the client the particular fee arrangement to the exclusion of other fee arrangements." Watson v. Cook, 616 So.2d 803 (La.App. 2d Cir. 1993), writs denied, 619 So.2d 579 (La. 1993).
Louisiana Rules of Professional Conduct 1.5(a) and (c) regarding fees provide as follows:
Louisiana courts have long approved of the contingent fee contract to compensate attorneys. O'Rourke, supra. The Louisiana Supreme Court has defined a contingent fee contract as a contract for legal services in which the attorney's fee depends upon success in the enforcement of the client's claim. The attorney bears the risk of loss insofar as his legal services are concerned. Such contracts promote the distribution of needed legal services by reducing the risk of financial loss to clients and making legal services available to those without means. Saucier, supra. The Louisiana Supreme Court has stated that it views "the Code of Professional Responsibility as being the most exacting of laws established for the public good." Leenerts Farms, supra.
The Skannals argue that the Fee Agreement expressly assured J & O complete compensation earned under the firm's current and scheduled hourly rates upon its rendering of legal services throughout the litigation even if the Skannals lost the litigation. Therefore, the additional optional compensation provided by the one-third contingency was not "contingent on the outcome of the matter for which the service was rendered" in violation of Rule 1.5(c). Relying on the face of the contract alone, the Skannals assert that J & O was granted the unilateral option to elect the contingency fee at any time during the course of the litigation, thus allowing it to retain its guaranteed fixed fee arrangement until such time that the risk of the litigation had significantly diminished or ended. As a matter of law, on the face of the parties' contract, the Skannals seek summary judgment for the nullity of the contingency fee provision.
To the contrary, J & O disputes that view of the Fee Agreement, asserting that the affidavits of Odom and Jones raise material fact issues
When the words of a contract are clear and explicit and lead to no absurd consequences, no further interpretation may be made in search of the parties' intent. La. C.C. art. 2046. In case of doubt that cannot be otherwise resolved, a provision in a contract must be interpreted against the party who furnished its text. A contract executed in a standard form of one party must be interpreted, in case of doubt, in favor of the other party. La. C.C. art. 2056.
The determination of whether a contract is clear or ambiguous is a matter of law. Stephenson v. Petrohawk Properties, L.P., 45,296 (La.App.2d Cir.6/2/10), 37 So.3d 1145; Town of Haynesville, Inc. v. Entergy Corp., 42,019 (La.App.2d Cir.5/2/07), 956 So.2d 192, writ denied, 07-1172 (La.9/21/07), 964 So.2d 334. Ambiguity exists as to the parties' intent when the contract lacks a provision on the issue or when the language of the contract is uncertain or fairly susceptible to more than one interpretation. Stephenson, supra; Rogers v. Horseshoe Entertainment, 32,800 (La.App.2d Cir.8/1/00), 766 So.2d 595, writs denied, 00-2894 (La.12/8/00), 776 So.2d 463, 00-2905 (La.12/8/00), 776 So.2d 464.
Testimonial or other evidence may not be admitted to negate or vary the contents of an authentic act or an act under private signature. Nevertheless, in the interest of justice, that evidence may be admitted to prove such circumstances as a vice of consent or to prove that the written act was modified by a subsequent and valid oral agreement. La. C.C. art. 1848.
Parties are free to contract for any object that is lawful, possible, and determined or determinable. La. C.C. art. 1971. This "freedom of contract" signifies that parties to an agreement have the right and power to construct their own bargains. However, the state may legitimately restrict the parties' right to contract if the proposed bargain is found to have some deleterious effect on the public or to contravene some other matter of public policy. Therefore, in a free enterprise system, parties are free to contract except for those instances where the government places restrictions for reasons of public policy. Family Care Services, Inc. v. Owens, 45,505 (La.App.2d Cir.8/11/10), 46 So.3d 234.
A contract is absolutely null when it violates a rule of public order, as when the object of a contract is illicit or immoral. A contract that is absolutely null may not be confirmed. Absolute nullity may be invoked by any person or may be declared by the court on its own initiative. La. C.C. art. 2030.
Reviewing the parties' contract under these principles, we find that the Fee Agreement unambiguously set forth a fixed-fee arrangement for J & O's compensation, providing obligatory fees during the time the firm's services accrued throughout the litigation and irrespective of the outcome of the suit. In that connection, the clear language of the contract does not support J & O's assertion that upon the election of the contingency option the firm
The language of paragraph II.(C) of the Fee Agreement provides that the contingency would be "in addition to the aforementioned hourly fee." The contingent fee which J & O could elect was one-third of the "gross sum recovered." Out of the firm's portion of the assets recovered and damages received in the litigation, the Skannals would receive a "credit back" for the firm's prior earned fees.
Rule 1.5(c) suggests a risk assessment of the outcome of the matter at the inception of the fee arrangement. Instead, with this disputed discretionary option exercisable by J & O long after the fee engagement and filing of suit, J & O could gauge the amount of its earned legal fees received throughout the course of the litigation while continuously assessing the size or value and the possibility of recovery. Such weighing of the values in dispute and the consideration of the likely outcome could extend throughout the course of the litigation before the firm's election was required. In particular, the language first providing the firm's option describes the resulting "credit back" right of the Clients as extending to "all previously earned fees for work performed ... through execution of any judgment." The execution of judgment phase of any litigation is usually after the finality of a favorable judgment. Thus, fees could be earned in that phase and credited back against the contingency fee elected thereafter by the firm.
With this determination of the operation of the clear language of the parties' contract, we find that public policy for the regulation of the attorney-client fee relationship was violated upon the execution of the Fee Agreement in 2005. Such policy violation concerns the underlying premise of reasonableness reflected in subsection (c) of Rule 1.5 and specifically addressed in subsection (a). In the usual setting, with the risk of the outcome of the matter present and measurable upon entering a fee contract, the total benefit to the attorney from the contingency may extend well beyond the maximum reasonable fee the attorney could otherwise obtain by imposing a fixed-fee obligation on the client from the start. Nevertheless, in this case, J & O prepared the contract for their clients with the contingency option as an additional contractual benefit to the firm over and beyond its fixed-fee benefits for which the Skannals were obligated. The contingency fee option did not expressly provide a stipulated time for its execution. The anticipated suit against the Bamburgs was to seek a money judgment against them in addition to the return of mineral rights and other assets. Therefore, the Fee Agreement suggests by its language an allowance for the election of the firm's option even after the finality of judgment "through execution of any judgment." At such stage of a legal dispute, "the outcome of the matter" can no longer be said to involve such contingent risk to allow for the sizeable one-third contingency fee out of the subject matter of the attorney-client representation. Thus, J & O's open-ended option in this case does not fall, in our opinion, within the allowance for a contingent
Our policy concerns over the format of this Fee Arrangement as executed by the clients in 2005 have been reflected in the various commentaries for the rules of ethics. For example, reviewing the parallel American Bar Association model rules for contingency fees, one commentator observed:
Lester Brickman, ABA Regulation of Contingency Fees: Money Talks, Ethics Walks, 65 Fordham L.Rev. 247, 271 (1996).
The inclusion of the "contingent" fee within the criteria for the measure of reasonableness under Rule 1.5(a), prompted the following observation:
Lester Brickman, Contingent Fees Without Contingencies: Hamlet Without the Prince of Denmark?, 37 UCLA L.Rev. 29, 71-72 (1989).
J & O argues that these policy issues are, nevertheless, not implicated because the Fee Agreement must be considered as a so-called hybrid fee contract. The Louisiana Supreme Court has not addressed the allowance for any hybrid contingency/hourly fee contracts which might be permissible under our Rules of Professional Conduct. See, In Re Gaston, 11-0390 (La.7/1/11), 65 So.3d 1239, and In re Curry, 08-2557 (La.7/1/09), 16 So.3d 1139. Only two Louisiana appellate cases have approved of a form of hybrid contingency fee agreements. The context of the disputed fee agreements in those cases, however, involved contractual provisions converting from a contingency to an hourly fee obligation upon the client's discharge of the attorney. Gilbert v. Evan, 01-1090 (La.App.1st Cir.6/21/02), 822 So.2d 42, writ denied, 02-1903 (La. 10/25/02), 827 So.2d 1154; Anderson, Hawsey & Rainach v. Clean Land Air Water Corp., 489 So.2d 928 (La.App. 5th Cir.1986), writ denied, 492 So.2d 1221 (La.1986). These cases are therefore clearly distinguishable.
Other jurisdictions recognize contingency fee contracts which combine both substantially reduced hourly and contingency fee rates including those cases cited by J & O in brief. See, State, Public Employees Retirement Bd. v. Cacioppo, 813 P.2d 679 (Alaska 1991); Cotchett, Pitre & McCarthy v. Universal Paragon Corp., 187 Cal.App.4th 1405, 114 Cal.Rptr.3d 781 (App.Ct.2010); In re Market Center East Retail Property Inc., 469 B.R. 44, 67 Collier Bankr.Cas.2d 566 (10th Cir. BAP 2012). See also, Marketfare Annunciation, LLC v. United Fire & Cas. Co., 2009 WL 3672758 (E.D.La.2009); Arnal v. Travelers Property Cas. Ins. Co., 2007 WL 1412492 (D.Ariz.2007). J & O argues that these cases demonstrate that the Rules of Professional Conduct do not prohibit the combination of a fixed fee obligation upon a client and a contingent fee component in a hybrid fee contract. From our review of this national jurisprudence, we find that the courts in these cases addressed attorney-client contracts with pronounced differences from the Fee Agreement.
Most importantly, in these hybrid settings, the balance between the client's obligation to pay a lower hourly rate and the reduced percentage of the additional contingent reward is struck upon inception of the fee arrangement. This "hybrid" balance results from the parties' evaluation of the risk of the "outcome of the matter" and the contingent fee percentage is then fixed by the client's informed consent. Here, J & O claims a convertible fee arrangement that remained optionally available for the attorney's evaluation alone for over three years, post trial on the merits.
Second, this written contract now claimed as a "hybrid" by J & O did not inform the client that both the hourly fees to be charged and the percentage of the contingency were reduced. Here again, the option element as expressed in the Fee Agreement suggests to the contrary that either fee, the hourly payments or the one-third contingency, would fully compensate J & O for its services. The Skannals were expressly informed by the agreement that the firm's "scheduled hourly charges" would be charged, not reduced billing rates. We likewise find that a one-third contingency for this litigation cannot be viewed as a less than typical contingency fee and significantly reduced. From the language of the Fee Agreement, the contingency fee option was said to be provided "in addition to the aforementioned hourly fee" because of the pressing time constraints placed on J & O by the litigation, not because the firm had significantly reduced its hourly fees.
Third, the analyses in some of the hybrid cases noted the clients' concerns and possible inabilities for payment of the attorney's regular hourly rates. This allowed the client to negotiate a lower hourly rate while at the same time, in exchange, allowing the attorney a reduced contingency award as an additional benefit.
Thus, in summary, while we need not express our opinion over the possible use of hybrid fee arrangements in Louisiana, this Fee Agreement with J & O's unilateral option is clearly distinguishable from those reduced fee/contingent contracts sanctioned in the cited jurisprudence. As a matter of law, the Fee Agreement violated public policy by effectively eliminating the risk of the "outcome of the matter" under Rule 1.5(c). The Skannals fully obligated themselves to a fair and reasonable fixed fee arrangement in 2005, and J & O's one-third contingency fee option was a nullity.
Finally, we further address certain fact disputes and other assertions whereby J & O argues genuine issues of material fact. J & O emphasizes that after Mr. Skannal's death, the inheritance taxes, the liquidity of the estate and any possible repayment obligation the Skannals might owe the Bamburgs were great risks extending into 2008-2009. Thus, J & O argues that even with success in the Bamburg litigation, there was a great risk that "the Skannals would have been `rich' in assets and `poor' in cash and the likelihood that J & O would have recouped any fee for its four years of work would have been very slim." This depiction of the situation ignores the fact that through the August 2008 invoice, J & O had received "earned fees" of almost $900,000 for well over three years for the bulk of the litigation services. Those "earned fees," as held above, were not contingent payments that J & O might be obligated to repay upon reversal of the trial court judgments on appeal. Moreover, the risk of insolvency of a client under a fixed fee arrangement is an inherent risk in such contracts. If J & O believed that it would not be paid its fixed fees after August 2008, the Rules of Professional Conduct allow for the possible ending of representation. Louisiana Rule of Professional Conduct 1.16.
Likewise, the two additional acts which the Skannals executed in 2008 and 2009, the Amendment and the Fee Disbursement Agreement, do not create material fact issues regarding the nullity of the contingency fee provision of the Fee Agreement. In both agreements, the one-third optional contingency of the initial contract was acknowledged by the Skannals. Yet, an absolutely null provision of a contract in violation of public policy may not be confirmed. La. C.C. arts.2030 and 1842. Those two agreements prepared by the attorneys for the clients cannot provide J & O with the very same fee which was a nullity from the start.
Last, although J & O's brief repeatedly references Rice's participation as "independent counsel" for the Skannals, the public policy prohibition of this fee arrangement for the protection of an attorney's clients does not become less absolute in its nullifying effect because of another lawyer's advice. Rice's agreement for a sharing of the one-third contingency with J & O, which was entered on the same day in 2005 as the Fee Agreement, hardly allows his participation in the matter to be considered independent.
For the foregoing reasons, we grant the Skannals' partial summary judgment. The
APPLICATION FOR REHEARING
Before BROWN, CARAWAY, DREW, MOORE and LOLLEY, JJ.
Rehearing denied.