FOR THE RESPONDENT FOR THE INDIANA SUPREME COURT
Ron Elberger, Judy L. Woods
Bose McKinney and Evans Donald R. Lundberg, Executive Secretary
Indianapolis, Indiana 46204 115 West Washington Street
Indianapolis, Indiana 46204
SUPREME COURT OF INDIANA
IN THE MATTER OF )
) CASE NO. 49S00-0009-DI-560
RICHIE DOUGLAS HAILEY )
August 8, 2003
In collecting a contingent attorney fee from a clients settlement, attorney Richie Douglas
Hailey retained a fee in excess of the amount justified by the percentage
provided in his written agreement with his clients. We find today, therefore,
that his fee was unreasonable. We also find that the respondent failed
timely to provide the client with a written settlement disbursement summary, delayed payment
to medical and other third-party creditors, and shared a portion of his fee
with another lawyer who was not a member the respondents law firm in
a manner not permitted by the Rules of Professional Conduct. Because this
is the first instance of discipline for a violation of this type and
because the respondents services in achieving a settlement for his client were effective
despite his failure to be diligent in wrapping the matter up, we impose
only a public reprimand. Future violations of this nature may result in
more severe sanctions.
This matter comes before us upon the hearing officers tendered report, generated after
a full evidentiary hearing. The hearing officer concluded that the respondent violated
Rules of Professional Conduct as charged. The respondent has petitioned this
Court for review of those findings and conclusions, pursuant to Ind.Admission and Discipline
Rule 23(15), urging us not to adopt the hearing officers findings of misconduct.
Where the hearing officer's report is challenged, we review the record
presented de novo. Final determination as to misconduct and sanction rests with
this Court. Matter of Lamb, 686 N.E.2d 113 (Ind. 1997); Matter of
Gerde, 634 N.E.2d 494 (Ind. 1994).
I. The Facts
The respondent was admitted to the practice of law on October 9, 1974,
and practices law in Indianapolis. In 1992, a 13 year-old boy was
seriously injured in Indiana while riding as a passenger in an automobile.
He incurred several hundred thousand dollars in medical expenses and is confined permanently
to a wheelchair. Shortly after the accident, the boys mother spoke with
relatives, who suggested she contact the boys uncle, who was a lawyer in
Alabama, but did not handle personal injury matters. The uncle obtained the respondents
name from a friend and fellow Alabama attorney, and gave it to the
The boys father was generally aware that the uncle had consulted with another
Alabama attorney before the uncle recommended the respondent. The mother and boy
were not aware of the consultation. The Alabama attorney and the parents
each independently contacted the respondent, but had no direct contact with each other.
In January 1993, the respondent agreed to represent the parents and the
boy (collectively the clients) on a contingent fee basis and the respondent drafted
a written contingent fee agreement which was executed by the clients on January
14, 1993. The agreement provided, in relevant part, [I]f the matter is
settled or tried after One Hundred Eighty (180) days after suit, the client
will pay at a rate of Forty percent (40%) of the gross amount
recovered. Expenses of pursuing the claim were to be paid by the
clients. The respondent did not include in the contingent fee agreement any
provision that specifically addressed how his attorney fee would be calculated in the
event of a structured settlement that included future periodic payments. The respondent's written
fee agreement also did not disclose the division of attorney fees with the
Alabama lawyer specifically, nor did it address generally the subject of division of
fees with a lawyer not associated with the respondent's law firm. The
respondent did not provide the clients with a copy of the agreement.
In November 1993, the respondent filed suit in an Indiana court on behalf
of the clients against the driver of the vehicle in which the boy
was riding at the time of the accident, the owner of the vehicle,
the automobile manufacturer, and others. Throughout the litigation, the clients were in
frequent contact with the respondent. The father also spoke to the
uncle about the case from time-to-time, and raised questions about certain aspects of
the case. The uncle in turn talked to the Alabama attorney before
responding, but the father never spoke to the Alabama attorney about the case
and the mother and boy remained unaware that the Alabama attorney had any
role in the matter.
In November 1997, the clients, the respondent, representatives of various defense insurers, and
counsel for the defendants in the case met in two mediation sessions. At
least by that time, the respondent was aware that a structured settlement was
a likely option. As the discussion focused on a proposal to settle for
a lump sum plus an annuity, the clients were concerned whether the lump
sum would be sufficient to pay the boys medical expenses, attorney fees, and
litigation expenses. They thought it would be best to leave the annuity
unencumbered for the boys future expenses. To evaluate a structured settlement proposal
they needed to know the dollar amount required for both the boys medical
providers and for attorney fees. In particular, the clients did not know
what several medical providers would be willing to accept in satisfaction of their
claims or how the respondent's attorney fee was to be calculated in the
event of a structured settlement.
The defendants were accompanied at the second session by a broker experienced in
purchasing annuities to fund structured settlements. For the first time the clients
and the respondent discussed various methods by which the respondent's attorney fee might
be calculated under a structured settlement. A copy of the written fee
agreement was not available and the respondent did not give the clients a
definitive answer to the calculation of his fee. Among the methods discussed
during the second mediation session was a proposal whereby the respondent would retain
40% of the lump sum cash payment and 40% of the gross amount
of future guaranteed payments to be made to the boy, undiscounted to present
value. The father concluded that, under this method, the respondent's fee and
the medical expense payments would consume the lump sum payment and leave the
boy owing additional attorney fees. By this time medical expenses were estimated
at less than $400,000.
[JACK] The respondent ultimately agreed in writing with the
clients prior to settlement that his maximum fee would be $1.6 million.
The clients and respondent both intended that $1.6 million was a maximum, not
the agreed amount of the fee.
With the respondent's attorney fee capped
at $1.6 million, and the knowledge that the total amount of medical and
related expenses was less than $400,000, the clients negotiated for an annuity without
concern that the cash portion of the settlement would be inadequate to cover
the medical and legal expenses.
The second mediation session resulted in a settlement. Its terms called for
an initial lump sum payment of $2 million cash, plus periodic future payments
of $80,000 per year compounding annually at 1.5%, beginning December 29, 1998 and
lasting for the longer of the balance of the boys life or 40
years. Pursuant to the settlement agreement, on December 3, 1997, the defendants
purchased an annuity for the boys benefit for a single premium of $1,465,698.
That price, which was $28,818 less than the quote provided on November
29, 2003, was not reported to the respondent or the clients and they
made no inquiry.
Under the 40-year guarantee, the boy will receive a minimum gross total payout
The annuity was issued by a life insurance company and backed
by the irrevocable guaranty of a second life insurance company. If the
boy lives beyond the fortieth annual payment, he will continue to receive payments
as scheduled until he dies.
In mid January 1998, the respondent received the initial cash payment of $2
million from the defendants and deposited it into his trust account. Fairly early
in the case the respondent and the Alabama attorney had agreed that the
Alabama attorney would receive one-third of the respondents fee. On January 21,
1998, the respondent issued checks from his trust account in the amount of
$1,066,666.66 to his law firm and $533,333.33 to the Alabama lawyer for a
total of $1.6 million attorney fees. The respondent did not notify the
clients that he was paying the fees or that one-third of the fee
was being paid to the Alabama attorney. The father was aware before
the mediation sessions that a referral fee would likely be paid to the
uncle, but he had no indication as to the amount. Neither the
mother nor the boy knew that a referral fee would be paid.
On November 3, 1995, the respondent wrote a letter to the Alabama attorney
in which, for the first time, he placed in writing his understanding that
he would share the fees with the Alabama attorney.
The respondent did
not provide a copy of this letter to the clients.
In mid-February 1998, the respondent withdrew from his trust account an additional $24,837.63
to reimburse his law office for various expenses of the litigation. The
respondent did not notify the clients of the withdrawal and did not provide
them with an accounting showing the items that were being reimbursed. There
is no claim that the amounts were improper. The respondent retained the balance
of the settlement funds in his trust account to pay the medical creditors
and health insurers who held subrogation interests in the settlement.
At the mediation, the clients had directed the respondent to negotiate with medical
providers to attempt to reduce their claims. Between February 16 and October
28, 1998, the respondent made several partial distributions to the clients, totaling $80,000.
Throughout 1998, the mother became increasingly concerned that her health insurers and
various medical providers had not been paid. In some instances, the creditors
contacted her directly. She made several unsuccessful efforts to contact the respondent's
office about payment of these bills.
On October 7, 1998, almost nine months after settlement was closed, the mother
sent a note to the respondent asking him to complete the distribution of
the settlement funds within the next two weeks because she had been deferring
a necessary surgical procedure until the distributions were complete. The clients sent
a similar letter on October 23, 1998. In late October 1998, the
clients finally hired an attorney to assist them in getting the respondent's cooperation
in distributing the settlement proceeds. On November 4, 1998, the clients attorney
wrote to the respondent noting his representation of the clients and asking for
a copy of the written contingent fee agreement, an accounting of the settlement
funds, and a status report of any outstanding medical or subrogation claims. The
respondent did not reply, and on December 3, 1998, the clients attorney renewed
his request. Following the second request, the respondent began paying the medical
claims. Between December 8, 1998 and January 23, 1999, the respondent paid a
total of $282,189.87 from his trust account to four medical creditors and subrogated
insurers. The only medical bill the respondent paid before December 1998 was
a subrogation claim of one of the mothers insurers. This was paid
on August 18, 1998 only after respondent was threatened with legal action by
an attorney representing the collection agency for the insurers subrogation interest. Payment
of the medical claims was complicated by several factors. The applicable medical
insurance changed over time, and different insurers covered different items and had different
co-pays and deductibles. Bills submitted by medical creditors included duplications, billing errors,
and unauthorized charges. Some were subject to Indiana's hospital lien statute (I.C.
32-8-26-4 (a)(6)); some were subject to the subrogation statute (I.C. 34-53-1-2), and others
were subject to neither. The respondent ultimately negotiated discounts and reductions of
approximately $115,793.01 from the original medical expense claims. Despite those difficulties, the
delay was for the most part due to respondents failure to resolve those
On December 11, 1998, approximately eleven months after he received the settlement proceeds,
the respondent first reported to the clients and their attorney the distributions he
had made from the settlement proceeds. He did not report that he
had distributed in excess of $1,624,000 for expenses of litigation and attorney fees.
The clients new attorney wrote to the respondent on January 25, 1999.
In addition to pointing out several claims for medical services that appeared
to remain unpaid, he renewed the mothers request for a copy of the
contingent fee agreement and a full accounting for the funds received in settlement.
On April 30, 1999, the clients attorney again asked for documentation that
all of the medical creditors had been paid and reminded the respondent of
his earlier unsatisfied request for a copy of the fee agreement and an
accounting of distributions. The clients attorney again renewed that request on June 3,
1999. On June 10, 1999, five months after he had paid the
last medical creditor, the respondent provided the clients attorney with a settlement statement
disclosing the total settlement, listing the payments made from the settlement proceeds (including
distributions to medical creditors, payment of litigation expenses, and distributions to the clients)
and the balance remaining in trust. For the first time, the statement
disclosed that the total amount of funds distributed from the settlement for attorney
fees was $1.6 million, but still did not disclose that $533,333.33 of that
was paid to the Alabama attorney. The respondent did not furnish a
copy of his fee agreement.
The Alabama attorneys participation in the case was minimal. The clients never hired
him to be their attorney, and their contract with the respondent did not
mention a role for any other attorney not associated with the respondent's law
firm. As the case progressed, and unbeknownst to the clients, the respondent
and the Alabama attorney discussed the case by telephone from time to time,
but the Alabama attorneys role was not significant. He discussed some ideas
about insurance coverage with the respondent, but he was not involved with research,
drafting of pleadings or other papers, investigation, discovery, court appearances, negotiations, or client
communications. The clients first became aware of the payment to the Alabama attorney
in March 2001 when the clients were notified by the IRS that the
boy owed taxes on the interest earned by a certificate of deposit held
by the uncle for the benefit of the boy. As it turned
out, the Alabama attorney had in turn paid the uncle $177,600 of the
$533,333.33 he received from the respondent. That amount was placed in trust
for the boy by the uncle without the clients or the boys knowledge.
By June or July 1999, the respondent was ready to close the case
and distribute the $112,972 in settlement funds remaining in his trust account.
The respondent paid that amount to the clients on November 22, 1999.
On December 6, 1999, the clients attorney once again asked the respondent for
a copy of the written contingent fee agreement and also asked for an
explanation of how the respondent's attorney fees were calculated. The respondent never replied.
II. The Charged Violations
The hearing officer found that
the respondent charged an unreasonable fee in violation of Ind.Professional Conduct Rule 1.5(a)
because the contingent fee agreement did not clearly state the method by which
the fee was determined. Findings of Fact at 34. He also
concluded that the respondent violated Prof.Cond.R. 1.5(c)
by failing timely to provide a
written settlement disbursement summary to his clients, Prof.Cond.R. 1.3 and 1.15(b)
payment of the medical creditors and lien holders, and Prof.Cond.R. 1.5(e)
dividing his attorney fees with the Alabama attorney without the clients knowledge.
A. Unreasonable fee
The Disciplinary Commission alleged that the respondent charged an unreasonable fee by recovering
a contingency fee on settlement funds that were not to be received until
the future without discounting the future settlement payments to present value. Verified Complaint
at 4. Respondent contends that there is no requirement that a
structured settlement be discounted to present value when calculating a contingent attorney fee
on the settlement.
We agree with the hearing officers conclusion that the respondents fee agreement with
the client failed to state clearly the method by which the fee was
determined. That in and of itself does not constitute a violation of
the prohibition in Prof.Cond.R. 1.5(a) against unreasonable fees.
However, we find
that the respondents fee was unreasonable nonetheless, because the fee agreement, in calling
for 40% of settlement, must be based on the value to the client,
unless some other method is clearly spelled out. If an attorney wishes
to calculate such a fee based on anything else, the fee agreement must
make those calculations clear to the client. Here, by calling for 40%
of the settlement, the agreement limited respondents fee to 40% of the value
and no more.
Use of the term gross proceeds does not salvage this agreement. A
lay person might well understand that to mean only that expenses will not
be deducted, and may have no understanding of what a structured settlement is
or that it is a possibility. Where a contingency fee on a
structured settlement will not be collected as settlement funds are actually received, a
lawyer cannot ignore the time value of money or let any material risk
of nonrecovery fall disproportionately on the client. In
Matter of Myers, 663
N.E.2d 771 (Ind. 1996), a client hired attorney Myers to recover investment funds.
Myers and the client later entered into a written contingency fee agreement, which
provided that Myers would retain as his fee 10% of the gross recovery
of money and/or property prior to the filing of a claim. Myers
thereafter negotiated a settlement on behalf of the client, which terms provided for
payments totaling $550,000: $50,000 due upon execution of the settlement agreement, $50,000 due
shortly thereafter, and $15,000 per month for 30 months. Myers deducted $35,000
for his fee from the first payment and deducted $15,000 from the second
payment. He then relinquished any claim to the remaining $5,000 in fees
and notified the defendant that the remaining periodic payments of $15,000 should be
made directly to the clients. The defendant defaulted after paying a total
of only $160,000 of the $550,000 promised. We concluded that the lawyers
retention of the bulk (91%) of his anticipated $55,000 fee from the initial
two payments of the structured settlement was unreasonable because, although the fee agreement
called for a fee of ten percent, his fee in fact approached thirty
percent of the total actual recovery. Myers at 774.
Myers turned principally on the collection risk in deferred payments, but the time
value of money is subject to the same principle. Other jurisdictions, in
valuing structured settlements have expressly held that contingency fees on structured settlements must
account for the time value of money and therefore be based upon either
the settlements cost (i.e. the price of annuity or its present value).
Deferred payments always include a time value factor, and can also include risk
of collection factors. Shifting either without full disclosure and consent of the
client is simply a breach of the fee agreement. A lay person
may not readily grasp the economic significance of deferred payments. But we
think it should be obvious to any attorney who competently represents a party
in negotiating a transaction involving deferred payments.
Here the amount the respondent retained for himself was substantially in excess of
40% of the value of the settlement at the time he took his
fee. This is true whether value is calculated on the cost of
the annuity, which is one reasonable approach, or by discounted cash flow.
As such it is unreasonable when the fee agreement simply called for
a 40% fee.
The respondent contends that at the time he took the $1.6 million fee,
the figure functioned as a "cap" because he otherwise would have been permitted
to calculate his fee by taking 40% of the $2 million cash plus
40% of the gross amount of the clients guaranteed future payments ($4,341,431.29), without
discounting to present value. The respondent's fee, using this method, would have been
$2,536,572.40. The annuity was purchased for $1,465,698. Forty percent of
the lump sum plus the purchase price of the annuity (its cost) is
$1,386,792. According to the respondents expert, the present value
of the cash
stream payable under the annuity was slightly less ($1,368,509) than the cost of
Thus, whether valued using the cost of the annuity
or the discounted cash flow from the annuity, the fee the respondent actually
retained was over $200,000 in excess of 40% of the total present value
of the settlement. An attorneys retention of a fee greater than that
specified in the fee agreement with the client, without the renegotiated agreement of
the client is strongly indicative of an unreasonable fee. Matter of Lehman,
690 N.E.2d 696, 702 (Ind. 1997).
The respondent collected his entire fee, $1.6 million, from the initial payment of
$2 million. At the moment he collected his fee, it amounted to
80% of the gross amount recovered, at that time. We have held
that taking an entire contingent fee from the first payments of a structured
settlement, absent explicit authorization in the fee agreement, amounts to an unreasonable fee.
Myers, infra (holding that gross amounts recovered in contingent fee agreement meant
actual receipt of funds); Matter of Benjamin, 718 N.E.2d 1111 (Ind. 1999) (lawyer
took entire contingent fee from first settlement payments). Absent a contrary
written agreement, contingent fee recoveries should be taken only as the funds are
actually received. Restatement (Third) of the Law Governing Lawyers, Section 35(2) (Unless
the contract construed in the circumstances indicates otherwise, when a lawyer has contracted
for a contingent fee, the lawyer is entitled to receive the specified fee
only when and to the extent the client receives payment.). The hearing
officer found that the clients expressed a desire to have the respondents fee
deducted from the lump sum payment so that the annuity payments would be
preserved for the benefit of the boy. This does not justify increasing the
amount of the fee, which is the effect of accelerating its payment ahead
of the clients recovery without discounting for the time-value of money. If
an attorney wishes to calculate a fee based on this consideration, it needs
to be spelled out for the client in the written agreement, and the
economic cost and risk of noncollection to the client needs to be made
clear. Here there appears to be no risk of collection as there
was in Myers, but that factor is also a necessary disclosure if the
attorney wishes to shift it to the client.
We recognize the value in the availability and use of structured settlements.
They often provide a severely injured plaintiff with a regular, permanent income stream
for future medical expenses and support and may result in tax savings.
If the parties agree to it, there is nothing inherently wrong with a
lawyers receiving the full amount of his fee in current dollars and the
clients receiving payment in future dollars so long as the relationship between the
present value of the two is in proportion to the percentage of the
lawyers fee agreed to in the fee agreement. But that condition was
not met here.
We conclude that the respondents fee was unreasonable in violation of Prof.Cond.R. 1.5(a),
because it ignored the time-value of money and thereby exceeded the fee agreed
to in the initial written fee agreement with the clients by over $200,000.
The respondents proposed method of calculating the present value of the structured
settlement, by factoring in the hypothetical tax savings inuring to the client, is
not spelled out in the fee agreement and is contrary to a lay
persons understanding of the written agreement the respondent created. It appears to be
a justification after the fact, not a condition in setting the fee, and
one not explained to the client. The requirement of a written fee
agreement includes spelling out any unusual calculations and is designed to avoid exactly
the kind of dispute that arose here.
B. Fee sharing
Indiana Professional Conduct Rule 1.5(e) provides:
A division of fee between lawyers who are not in the same firm
may be made only if:
(1) the division is in proportion to the services performed by each lawyer
or, by written agreement with the client, each lawyer assumes joint responsibility for
(2) the client is advised of and does not object to the participation
of all the lawyers involved; and
(3) the total fee is reasonable.
All three requirements are lacking in this case. The Alabama attorneys involvement
in the case was minimal. It consisted of only a few telephone
conversations with the respondent about insurance coverage issues relative to the case.
Clearly, the division of fees between the respondent and the Alabama attorney was
not in proportion to the services provided by the two. Nor were
the clients aware of the Alabama attorneys participation. Absent proportionality, the fee
division would nevertheless have been permissible if: (1) the client was advised of,
and had no objection to, the fee sharing, (2) the respondent and the
Alabama attorney, by written agreement with the client, each assumed joint responsibility for
the representation, and (3) the total fee was reasonable. There is no
evidence of a joint responsibility agreement in this case (the respondents letter to
the Alabama attorney states that the respondents office takes primary responsibility for the
case). We conclude that the fee sharing between the respondent and the
Alabama attorney in this case violated Prof.Cond.R. 1.5(e).
Delays in wrapping up the transaction
The respondent received the lump-sum settlement proceeds in mid-January 1998. At that
time, several third parties had interests in the settlement proceeds. Some of
the creditors--the subrogated insurers--were statutorily obligated to reduce their claims to share pro
rata in the costs of the recovery. The application of this statutory obligation
is not complex and there is no evidence in the record establishing any
resistance by the subrogated insurers to do so upon being informed of the
requirements of the statute. Furthermore, the respondent had collected information about the boys
special medical damages during the lawsuit. Upon settlement of the suit, therefore,
the respondent was well aware of the identity of the subrogation and medical
provider claimants. The respondent did have to scrutinize the third-party medical bills
to check for duplications, billing errors, and unauthorized charges. His efforts in
regard to these concerns resulted in the respondent negotiating discounts and reductions of
approximately $115,793.01 from the original claims. However, the respondent had paid only
one of the medical bills by the end of 1998, some 10 months
after he received the settlement proceeds, and he was aware of at least
most of the claimants interests before the lawsuit settled. He did not
pay the first medical creditor until eight months after receiving the settlement proceeds,
and then only after that creditor threatened the respondent with a lawsuit.
The respondent began paying the rest of the third-party claims only after the
clients hired a new attorney. That the respondent, following the clients new
attorneys second contact, soon thereafter paid some $282,189.87 in claims strongly indicates that
there was nothing slowing the claims payment process save the respondents inattention.
Professional Conduct Rule 1.3 requires lawyers to act with reasonable diligence and promptness
in representing clients. Professional Conduct Rule 1.15(b) provides, in relevant part, that
a lawyer shall promptly deliver to third persons any funds the third person
is entitled to receive. The respondents delay in paying third party creditors
following his receipt of the settlement proceeds violated these rules and ultimately required
the clients to go to the expense of hiring another attorney to prod
the respondent to finish a project for which respondent had already collected over
$1 million in fees.
D. Written settlement statement
Professional Conduct Rule 1.5(c) requires that, upon conclusion of a contingent fee matter,
the lawyer is to provide the client with a written statement stating the
outcome of the matter, and, if there is a recovery, showing the remittance
to the client and the method of its determination. At the time
of settlement in late November 1997, the respondent did not provide to the
clients a written statement showing the total settlement, the anticipated deductions, a specification
of costs of litigation that were advanced by the respondent, and the net
recovery to the clients. The respondent did not provide a written settlement statement
to the clients in advance of removing the attorney fees or expenses from
trust. On December 11, 1998, the respondent reported to the clients the
distributions he had made from the settlement proceeds, 11 months after receiving the
settlement proceeds. At that time, he did not disclose the $24,000 he
had withdrawn to cover his expenses, the $1,066,666.66 he withdrew as his own
attorney fees, or the $533,333.33 he withdrew to provide to the Alabama attorney.
On June 10, 1999, after several unanswered requests from the clients
new attorney for a full accounting, the respondent provided to them a settlement
statement disclosing the total settlement, the distributions made to medical creditors and others,
and the balance remaining in trust. That statement again omitted mention of
the fee paid to the Alabama attorney. In December 1999, while the
final distributions were being made from the settlement proceeds, the clients attorney asked
the respondent for an explanation of how his fee was calculated.
The respondent never replied.
We find that the respondent violated Prof.Cond.R. 1.5(c) by failing to provide an
adequate settlement statement upon conclusion of the representation. Because the respondent failed to
state the method of calculating his fee, his statements did not adequately specify
the method of determining the remittance to the client. Additionally, the respondents
settlement statements failed to disclose the portion of the fee paid to the
Determination of an appropriate
sanction for the respondents misconduct requires consideration of several factors, including the respondents
state of mind, the duty violated, actual or potential injury to the client,
the duty of this Court to preserve the integrity of the profession, the
risk to the public in allowing the respondent to continue in practice, and
mitigating and aggravating circumstances. Matter of Cox, 662 N.E.2d 635 (Ind. 1996).
The hearing officer found that the respondent's delay in resolving claims of third
parties resulted in direct and significant harm to the clients. For example,
the respondents delay in paying one medical provider resulted in that providers freezing
its account with the clients, and requiring the clients on one occasion to
pay cash for necessary medical supplies.
the hearing officer found that the clients agreed that the respondent did an
exemplary job prosecuting the case and obtained an excellent result. We are
strongly influenced by the testimony of the clients wherein they expressed their deep
gratitude to the respondent for the settlement he obtained for them and his
expertise in recovering on their behalf. Their dissatisfaction arose only in relation
to the amount of attorney fees and his handling of pending medical claims.
The hearing officer also found that the respondent has no prior disciplinary
actions and has had an exemplary career, performing substantial service to the bar
and the justice system. Further, we note that the respondent placed
in an interest bearing escrow account shortly after the disciplinary proceeding was
commenced. We direct the respondent to refund to the clients $252,596.40,
interest computed at 8% annually and to reimburse the clients for the attorney
fees they incurred to prod him to complete the project.
Absent substantial aggravating or concurrent misconduct, this Court has generally
imposed either public or private reprimands or at most short suspensions on attorneys
who exact unreasonable fees.
See, e.g., Matter of Myers, infra (public reprimand);
Matter of Benjamin, 718 N.E.2d 1111 (Ind. 1999) (public reprimand for lawyer who
kept fee in excess of that permitted by statutes governing recoveries from Indiana
Patient Compensation Fund, and was taken from first installment of periodically-paid settlement, contrary
client wishes); Matter of Lehman, 690 N.E.2d 696 (Ind. 1997) (violation of
rules governing contingent fee agreements, and misrepresentation, by attorney who failed to disclose
to personal injury client that attorney would retain pro rata share of costs
of recovery, which insurers holding subrogation claims against client were required by statute
to pay, warranted reprimand). We view this case primarily as an
unreasonable fee case, although by that characterization we do not wish to diminish
the gravity of the respondents other transgressions.
The Clerk of this Court is directed to provide notice of this order
in accordance with Admis.Disc.R. 23(3)(d), to the hearing officer, and to the clerk
of the United States Court of Appeals for the Seventh Circuit, the clerk
of each of the United States District Courts in this state, and the
clerks of the United States Bankruptcy Courts in this state.
Costs of this proceeding are assessed against the respondent.
DICKSON, BOEHM, and RUCKER, JJ., concur.
SULLIVAN, J., concurs and dissents with separate opinion.
SHEPARD, C.J., not participating.
SULLIVAN, Justice, concurring and dissenting.
I concur in the Court's opinion except as to sanction. I agree
that respondent's career and contributions to the profession are weighty mitigating circumstances.
I nevertheless believe a period of suspension is warranted. While I would
find a public reprimand sufficient sanction for any of the violations standing alone,
I believe it is insufficient for the combination of violations committed here. I
do concur with the Court's directing the respondent to refund the excess of
the fee with interest and to reimburse the clients for the attorneys fees
they incurred to pride him to complete the project.
The clients testified that they did not know the basis for the
fee of $1.6 million, but that they remembered the agreement with the respondent
to cap his fee at $1.6 million. The respondent testified that the
$1.6 cap was agreed to at a point during the settlement negotiations, but
before the final settlement amount was known.
That letter stated in pertinent part:
"Please accept my apologies for not sending you a written confirmation as to
our fee arrangement prior to this date. . . . I took a
look through all correspondence, and did not find where I ever sent you
a letter confirming our agreement. However, I did find a note indicating what
our agreement was. Customarily, our office agrees to take primary responsibility for the
processing of the litigation against all named defendants, and settlement and resolution of
all subrogation claims. We also agree to be responsible for 100% of all
litigation expenses, subject only to reimbursement, in the event the litigation is successful.
Obviously, this litigation expense reimbursement will come from the client's share. Further, we
agree that any attorneys' fees realized will be split on the basis of
2/3rds to our office, and 1/3rd to yours. The 1/3rd that is paid
to your office is characterized as co-counsel fees to you."
Professional Conduct Rule 1.5(a) provides:
A lawyer's fee shall be reasonable. The factors to be considered in determining
the reasonableness of a fee include the following:
(1) the time and labor required, the novelty and difficulty of the questions
involved, and the skill requisite to perform the legal service properly;
(2) the likelihood, if apparent to the client, that the acceptance of the
particular employment will preclude other employment by the lawyer;
(3) the fee customarily charged in the locality for similar legal services;
(4) the amount involved and the results obtained;
(5) the time limitations imposed by the client or by the circumstances;
(6) the nature and length of the professional relationship with the client;
(7) the experience, reputation, and ability of the lawyer or lawyers performing the
and (8) whether the fee is fixed or contingent.
Professional Conduct Rule 1.5(c) provides:
A fee may be contingent on the outcome of the matter for which
the service is rendered, except in a matter in which a contingent fee
is prohibited by paragraph (d) or other law. A contingent fee agreement shall
bed in writing and shall state the method by which the fee is
to be determined, including the percentage or percentages that shall accrue to the
lawyer in the event of settlement, trial or appeal, litigation and other expenses
to be deducted from the recovery, and whether such expenses are to be
deducted before or after the contingent fee is calculated. Upon conclusion of a
contingent fee matter, the lawyer shall provide the client with a written statement
stating the outcome of the matter and, if there is a recovery, showing
the remittance to the client and the method of its determination.
Professional Conduct Rule 1.3 provides:
A lawyer shall act with reasonable diligence and promptness in representing a client.
Professional Conduct Rule 1.15(b) provides:
Upon receiving funds or other property in which the client or third person
has an interest, a lawyer shall promptly notify the client or third person.
Except as stated in this rule or otherwise permitted by law or by
agreement with the client, a lawyer shall promptly deliver to the client or
third person any funds or other property that the client or third person
is entitled to receive and, upon request by the client or third person,
shall promptly render a full accounting regarding such property.
Professional Conduct Rule 1.5(e) provides:
A division of fee between lawyers who are not in the same firm
may be made only if:
(1) the division is in proportion to the services performed by each lawyer
or, by written agreement with the client, each lawyer assumes joint responsibility for
(2) the client is advised of and does not object to the participation
of all the lawyers involved;
(3) the total fee is reasonable.
If the agreement permitted the fee the respondent sought, it appears
to violate Prof.Cond.R. 1.5(c), which requires contingency fee agreements to be in writing
and to state the method by which the fee is to be determined.
However, the Commission charged a Prof.Cond.R. 1.5(c) violation only with respect to
the respondent's failure to provide the clients with an adequate settlement statement.
As pointed out by the parties in this case, many jurisdictions, including
courts in Florida, California, New Jersey, South Carolina, Washington, Michigan, and New York,
use cost approach method in valuing annuity payments made pursuant to structured settlements.
See e.g., Fla.Prof.Cond.R. 4-2.5(f); Schneider v. Kaiser Foundation Hospitals, 215 Cal.App. 3d
1311, 264 Cal.Rptr. 227, 231 (1989); Merendino v. FMC Corp., 181 N.J. Super.
503, 438 A.2d 365, 368 (1981); Johnson v. Sears, Roebuck & Co., 291
Pa.Super. 625, 436 A.2d 675 (1981); Matter of Williams, Jr., 336 S.C. 578,
521 S.E.2d 497 (1999); Wash.Prof.Cond.R. 1.5(c)(2); Re Estate of Muccini, 118 Misc.2d 38,
460 NYS2d 680 (1983). Other states, including Michigan, Alabama, have used the
present value approach. See, e.g., Mich.Prof.Cond.R. 8.121 (2002); Ex parte St. Regis
Corp., 535 So. 2d 160 (Ala. 1988). The Association of Trial
Lawyers of Americas position on the topic is set forth in a Board
of Governors resolution stating, contingent fees on structured settlements should always be calculated
on the cost or present value of the annuity, whichever is lower, unless
the fee is paid in periodic payments. Commissions Exhibit A, ATLA Board
of Governors Resolution on Contingent Fees, July 18, 1986. Under either approach,
it is recognized that the true immediate value of the structured settlement is
that which takes into account the time-value of money.
Present value may be defined as the total sum of future payments
based upon the plaintiffs projected life expectancy discounted to reduce the sum to
its value in todays dollars. See Nguyen v. Los Angeles County Harbor/UCLA
Medical Center, 40 Cal.App.4th 1453, 348 Cal.Rpt. at 309-310 (1995).
discount rate used by the expert is not clear from the record.
This calculated present value of the annuity is without regard to
income tax considerations. Under the annuity the client obtained in the settlement,
payments may receive more favorable tax treatment than if the client received a
lump sum and purchased an annuity. See Stipulated Ex. 217 at 36-38,
Ex. A. The respondents expert testified that the clients hypothetical tax advantages
should be considered when arriving at a present value. However, as noted
by the Commission, the clients lump-sum settlement, as compensatory damages, would not have
been taxable. Interest earned after the settlement was invested would have been taxable
income. A qualified structured settlement, like the one in this case, may result
in all future payments from the annuity being treated as non-taxable income.
The respondents expert testified that the present value of the clients future stream
of income should be determined by asking what amount of money the client
would need to start out with in order to invest in such a
way that, after taxes on the earned interest, would pay the same stream
of income as the annuity. It is upon this rubric that the
respondents expert calculated what was, in his opinion, the true present value of
the settlement. We agree with the Commission that the clients tax savings
inherent to the structure of the settlement and income tax law are not
part of the gross amount recovered for purposes of calculating contingent attorneys fees.
If an attorney wishes to have that considered that a part of
the fee, the written agreement must spell it out. Of course, the
fee must also be reasonable.
Using the discount rate supplied by the respondents expert witness, the present
value of the annuity and contingent benefits was $1,368,509. Accordingly, the total
settlement value for purposes of calculating the respondents contingent fee is $3,368,509 with
the respondents agreed fee being $1,347,403.60, or $252,596.40 less than he retained.
Using the cost approach, the total settlement value was $3,465,698, with the respondents
fee being $1,386,279.20, or $213,720.80 less than he retained. Because the purchase
of an annuity should preclude risk of collection issues that might apply to
long term structured settlements, this alternative is more costly to the client.
We consider it nevertheless a reasonable approach.
This figure is calculated using the present value the respondents expert attached
to the annuity in the computation of the total value of the settlement,
as described in footnote 11, supra. Pursuant to ATLAs resolution, the
contingent attorney fee is to be calculated on the cost or present value
of the annuity, whichever is lower. See footnote 8, supra.