Hughes and Coleman, Pllc v. Ann Clark Chambers of the Estate of James W. Chambers , 526 S.W.3d 70 ( 2017 )

R_E.NDERED AUGUST 24, 2017
TO BE PUBLISHED
a Supreme Tnnr'f of ‘Benhxckg
20 1 5~SC-OOO435-DG
HUGHES AND COLEMAN, PLLC ` APPELLANT
' oN REVIE_:W FROM c'oURT oF APPEALS
V. , No. 2013-cA-002074~MR
HARDIN cIRCUIT coUR'r No. 13-01-00166 .
ANN CLARK CHAMB-ERS, EXECUTRIX OF . n 7 ` APPELL]iJE
THE ESTATE_ OF JAMES W. CHAMBERS, ` '
DECEASED -
c OPINION OF THE COURT BY JUSTICE WRIGHT
REVERSING
Personal-injury law firm Hughes 85 coleman Was hired by Travis
UnderWood after he Was injured in a car crash. Underwood eventually became ' `
dissatisfied With the firm and fired them. Shortly after discharging I-Iughes &
Coleman and hiring another attorney, Underwood agreed to a final settlement
of his claims. This appeal asks whether Hughes 85 Coleman. is entitled to be
compensated for their services rendered before being iired. Our precedent _
entitles a discharged lawyer to receive, on a quantum meruit basis, a portion of
a contingency fee on a former client’s recovery-so long as the termination Was
not “for cause.” Because -Hughes_& Coleman’s firing Was not tor cause under
this rule, the firm is entitled to quantum meruit compensation.
I. background
On October l, 2012, Travis Underwood was injured when a commercial
truck crashed into the vehicle he was driving. His injuries required
hospitalization and other medical treatrnent, and forced him to miss‘about five .
weeks of work. The truck driver was apparently (at least mostlyl) at fault.
On October 9, Underwood‘ received a so-called Pe_rsonal Injury Protection
(PIP), or no-f`ault,2 payment of $200 from his insurer, Progressive, to replace
one week’s lost wages in the amount prescribed by KRS 304.39-130. On
October `18, Progressive disbursed another $990.06 of Underwood’s PIP
benefits to pay two‘medical bills. l
On October 23, Underwood hired the law firm Hughes 8a Coleman to
represent him in his motor-vehicle personal-injury matter. Their agreement
provided for Hughes 85 Coleman to be paid on a contingency-fee basis and
included, among other terms, that the firm would “assist `_the client in
submitting medical bills for payment to any responsible insurance carrier or
agency.” Attomey Judy Brown handled most of the pre~litigation Work in the
case, while another attorney, Brent Travelsted,3 primarily worked the case once
it entered active litigation in January 2013. The firm’s non-lawyer personnel
-also provided substantial assistance under the attorneys’ supervision and
‘1 There was some question whether Underwood’s own negligence may have
contributed to causing the crash and the extent of his injuries because of evidence
that he was speeding and not wearing a seat belt.
2 We use the synonymous labels rio-fault and Pl`P interchangeably. _
3 Sa_dly, Travelsted passed away in 2013`.
2
direction. The firm maintained, as the trial court put it, “a highly meticulous
database [that] document[ed] every event [e.g. letter, telephone call,
settlement offer)” related to its representation of Underwood.
Two days after Underwood retained its services, Hughes & Coleman
mailed Progressivel a letter advising the insurer of Underwood’s PIP claim and
'requesting, under KRS 304.39-241, that it reserve all no-fault benefits to “pay
bills or lost wages only as directed by _I-Iughes 85 Coleman.”`Through further
communications with Progressive, the firm learned that Underwood had a total
of $20,000 in PIP coverage-$I0,000 in basic reparation benefits (BRB]' plus
$10,000 in added reparation benefits (ARB). See KRS 304.39-020(1), (2];
KRS 304.39-140. The firm also learned that Underwood had not provided to
Progressive any physician statements or wage-verification documents'required
to verify his entitlement to further lost-wage payments See KRS 304.39-280.
Despite repeated~requests from Hughes & Coleman, Underwood never provided
these documents.
. On November 6, Hughes 8a Coleman mailed Progressive another letter,
this time asking it to release Underwood’s remaining rio-fault benefits of
$18,309.94 by check payable to Underwood and the`iirm. To support the:
request and show that Underwood’s covered losses would easily exceed that
amount, Hughes 85 Coleman attached a bill totaling $71,812.40 from
Underwood’s stay at the University of louisville Hospital. The firm received the
check on November 30. That same day, they mailed Underwood a “Power of -
Attorney” document, which he signed a couple days later. This limited power of
3
attorney authorized Hughes 85 Coleman “to endorse [Underwood’s] name to a
settlement draft for the purpose of depositing [the outstanding PIP] funds in
[the firm’s] escrow account pending final distribution.”
On December 7, despite Underwood’s not providing any verifying
documentation, Hughes 85 Coleman issued-him a check for $973 from the
escrowed hinds .for lost wages. This was calculated by applying the $200-per-_
week statutory rate to the four weeks and three days that he had not worked or
been already compensated for.4 Later, Hughes & Coleman cut another check
from the escrowed funds for $3,492.88_a negotiated full-satisfaction of the
University of Louisville Hospital bill. See KRS 304.39-245. This left $14,344.06
remaining in the escrow account
By January 2013, Hughes 85 Coleman decided that the claim needed to
enter litigation, and Travelsted took over primary control of the case. On
January 23, Underwood authorized Travelsted’s filing suit on his behalf.
Travelsted then began negotiating a settlement with the tortfeasor’s insurer,
and by F_`ebruary, their back and forth had culminated in the insurer offering
$145,000, Which Underwood rejected. Hughes & Coleman’s case-management
notes show that Travelsted had valued the case at $200,000 or more and
recommended against settling for less than that amount.
4 Underwood returned to work on November 8. Because Progressive had already
paid him for the week of October 1-5, his remaining missed time included October 8~
12, 15-19, and 22-26; October 29-November 2; and Novem_ber 5-7.
4
Unfortunately, Underwood’s (and his mother’s5) relationship with his
counsel deteriorated -On March 13, Underwood fired Hughes 85 Coleman. In
her email discharging the firm and requesting the case file and remaining
escrow balance, his mother explained:
One of the reasons that we are letting you go is, the escrow money
could have been given to Travis when he needed the money but we
were not told that, we were told that you all had to take it and put
it in escrow. We have found out that this was not required like we
were made to think it was. `
On March 18, Hughes 85 Coleman sent Underwood the remaining escrow
balance of $ 14,344;.06.
Underwood then hired new counsel, James C_l_'lambers,6 to represent him.
Shortly thereafter, negotiations with the tortfeasor’s insurer concluded with the
parties’ agreeing to a final settlement of $200,000, resulting in the contingency
attort`tty fee of $ee,eeo? that is the subject of this diqute.
Hughes 85 Coleman asserted an attorney’s lien on that fee under
KRS 376.460,`claiming that it was entitled to a quantum meruit share of the
fee as compensation for its services rendered to Underwood before being
terminated Charnbers challenged_the firm’s entitlement to any portion of the
5 Underwood’s mother played a large role assisting him after the crash, and
much or most of Hughes 85 Coleman’s correspondence about the case was actually
with her.
6 After the Court of Appeals issued its opinion in this case, Chambers also sadly
passed away. As a result, Ann Clark Chambers_, as executrix of 'his estate, has been `
substituted as appellee.
7 Although the amount of the one-third contingency fee is $66,666.67, the
parties agreed to $66,660, presumably to make the math simpler. These funds are
being held by Selective lnsurance Company of America, the tortfeasor’s insurer, under
court order pending resolution of this dispute.
5 n
fee, insisting that its firing was “for cause” and so barred its quantum meruit
claim._ The firing’s justifiable cause, Chambers argued,' was Hughes 85
Coleman’s supposed mishandling of Underwood’s no-fault benefits, which he
maintained was both unethical and legally unauthorized Despit_e Hughes 85
Coleman’s willingness to do So, Chambers declined to participate in the
Kentucky Bar Association’s fee arbitration process. See SCR 3.810.
The circuit court, then, held an evidentiary hearing where it heard
testimony from pre-litigation attorney Brown and members of Hughes '85
Coleman’s staff who worked on Underwood’s case, The firm also submitted
deposition testimony from Reford Coleman (no relation to the iirrn’s named
principal), who testified as an expert in motor-vehicle personal-injury litigation.
He explained that it was common practice to handle clients’ no-fault benefits as
Hughes 85 Coleman had handled Underwood’s. He also opined that the firm
had provided diligent service, that Underwood’s case appeared to have been
progressing well, and that there was nothing about the representation that he
considered good cause for discharging .'the firm. Hughes 85 _Coleman also
submitted its entire 503-page, contemporaneously generated file for
Underwood’s case from its case-management system, which the trial court
found to be “extremely detailed and meticulous.” Chambers’s evidence included
only notarized statements from Underwood and his mother; he did not call any
Witnesses or personally testify|;it the hearing.
Relying primarily on Coleman’s testimony and the case-management
records, the trial court concluded that Hughes 85 Coleman’s representation of
6
Underwood was not deficient and that the firing was without cause. The court
rejected Chambers’s contention that the firm’s communications with
Und'erwood had been inadequate, finding “substantial evidence showing that
[Hughes 85 Coleman] -maintained excellent communication with [Underwood]
and returned telephone calls promptly.” The trial court also rejected
Chambers’s argument that Hughes_& Coleman improperly withheld or
otherwise mishandled Underwood’s no-fault benefits.
Having concluded that Hughes 85 Coleman was discharged without
cause, the trial court looked to the factors provided in SCR 3.13'0-1.5 and
apportioned 75% of the attorney fee to the firm and 25% to Chambers. ln the
trial court’s`view, that was “the allocation that most fairly recognize[d] both
Hughes 85 Coleman’s labor and Chambers’[s] ability to settle_.” So the court
ordered that $49,995 be paid to l-Iughes 85 Coleman and $16,66`5 to Chambers.
Chambers appealed to the Court of Appeals only the issue of whether
Hughes 85 Coleman’s termination was “for cause.”B The Court of Appeals
reversed, holding that in its-handling of Underwood’s rio-fault benefits, Hughes
85 Coleman had “maintained a position unsupported by law and adverse to its
client,” which “constituted valid cause” for Underwood’s terminating its
Se_rvices. So the Court of Appeals reversed the trial court’s judgment
apportioning 75% of thc contingency fcc to thc iinn; '
8 Because the trial court’s quantum meruit fee apportionment was not appealed
and is no longer a live issue in this case, we leave for another day discussion of how to
go about assessing the reasonable value of the discharged lawyer’ s services.
7 l
We granted Hughes 85 Coleman’s petition for discretionary review.
n . II. Analysis
With Bokcr v. Shcpcro, 203` s.W.sti 697 (Ky. 2006), this court brought
Kentucky in line with most other jurisdictions’ treatment of a discharged
attorney’s-entitlement to compensation on a former contingency-fee client’s
recovery. Before that, a Kentucky attorney whose client discharged her without
cause was entitled to the agreed-upon contingency fee on her former client’s
final-recovery (less the “reasonable cost” of the replacement attorney’s services),
despite having not completed the contracted-for work. See La.l§’ach v. Hampton,
585 s.w.2ti 434, 436 (iShapero, 203 S.W.3d at 699. So the Court
overturned LaBach and held, instead, that “when an attorney employed under
a contingency-fee contract is discharged without cause before comple-tion'of the
lcontract, he or she is entitled to fee recovery on a quantum meruit basis only,
' and not on the terms of the contract.” Id.
The term quantum memit-literally meaning “as much as he has
deserved”-refers generally to the “reasonable value of services.” Black’s Law
Dictionary (lOth ed. 2014). It is an equitable remedy entitling a person who has
rendered services to recover payment for the reasonable value of those services.
Its focus, then, is on the value of the benefit conferred to the other person_in
the attorney-fee setting, quantum meruit recovery seeks to compensate the
discharged attorney for the value of the services rendered before being fired.
But the doctrine’s equity roots limit its reach.
Baker v. Shapero’s quantum meruit fee-recovery rule applies only when
an attorney is discharged “without cause”-the negative implication being that
an attorney forfeits any claim to a fee when validly discharged “for cause.” But
when exactly does a discharge amount to being “for Cause”? That is an
important question because, whatever it means, the Baker v. Shapero rule
directs that an attorney who is discharged for cause recovers no fee at all-the
lawyer, by doing whatever reprehensible thing or things that`precipitated the
for-cause firing, has lost her right to be compensated for the beneficial services
she provided the client.
Since Baker v. Shapero, we have twice had occasion to address the
related scenario of lawyers voluntarily withdrawing as counsel. Whether a
withdrawn lawyer may recover a quantum meruit fee on his or her former
client’s ultimate recovery turns on whether the lawyer’s reason for withdrawing
constituted “good (or'just) cause.” J['.lo_fton 1).l Fairmortt Specialty Ins. Mgrs.,' 367
S.W.3d 5§3, 597-98 (Ky. 2012); see also B. Dahlenburg Bonar, P.S.C. v. Waite,
Schnez`der, Bayless &Chesley Co., 373 S.W.3d 41_9, 423 (Ky. 2012]. In Lofton,
we held that disagreeing with a client about the case’s settlement value is not
sufficient cause to allow va lawyer to withdraw‘and still receive a quantum
meruit fee_because that simple conflict does not merit terminating the entire
lawyer-clientvrelationship, the lawyer’s withdrawal forfeited the fee. 367 S.W.3d
at 597-98. Likewise, only two months later _in B. Dahlenburg Bon.ar, we held
that a lawyer forfeited her entitlement to a quantum meruit fee when she
withdrew as co-counsel in a class action over worries that-her clients’ position
9
jeopardized her relationships with other clients and colleagues. 373 S.W.3d at
422-24.
Although those cases provide some guidance, they do not exactly provide
the answer. Ending a lawyer-client relationship cancels ‘the employment
contract under which the client promised to pay the lawyer for his or her
services. In this respect, situations where the lawyer ends the representation
are different from those where the client does so.
When the lawyer withdraws, the ethical and contractual duties and
obligations owed to the client are paramount to the analysis. Broadly speaking,
attorneys must, among other things; competently represent and zealously
advocate their clients’ best interests. See SCR 3. 130~1.1; SCR 3.130, Preamble:
A Lawyer’s Responsibilities, at III._ This Court rightly held in Lofton and B.
Dahlenburg Bonar, respectively, that neither simple disagreements with clients
over claim values, nor latent fears that the representation will somehow
jeopardize the lawyer’s relationships with third-parties, justify lawyers’ casting `
aside their clients and the duties otherwise owed to them. Absent sufficient
justification in the ilk of an irretrievable breakdown of the lawyer-client
relationship, see 7A C.J.S. Attorney 85 Client-§ 329 (June 2017], a"lawyer who
‘ voluntarily withdraws from the representation will not be permitted to later
insist on receiving a fee on the former client’s ultimate recovery. Those prior
cases rest largely on whether a lawyer’s withdrawing was at odds with her
ethical or contractual‘obligations to the client. It does not exactly translate _to
10
situations, as here, where it is the client who exercises his absolute prerogative
to terminate the attorney-client relationship.
Where the client discharges the lawyer, different considerations'are in
play. As Maryland’s highest court has explained, the quantum meruit rule
seeks to “strike a balance between the client’s absolute right to discharge his or
her attorney and the attorney’s right to fair compensation for services
competently rendered prior to discharge.” First Union Nat’l Bank v. Meyer,
Faller, Weisman 85 Rosenberg, P.C., 723 A.2d 899, 910 (Md. 1999). Striking that
balance requires recognizing a client’s “basis” for discharging her attorney as
distinct from “cause” justifying forfeiture of the attorney’s compensation.
Somuah v. Flachs, 721 A.2d 680, 691 (Md. l998l. v
A client may have a good-faith reason for being unhappy with her
current lawyer that is not based on a_ny sort of wrongful conduct by the lawyer.
Although the client may feel that she had a good reason to discharge her
attorney and hire a new one, that alone does not justify forfeiture of the
discharged attorney’s right to' be paid for the services she provided before being
fired. 'Consider Lofton’s facts, but flipped: lawyer and client disagree about
settlement value, but instead of the lawyer withdrawing over the disagreement
as in Lofton, the client fires the lawyer. Just as this simple disagreement is not
sufficient cause for a withdrawing lawyer to later insist on being paid, it is not
sufficient cause for a discharged lawyer to be barred from being fairly
compensated for services rendered.`
`11
Instead, to justify fee forfeiture, the_ “cause” of the discharge must involve
some sort of wrongful conduct by the attorney, resulting in an irreconcilable
breakdown in the attorney-client relationship. lt appears that most other
jurisdictions also limit fee forfeitures by discharged attorneys in this way. See,
e.g., Somuah, 721 A.2d at 688; see also 56 A.L.-R. 5th l, § 2[b] (orig. pub’d
_ 1998) (“Generally, however_, a_ complete forfeiture of attomey's fees will be
warranted only when the attomey's ‘clear’ violation of a duty is found to have
so destroyed the attorney-client relationship that the attorney is considered to
no longer have a right to compensation for services rendered prior to the point
of his or her discharge.”). Thus, we now hold that an attorney’s discharge
should be deemed “for cause”¢-so as to bar the fired attorney from recovering a
fee in quantum meruit-only where the reason for the discharge is some sort of
culpable conduct by the attorney.
Applying that rule here, we surmise no cause justifying forfeiture of
Hughes 85 Coleman’s quantum meruit fee. While Underwood may have felt that
he had good reason to be dissatisfied with his lawyers, the trial court was
correct to rule that this dissatisfaction was not a sufficient cause to bar those
lawyers from being paid for the work that they performed.
When Underwood fired Hughes 85 Coleman, his mother explained that he
was doing so because “the [PIP] money could have been given to Travis when.he
needed the money but we were not told that, we were told that [Hughes 85
12
Coleman] had to take it and put it into escrow.”9 The'Court of Appeals looked
to that explanation 7and the- statutes governing no-fault benefits and concluded
~ that Hughes 85 Coleman “was terminated because it"`maintained a position
- unsupported by law and adverse to its client,” which “in turrhl constituted valid
_ cause for Underwood’s” discharge of the firm.
v . "The first thing that stands out is that the Underwoods’ asserted basis for .
terminating Hughes 85 Coleman misunderstands the law. Underwood was not,
as he and his mother had apparently come to _believe, entitled to receive all of
the remaining PIP funds “when he needed the money.” lndeed, those funds’ use
is statutorily restricted to compensate him only “for loss from injury” from the
car crash. KRS 304.39-04_0. Loss is also defined: it means “accrued economic '
loss consisting only of medical expense, work loss, [and] replacement services
ioee.” KRS 304.39-020(5). so only to the extent that Underwood showed proof
of those sort of economic losses was he entitled to receive PIP be_nef`its; .he was
not entitled `to them merely because he needed the money. The record also
shows that Underwood failed to provide to Hughes 85 Coleman verifying '
documentation supporting his entitlement to no-fault benefits, despite the
9 ln their notarized statements, Underwood and his mother explained that their
unhappiness with Hughes 85 Coleman also centered on feeling unattended to and that
the finn’s attorneys were not pushing hard enough to attain a settlement value that
Underwood believed he deserved. But in the end, the crux of their dissatisfaction
appears to have been, as Underwood put it in his statement, that Hughes 85 Coleman
“never told [him and his mother] that [he] was entitled to receive the full amount [of
the PIP funds],"’ adding that “to find out that [he] could have gotten [all of the PIP
funds] was it.”
13
firm’s repeated requests that he do soto allow them to begin disbursing the
escrowed funds.
More to the point, however, the Court of Appeals erred in concluding that
Hughes 85 Coleman’s handling-of Underwood’s PIP funds was unlawful or
unethical. That ruling far too narrowly construed the lawyers’ ethical and
contractual obligations Contrary to that court’s belief that the firm’s handling
of the PIP funds somehow put its interests at odds with its client’s, Hughes 85
Coleman’s spearheading Underwood’s benefits disbursement was completely
aboveboard. lndeed, that practice seems almost integral to fully servicing a
n motor-vehicle personal-injury client’s needs~it should be commended and
encouraged, not punished - -
While injured insureds are entitled_by statute to direct how their PIP
benefits are to be paid, see KRS 304.39-241, the disbursement of PIP funds
remains subject to the statutory restrictions o_n their use mentioned above.
Reparation obligors have`the right to sue to recover benefits that were not
actually payable under the statute, but were in fact paid based on
misrepresentations by an insured. See KRS 304.39~210(4). So Hughes 85
Coleman was not only authorized but legally bound to insist on proper
documentation from Underwood to ensure that the escrowed funds were
disbursed lawfully, not according to his or lhis mother’s whims. See
KRS 304.39-210(1). Requiring such documentary proof from Underwood did
1 not somehow put the firm’s interests at odds with its client’s.
Perhaps Hughes 85 Coleman could have better explained this to
Underwood. Hindsight being what it is, it is tempting to criticize them for not `-
being crystal clear about how PIP benefits work and.what the firm’s role would
be exactly in helping to disburse them. Yet the trialcourt found that Hughes 85
Coleman’s communications with Underwood were reasonable and adequate,
emphasizing the fairly robust lines of communication with the Underwoods
seen in the case-management records (while apparently putting less weight in
the Underwoods’ notarized statements). Given the voluminous records Hughes
85 _Coleman kept documenting their correspondence with Underwood, that
finding was supported by substantial evidence.
'S-till, even if the firm’s communications to Underwood about his PIP
benefits were not perfectly clear to `him, nothing suggests that they were
intentionally misleading or wrongful in some way. lndeed, even if we were to
accept-the argument that the lawyers’ PIP-related communications to
Underwood fell short of meeting their ethical obligations of reasonably '
explaining, see SCR 3.130-1.4(b); informing, see SCR 3.130-1.4(a)(3); and
consulting with their client, see SCR 3.130-1.4(a](5); that would not alone
establish that Underwood discharged them “for cause” under__Baker v. Shapero.
Whether a quantum meruit fee is forfeited is not governed by the ethics rules
and standards-guided perhaps, but not governed Cf Lofton, 367 S.W.3d at
596 (differentiating “good cause” for withdrawing as counsel with` court’s leave
under SCR 3.130-1.16(b], from the higher stande for withdrawing and
receiving quantum meruit compensation). Even if Hughes 85 Coleman neglected
15
to fully explain to Underwood; in clear and understandable terms, his PIP
benefits and their handling of them, that does not amount to the sort of
culpable conduct that forfeits a discharged lawyer’s right to be paid for services
rendered
ln surn, Hughes 85 Coleman is entitled to quantum meruit apportionment
of the contingency fee, as the trial court ordered We need not address the
second step ind the quantum meruit fee assessment-the reasonableness of the
trial court’s apportionment_because Chambers did not appeal that part of the
judgment
III.` Conclusion
We reverse the Court of 'Appeals and reinstate the circuit court’s
judgment awarding Hughes 85 Coleman a quantum meruit portion of the
contingency fee on Underwood’s ultimate recovery.
All sitting All concur.
COUNSEL FOR APPELLANT:
Peter Lucas Ostermiller
COIlNSEL FOR APPELLEE:
Charles E. Theiler II
Ashby Angell.
`16