Attorney approval needed for fee-shifting settlement

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Though the Wisconsin civil court system generally promotes settlement and compromise at most every phase of litigation, it can be against public policy for clients to settle their cases without attorney approval.

In Randy L. Betz v. Diamond Jim’s Auto Sales, 2012 AP 000183, published Oct. 16, the appellate court found that parties who go behind the backs of their attorneys and settle a fee-shifting case may risk appellate court reversal.

Wisconsin law does recognize that settlement agreements are contracts, the court explained, and unless ambiguous, they will be enforced as written.

Yet in this case, the appellate court concluded that “to sustain the settlement here…violates the public policy considerations inherent in…the fee shifting statutes.”

In October 2009, Abe Betz paid almost $9,000 for a used 1999 Cadillac Escalade from Diamond Jim’s Auto Sales in Milwaukee.

Over the next several months, Betz repeatedly brought the Escalade back to Diamond Jim’s for repairs. On the final visit, Betz was told that the Escalade needed a new engine which would cost almost $3,000. The dealer wanted Betz to pay $1,000 of that cost.

Betz hired attorney Vince Megna of Aiken & Scoptur SC, Milwaukee, and on March 1, 2010, sued Diamond Jim’s for advertising injury (Wis. Stat. 100.18), intentional fraudulent misrepresentation and auto dealer licensing violations (Wis. Stat. 218.0116). Two of the three counts involved fee-shifting statutes, and Betz demanded punitive damages as well.

The attorney retainer agreement that Betz signed with Megna specifically stated that no fees would be collected unless Betz won, and that Megna would “look to the defendant” for payment of attorney’s fees pursuant to fee shifting provisions of the statutes.

On April 4, 2011, Diamond Jim’s owner and general manager James Letizia spoke directly with plaintiff Betz, according to court documents. Together, the two reached a “confidential” agreement which would pay Betz a flat $15,000 to settle “all claims.”

Counsel for both sides claimed they were unaware of any direct discussions under way between the parties at the time.

Betz’s counsel quickly filed a series of motions with the court, including a motion for attorney’s fees from Diamond Jim’s, motion for disclosure of the “confidential” agreement and a motion for leave to amend complaint and to intervene as plaintiff.

Subpoenas were issued to Letizia and several Diamond Jim employees to testify about how the settlement agreement was reached. The court quashed Megna’s subpoenas, saying that a final hearing on the briefs would be held Dec. 8, 2011.

There, the court denied all of attorney’s Megna’s motions and upheld the settlement agreement, stating that “it’s terms were clear and unambiguous … and accounted for attorney’s fees.”

Megna’s core issue on appeal was that the agreement between Betz and Diamond Jim’s had too narrowly employed the use of strict contract law principles by the trial court, without factoring in whether the settlement agreement was against public policy.

If the court allows this settlement to stand, Megna argued, “it will thwart the very purpose of the fee-shifting statutes, which is to alleviate the financial burden on individuals bringing such claims … and enable them to retain counsel.”

Megna cited Shands v. Castrovinci, 115 Wis.2d 352 (1983), a housing case where pro bono attorneys sought to collect attorney fees from the defendant landlord, where the court in part noted that “the attorney fee award is the property of the organization that provided legal services.”

Megna also cited other Wisconsin cases including Gorton v. Hostak, Henzel & Bichler, 217 Wis. 2d 493 (1998), and Cook v. Public Storage, 2008 Wis. App. 155, to suggest that other Wisconsin appellate courts have routinely considered public policy implications when deciding whether to enforce agreements between parties.

In response, counsel for Diamond Jim underscored the long history of court and legislative support for settlement by the parties before trial, where settlement agreements are “reviewed like any other contract.”

“A court determines what parties contract to do as evidenced by the language they saw fit to use,“ defendant’s counsel further asserts. “Because the terms of the settlement agreement are clear, there is no reason to refer to any other document.”

Besides, counsel reasoned, the fee-shifting component did in fact work in this case. “Mr. Betz enforced his right by filing a lawsuit against Diamond Jim’s, and he was able to get a satisfactory settlement that addressed attorney fees,” even if plaintiff’s attorney might have to pursue collection of those fees later from the plaintiff.

In addition, counsel found plaintiff’s reliance upon Cook, Gorton and Shands to be misplaced. He distinguished each case, saying they were either not on point due to differences in fee agreement settings, a failure to address fee “ownership” issue or that the case decision only indicated that fee awards vest after final settlement is completed, but not specifically prior to settlement.

The appellate court noted that there were few decisions in other jurisdictions that were truly on point, and also acknowledged that a client retains the right to settle, on terms that he or she deems appropriate.

However, the court concluded that the general law in Wisconsin is clear – there is nothing forbidding a party from settling with a represented party without the consent of and outside the presence of counsel – but that these agreements, “like all contracts,” are scrutinized in light of public policy interests.

“Settlement agreements are contracts unless ambiguous, and they are enforced as they are written”, the court explained. However, “the court will not enforce contracts that violate public policy.”

Referencing the Cook case, the appellate court reasoned that Diamond Jim’s could no more negotiate away directly with Betz the fee shifting provision in a settlement agreement, any more than Diamond Jim’s could have eliminated or limited in one of its sales contracts a customer’s recourse to fee shifting.