Editor's Note:
State Bar Ethics Opinions cite the applicable California Rules of Professional Conduct in effect at the time of the writing of the opinion. Please refer to the California Rules of Professional Conduct Cross Reference Chart for a table indicating the corresponding current operative rule. There, you can also link to the text of the current rule.
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1. Under a contingency fee contract, where there is no specific provision governing when and how attorneys' fees shall be paid in the event of a structured settlement, to what extent is an attorney permitted to receive attorneys' fees from the initial down payment?
2. May an attorney contract with a client that in the event of a structured settlement, the attorney shall receive the entire amount of attorneys' fees from the initial settlement down payment? In the event of such an agreement, what limits, if any, can an attorney place on acceptance of an offer of settlement from the opposing party?
An attorney whose fee agreement is silent as to how attorneys' fees shall be paid in the event of a structured settlement is permitted to receive fees only on the same pro rata basis that the client receives compensation.
While an attorney may contract with a client to receive the entire fee at the time of settlement, that contract must comport with rule 4-200 of the California Rules of Professional Conduct, regarding unconscionable fees and, to the extent applicable, rule 3-300, regarding attorneys having possessory or pecuniary interests adverse to their clients. Moreover, the contract must be in writing and signed, and otherwise fully comply with Business and Professions Code section 6147. This compliance must include a statement specifying how payment of attorneys' fees in full at time of settlement will affect the structured recovery of the client.
An attorney is obligated to present all significant settlement proposals to the client; if an offer acceptable to the client is received, an attorney can receive the entire fee if such receipt comports with rule 4-200.
Rules 3-300, 3-500, 3-510 and 4-200 of the Rules of Professional Conduct of the State Bar of California.
Business and Professions Code section 6147.
By written contract, Attorney has agreed to represent Client on a percentage contingency fee basis. Sometime after suit is filed, settlement is offered by Opposing Party. The settlement proposed is a "structured settlement," which would be paid out to Client as an annuity during his lifetime. A relatively small percentage of the total value of the "structure" is to be paid by Opposing Party in cash at the time of settlement. This percentage is substantially less than the percentage which Attorney is to receive for her fee. It is Attorney's desire to receive the entirety of her fee at the time of settlement and initial payment.
The above situation must be analyzed by evaluating the circumstances both at the time of making the contract, and at the time of proposed settlement.
The contract between Attorney and Client will ordinarily govern the extent to which Attorney's fee shall be paid at time of settlement. This contract must be in writing and signed by the parties. (Bus. & Prof. Code, § 6147 (a).) Moreover, if it is Attorney's intent to receive her entire fee at settlement, this is a significant fact relating to her employment which must be disclosed to the client. (Rule 3-500, Rules Prof. Conduct of State Bar.) If this arrangement is not set forth in the fee agreement, the agreement will properly be strictly construed against Attorney, who wrote the agreement. (See, e.g., Alderman v. Hamilton (1988) 205 Cal.App.3d 1033, 1038 [252 Cal.Rptr. 845].)
Thus, if the written agreement is silent as to when and to what extent Attorney shall be paid her percentage fee in the event of a structured settlement, she could not receive her entire fee at time of settlement, and would instead receive payment only on a pro rata basis. That is, she would receive her agreed-upon percentage of Client's first payment and all subsequent payments. Given the administrative headache such an arrangement might cause, Attorney and Client would be free to contract further between them at or near the time of settlement to "cash out" Attorney, so long as such agreement meets the requirements of rules 3-300 and 4-200 and section 6147 of the Business and Professions Code (see infra, discussion) and so long as Client's informed consent is obtained.
A written fee agreement containing a provision that in the event of a structured settlement, the entirety of Attorney's fee shall be paid at time of settlement must first withstand scrutiny under rule 4-200. That rule prohibits a member from both entering into an agreement to charge an unconscionable fee and charging or receiving an unconscionable fee.
However, resolving questions about whether an agreement is unconscionable does not end the inquiry as to the agreement's propriety. Attorney has a fiduciary relationship with Client, one of "the very highest character." (Neel v. Magana (1971) 6 Cal.3d 176, 189 [98 Cal.Rptr. 837].) This fiduciary relationship includes the duty to disclose all information that materially affects Client's interest. (See Day v. Rosenthal (1985) 170 Cal.App.3d 1125, 1149-1150 [217 Cal.Rptr. 89].) Moreover, any agreement between Attorney and Client to the benefit of Attorney will be closely scrutinized. (See Hunniecutt v. State Bar (1988) 44 Cal.3d 362, 372 [243 Cal.Rptr. 699] and Maxwell v. Superior Court (1982) 30 Cal.3d 606 [180 Cal.Rptr. 177].) "Attorney fee agreements are evaluated at the time of their making [citations] and must be fair, reasonable and fully explained to the client." (Alderman v. Hamilton, supra, 205 Cal.App.3d at p. 1037 citing former rule 2- 107, predecessor of current rule 4-200.) More generally, rule 3-500 and Business and Professions Code section 6068 (m) also mandate candid communication.
Finally, to be valid, the agreement must also comport with Business and Professions Code section 6147 (a)(2) which states that the contract "shall include":
A statement as to how disbursements and costs incurred in connection with the prosecution or settlement of the claim will affect the contingency fee and the client's recovery. (Emphasis added.)1
Merely reciting that Attorney's fees shall be paid entirely at settlement is not sufficient to meet these requirements. Rather, the agreement must specify how paying all of Attorney's fees at settlement could affect Client's recovery. In the case of a structured settlement, the likely effects on Client's recovery include diminishing the amount available for an annuity, and deferring some or all of Client's compensation for a period of time so that Attorney is paid first, before any monies go to Client. Unless the agreement contains a candid appraisal of these effects, the requirements of Business and Professions Code section 6147 (a)(2) have not been met. For example, circumstances exist where Attorney's fees, should they be fully paid in advance of any recovery to Client, would amount to more than the entirety of the first several years of Client's annuity payments. Business and Professions section 6147, rule 4-200(B)(11) and Attorney's general fiduciary obligations to Client collectively require complete, clear and unambiguous communication should such payments meet the threshhold requirement of having Client's informed consent.
In California State Bar Formal Opinion No. 1987-94 at p. 2, we noted that our legislature has made the entering into a contingency fee contract ". . . exempt from the effect of conflict of interest rules because of public policy." This Committee therefore concluded that an attorney who advocates acceptance or rejection of a structured settlement does not by giving that advice acquire a pecuniary interest in the client's case. (Ibid). Nevertheless, where Attorney and Client enter into an agreement which "front-loads" Attorney's fee, thus possibly inhibiting Client's ability to settle or limit Client's settlement options, Attorney should be cognizant of rule 3-300, concerning the acquiring of a pecuniary interest adverse to a client, and be aware that a court of competent jurisdiction could conclude that rule 3-300 does apply at least in these limited circumstances.
When a possible structured settlement is eventually discussed and negotiated, the relative positions of Attorney and Client become more complex. No longer is the situation simply a matter of determining the theoretical apportionment of a recovery. In settlement negotiations, it is likely that the issues of the amount and timing of Attorney's fee payment will be raised by opposing counsel. Even if these issues are not directly raised by the opponents, Attorney will be obligated to raise them with Client. Moreover, Attorney and Client must together deal with the issue of costs -- often large sums paid out in advance by Attorney.
In negotiating settlement, it is important for Attorney to understand two important points. First, Attorney has an obligation to convey to Client any written settlement offer, Rule of Professional Conduct 3-510, and any offer which is "significant," whether written or not. (Rule 3-510, Rules Prof. Conduct of State Bar, Discussion, par. 2.) Second, it is Client who controls the right to settle or compromise the case, and this control relates to the entirety of Client's claim. (Alvarado Community Hospital v. Superior Court (1985) 173 Cal.App.3d 476, 480 [219 Cal.Rptr. 52]; Whittier Union High School District v. Superior Court (1977) 66 Cal.App. 3d 504, 508 [136 Cal.Rptr. 86].)
The California Supreme Court, in Maxwell v. Superior Court, supra, 30 Cal.3d, at p. 618, fn. 8, has stated that "almost any fee arrangement between attorney and client may give rise to a `conflict'." This is particularly true with structured settlements, where presentation of a structured offer of settlement creates a clear potential for a de facto conflict of interest between Attorney and Client. Perhaps the most obvious problem occurs where the initial down payment offered is small, but the overall annuity is substantial.2 When the offer comes, Attorney must not only remember that she cannot settle the case without client's consent, as we have discussed ante. She must also recognize that lawyers serve at the pleasure of their clients; a client always maintains the right to terminate the services of a lawyer at any time. (See Code Civ. Proc., § 284; Fracasse v. Brent (1972) 6 Cal.3d 784, 790 [100 Cal.Rptr. 385].) In the event of a disagreement with Client as to whether to accept the settlement, Attorney can accordingly be dismissed. Where such a conflict exists, it may also be incumbent upon Attorney to withdraw. Where Client desires a settlement to which Attorney objects, an actual conflict of interest exists between Attorney and Client, and Attorney must withdraw. Thus, notwithstanding an agreement to the contrary, Attorney may be faced with a settlement which does not permit immediate payment of her entire fee.
An offer of a structured settlement may be accompanied by opposing counsel's specific assurance that Attorney's fees will be paid in full "up front." But even counsel's specific offer of front-loaded fees does not change the requirement that Attorney may receive the fees only on a pro rata basis unless the fee agreement makes specific other provision. Should Attorney and Client wish to enter into a new agreement which would allow for Attorney's front-loaded receipt of fees, such new agreement must meet the requirements of rule 3-500 and rule 3-300, since such an agreement is best seen as giving Attorney a possessory or pecuniary interest adverse to Client, by limiting Client's settlement options.
If such a subsequent agreement between Attorney and Client is entered into, particular attention must be paid to the first prong of the rule 3-300 test -- that the terms of the transaction be "fair and reasonable to the client." Thus, the legitimate public policy interest in settling cases by structured settlements, thereby serving the needs of litigation claimants, California State Bar Formal Opinion No. 1987-94, must be balanced against the fairness of the amount and manner of distribution itself. This fairness is required both because the burden is on the attorney to establish that an agreement is fair and reasonable (see Rogers v. State Bar (1989) 48 Cal.3d 300, 314 [256 Cal.Rptr. 381]), and because an attorney's good faith compliance with rule 3-300 will be measured after the fact. (See Ames v. State Bar (1973) 8 Cal.3d 910, 920-921 [106 Cal.Rptr. 489].)
Finally, in the event settlement is accepted, even where all other requirements are met, Attorney may not accept the immediate payment of her entire fee unless such payment comports with rule 4-200. Rule 4-200 requires that the fee collected shall not be unconscionable. The rule lists 11 factors in determining the conscionability of a fee. The factor of most significance in the present situation is rule 4-200(B)(5) ([T]he amount involved and the results obtained). If this factor, considered in light of the others, results in a payment "so exorbitant and wholly disproportionate . . . as to shock the conscience," (Bushman v. State Bar (1974) 11 Cal.3d. 558, 563 [113 Cal.Rptr. 904]) then it cannot be received.
Take, for example, a wheelchair-bound Client who wants the substantial structured annuity allocated in such a way as to provide the cost of living, care, and human assistance on an ongoing annual basis to last for Client's lifetime. Here, the structure most advantageous to Client is likely to involve an initial payment of only a small percentage of the total, far less than Attorney's fee. Yet if Attorney insists on payment of the entirety of her fees before Client receives anything, the fees could eat up not only the entire downpayment but the first several years of structured annuity as well. This would defeat the very purpose behind Client's desire for such a settlement.
In such a circumstance, Attorney would have to alter her receipt of fees to avoid a unconscionable result. This is true even if the fee agreement permits her receipt of fees in their entirety in advance of payment to Client. This is the case not only because of rule 4-200, but because Attorney's ongoing fiduciary duty to Client prohibits Attorney from collecting her fees in a way that defeats the very purpose of Client's willingness to settle. Even in a less extreme situation, Attorney may have to modify her receipt of some of her fees.
The best protection for both Attorney and Client against the anomalies presented by a settlement offer that may put Client and Attorney at odds may be the inclusion, per Business and Professions Code section 6147 (a)(2), of language which recognizes and anticipates these situations and discusses how they will be dealt with when they arise, thus fully amplifying in the fee agreement how Attorney's fee and Client's recovery are interrelated.
This opinion is issued by the Standing Committee on Professional Responsibility and Conduct of the State Bar of California. It is advisory only. It is not binding upon the courts, the State Bar of California, its Board of Governors, any persons or tribunals charged with regulatory responsibilities, or any member of the State Bar.
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