Case Title: Wunschel Law Firm, PC v. Clabaugh

Citation: 291 N.W.2d 331

Docket Number: 63634

State: iowa

Court: Iowa Supreme Court

Date: 1980-04-23T00:00:00Z

Document:
291 N.W.2d 331 (1980) WUNSCHEL LAW FIRM, P.C., Appellee, v. Larry D. CLABAUGH, Appellant. No. 63634. Supreme Court of Iowa. April 23, 1980. *332 Morris C. Hurd, of Hurd Law Firm, P.C., Ida Grove, for appellant. James R. Van Dyke of Wunschel Law Firm, P.C., Carroll, for appellee. Lee H. Gaudineer, Carlton G. Salmons, and Hedo M. Zacherle, Des Moines, for amicus curiae Committee on Professional Ethics and Conduct of the Iowa State Bar Ass'n. Considered by LeGRAND, P. J., and HARRIS, McCORMICK, McGIVERIN, and LARSON, JJ. McCORMICK, Justice. The determinative question in this appeal is whether this court should approve contingent attorney fee contracts for the defense of unliquidated tort damage claims in which the fee is fixed as a percentage of the difference between the amount prayed for in the petition and the amount actually awarded. In entering judgment for plaintiff in this case, the trial court rejected defendant's contention that such contracts should not be approved. We reverse without prejudice and remand to permit plaintiff to seek recovery of fees on a quantum meruit basis. This case originated as an action for attorney fees based on a contingent fee contract under which plaintiff Wunschel Law Firm, P.C., defended defendant Larry D. Clabaugh in a defamation suit in Crawford County District Court. The action for fees was tried to the court at law. The trial court entered judgment for plaintiff for $4270, with interest from January 7, 1977. Viewing the evidence in its light most favorable to the judgment, the record shows defendant employed plaintiff to represent him in the defamation suit on September 18, 1975. Defendant previously had other counsel in the case, but that relationship had terminated. An order of the court gave defendant until October 1, 1975, to produce tax returns and financial statements, failing which he would be in default in that litigation. He met with Russell S. Wunschel and James R. Van Dyke in plaintiff's office. Upon defendant's request to employ the firm, Mr. Wunschel told him the firm would represent him for a fee of fifty dollars per hour, with a retainer of $1000 to be credited against expenses and the fee. Defendant asked if an alternative arrangement was possible, and Wunschel advised him the fee could be based on a contingent fee contract, giving plaintiff one-third of any amount saved defendant under the $17,500 prayer of the petition in the defamation suit. The $1000 retainer would also be required. When defendant asked which arrangement would cost him more, Wunschel first refused to tell him, but then changed his mind and said, "It may cost you more under the contingent-fee contract." A contingent fee contract prepared by Wunschel was subsequently executed, and defendant paid the $1000 retainer. Plaintiff represented defendant in a jury trial of the defamation suit which resulted in a judgment against defendant for $1750. Plaintiff subsequently billed defendant for $4270, showing the fee pursuant to the agreement as $5250, less the $1000 retainer, plus twenty dollars advanced for sheriff's costs. When defendant refused to pay the bill after the firm's demand, the present action was brought. Although defendant raises other issues, we find it necessary to address only the question of the validity of the kind of contingent fee contract on which the action is based. Because the Iowa Code of Professional Responsibility for Lawyers is implicated, we requested and obtained an amicus curiae brief on the question from the Committee on Professional Ethics and Conduct of the Iowa State Bar Association, a commission of this court in ethics matters. In its brief, the Committee states it found no case involving a challenge to a contingent fee contract in circumstances like those involved here. The Committee concluded that the present case "appears to be *333 unique in the annals of American jurisprudence." Our own research confirms that view. Although they are rare, a number of cases exist in which contingent fees to defense counsel have been involved. See, e. g., Dunham v. Bentley, 103 Iowa 136, 142, 72 N.W. 437, 439 (1897) (agreement by defendant to pay thirty percent of her interest in estate property for the services of her attorneys in protecting it from creditors' claims); Cline v. Zappettini, 131 Cal. App. 2d 723, 281 P.2d 35 (1955) (agreement by party in defense of counter-claims for breach of real estate contract and for real estate commission to pay attorney a percentage of broker fee saved); Sedbrook v. McCue, 104 Kan. 813, 180 P. 787 (1919) (challenge to attorneys' right to property received as contingent fee under agreement with client which gave them one-half of all property they saved the client in defending an action involving a mortgage on the land); Lipscomb's Administrator v. Castleman, 147 Ky. 741, 145 S.W. 753 (1912) (fee based in part on success in defending an action to set aside a deed); Moss v. Richie, 50 Mo.App. 75 (1892) (fee of $300 contingent on successful defense of ejectment action); In re Wise, 172 A.D. 491, 158 N.Y.S. 793 (1916) (agreement to defend claim against inheritance for small retainer and $5000 if the defense was successful); Board of Education v. Thurman, 121 Okl. 108, 247 P. 996 (1926) (fee based on twenty-five percent of amount saved in defending taxpayer suits). These cases are of little assistance here, however, because the attorneys in them were retained to defend claims relating to existing property or seeking liquidated damages and, thus, the fees were based on fixed values or sums. In addition, none of the cases involved a challenge to the fee on public policy grounds. Other cases cited in the briefs are also plainly distinguishable. In a case in which a contingent fee contract was not involved, the court in Leighton v. New York, Susquehanna & Western Railway, 303 F. Supp. 599 (S.D.N.Y.1969), aff'd 455 F.2d 389 (2d Cir.), cert. denied, 406 U.S. 920, 92 S. Ct. 1777, 32 L. Ed. 2d 120 (1972), simply approved the principle of permitting a fee to be based on the savings or reduction of financial losses of a client, rejecting the idea that the creation or production of a fund is essential to its validity. Defendant contends Walls v. Russell, 519 P.2d 936, 938 (Okl.App.1974), disapproved contracts like the one here. However, we find it did not. The Walls court merely held that when a statute provided for award of a reasonable attorney fee for the successful defense of a lien foreclosure action, a contract fixing the fee at forty percent of the amount thereby saved was not "an appropriate basis for determining a reasonable fee." In Priester v. Citizens National Trust & Savings Bank, 131 Cal. App. 2d 314, 280 P.2d 835 (1955), a contingent defense fee was voided as unreasonable in the circumstances when the contract was entered during the existence of the attorney-client relationship, and the lawyer's co-executors did not meet their burden to show that the transaction was fair and equitable. We applied the same principle in voiding the plaintiff's contingent fee contract in Lawrence v. Tschirgi, 244 Iowa 386, 57 N.W.2d 46 (1953). Because the contract in the present case was made at the inception of the relationship, the Priester-Lawrence principle has no application here. No case has involved a contingent defense fee predicated on a percentage of the amount saved under the prayer in defending an unliquidated tort claim. We therefore depend on principles governing fee contracts generally. The essential characteristic of a contingent fee contract is that the attorney's right to be paid any amount for his services is dependent on the result obtained. See, e. g., Carmichael v. Iowa State Highway Commission, 219 N.W.2d 658 (Iowa 1974). Thus nothing in the nature of the contract limits its use to employment of lawyers by plaintiffs. We have long recognized the validity of contingent fee contracts generally. See Wallace v. Chicago, Milwaukee & St. Paul Railway, 112 Iowa 565, 567-68, 84 N.W. 662, *334 663 (1900). We have disapproved contingent fees based on a percentage of the property obtained for the client in a divorce case on public policy grounds. See In re Estate of Sylvester, 195 Iowa 1329, 1333, 192 N.W. 442, 443-44 (1923). Lawrence v. Tschirgi exemplifies another situation in which a contract was disapproved. In Carmichael v. Iowa State Highway Commission, 219 N.W.2d at 664, we construed an ambiguous contingent fee contract with a view toward arriving at a "fair, rational and probable contract." These holdings are in accord with the principle that the courts have authority to monitor and determine the reasonableness of contingent fee contracts under their inherent power to regulate the bar. See Dunn v. H. K. Porter Co., 602 F.2d 1105, 1109 (3d Cir. 1979); Anderson v. Kenelly, 37 Colo.App. 217, 218, 547 P.2d 260, 261 (1976) ("Under its general supervisory power over attorneys as officers of the court, a court may and should scrutinize contingent fee contracts and determine the reasonableness of the terms thereof."); Rosenthal v. First National Bank, 127 Ill.App.2d 371, 376, 262 N.E.2d 262, 265 (1970); American Trial Lawyers Association v. New Jersey Supreme Court, 66 N.J. 258, 330 A.2d 350 (1974) (upholding a supreme court rule establishing a graduated scale of maximum contingent fees); Harmon v. Pugh, 38 N.C. App. 438, 444, 248 S.E.2d 421, 424 (1978). This authority is implemented in Iowa by the standards promulgated in the Iowa Code of Professional Responsibility for Lawyers. DR2-106 concerns fees for legal services. It provides: (C) A lawyer shall not enter into an arrangement for, charge or collect a contingent fee for representing a defendant in a criminal case, or either party in any action involving domestic relations. EC5-7 recognizes circumstances in which a contingent fee is appropriate. It provides: EC2-17 is also relevant. It provides: Finally, EC2-20 deals directly with situations in which a contingent fee contract is or is not proper. It provides: Under our authority to monitor and determine the reasonableness of contingent fee contracts as implemented in the ethical strictures, we must decide whether the kind of contingent fee contract challenged in this case conforms to sound public policy. It is not necessary to decide whether other kinds of contingent fee contracts for defense of civil cases will be approved. A contract which contravenes public policy will not be enforced by the courts. See, e. g., Rowen v. Le Mars Mutual Insurance Co., 282 N.W.2d 639, 650 (Iowa 1979); Tschirgi v. Merchants National Bank, 253 Iowa 682, 689-90, 113 N.W.2d 226, 230 (1962). This is a delicate power which "should be exercised only in cases free from doubt." Richmond v. Dubuque & Sioux City Railroad, 26 Iowa 191, 202 (1868). One ground for invalidating a contract on policy grounds is its contravention of "any established interest of society." Liggett v. Shriver, 181 Iowa 260, 265, 164 N.W. 611, 612 (1917). It is not necessary that the contract actually cause the feared evil in a given case; its tendency to have that result in sufficient. Jones v. American Home Finding Association, 191 Iowa 211, 213, 182 N.W. 191, 192 (1921). The principles in our cases are consistent with the standards for determining whether a contract contravenes public policy which are delineated in Restatement (Second) of Contracts §§ 320, 321 (Tent. Draft No. 12, 1977). The Committee states its position on the policy issue in its brief as follows: The critical factors in determining the amount of a contingent fee are (1) the percentage and (2) the amount against which the percentage is taken in order to determine the fee. From the plaintiff's perspective, the percentage requires the client's agreement and the amount against which it is taken is, at a later date, either determined by a jury or, again, by agreement of the client in settlement. A lawyer (plaintiff or defendant) cannot, independently of the client, control the amount of the fee. Also, generally *337 the case must be resolved favorably to the client before any fee is due. The same is generally true, but to a lesser extent, when such a contingent fee arrangement applies to the defense of a liquidated amount. We approve and adopt the Committee's view. We agree that the overriding principle from the ethical standards is that the fee must be reasonable. We concur with the Committee that a contingent fee contract is unreasonable when it provides for determination of the fee by factors having no logical relationship to the value of the services. We also agree the present contract is of that kind. We hold that a contingent fee contract for the defense of an unliquidated tort damage claim which is based upon a percentage of the difference between the prayer of the petition and the amount awarded is void. Accordingly, we reverse the trial court. We do not decide whether the fee charged in the present case is reasonable or not. We simply hold that contracts of this type are likely to result in unreasonable fees in too many cases and thus are contrary to sound public policy. The contract is not invalid because of illegality of the services but merely because on policy grounds we cannot approve the way in which the fee was to be calculated. In this situation, plaintiff performed valuable services for defendant for which it is entitled to be compensated. Therefore our decision is without prejudice to plaintiff's right to obtain a reasonable fee from defendant on a quantum meruit basis. See Lawrence v. Tschirgi, 244 Iowa at 399-400, 57 N.W.2d at 53.See generally Annot., 100 A.L.R.2d 1378 (1965). Because this disposition is without prejudice, the general rule barring recovery on the same claim on a new theory does not apply.See Restatement (Second) of Judgments § 48.1(1)(b) (Tent. Draft No. 1, 1973). Nor is recovery barred by the rule against splitting a claim.See id at § 61.2(b). In the interest of judicial economy, we hold that upon remand plaintiff shall have ten days from the date of procedendo within which to amend its petition in the present action to seek recovery for its services on a quantum meruit basis. REVERSED AND REMANDED.