Frederick C. Moss 0000-00-00 00:00:00
In August 2011, the Supreme Court of Texas’ Professional Ethics Committee for the State Bar of Texas issued Opinion 610.1 The question it dealt with concerned a provision in a personal injury lawyer’s fee contract. According to the opinion, Disciplinary Rule 1.08(h) prohibited a lawyer from entering into a fee agreement that gave the lawyer an interest in the client’s cause of action to secure payment of the fee. Unfortunately, in doing so, the Ethics Committee overlooked more than a century of Texas case law that has granted lawyers the right to enter into such agreements. Moreover, the opinion unnecessarily impairs the ability Texas lawyers have to prevent clients from colluding with third parties to do the lawyer out of an earned fee. The basis for the committee’s decision is Texas Disciplinary Rule of Professional Conduct 1.08(h), which states, A lawyer shall not acquire a proprietary interest in the cause of action or subject matter of litigation the lawyer is conducting for a client, except that the lawyer may: (1) acquire a lien granted by law to secure the lawyer’s fee or expenses, and (2) contract in a civil case with a client for a contingent fee that is permissible under Rule 1.04. Comment 7 to Rule 1.08 notes: This Rule embodies the traditional general precept that lawyers are prohibited from acquiring a proprietary interest in the subject matter of litigation. This general precept, which has its basis in common law champerty and maintenance, is subject to specific exceptions developed in decisional law and continued in these Rules, such as the exception for contingent fees set forth in Rule 1.04 and the exception for certain advances of the costs of litigation set forth in paragraph (d) [of this Rule]. Opinion 610 cites a 1918 Texas Supreme Court case2 that recognized the attorney’s common law retaining or possessory lien as an example of a specific exception developed in decisional law. The committee then assumes that the retaining lien is the only lien that is authorized by law, and thus by Rule 1.08(h). The committee notes that, “Under Texas law, there is no general statutory attorney’s lien.” The committee must be referring to a statutory “charging lien.”3 Unstated is that there is also no common law charging lien in Texas.4 The opinion concludes that because a lawyer’s contractual security interest in a client’s cause of action is neither an authorized common law retaining lien nor a contingent fee, it is “not within the scope of the exceptions stated in Rule 1.08(h),” and is prohibited. Opinion 610 invalidates a provision that is probably in most Texas contingent fee contracts.5 It deems unethical a fee contract provision that has been upheld in numerous Texas cases dating back to the 19th century6 and was recognized as proper in Texas Ethics Opinion 395 (1980), which the committee cites with approval. Opinion 610 is fundamentally flawed because it fails to recognize this well-settled Texas case law. Like the common law retaining lien, a lawyer’s contractual security interest in the client’s cause of action is simply a contractual charging lien and, in the words of Rule 1.08(h)(1), “a lien granted by [decisional] law to secure the lawyer’s fee.” Moreover, if Opinion 610 is not modified or withdrawn, it will create an opportunity for disgruntled contingent fee clients to accuse their attorneys of breaching their fiduciary duties by having this security interest provision in their fee contracts and it will handicap lawyers’ ability to prevent their clients from unfairly “stiffing” them on their fees. Some context is necessary. Texas has never recognized a lawyer’s common law “charging lien” on the proceeds of their clients’ cases.7 Largely because of this, contingent fee lawyers have routinely put into their fee contracts an assignment of an undivided part interest in the client’s cause of action to provide a contractual basis to intervene and enforce the fee contract.8 Both before and after Rule 1.08(h) and its identical predecessor, Texas DR 5-103(A), were adopted, Texas courts have routinely upheld and enforced these assignments.9 Lawyer-client fee contracts with such assignments were treated like an arm’slength contract between lay persons.10 Unfortunately, in the ethically rough and tumble early days of this state to as late as the 1990s, these assignments were held to give lawyers absolute control over the assigned percentage of the claim.11 The lawyer could veto the client’s attempt to settle or dismiss the entire claim and even continue the action on the lawyer’s behalf.12 While this is no longer true,13 taking an assignment of a portion of the client’s claim as a security interest has continued and has never been declared impermissible by Texas courts. For example, in Dow Chemical Co. v. Benton,14 the question before the Texas Supreme Court was whether a lawyer with an assigned undivided interest in his client’s claim could intervene and prosecute the claim in his own right to secure his contingent fee after the case had been dismissed. The court of appeals, based upon a century of Texas case law, held that he could. The Supreme Court, in an opinion by Justice Joe Greenhill, reversed. The Court based its opinion on the myriad adverse effects on the rules of civil procedure that would occur if a lawyer, by virtue of an assignment, could act as a party to the lawsuit. The Court emphasized that the lawyer’s rights were entirely derivative of the client’s and could not be asserted separately despite the assignment. What is notable about Dow is that the Court went out of its way to say: “It should be stated that there is no question of the personal ethics of the attorneys here in question.”15With regard to the contractual assignment, the Court stated, “We do not reject the rationale that a properly worded contingent fee contract may effect an assignment of part of the recovery and a part of a cause of action to the attorney.”16 In short, the Court was unwilling to undo a century of Texas precedent that had enforced lawyers’ contractual assignments of clients’ causes of action.17 Moreover, in Texas Ethics Opinion 395,18 cited in Opinion 610, the Ethics Committee was asked whether a lawyer, whose fee contract assigned to him an interest in the client’s case and required the lawyer’s consent before the case could be settled, could refuse to be discharged by the client. The Committee held that the fee contract may not abrogate the client’s absolute right to discharge her lawyer. However, the committee, citing Dow, noted that the Supreme Court had accepted that fee contracts may assign part of the claim to the lawyer. The committee did not state or even imply that such assignments were unethical under Texas DR 5-103(A), which it quoted in full. Not cited in Opinion 610 is Texas Ethics Opinion 449.19 The question there was whether a lawyer, when representing a client in a property dispute, may acquire an undivided fee simple interest in the property as security for the payment of his fee. Relying on a Texas appeals court decision,20 the committee said yes, if the interest was acquired in good faith and with the client’s consent. The committee said that acquiring the interest in the property in dispute “is equivalent to contracting for a contingent fee which is allowed by DR 5-103(A)(2).” It is difficult to reconcile Opinion 610 with Opinion 449. If the prohibition on acquiring a proprietary interest in “the subject matter of litigation” does not apply to property sub judice according to Opinion 449, why would taking a security interest in the cause of action cross the line into unethical conduct? Certainly, the risk that a lawyer’s increased personal interest in the outcome of the case will undermine his or her loyalty to the client’s best interests is no greater when the security interest is in the claim for damages than when it is in the property that is the subject of the suit. Also, it might be noted that Opinion 610 is incorrect in stating that under Texas law there is no statutory attorney’s charging lien. While there is no common law charging lien, there has been a statutory charging lien available to Texas lawyers since 1889. The Act of March 26, 1889, then titled “Judgments — Notice of Transfer of,” gave lawyers a means of recording the transfer or sale of any part of a cause of action or interests in suits in courts of records if the transfer was executed and recorded after the suit was filed.21 However, this law does not apply to assignments made in the typical contingent fee contract, which are executed before the suit is filed.22 Nevertheless, after personal injury claims became assignable choses in action in 1895, Texas courts overlooked this limitation and upheld pre-suit cause of action assignments and enforced them against parties with actual notice of the lawyer’s assigned interest.23 It is true that the Transfers of Judgments Act is inapplicable to the situation addressed in Opinion 610. However, its existence shows that lawyers have access to, in the words of Rule 1.08(h)(1), “a lien granted by law to secure the lawyer’s fee or expenses.” The Ethics Committee (as well as most commentators and Texas court opinions) incorrectly assumed that the only “lien granted by law” available to Texas lawyers is the common law retaining lien. The Transfers of Judgments Act allows lawyers to file their contractual security interest in the cause of action and to enforce it as a lien against anyone with notice. Because it is “granted by law,” such a lien is not unethical under Rule 1.08(h)(1). Should it be unethical to do the same thing before the suit is filed? Scores of Texas cases have said no. Finally, although it is far from clear, there is substantial Texas case authority for the proposition that having an assigned interest in the client’s cause of action is a necessary precondition to allowing lawyers to intervene in their clients’ cases in order to preserve their rights to their fee.24 Typically, intervention is employed by lawyers when clients have benefited from their services but seek to avoid paying their fee by firing them and proceeding alone or with another lawyer.25 Without the ability of lawyers to contract with their clients for an assignment of part of the cause of action, Texas lawyers may be precluded from intervening in their former clients’ case in order to stake a claim to their earned fee. In sum, it would recognize long-standing Texas practice, blessed for more than a century by Texas courts, if the committee would withdraw Opinion 610 and revise it to permit lawyers to contract for a charging lien to secure payment of the fee. This could be reconciled with Rule 1.08(h) by finding that the exception for liens “granted by law” in subsection 1 includes both the lawyer’s common law retaining lien and the lawyer’s contractual charging lien. It is true that Comment 7 states that Rule 1.08(h) “is subject to specific exceptions developed in decisional law and continued in these Rules,” such as contingent fees, and that contractual charging liens are not mentioned in the Rules. But Comments to the Disciplinary Rules “do not, however, add obligations to the rules,”26 and Rule 1.08(h)(1) unequivocally states that, “the lawyer may: (1) acquire a lien granted by law to secure the lawyer’s fee or expenses.” As demonstrated above, Texas case law allows lawyers to take an assignment of a portion of the client’s cause of action or the proceeds of the litigation to secure payment of the fee in fee agreements. Thus, they are permitted by the Rule. Alternatively, the committee could follow the lead of Texas Ethics Opinion 449 and treat such security interests as part of the contingent fee. Allowing Texas lawyers to contract with their clients for a security interest in the causes of action introduces no increased risk that the lawyers’ fidelity to their clients’ best interests will be compromised. Modern tenets of professional ethics no longer permit lawyers with an assigned interest in the cause to exercise independent control over “their” assigned portion of the claim except in the very limited circumstances delineated in the Dow case. Lawyers may no longer enter into fee contracts in which clients sign away the right to decide whether to end or continue the litigation. The taking of an assignment of a percentage of the claim or the proceeds is a valid contractual charging lien. The contractual lien fills the gap left by the absence of a general common law charging lien. No Texas court has ever held this contract provision to be against public policy or contrary to the ethics of the profession. Notes 1. 74 Texas Bar Journal 857 (October 2011). 2. Thomson v. Findlater Hardware Co., 205 S.W. 831 (Tex. 1918). 3. A charging lien is a lawyer’s “right to a portion of the money or other property that is obtained in litigation through the lawyer’s efforts.” Charles W. Wolfram, Modern Legal Ethics 558 (1986). Thus, a charging lien is a vested interest in a future recovery. A retaining lien is the “right of the lawyer to hold onto client property or funds that have come into the lawyer’s hands until the client pays the lawyer’s fee.” Id. Ethics Rule 1.15(d) makes reference to the retaining lien. 4. Finkelstein v. Roberts, 220 S.W. 401, 405 (Tex. Civ. App. — Fort Worth 1920, writ dism.). 5. In the course of previous research into Texas contingent fee contracts, I asked several Texas plaintiffs’ personal injury lawyers to send me their fee contracts. Sixty-five percent had either an assignment of a percentage of or a grant of an interest in the cause of action to secure payment of the fee. Dorsaneo’s Texas Litigation Guide, §3.100, provides a sample contingent fee contract with this provision: “To secure the performance of Client’s obligations, as set forth below, the Client hereby transfers and assigns to the Attorney an undivided interest in the Client’s claim, the interest being equivalent to the amount or percentage that the Client, by this agreement, promises to pay for the services of the Attorney.” This is Texas continent fee contract “boilerplate.” 6. See, e.g., Gulf, C. & S. R. Ry. Co. v. Miller, 53 S.W. 709 (Tex. Civ. App. 1897, writ ref ’d). 7. Finkelstein v. Roberts, 220 S.W. 401, 405 (Tex. Civ. App. — Fort Worth 1920, writ dism.). 8. Lynch v. Munson, 61 S.W. 140, 141 (Tex. Civ. App. 1901) (“In suits for damages for personal injuries, in this state, the attorney bringing the suit is usually assigned an interest in the cause of action.”) 9. See, e.g., Texas & Pac. Ry. Co. v. Vaughan, 40 S.W. 1065 (Tex. Civ. App. 1897, writ ref ’d.); Honeycutt v. Billingsley, 992 S.W.2d 570 (Tex. App. — Houston [1st Dist.] 1999, pet. denied). 10. Cf., Galveston, H. & S. A. Ry. Co. v. Ginther, 72 S.W. 166 (Tex. 1903). 11. See Honeycutt v. Billingsley, supra. 12. See, e.g., Honeycutt v. Billingsley, supra; Gibson v. Texas Pac. Coal Co., 266 S.W. 137 (Tex. Com. App. 1924); Wichita Falls Elec. Co. v. Chancellor & Bryan, 229 S.W. 649 (Tex. Civ. App. 1921, writ ref ’d.); Herndon v. Lammers & Flint, 55 S.W. 414 (Tex. Civ. App. 1900). 13. See ethics Rule 2.01(a) and Texas Ethics Op. 395 (1980). See also, Dow Chemical Co. v. Benton, 357 S.W.2d 565 (Tex. 1962) (Lawyer with an assignment of the client’s claim may not appeal dismissal of the case when the client refuses to do so.) 14. Id. 15. Id. at 567. 16. Id. at 568. 17. The court limited the right of such lawyers to intervene and continue a case in their own name against the wishes of the client to situations where the client “has conspired with a third party to circumvent the attorney-client relationship with the intention of terminating it unilaterally.” Id. 18. 43 Texas Bar Journal 560 (corrected, June 1980). 19. 51 Texas Bar Journal 165 (1988) (applying DR 5-103(A)). 20. State v. Baker, 539 S.W.2d 367 (Tex. Civ. App. — Austin 1976, writ ref ’d n.r.e.). 21. Sayles’ Tex. Civ. Stat. art. 4647 (1898). The “Transfers of Judgments” statute currently resides, essentially unchanged, in Texas Property Code, Sec. 12.014 (Vernon’s Tex. Code Ann. (2007)). 22. See Texas & Pac. Ry. Co. v. Vaughan, supra. 23. See, e.g., Gulf, C. & S. F. Ry. Co. v. Miller, 53 S.W. 709 (Tex. Civ. App. 1899); Galveston, H. & S. A. Ry. Co. v. Ginther, 72 S.W. 166 (Tex. 1903). 24. Carroll v. Hunt, 168 S.W.2d 238 (Tex. Com. App. 1943, no writ); Besteiro v. Besteiro, 7 S.W.2d 124 (Tex. Civ. App. — San Antonio 1928, no writ); Wheeler v. Fronhoff, 270 S.W. 887 (Tex. Civ. App. — Texarkana 1925, writ dism.); Strickland v. Sellers, 78 F.Supp. 274 (N.D. Tex. 1948). Generally, it is held that a lawyer with a contingent fee contract that does not assign to the lawyer an interest in the cause of action or the recovery does not have a sufficient legal or equitable interest in the matter to have standing to intervene until after the judgment is entered. See Madeksho v. Abraham, Watkins, Nichols & Friend, 112 S.W.3d 679 (Tex. App. — Houston [14th Dist.] 2003, rev. denied); Coen v. Stout, 245 S.W.2d 971 (Tex. Civ. App. — Texarkana 1952, no writ); In re Willis, 143 B.R. 428 (Bankr. E.D. Tex. 1992). 25. See, e.g., Law Offices of Windel Turley, P.C. v. Ghiasinejad, 109 S.W.3d 68 (Tex. App. — Fort Worth 2003, no pet.); Honeycutt v. Billingsley, 992 S.W.2d 570 (Tex. App. — Houston [1st Dist.] 1999, pet. denied). 26. Tex. Disc. Rules of Prof ’l Conduct, ¶ 10, Preamble (1990). Frederick C. Moss is professor of law (emeritus) at Southern Methodist University Dedman School of Law in Dallas. Professor Moss is a member of the State Bar of Texas Disciplinary Rules of Professional Conduct Committee. The views expressed in this article are his alone.
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