BENCH BLOG: Weighing in on a ‘professional divorce’

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The Court of Appeals recently had an opportunity to review a decision that addressed contingency fees after the break-up of a law practice.

The lesson: specify such fee matters in writing before the separation is effectuated.

Scott Winston sued Thomas Guelzow in 2012, a year after these two Eau Claire plaintiffs’ personal injury lawyers developed a fee dispute. Both were represented by skilled lawyers: Terry Johnson for Winston and Ward Richter for Guelzow.

The attorneys’ history

Guelzow originally hired Winston as an associate. Three years later Guelzow continued as sole owner of Guelzow Law while Winston formed and became sole owner of Winston & Guelzow Law.

Although separate, the two law firms jointly practiced law. Their oral operating agreement stipulated that Winston would provide all overhead including staff and would front costs for cases. The name of Winston’s firm reflected Guelzow’s part of the bargain: allowing his name and “brand recognition” to attract clients.

As to fees, their agreement was that Winston would first be reimbursed for the costs and expenses he had fronted, and then contingency fees would be divided equally.

Six years later, at Guelzow’s initiation, the two firms parted ways. By that time, Winston was nearly bankrupt, having exhausted a number of loans and still carrying the burden of unpaid bills.

Before the actual separation of the firms, the clients were sent a letter explaining that the firms were splitting up and the clients could choose either attorney, or some other attorney to continue to represent them. But the two attorneys jointly recommended that the clients choose Guelzow and all 13 did.

Remarkably, despite the fact that Winston retained an attorney specifically related to the firms’ separation, Winston and Guelzow had no contractual agreement – either orally or in writing – for dividing contingency fees after the separation.

Guelzow did reimburse Winston for all costs that Winston had advanced on those 13 cases but did not give him any of the earnings from nearly $950,000 in contingency fees. That’s when Winston sued.

Bench trial decision

Rusk County Circuit Judge Steven Anderson was tapped to preside over the case since the Eau Claire County judges would be expected to know the attorneys.

During the two-day bench trial, Winston’s expert testified he spent no more than four hours reviewing a room full of boxes comprising the 13 cases in dispute. Nonetheless, he opined, case by case, what he thought “in fairness” should be Winston’s percentage of the contingent fee. An implied premise was that 50 percent was the beginning mark.

The defense expert emphasized the risk in a contingent fee agreement. In his opinion, Guelzow was entitled to the full fee since he had the files from the beginning and brought them to conclusion.

Anderson found that Winston had withdrawn from representation of all the clients. The continued risk, responsibility and cost of prosecuting the cases to completion by settlement or trial then were borne solely by Guelzow.

Anderson noted, “Here we have a firm that began but did not finish a case making a claim against a firm that represented the injured party from start to finish.” Anderson concluded that Winston was entitled only to quantum meruit compensation for his work on the cases.

Unfortunately, contingent fee case work does not involve particularized time records. Moreover, Anderson stated, time is not the only factor in a contingent fee; one must also consider the risk of not succeeding (here, at least one case was lost at trial) and the need for success.

The judge concluded Winston had failed through his expert witness to prove a claim to any portion of the fees. Anderson commented on the fact that a photo in the court’s file depicted a truckload of case files yet Winston’s expert expressed opinions based on at most four hours of review.

Anderson awarded Winston $33,333.33 in damages for fees, an amount that Guelzow stipulated Winston was entitled to. Winston appealed.

Court of Appeals opinion

District 3 Court of Appeals Presiding Judge Michael Hoover wrote the decision of the court. The court reviewed the legal argument that each side had advanced in front of Anderson.

Winston relied on the 1959 Tonn case. In Tonn, counsel did substantial work on a contingency fee case before the client terminated counsel without cause. After successor counsel obtained a settlement, original counsel sued the client for the entire contingency fee.

A 2008 Court of Appeals case explained that Tonn stands for the proposition that “damages [are] available to an attorney after a client breaches a contingency fee agreement by discharging the attorney without cause.” Hoover noted that this scenario was distinct from Winston’s in that Winston withdrew from representation with his clients’ consent.

Winston disputed Anderson’s finding that he had withdrawn from representation, but the court agreed with Anderson. Hoover wrote that Winston was “financially unable” to continue representation as well as having jointly recommended that the clients choose Guelzow to continue their cases.

Guelzow relied on a 1978 case, Hardison, from the Eastern District. There, an attorney withdrew with clients’ consent. The court determined the attorney could recover the reasonable value of services rendered, but not the contingency fee because of the risk inherent in accepting a case on a contingent basis.

The Court of Appeals found no error in Anderson having applied Hardison. It also tossed Winston’s claim for prejudgment interest on the $33,333.33 amount because it was only one part of a disputed claim for fees on 12 other cases, and thus the amount of damages was not reasonably certain before trial.

Commentary

I’m a big fan of concise opinions, but this one was so succinct as to be sparse, particularly about aspects of the trial and Anderson’s bench decision. I benefitted from reviewing the trial court decisional materials.

The opinion does not explicitly state who has the burden of proving the value of legal services rendered — an issue in the trial court — but it’s reasonable to view this as the withdrawing attorney’s burden.

Anderson found Winston’s expert testimony wholly inadequate for this purpose. One wonders if Winston’s inability to pay was the reason his expert spent such a paltry number of hours on the case.

The contentiousness in this case is evident in the decisional materials. Part of the backstory is the difference between the litigants’ personalities. Anderson commented on Guelzow’s commanding confidence and Winston’s reserve and restraint.

Such contentiousness and personality differences are often seen when professional associations part ways with a severing of the underlying relationships. It is often described as a “professional divorce” with a pugnacity typically seen in divorce court.

The lack of a written agreement in small associations is not uncommon. The sense of betrayal, then, is understandable because trust took the place of a contract.

This case implicitly trumpets the need for a contractual agreement when professionals work in joint endeavors.