Source: https://www.plaintiffmagazine.com/recent-issues/item/generous-referral-fees-paid-per-state-bar-rules
Timestamp: 2019-04-20 19:02:07+00:00

Document:
Margolin alleged she relied on an oral agreement with the handling lawyer to provide the referred client with a written disclosure of the referral arrangement as was required by Rule 2-200, and to obtain the referred client’s written consent to the referral fee. Margolin alleged that she was to receive 50 percent of any fee that was earned by the lawyer to whom the case was referred. As noted, the handling attorney ultimately recovered $450,000 in fees, and did not make any payment, relying upon Margolin’s violation of Rule 2-200.
Margolin’s evidence included that she was (primarily) a family law practitioner and she learned that a husband committed certain acts that could form the basis of a tort lawsuit by her client, the wife. Margolin referred the matter to a lawyer she had known for 20 years and believed him to be competent. She discussed the facts of the case with the attorney before he met with her client.
According to Margolin, the two lawyers and client met for “several hours,” during which it was agreed that the attorneys would split any recovery for fees equally, and that the attorney to whom the case was referred would memorialize the agreement between the lawyers and client and have it signed. The handling attorney testified the underlying referral fee agreement was not a 50-50, but 1/3-2/3, and he also acknowledged the obligation to prepare the fee agreement consistent with Rule 2-200.
While the underlying case was proceeding, the attorney to whom the case was referred wrote a letter to the personal representative of the wife (his client) and a copy to the referring attorney. In that letter, the attorney represented the referral fee to the referring attorney as one-third, and that he required a signature from the client to perfect the agreement under the Rules of Professional Conduct. Upon her receipt of the letter, the referring attorney objected that the signature had not already been obtained on an agreement that accurately represented the referral fee. The client never signed and returned the letter – or any other memorandum.
The underlying case went sideways but the Court of Appeal does not give a full exegesis, only a terse description: “Initially wife and husband struck an agreement in both the family law and tort cases, but in the end, the couple reconciled, and no written settlement agreement was ever executed.” (Id., 85 Cal.App.4th at p. 897.) Following the reconciliation, the handling attorney hired counsel to sue husband and wife for his fees. It settled for $450,000, of which he paid $100,000 in fees to his personal attorney and $20,000 in costs. He did not pay the referring attorney anything.
The Court of Appeal affirmed the trial denying Margolin, the referring lawyer, any fees. The failure of the client to sign a writing approving the fee split they agreed to was dispositive. In so holding, the Margolin court relied on its earlier decision in Scolinos v. Kolts (1995) 37 Cal.App.4th 635.
The Margolin court noted that in Scolinos, the Court did not reject the referring attorney’s contention on the merits that the attorney to whom the case was referred was responsible for preparing the appropriate agreement and having it signed, because it was not pleaded in that case. Therefore, it was not part of the motion for summary judgment or resulting decision.
Margolin distinguished Scolinos on the basis the defendant attorney to whom the case was referred was responsible for preparing the appropriate paperwork for the client’s signature, and because of his breach, the referring attorney was entitled to a full fee.
Margolin claimed the referring attorney was capitalizing on his own breach of Rule 2-200. By his entering into the oral agreement, he violated Rule 2-200 because it was not in writing. However, the Court of Appeal disagreed in a footnote: had the handling attorney paid the referring attorney a fee, the payment would have established a violation, not merely entering into the agreement.
Margolin also argued that strict compliance with Rule 2-200 would penalize referring attorneys who trusted counsel to whom the case was referred and provide a windfall to those who breached their agreement. Surely that was contrary to the purposes of Rule 2-200 in that the client’s wishes (as voiced by her verbal consent to the fee sharing arrangement) are not carried out.
In Phillippe, the main issue before the Supreme Court was whether equitable estoppel was available to a real estate broker to avoid the statute of frauds on a claim for commissions. The Supreme Court rejected the claim and found the broker’s reliance on the oral contract unreasonable in light of the rule and a realtor’s training that a written agreement is required by statute. The Court ruled the broker assumed the risk of relying on an oral agreement, so there could be no unconscionable injury.
Faced with a clear legislative desire for written contracts in a wide variety of contexts and the special significance of real estate transactions, we cannot conclude that section 1624(d) is a legislative anachronism that should be judicially swept away. In Buckaloo v. Johnson  14 Cal.3d 815, which also involved a licensed broker’s commission, the court made clear that, ‘[t]he statute of frauds conclusively establishes that brokerage contracts with either the vendor or the vendee must be in writing. We have neither the authority nor the inclination to circumvent that declared policy ....’ (Id. at 827.) Our view has not changed.
Based on Phillippe, and its holding that equitable estoppel could not be used to circumvent the statute of frauds, “reliance on Shemaria’s promise to prepare the appropriate paperwork was not sufficiently reasonable to afford plaintiff’s release from the requirements of Rule 2-200.” (Margolin, 85 Cal.App.4th at p. 901.) Accordingly, there is no unconscionable injury to the referring attorney. No fees were owed to Margolin.
In Chambers v. Kay (2002) 29 Cal.4th 142, a unanimous Supreme Court ruled that whether the situation is a “pure referral” or a “joint venture,” or an admixture, unless the client assented to the fee arrangement in writing, the lawyer without a fee agreement has no remedy.
Chambers involved two lawyers with separate practices who had teamed up as associate counsel in a few cases over the (two) years they were using the same office. One of those cases was Weeks v. Baker & McKenzie. Both lawyers were listed on the pleadings as plaintiff’s counsel, and the pleadings identified Chambers’ office address, but it is unclear if a formal association of counsel was filed. Chambers advanced approximately $3,500 in costs over the course of his involvement in the case. He also met with the client, conducted discovery and appeared in court on her behalf in pretrial proceedings.
The two lawyers had a falling out during discovery with Kay notifying Chambers he was removed effective immediately with the client’s approval. Kay represented in a letter that Chambers would receive a graduated percentage of the fees and reimbursement of all costs when the case concluded. But Kay never sought or obtained a written or oral consent to the proposed fee division with Chambers.
The Weeks case was tried to a large verdict of compensatory and punitive damages, augmented by an award of attorney’s fees with a lodestar multiplier. When it came time to settle-up, Kay accused Chambers of failing to perform services and an improper accounting for the services he had performed. Kay offered to resolve the matter for $200 per hour for the total number of hours in Chambers’ billing statement. Chambers declined Kay’s offer and proposed mediation of their fee dispute.
Following affirmance of the Weeks judgment in 1998, it was satisfied and Kay was paid his fees. Chambers filed a lawsuit against Kay for breach of contract and a common count. The trial court granted summary judgment against Chambers because the parties’ alleged fee agreement was an unlawful division of fees that violated Rule 2-200. In addition, the trial court ruled the claim for quantum meruit was barred by the statute of limitations. The Court of Appeal affirmed that the rule violation excused payment on the agreement, but reversed on Chambers’ claim for quantum meruit.
Chambers petitioned for review. He asserted the decisions governing Rule 2-200 were distinguishable because they related to “pure referral fees,” and in his case, his efforts were not insubstantial. Even if Rule 2-200 applied, Chambers claimed he was a de facto partner or associate of the member performing services, and therefore his claim was within an express exception to the rule against fee splitting. He also asserted that noncompliance with Rule 2-200 did not render the fee splitting agreement invalid and unenforceable. Regarding quantum meruit, he asked the Supreme Court to reverse the Court of Appeal’s finding that it could not be predicated on an apportionment of the contingency fee paid to Kay.
Chambers’s attempt to recover outside of the rule was also snubbed.
Rule 2-200 unambiguously directs that a member of the State Bar “shall not divide a fee for legal services,” unless the rule’s written disclosure and consent requirements and its restrictions on the total fee are met. Yet Chambers, in effect, seeks the aid of this court in dividing the fees of a client without satisfaction of the rule’s written consent requirement. We decline such aid.
Our decision to affirm the importance of written consent is consistent with Scolinos  and Margolin  which denied recovery for breaches of referral fee agreements where there was no compliance with the disclosure and consent requirements of rule 2-200 and its predecessor, former rule 2-108.
Before turning to the practical implications of Chambers, it is important to note that fraud is an exception. “An attorney may be equitably estopped from claiming that a fee-sharing contract is unenforceable due to noncompliance with Rule 2-200 or Rule 3.769, where that attorney is responsible for such noncompliance and has unfairly prevented another lawyer from complying with the rules’ mandates.” (Barnes, Crosby, Fitzgerald & Zeman, LLP v. Ringler (2012) 212 Cal.App.4th 172, 174.) In other words, the handling attorney cannot prevent the referring attorney from receiving consent from the client. In Ringler, the lead class-action clients were allegedly changed to prevent contact and the referring attorneys from recovering a referral fee. That interference is not privileged.
In 2004, the California Supreme Court clarified the issue of quantum meruit recovery for attorneys who were terminated after performing services on a contingency fee case without a referral-fee agreement or direct contract with the client in Huskinson & Brown v. Wolf (2004) 32 Cal.4th 453. There, the referring attorney sued the handling attorneys for failing to pay 25 percent of the attorney’s fees they earned on a $250,000 judgment in favor of the client. The trial court acknowledged there was no breach of contract because the attorneys failed to comply with Rule 2-200, but awarded $18,497.91 for unjust enrichment, the same amount that would have been paid under the referral-fee agreement. Alternatively, the trial court awarded $5,800 for quantum meruit. The Court of Appeal agreed contract was unavailable but also concluded unjust enrichment was error because it violated Rule 2-200. It also vacated the award for quantum meruit for the same reason.
The best practice includes a letter to the attorney referring the matter stating the terms of the referral and countersigned by the client. This can be a simple one-paragraph letter that explains the detail of any fees that will be paid and how it does not affect the client’s recovery.
Referring attorneys are not without “power” to contact the client, and they can memorialize the terms of the referral and ask for the letter to be countersigned and returned, with a copy sent to the lawyer by whom the case will be handled. If clients have any questions, they are urged not to sign (and return) the letter until they seek clarification with a call to counsel.
Knowing that a referring lawyer has no tenable claim without a signed agreement should provide some incentive for the handling lawyer to get the agreement confirmed promptly, as soon as the client relationship commences. That will end awkward exchanges about the case as well as allow the handling attorney to get to the business of resolution.
When a contingency-fee lawyer is called in by another contingency-fee lawyer to help or associate into the case for a limited time for all purposes, and assuming it is not gratis, the rule requires a letter that accomplishes the same purpose: explaining the terms of the engagement and securing client approval. The issue is disposed of from that point forward.
By taking care of the details at the outset of the relationship, neither side will be disappointed with the outcome and there will be fewer reasons for a dispute to occur and spoil a good relationship with counsel and the client. Even if the client is completely uninvolved, there will be recriminations in any fee dispute. Prevention is the best medicine.
It is understood and agreed by Attorney and Client(s) that John Doe, Esq. referred Client(s) and/or Matter to Attorney, and s/he will be compensated exclusively by Attorney, in the sum/ amount of __ %, from any Attorneys’ fees that are collected in this Matter. John Doe, Esq., will not be involved in the day-to-day handling of the case, and neither is he obligated to pay any costs of the claim or litigation. However, it is lawful and customary for contingency-fee attorneys to pay a percentage of the fees they earn to the referring attorney, subject to the Client’s (your) approval. This payment of Attorneys’ fees does not affect the Client’s recovery whatsoever. In order to facilitate the referral-fee agreement, a letter from Attorney to John Doe, Esq., with Client’s signature, confirming Client approval will follow.
David Hoffman is in private practice in Woodland Hills emphasizing all aspects of major tort litigation, including medical malpractice, insurance bad faith and civil rights violations. Mr. Hoffman is a former firefighter and has tried over 100 cases to verdict. He has been a member of the CAALA Board of Governors since 1993, receiving the Association’s Presidential Award in 1993, 1996, 2000 and 2012. He is a co-founder of the L.A. Bench-Bar Coalition, served a term on the LACBA Judicial Appointments Committee, and has spoken at numerous MCLE programs. Mr. Hoffman graduated from UCLA in 1984 and received his J.D. from Southwestern University School of Law in 1988.

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