By John Council
5TH COURT: ATTORNEYS’ FEES NOT RECOVERABLE AS LEGAL-MAL DAMAGES
Here’s an interesting math question: If a firm is hit with a malpractice jury verdict, is it entitled to subtract a portion of the damages award if it handled its former client’s case on a partial contingent-fee basis?
That was the issue of first impression Akin Gump Strauss Hauer & Feld presented to Dallas’ 5th Court of Appeals recently after a jury found Akin Gump negligent in a legal malpractice suit and hit the firm with a $922,631 verdict. On appeal, the firm argued in its brief that attorneys’ fees the former client paid Akin Gump should not have been part of the jury’s verdict, because only judges can order disgorgement.
Akin Gump also argued that the award should have been reduced by 10 percent, because the firm had a partial contingent-fee arrangement with the client: Lawyers worked at a reduced billing rate but were entitled to take 10 percent of National Development Research Corp.’s recovery. According to its brief, Akin Gump’s theory was that its former client should not be allowed to recover more money in a malpractice suit than it would have recovered from its client if the firm had successfully represented the client.
In its Aug. 29 opinion in Akin Gump Strauss Hauer & Feld v. National Development Research Corp., et al. the 5th Court ruled that the attorneys’ fees former client NDR paid to the allegedly negligent firm ‘are not recoverable as an element of damages’ in a legal malpractice suit against a firm. The holding conflicts with rulings from Texarkana’s 6th Court of Appeals and Eastland’s 10th Court of Appeals.
But the 5th Court rejected the firm’s contingent-fee argument, saying the former client ‘should not be forced to pay a contingency fee that Akin Gump never earned.’ It also noted the client had to hire a second set of lawyers to ‘be in the same position it would have been absent Akin Gump’s negligence.’
According to the opinion, the facts of the case are as follows: Akin Gump represented NDR in a dispute over a business termination agreement it had with Panda Global Energy Co. and the stock interest owed to NDR upon termination. At trial, a 68th District Court jury returned a partial verdict for NDR in National Development Research Corp. v. Panda Global Energy Co. However the trial court judge granted Panda’s motion for judgment notwithstanding the verdict, because NDR failed to submit jury questions to support the portion of the verdict in its favor. The trial court then entered a final judgment in favor of Panda, ordering NDR to pay more than $450,000 to Panda for attorneys’ fees.
NDR subsequently sued Akin Gump alleging malpractice for failing to submit the jury questions in the underlying business litigation suit. A jury found Akin Gump negligent and awarded NDR $922,631 — $216,590 of that award for attorneys’ fees NDR paid Akin Gump to appeal the jury’s verdict in Panda Global.
Akin Gump appealed the malpractice verdict based on several issues; chief among them was the firm’s assertion that attorneys’ fees cannot be recovered in a ‘jury verdict in a legal malpractice lawsuit’ in which jurors found Akin Gump negligent. Akin Gump argued in its brief to the 5th Court that disgorgement of fees is a question of law that only a court can answer.
Because Akin Gump had a partial contingent-fee arrangement in which it represented NDR in the underlying suit on a 10 percent contingent-fee basis — along with NDR paying the firm’s reduced hourly rate — the firm argued that the trial court should have reduced the legal-mal verdict by 10 percent.
But in an opinion written by Bea Ann Smith, a retired 3rd Court of Appeals justice sitting by assignment, the 5th Court ruled against Akin Gump in all of its appellate challenges except one: the firm’s contention that attorneys’ fees cannot be recovered in the form of a jury verdict.
NDR was not seeking attorneys’ fees expended at trial, only those it paid Akin Gump in the unsuccessful appeal of the underlying Panda Global case. NDR argued in its brief to the 5th Court that it would not have incurred the fees and expenses of an appeal but for Akin Gump’s negligence.
‘We reject this proposition, noting that even a successful litigant may be forced to defend its judgment when the losing party appeals,’ Smith wrote in an opinion joined by 5th Court Justices Martin Richter and Carolyn Wright. Smith then cited 15 opinions in which Texas intermediate appellate courts have split on the issue.
The 5th Court affirmed the trial court judgment but modified it to delete the $216,590 award of attorneys’ fees, reducing the judgment in the legal malpractice suit to $706,041.
The panel also noted that Akin Gump’s request that the legal-mal damages be reduced because of the 10 percent contingent fee it had with NDR in the underlying suit never has been addressed by a Texas appellate court. But it cited about 16 cases where jurisdictions outside of Texas have split on that issue.
The 5th Court ruled that Akin Gump should not be allowed to reduce the award by 10 percent, because to do so ‘would reward its wrongdoing.’
Jeff Levinger, a partner in Dallas’ Carrington, Coleman, Sloman & Blumenthal who represents Akin Gump, says the firm’s argument that the damages should be reduced by 10 percent was only fair.
‘The rationale for it is the damages award to the malpractice plaintiff assumes this but-for world that they are succeeding in the underlying case,’ Levinger says. ‘And that’s the basis upon which some of the damages were awarded in this case — if Akin Gump had succeeded in winning against the Panda defendant.’
‘And when you reconstruct that but-for world, you have to take into account the fact that the client would owe Akin Gump its 10 percent contingent fee,’ Levinger says. ‘And if you fail to take that into account, you give the former client in the malpractice case more than they would get had the world been the way they wanted it to be.’
Levinger says the firm has not decided whether it will appeal the case to the Texas Supreme Court.
But Akin Gump’s contingent-fee argument doesn’t take into account that NDR had to pay the firm for its Panda Global representation and pay malpractice lawyers to sue Akin Gump to obtain the same recovery from a trial court, says Michael L. Jones, a partner in Dallas’ Henry & Jones who represents NDR.
‘They have to pay the lawyer as if he did the job, and they end up with less money,’ Jones says. ‘To do otherwise would put the client in a worse position than they should have been had the malpractice not occurred.’
Jones says his client has not decided whether to appeal the legal-mal case.
But Daniel Sheehan, a legal malpractice plaintiffs lawyer with Daniel Sheehan & Associates in Dallas, wishes the parties in the NDR case would appeal to the Texas Supreme Court so the high court could sort out a raging debate among the intermediate appellate courts.
‘This issue of attorneys’ fees and are they recoverable as damages in legal malpractice cases is a mess in Texas,’ Sheehan says.
The problem is that some intermediate appellate courts view awarding attorneys’ fees in legal malpractice cases the same as awarding attorneys’ fees in other civil actions, Sheehan says. For example, under Chapter 38 of the Texas Civil Practice & Remedies Code, plaintiffs may recover attorneys’ fees in breach-of-fiduciary-duty cases if they prevail against defendants, he says. He believes that some courts have confused the concept found in Chapter 38 with the award of attorneys’ fees as damages.
‘That doesn’t have anything to do with it,’ Sheehan says. Attorneys’ fees a client pays a negligent firm for representation in underlying litigation are ‘just proximately caused damages’ in legal malpractice cases, he says. ‘This issue makes me crazy.’
But Jim Pennington, a Dallas solo who represents plaintiffs in legal malpractice cases, is happy the 5th Court addressed whether a firm can ask for a reduction of a legal malpractice damages award if it handled an underlying case on a contingent-fee basis.
‘I’m glad that the court took a chance and decided that issue. It seems really inequitable for an attorney to take that position in a legal malpractice case,’ Pennington says. ‘And the rationale the court took for rejecting that argument is right on. You do have a client incurring attorneys’ fees in prosecuting a legal malpractice case. And as the court pointed out, if they allowed that offset, then the client would be out for two sets of attorneys’ fees.’