Are Unusual Contingency Fee Agreements Lawyer-Client Business Transactions?

Yes, according to a recent decision by the United States Fifth Circuit Court of Appeals. See Weiner, Weiss & Madison, APC v. Fox, No. 19-30688 (5th Cir. Aug. 21, 2020).

Louisiana Rule 1.8(a) requires a lawyer who enters into a business transaction with a client to jump through various hoops before doing so. For example, the lawyer must advise the client of the “desirability of seeking” independent counsel before entering into the transaction.

Here, the law firms representing Leslie B. Fox had a continent fee agreement that gave them “up to a 35% interest in the gross proceeds (whether cash or property) that Fox received for her claims against the bankruptcy estate and as an equity owner of the bankruptcy estate of her husband.” Id. at 2. The firms did not comply with Rule 1.8(a) in entering into this transaction with Ms. Fox.

The firms argued, however, that their contingent fee agreement was not a “business transaction” subject to Louisiana Rule 1.8 because “it did not convey an interest in property; it only provided the Firms a future claim to 40% of the proceeds of the bankruptcy proceedings, to the extent they were any.” Id. at 8. The Fifth Circuit flatly rejected their argument:

this strained definition of “business transaction” deprives Rule 1.8(a) of its very purpose and borders on (if not crosses over into) absurdity.

On the contrary, observed the court, decisions “from sea to shining sea” have recognized that a fee agreement that gives a lawyer ownership in a client’s business implicates Rule 1.8(a). Id. at 10.

Because the fee agreement here violated Rule 1.8(a), the firm’s agreement directly violated a disciplinary rule. As a result, said the court, the agreement is “unenforceable.” Id. at 8 (quoting Hodges v. Reasonover, 103 So. 3d 1069, 1073 (La. 2012).

Considering this opinion, a Louisiana lawyer who seek to enter into any sort of unusual or atypical contingent fee agreement should strictly comply with Rule 1.8(a) out of an abundance of caution. The risk of failing to do so could be severe, as it was for the lawyers in Fox–forfeiture the agreed-upon contingent fee.

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