Mitzel v. Westinghouse Elec. Corp. , 72 F.3d 414 ( 1995 )

Opinions of the United
1995 Decisions States Court of Appeals
for the Third Circuit
12-29-1995
Mitzel v. Westinghouse Elec. Corp.
Precedential or Non-Precedential:
Docket 94-5666
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UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
No. 94-5666
KIRK MITZEL; JANET MITZEL, h/w
v.
WESTINGHOUSE ELECTRIC CORPORATION;
DRAVO CORPORATION; DICK CORPORATION;
CORTEC INDUSTRIES, INC., t/a, d/b/a INLAND BUILDINGS;
DAVY McKEE CORPORATION, t/a, d/b/a DAVY DRAVO;
DRAVO ENGINEERING COMPANIES, INC.;
CORTEC INDUSTRIES, INC., t/a, d/b/a SUMMIT BUILDINGS;
S.B. ACQUISITION COMPANY, t/a, d/b/a SUMMIT BUILDINGS
DICK CORPORATION; DRAVO CORPORATION
Third-Party Plaintiffs
v.
A.C. DELLOVADE, INC.;
DAVY McKEE CORPORATION, t/a, d/b/a DAVY DRAVO
Third-Party Defendants
Kirk Mitzel and Janet Mitzel, by and with
their Attorneys, A Dragon Associates,
Appellants
(Caption amended per the Clerk's 11/04/94 Order)
On Appeal from the United States District Court
for the District of New Jersey
(D.C. No. 91-cv-05689)
Submitted Pursuant to Third Circuit LAR 34.1(a)
July 17, 1995
Before: SLOVITER, Chief Judge, SCIRICA, Circuit Judge,
1
and AMBROSE, District Judge
1
Hon. Donetta W. Ambrose, United States District Court for the
Western District of Pennsylvania, sitting by designation.
1
(Opinion Filed December 29, l995 )
Arlin M. Adams
Schnader, Harrison, Segal & Lewis
Philadelphia, PA 19103
Of Counsel:
Kaethe B. Schumacher
Schnader, Harrison, Segal & Lewis
Philadelphia, PA 19103
Albert Dragon
Litvin, Blumber, Matusow & Young
Philadelphia, PA 19107
Attorneys for Appellants
OPINION OF THE COURT
SLOVITER, Chief Judge.
A Pennsylvania law firm, A Dragon Associates, and its
clients, Kirk and Janet Mitzel, challenge the district court's
application of the New Jersey State Court Contingency Fee Rule to
a two-million-dollar settlement received by the Mitzels in a case
Dragon filed for them in federal court in New Jersey. They argue
that the district court erred in applying New Jersey rather than
Pennsylvania law, and, in the alternative, that even if the New
Jersey rule is applicable, Dragon is entitled to an increased fee
under the terms of the rule because of the extraordinary time and
effort it devoted to this case. We have jurisdiction under 28
U.S.C. § 1291. As none of the defendants have filed briefs, this
matter is before us on appellants' brief only. Although the
2
appeal was filed on behalf of both Dragon and the Mitzels, we
will treat only Dragon as the appellant.
I.
Kirk Mitzel was severely injured at a construction site
in New Jersey when a steel beam on which he was working collapsed
and fell 26 feet to the ground. Mitzel and his wife, Janet, were
Pennsylvania residents at the time and retained Dragon to pursue
worker's compensation and personal injury claims on their behalf.
On July 26, 1990, the Mitzels signed a contingency fee agreement
with Dragon in which the law firm agreed to represent them in
return for 40% of any net recovery. At some point after signing
this agreement, but before the complaint was filed, the Mitzels
moved to North Dakota.
Dragon filed a complaint on December 30, 1991 in the
District Court of New Jersey based on diversity jurisdiction,
naming as defendants the primary and general contractors and the
companies that designed the equipment and materials involved in
the accident. Two attorneys from the firm were admitted pro hac
vice to the District Court of New Jersey on May 18, 1992,
pursuant to the district court's Local Rule 4(c).
Dragon asserts that during the following two-and-a-half
years it invested over 5100 attorney hours in discovery, taking
nineteen depositions, accumulating fifty-two expandable files of
documents that are over twenty-two feet thick, arguing nearly
twenty oral and written motions, reviewing hundreds of thousands
of records, and consulting more than ten experts. It also claims
3
to have incurred considerable costs in travelling to Pittsburgh
and Orlando to inspect documents.
Ultimately, in mid-1994 the defendants offered the
Mitzels two million dollars, and Dragon volunteered to reduce its
contingency fee from 40% to one-third in order to facilitate a
settlement at this amount. The Mitzels agreed and, on July 25,
1994, filed a motion with the district court asking it to confirm
the settlement and approve the one-third counsel fee in the
amount of $648,403.28. The motion was referred to a magistrate
judge, who instead recommended application of New Jersey Court
Rule 1:21-7, and a counsel fee award of $435,181.47. The
district court adopted the magistrate's recommendation and denied
plaintiffs' motion for reconsideration. This appeal followed.
II.
A.
Choice of Law
New Jersey Court Rule 1:21-7(c), which sets a schedule
of maximum limits on the contingency fees that New Jersey
attorneys can collect in tort litigation, provides:
In any matter where a client's claim for
damages is based upon the alleged tortious
conduct of another, . . . an attorney shall
not contract for, charge, or collect a
contingent fee in excess of the following
limits:
(1) 33_% on the first $250,000 recovered;
(2) 25% on the next $250,000 recovered;
(3) 20% on the next $500,000 recovered; and
(4) on all amounts recovered in excess of the
above by application for reasonable fee in
accordance with the provisions of paragraph
(f) hereof . . . .
4
N.J. Court Rules, 1969, R. 1:21-7(c). Paragraph (f), referred to
in subparagraph (4) above, provides that "[i]f at the conclusion
of a matter an attorney considers the fee permitted by paragraph
(c) to be inadequate, an application on written notice to the
client may be made to the Assignment Judge for the hearing and
determining of a reasonable fee in light of all the
circumstances." R. 1:21-7(f).
The New Jersey district court has incorporated New
Jersey's contingency fee rule into its local rules through Local
Rule 4(c), which provides that "[a] lawyer admitted pro hac vice
[to the federal court] is deemed to have agreed to take no fee in
any tort case in excess of the New Jersey State Court Contingency
Fee Rule (N.J. Court Rules, 1969, R. 1:21-7 as amended)."
Dragon argues that the district court erred in holding
that New Jersey law rather than Pennsylvania law was applicable
to its decision as to the amount of the contingency fee.
Pennsylvania courts will uphold contingency fee agreements
voluntarily entered into by the parties as long as they are not
excessive and do not take "inequitable advantage of the payer."
Richette v. Solomon, 187 A.2d 910, 919 (Pa. 1963). A one-third
contingency fee is not considered excessive, see id., and fees as
high as 40% have been enforced by Pennsylvania courts. See,
e.g., Oliastro v. Borough of Ellwood City, 486 A.2d 966 (Pa.
Super. Ct. 1984). We apply plenary review to the district
court's decision that New Jersey law is applicable here. See
5
Linan-Faye Constr. Co. v. Housing Auth. of Camden, 49 F.3d 915,
919 (3d Cir. 1995).
Dragon presents the choice as one between Pennsylvania
and New Jersey law, but it has apparently failed to consider the
possibility that under the rules established by Erie R.R. Co. v.
Tompkins, 304 U.S. 64 (1938), and its progeny, an attorney's fee
issue affecting the allocation of funds between attorney and
client presented in a diversity case is a matter of procedure
governed by the law of the forum.
Generally, the right of a party or an attorney to
recover attorney's fees from another party in a diversity action
is a matter of substantive state law. See Alyeska Pipeline Serv.
Co. v. Wilderness Soc'y., 421 U.S. 240, 259 n.31 (1975); Abrams
v. Lightolier Inc., 50 F.3d 1204, 1224 (3d Cir. 1995); Montgomery
Ward & Co. v. Pacific Indem. Co., 557 F.2d 51, 55-58 (3d Cir.
1977); see also 1A James W. Moore et al., Moore's Federal
Practice ¶ O.309[1], at 3109-10 & n.46 (2d ed. 1995). In
contrast, contingency fee agreements have been treated
differently.
Contingency fee agreements apportion resources between
plaintiffs and their counsel rather than plaintiffs and
defendants, and therefore are collateral to the substantive
merits of lawsuits in a way that awards of attorney's fees
between parties are not. Furthermore, because of the imbalance
of power that may exist between client and attorney, we have held
that "contingency fee agreements are of special concern to the
courts," Dunn v. H.K. Porter Co., 602 F.2d 1105, 1108 (3d Cir.
6
1979), and fall within a court's "supervisory power over the
members of its bar." Schlesinger v. Teitelbaum, 475 F.2d 137,
141 (3d Cir.), cert. denied, 414 U.S. 1111 (1973); see Dunn, 602
F.2d at 1110 n.8.
In Elder v. Metro. Freight Carriers, Inc., 543 F.2d 513(3d Cir. 1976), this court was faced with an attorney's challenge
to a federal court's limitation of his contingency fee under
facts strikingly similar to those before us. Mrs. Elder, the
widow of a New York resident killed in an accident in New Jersey,
filed suit in New Jersey federal court seeking recovery under
state tort law. Id. at 515. Both Mrs. Elder and her lawyer were
residents of New York and they had signed a fee agreement there
promising the attorney a one-third contingency fee. The lawyer
was admitted pro hac vice to the New Jersey district court, where
the suit proceeded. After some discovery, the parties agreed to
a settlement. Id. The New York Surrogate Court approved
distribution of the proceeds to the widow and children, and set
the counsel fees pursuant to the one-third agreement, which would
have led to a fee substantially in excess of the amount allowable
under the New Jersey rule. A proposed order for payment of the
one-third fee was then presented for approval to the district
court. It declined to follow New York law and instead reduced
the contingency fee under the formula set forth in New Jersey
Court Rule 1:21-7, which was then, as now, incorporated into the
district court's local rules. Id. at 515-16.
Counsel appealed to this court, and we affirmed the
district court's decision. Id. at 517-19. We rejected an
7
argument, proffered by Dragon here as well, that we should apply
the choice of law analysis of Klaxon Co. v. Stentor Elec. Mfg.
Co., 313 U.S. 487 (1941). We reasoned as follows: "Rules
regulating contingent fees pertain to conduct of members of the
bar, not to substantive law which determines the existence or
parameters of a cause of action. Such rules are designed to
promote the efficient disposition of litigation and enhance the
public's confidence in the bar." Id. at 519. After noting that
federal courts have the power to prescribe requirements for
admissions before them and to discipline attorneys who have been
admitted to practice before them, we stated that "such rules are
of deep concern to the court which promulgated them," and
concluded "[w]hen local rules of a federal district court are
questioned, it is doubtful that the choice of law doctrines of
the forum state come into play." Id.2
Under this reasoning, contingency fee agreements in
diversity cases are to be treated as matters of procedure
governed by federal law. We nonetheless proceed to analyze the
district court's choice of law decision, a step we also took in
Elder. We hold that, even assuming arguendo that the issue were
a matter of state law under the Erie test, an application of New
Jersey choice of law principles would mandate application of New
2
We are not persuaded by Dragon's attempt to distinguish Elder on
the ground that Elder involved a conflicting order from a New
York Surrogate court. That fact was not relevant to, and
certainly not dispositive of, this court's analysis of the
conflict of law issue regarding the amount of the counsel fee.
8
Jersey law to the contingency fee agreement and thus lead to the
same result. See Elder, 543 F.2d at 519.
New Jersey law considers that matters relating to
attorney's fees fall within the sphere of the state's "paramount
concern with its courts," id. at 519. The New Jersey view is
clear and express:
It is a virtually axiomatic principle of
conflicts of law that the procedural law of
the forum applies even to causes of action
governed by a different jurisdiction's
substantive law. . . . Court rules
regulating attorney fees are not only clearly
procedural but have also expressly been so
declared.
Du-Wel Prods., Inc. v. U.S. Fire Ins. Co., 565 A.2d 1113, 1120
(N.J. Super. Ct. App. Div. 1989) (citations omitted), cert.
denied, 583 A.2d 316 (N.J. 1990); see also State v. Otis Elevator
Co., 95 A.2d 715, 717 (N.J. 1953) ("From the outset in New
Jersey, following English precedents, the allowance of costs and
counsel fees had been uniformly considered by the courts of this
state to be a matter of procedure rather than of substantive
law.").
Accordingly, we hold that the district court did not
err in applying New Jersey Court Rule 1:21-7 or its local federal
court counterpart to the Mitzels' contingent fee agreement.
B.
Reasonableness of the Fee Awarded
Dragon contends that even if the district court was
bound to follow the New Jersey contingency fee rule, it failed to
award "reasonable" compensation. Dragon recognizes that we
9
review the district court's order in this respect only for an
abuse of discretion.
Under Rule 1:21-7(f), a court may increase a
contingency fee above the maximum limits in the rule on
application by the attorney and written notice to the client. The
language of the rule makes the polestar "a reasonable fee in
light of all the circumstances." The New Jersey caselaw
instructs that the attorney seeking an increased fee must
demonstrate that
(1) the fee allowed under the rule is not
reasonable compensation for the services
actually rendered, and (2) the case presented
problems which required exceptional skills
beyond that normally encountered in such
cases or the case was unusually time
consuming.
Wurtzel v. Werres, 493 A.2d 611, 614 (N.J. Super. Ct. App. Div.),
cert. denied, 508 A.2d 223 (N.J. 1985); accord Anderson v.
Conley, 501 A.2d 1057, 1066 (N.J. Super. Ct. Law Div. 1985).
In considering Dragon's application for a one-third
contingency fee, the magistrate judge distinguished earlier New
Jersey cases that granted fees above those established by Rule
1:21-17(c) on the ground that those adjustments were made at a
time when the Rule imposed a ten percent cap on judgments over
$250,000. See, e.g., Bambi v. Dr. O, 482 A.2d 536, 538 (N.J.
Super. Ct. Law Div. 1984); Burd v. Hackensack Hosp. Ass'n, 477
A.2d 843, 844 (N.J. Super. Ct. Law Div. 1984); McNelis v. Cohen,
455 A.2d 1166, 1168 (N.J. Super. Ct. Law Div. 1982). The
magistrate judge deemed those cases of little precedent,
particularly in light of the Rule's 1984 amendment increasing the
10
percentages applicable and requiring counsel to make application
for fees for recoveries above $1 million, R.1:21-7(c)(4).
Based on Dragon's application, the magistrate judge
recommended that Dragon be awarded twenty percent on the amount
recovered over and above $1 million, explaining "[a]lthough the
instant case did not present complex or novel legal issues,
counsel vigorously prosecuted [it] on behalf of his clients, and
dedicat[ed] a great deal of time to the matter, and secured a
very good result." Magistrate's Report and Recommendation at 4.
Thus the fee recommended by the magistrate judge was calculated
as: 33_% of the first $250,000 recovered, equaling $83,250; 25%
of the next $250,000, equaling $62,500; 20% of the next $500,000,
equaling $100,000; and 20% of the remainder of $947,157.10,
equaling $189,431.42, leading to a total of $435,181.42.
Dragon contends that this award was not sufficient to
render the total fee "reasonable" and that the fee should have
been increased to one-third of the entire net recovery. It
argues that the fee awarded is not reasonable compensation
because it amounts to just $85 per attorney hour, out of which
the firm must still pay overhead and operating expenses. Dragon
points to the magistrate judge's finding that counsel "vigorously
prosecuted [the] case," and to letters from defense counsel in
this case praising Dragon as "extremely competent," App. at 295,
and as having done an "excellent job in putting together a
difficult case." App. at 172. Dragon argues that the case was
"unusually time consuming" as the firm devoted over 5100 attorney
hours in extensive investigation and discovery. Additionally, it
11
points to the facts that the Mitzels agree to the increase and
that Rule 1:21-7, which has not been changed since 1984, fails to
account for inflation. Substantially the same arguments were
considered and rejected by the magistrate judge and the district
court.
Taking at face value Dragon's assertions regarding time
and effort expended on this case, we are not persuaded that the
case was so unusual or time-consuming that we should disturb the
district court's ruling. The cases cited by Dragon in which one-
third fees were allowed under Rule 1:21-7(f) involved
considerably more extensive litigation than was involved here.
See Luchejko v. Membreno, 475 A.2d 696, 697 (N.J. Super. Ct. Law
Div. 1983) (medical malpractice action involving a "number of
difficult legal issues," as well as extensive discovery, pre-
trial motions, a six-day trial, and post-trial motions); Buckelew
v. Grossbard, 461 A.2d 590 (N.J. Super. Ct. Law Div.)(medical
malpractice action which was fully tried, appealed to appellate
division and then to Supreme Court, and remanded for new trial,
establishing new rule of law), aff'd, 469 A.2d 518 (N.J. Super.
Ct. App. Div. 1983).
Dragon has not cited, nor has this court found, any New
Jersey case reversing a trial court's finding that an increase
above Rule 1:21-7's fee schedule was unwarranted. Cf. Murphy v.
Mooresville, 333 A.2d 273, 275 (N.J. Super. Ct. App. Div.)
(reversing trial court's denial of fee increase where trial court
had concluded that increase warranted but had denied it on basis
of mistaken impression that rule precluded it), cert. denied, 343
12
A.2d 444 (N.J. 1975). On the other hand, in Bolle v. Community
Memorial Hosp., 368 A.2d 935, 937-38 (N.J. Super. Ct. App. Div.
1976), cert. denied, 377 A.2d 679 (N.J. 1977), the Appellate
Division reversed a trial court's allowance of a fee above the
schedule limits for the prosecution of a medical malpractice
action despite the fact that it admittedly required "time,
efforts and expertise" and involved not only discovery but a
five-day trial and an appeal. See also Wurtzel, 493 A.2d at 613-
16 (reversing trial court's allowance of increased fee for
prosecution of medical malpractice action involving extensive
discovery and trial preparation, including consultation and
preparation of multiple expert witnesses).
Dragon cites the opinion in Iskander v. Columbia Cement
Co., 484 A.2d 353 (N.J. Super. Ct. App. Div. 1984), as precedent
for the argument that the magistrate judge and the district judge
should have considered the New Jersey rule's failure to keep pace
with inflation and the reduced value of the dollar. While
Iskander cited inflation as one of several factors supporting a
fee increase, the court explicitly cautioned against extending
that holding beyond circumstances in which "an especially long
period of time has elapsed between retainer and outcome, such as
the eight years involved here." Id. at 355. Here, in contrast,
the time between retainer by counsel and settlement was four
years. As the court stated in Iskander, the rule's failure to
keep pace with inflation "can be solved only by the [New Jersey]
Supreme Court in its rule-making capacity." Id.13
Thus, in the absence of other factors indicating that
an increased fee is warranted, we cannot hold that the district
court exceeded the considerable bounds of its discretion.
C.
Throughout its brief, Dragon has called to our
attention the Mitzels' agreement to Dragon's receipt of the
larger fee. Indeed, the Mitzels filed the notice of appeal along
with Dragon, challenging the district court's fee award, even
though a reversal would mean that the Mitzels' recovery would be
substantially reduced. As the magistrate judge noted, if Dragon
were awarded the fee it requested, it would receive $648,403.28,
instead of the $435,181.47 awarded by the district court.
In this posture of the case, we are acutely
uncomfortable with the lack of an opposing party on the appeal.
Undoubtedly, the defendants have no interest in how the
settlement fund is divided between plaintiffs and their
attorneys. The only ones who stand to lose if Dragon gets the
increased fee it is seeking are the Mitzels themselves, and the
difference to them is $213,221.81, a considerable sum in any
financial circumstances. Any time the attorney's fee and the
client's recovery come from a fixed fund of money, a "significant
conflict of interest" arises between attorney and client. See
Report of the Third Circuit Task Force, Court Awarded Attorney's
Fees at 36 (Oct. 8, 1985), reprinted in 108 F.R.D. 237 (1985);
see also In re General Motors Corp. Pick-Up Truck Fuel Tank
Prods. Liab. Litig., 55 F.3d 768, 820 (3d Cir.) (discussing
similar conflict in class action context), cert. denied, 116 S.
14
Ct. 88 (1995). But in this case, by actually petitioning the
court for an increase in its fee, Dragon has brought that
conflict into stark relief.
The premise behind Rule 1:21-7 is that attorneys and
their clients do not have equal bargaining power, and that
clients consequently need protection from the courts with respect
to contingent fee agreements. See Kingman v. Finnerty, 486 A.2d
342, 344 (N.J. Super. Ct. App. Div. 1985); American Trial Lawyers
Ass'n v. New Jersey Supreme Court, 316 A.2d 19, 24-25 (N.J.
Super. Ct. App. Div. 1974), aff'd 330 A.2d 350 (N.J. Sup. Ct.
1974). Numerous provisions of the Rule are included to protect
clients' interests. Illustrative are those requiring the
attorney to advise the client of the option to retain the
attorney under an arrangement for compensation on the basis of
the reasonable value of the services, 1:21-7(b), and mandating
that any application for an increase be made on "written notice
to the client," 1:21-7(f).
We have no reason to assume that there has been any
overreaching by Dragon or that the Mitzels have not been fully
advised of their rights. We assume that the Mitzels joined in
bringing this appeal out of a sense of gratitude to Dragon and a
commitment to their earlier contractual fee arrangement.
Nonetheless, it is because there is an inherent conflict of
interest in this situation, but see New Jersey Rules of
Professional Conduct (RPC) 1.8(j)(2) (contingency fee contracts
excepted from general prohibition on conflicts of interest
15
between lawyer and client), that we have treated this appeal as
if filed by Dragon alone.3
III.
For the reasons set forth above, we will affirm the
order of the district court.
3
We have no desire to enter into the debate about contingency
fees currently underway in legal circles and particularly in New
Jersey, where regulation of contingency fees is apparently the
strictest in the country. It has been reported that a New Jersey
state senate committee has discussed proposals for abolition of
contingency fees, whereas the 1994 report of the New Jersey
Supreme Court Committee on Civil Practice, since tabled,
recommended amending Rule 1:21-7 to increase the contingency fees
allowed. See generally Robert J. Kerekes, The Crisis of
Congested Courts, 18 Seton Hall Legis. J. 489, 498 n.39 (1994);
Martin L. Haines, Contingent Fee System in Need of Shakeup, N.J.
L.J., Oct. 17, 1994, at 18; Martin L. Haines, Time to Rethink
Contingent Fee Caps, N.J. L.J., Sept. 19, 1994, at 17; Tess
Brennan, Proposed Contingency-Fee Revision Tabled, N.J. L.J.,
Apr. 11, 1994, at 8.
16
17