Determining reasonable attorneys’ fees in post-settlement dispute.

When determining the amount of attorneys’ fees to award in a post-settlement attorney fee dispute, the trial court should have considered the relevant facts and factors contained in Tennessee Rules of Professional Conduct 1.5(a).

In Cordova v. Nashville Ready Mix, Inc., No. M2018-02002-COA-R3-CV (Tenn. Ct. App. May 19, 2020), the issues at play were “post-settlement disputes concerning an attorney’s fee lien filed by the plaintiffs’ first attorney, a subrogation lien filed by the employer’s workers’ compensation carrier, and the assessment of post-settlement discretionary costs against the carrier.” In the underlying case, Sergio Lopez had died from injuries he sustained at work. The injuries were caused by a third party (defendant), and Mr. Lopez’s employer’s workers’ compensation insurance carrier had been paying benefits to his wife and children. The wife filed a wrongful death claim against defendant company and its employee, alleging that the employee caused her husband’s death and that the company was vicariously liable.

In the wrongful death action, plaintiffs were initially represented by attorney Gary Hodges, whose fee agreement “entitled him to 33% of the gross recovery obtained through arbitration, settlement conference or trial.” The agreement also provided that if Mr. Hodges was discharged and plaintiff recovered after the discharge, Mr. Hodges would be entitled to “a reasonable attorney’s fee and reimbursement for all costs advanced.” Notably, the agreement did not differentiate between “discharge for good cause and discharge without cause.” After he was hired by the plaintiffs, “Mr. Hodges entered a separate fee-sharing agreement with another solo practitioner, Robert L. Martin.” Plaintiffs never had an agreement with Mr. Martin and were not told about the agreement between Mr. Hodges and Mr. Martin.

Mr. Hodges and Mr. Martin filed the wrongful death action for plaintiffs, and almost one year later they received a settlement offer from defendants of $400,000. Mr. Martin engaged in negotiations, but after he relayed to plaintiffs that he had been told defendants would accept a $700,000 settlement offer, plaintiffs stopped responding and instead discharged Mr. Hodges. Three days later, both Mr. Hodges and Mr. Martin filed a notice of attorneys’ lien.

Plaintiffs hired new attorneys, whose agreement entitled them to 33% of plaintiffs’ eventual recovery. Within a week of beginning work on the case, the new attorneys received a settlement offer of $600,000 from defendants, which plaintiffs did not accept. Later, at mediation, plaintiffs eventually accepted a settlement offer of $1,350,000.

After the settlement, there was post-settlement litigation surrounding the attorneys’ fees lien. The case was referred to a special master, who found that “Mr. Hodges’s fee agreement entitled him to a ‘reasonable attorney fee’ in the amount of one-third of the $400,000 settlement offer.” The special master found that Mr. Hodges secured the $400,000 offer and that the client fee should thus be based on that figure. The special master also found that Mr. Martin “was simply Mr. Hodges’s agent and had no contract with [plaintiffs]” and thus “no right to recover a fee directly from Plaintiffs.” The trial court adopted the special master’s report, and this appeal followed.

This appeal addressed several issues. Regarding the fee owed to Mr. Hodges, the Court of Appeals first addressed plaintiffs’ assertion that Mr. Hodges “forfeited his entitlement to a fee by engaging in unethical conduct” by entering into a fee-sharing agreement with Mr. Martin without disclosing such to plaintiffs. It was undisputed that Tennessee Rule of Professional Conduct 1.5 requires a client to agree to a fee-sharing arrangement and that “Mr. Hodges did not obtain plaintiffs’ written consent to enter into a fee-sharing agreement with Mr. Martin.” Nonetheless, the Court ruled that this ethical “transgression is not of a most flagrant sort, and it does not go directly to the heart of the fiduciary relationship that exists between attorney and client.” (internal citations and quotations omitted). The Court determined that the failure to obtain consent to the fee-sharing agreement did not prejudice plaintiffs and that Mr. Hodges was thus not barred from recovering a reasonable fee.

In regards to what the reasonable fee should be, the Court noted that the fee agreement entitled Mr. Hodges to a “reasonable fee” if he was discharged, and the agreement did not distinguish between discharge with or without cause. The Court explained that “when the agreement specifies a reasonable fee rather than a percentage of recovery, it is clear that the parties expect a court to adjudicate the issue of a reasonable fee.” (internal citation omitted). In such a case, “the award must be based upon the guidelines by which a reasonable fee is determined,” which are found in Tennessee Rule of Professional Conduct 1.5(a). (internal citation omitted). Here, the trial court adopted the special master’s report which based the fee award only on the last firm offer obtained by Mr. Hodges. While the Court of Appeals agreed that the $400,000 figure was the last firm offer obtained, it ruled that “consideration of the relevant factors in Tennessee Rule of Professional Conduct 1.5(a) was required.” Because the trial court only considered one factor, “the results obtained,” the Court vacated the fee award and remanded with instructions to consider “the relevant facts and factors” in determining the fee to be awarded.

Another big issue in this case was how much the workers’ compensation carrier’s subrogation lien payment should be, as well as whether the workers’ compensation carrier was responsible for any portion of plaintiffs’ attorneys’ fee. The deceased was injured in the course and scope of his employment, and his employer’s workers’ compensation insurance carrier had thus been paying bi-weekly death benefits to plaintiffs, with a maximum liability of $205,400.80 plus a statutory funeral benefit of $7,500. The carrier filed a subrogation lien in this action, which would “prevent the employee from receiving a double recovery.” (internal citation omitted). The trial court awarded the carrier $275,400.80 for its lien, but the Court of Appeals remanded this figure for recalculation. Because of the maximum liability plus funeral benefit under Tennessee law, the Court ruled that the amount of the lien would be $212,900.80 at most. The Court ruled that “[b]ecause [the carrier] had not fully paid and discharged their maximum liability at the time of the court’s judgment, the amount of its lien should have been equal to $212,900.80 less the amount of future, unpaid weekly benefits.”

The other issue concerning the workers’ compensation carrier was whether the carrier “should pay a pro rata share of [plaintiffs’ second attorneys’] fee because [the carrier’s] counsel did not actively prosecute plaintiff’s tort claims.” During the litigation, counsel for the carrier informed plaintiffs’ attorneys that it would be “filing an intervening complaint,” as it was their “practice to intervene to formally notify the parties about [the carrier’s] subrogation interest…” Plaintiffs’ counsel asked the carrier not to intervene, asserting that refraining would benefit plaintiffs’ case. Plaintiffs’ counsel asked the carrier to refrain from intervening a second time over one year later. When the case was eventually set for mediation, plaintiffs’ counsel agreed to have counsel for the carrier present but “off stage.” The insurance carrier argued that, based on these facts, it should not be liable for any of plaintiffs’ attorneys’ fees because “its counsel actively participated by monitoring the proceedings and attending mediation,” and because plaintiffs’ counsel “did nothing to protect [the carrier’s] subrogation interest, and any lack of participation was at Plaintiffs’ behest and for Plaintiffs’ benefit.”

The special master agreed with the carrier, ruling that it was not responsible for any of plaintiffs’ attorneys’ fees, but the Court of Appeals reversed. The Court explained:

Because both the employee and the employer have an interest in recovering against third-party tortfeasors, employers have the right to intervene in a third-party action. …If both the employee and the employer have engaged counsel for ‘effecting the recovery,’ then the trial court may apportion the fees [pursuant to Tenn. Code Ann. § 50-6-112(b)]. Thus, § 112(b) directs the deduction of a ‘reasonable fee’ from the employee’s recovery, and it allows for distribution of that fee to the employee’s attorney, and the employer’s attorney, so long as the employer’s attorney was engaged ‘to represent the employer in effecting recovery against the third party.’ Our courts have interpreted this provision as requiring the employer’s attorney to ‘actively participate in the prosecution of the tort action.’ …When…the employer’s attorney is not entitled to a portion of the ‘reasonable fee,’ the employee’s attorney is entitled to recover his or her fee not only from ‘that portion of the recovery belonging to the employee, but also from the employer’s portion of the recovery.’

(internal citations omitted).

Based on the facts of this case, the Court of Appeals ruled that the carriers’ attorney’s actions were “insufficient to conclude that [he] actively participated in effecting recovery against the other person.” (internal citation omitted). The argument that the carrier’s inaction was at the request of plaintiffs did not change this analysis. The Court ruled that the carrier “abstained from intervening; whether it did so begrudgingly at Plaintiffs’ request is of no consequence.” The Court held that the carrier did not actively participate in the recovery, and that plaintiffs’ second attorneys were “entitled to a fee from [the carrier’s] portion of the recovery.” The Court remanded this issue was an instruction to “allocate Plaintiffs’ attorneys’ fees pro rata between Plaintiffs and [the carrier].”

Another issue on appeal was whether the attorney representing Mr. Hodges and Mr. Martin should have been disqualified due to an alleged conflict of interest. The attorney had represented one of the defendants in the wrongful-death action, and plaintiffs asserted this prevented him from representing the parties seeking to collect on an attorneys’ lien in this portion of the litigation. The Court ruled, however, that “plaintiffs did not have standing to challenge [the attorney’s] representation because he never represented plaintiffs.” The Court further ruled that any alleged “appearance of impropriety” was not sufficient here to disqualify the attorney.

Also at issue was whether the estate of Mr. Hodges was properly substituted as a party after his death. Plaintiffs asserted that Mr. Hodges claims should be dismissed because his estate was not substituted as a party within 90 days after his death was “suggested upon the record.” The estate claimed that the time limit began to run only when the Suggestion of Death was filed, or in the alternative that the trial court had discretion to waive the time limit. In a Motion to Enlarge filed in October 2017, Mr. Hodges’s death was first mentioned on the record. Six months later, the estate filed a Suggestion of Death and then moved to substitute itself as the proper party. The trial court allowed the substitution, which the Court of Appeals affirmed. The Court ruled that the time for substitution should have run from the Motion to Enlarge, which was “served on the parties” and was filed “to notify the court and parties that Mr. Hodges had died and to request additional time for filing a responsive brief because of his death.” On appeal, however, there was no transcript for the motion for substitution hearing, and “[g]enerally, in the absence of a transcript or statement of the evidence, [the court] must presume that the trial court’s decision is correct.” Here, the Court ruled that it “must presume that whatever statements were made or facts presented at the hearing on the motion established that the delay in filing the motion was due to excusable neglect,” and it found no abuse of discretion in the trial court’s decision to allow the Estate to be substituted as a party.

There were also issues concerning discretionary costs and prejudgment and post-judgment interest. The Court of Appeals ruled that “because [it] reversed the trial court’s allocation of attorneys’ fees, which was the basis for the assessment of discretionary costs against [the insurance carrier],” the award of discretionary costs was reversed and remanded. The Court also ruled that plaintiffs were not entitled to an award of attorneys’ fees against Mr. Hodges’s estate because the estate prevailed in enforcing the fee agreement. Further, because the estate was entitled to a reasonable attorneys’ fee, “an award of prejudgment interest to Plaintiffs [was] not appropriate in this case.”

This was a lengthy case addressing several post-settlement issues. The analysis in this opinion is particularly instructive for anyone litigating the award of a reasonable attorney fee or contesting whether an employer’s attorney has actively participated in litigation to bring about recovery from a third party who injured an employee.

NOTE: This opinion was released approximately three and a half months after oral argument.

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