Hoover Slovacek Llp v. Walton

• Decision Date: 03 November 2006
• Docket Number: No. 04-1004.,04-1004.
• Citation: 206 S.W.3d 557
• Parties: HOOVER SLOVACEK LLP, Formerly Hoover, Bax & Slovacek, LLP, Petitioner, v. John B. WALTON, Jr., Respondent.
• Court: Texas Supreme Court

Page 557

206 S.W.3d 557

HOOVER SLOVACEK LLP, Formerly Hoover, Bax & Slovacek, LLP, Petitioner, v. John B. WALTON, Jr., Respondent.

No. 04-1004.

Supreme Court of Texas.

Argued December 1, 2005.

Delivered November 3, 2006.

Mike A. Hatchell, Molly H. Hatchell, Charles R. Watson Jr., Locke Liddell & Sapp, LLP, Thomas R. Phillips, Baker Botts L.L.P., Austin, and Steven L Hughes, Mounce, Green, Myers, Safi & Galatzan, El Paso, for Petitioner.

John M. Phalen Jr., Daniel J. Sheehan Jr., Michael L. Atchley, Daniel Sheehan & Associates, L.L.P., Dallas, for Respondent.

Chief Justice JEFFERSON delivered the opinion of the Court, in which Justice O'NEILL, Justice WAINWRIGHT, Justice BRISTER, Justice GREEN, and Justice JOHNSON joined.

We deny Walton's motion for rehearing and grant Hoover Slovacek's motion for rehearing. We withdraw our opinion of June 30, 2006 and substitute the following in its place.

In this case, we must determine whether an attorney hired on a contingent-fee basis may include in the fee agreement a provision stating that, in the event the attorney is discharged before completing the representation, the client must immediately pay a fee equal to the present value of the attorney's interest in the client's claim. We conclude that this termination fee provision is contrary to public policy and unenforceable. We affirm the court of appeals' judgment in part, reverse in part, and remand to the court of appeals for further proceedings.

I Background

In June 1995, John B. Walton, Jr. hired attorney Steve Parrott of Hoover Slovacek LLP (Hoover) to recover unpaid royalties from several oil and gas companies operating on his 32,500 acre ranch in Winkler County. The engagement letter granted Hoover a 30% contingent fee for all claims on which collection was achieved through one trial. Most significantly, the letter included the following provision:

You may terminate the Firm's legal representation at any time . . . . Upon termination by You, You agree to immediately pay the Firm the then present value of the Contingent Fee described [herein], plus all Costs then owed to the Firm, plus subsequent legal fees [incurred to transfer the representation to another firm and withdraw from litigation].

Shortly after signing the contract, Walton and Parrott agreed to hire Kevin Jackson as local counsel and reduced Hoover's contingent fee to 28.66%. Parrott negotiated settlements exceeding $200,000 with Texaco and El Paso Natural Gas, and Walton paid Hoover its contingent fee. Parrott then turned to Walton's claims against Bass Enterprises Production Company (Bass), and hired accountant Everett Holseth to perform an audit and compile evidence establishing the claims' value.¹ Meanwhile, Walton authorized Parrott to settle his claims against Bass for $8.5 million.

In January 1997, Parrott made an initial settlement demand of $58.5 million. Bass's attorney testified that Parrott was unable to support this number with any legal theories, expert reports, or calculations, and that the demand was so "enormous" he basically "quit listening." The following month, however, Bass offered $6 million not only to settle Walton's claims, but also to purchase the surface estates of eight sections of the Winkler County ranch, acquire numerous easements, and secure Walton's royalty interests under the leases. Walton refused to sell, but authorized Parrott to accept $6 million to settle only Walton's claims for unpaid royalties. Walton also wrote Parrott and expressed discontent that Parrott did not consult him before making the $58.5 million demand. According to Walton, Parrott responded by pressuring him to sell part of the ranch and his royalties for $6 million. In March 1997, Walton discharged Parrott, complaining that Parrott was doing little to prosecute his claims against Bass and had damaged his credibility by making an unauthorized and "absurd" $58.5 million demand.

Walton then retained Andrews & Kurth LLP, which, in November 1998, settled Walton's claims against Bass for $900,000. By that time, Hoover had sent Walton a bill for $1.7 million (28.66% of $6 million), contending that Bass's $6 million offer, and Walton's subsequent authorization to settle for that amount, established the present value of Walton's claims at the time of discharge. Walton paid Andrews & Kurth approximately $283,000 in hourly fees and costs, but refused to pay Hoover.

When Hoover sought to intervene in the settlement proceedings between Walton and Bass, the trial court severed Hoover's claim, and the parties tried the case before a jury. Richard Bianchi, a former state district judge in Harris County, testified as Hoover's expert witness. Bianchi opined that a 28.66% contingent fee was, "if anything, lower than normal, but certainly reasonable under these circumstances," and that "it would only be unconscionable to ignore the agreement of the parties." He also testified that charging more than Walton ultimately recovered from Bass "doesn't change the deal they made. That's just a bad business deal." In contrast, Walton's local counsel, Kevin Jackson, testified that he had never heard of attorneys charging a percentage based on the present value of a claim at the time of discharge rather than the client's actual recovery, and that the $1.7 million fee was unconscionable.

The jury failed to find that Walton discharged Hoover for good cause or that Hoover's fee was unconscionable. The trial court entered judgment on the verdict, which awarded Hoover $900,000.² The court of appeals reversed and rendered a take-nothing judgment for Walton, concluding that Hoover's fee agreement was unconscionable as a matter of law. 149 S.W.3d 834, 847. We granted Hoover's petition for review. 49 Tex. Sup.Ct. J. 15 (Oct. 17, 2005). Because our reasoning differs from the court of appeals' in some respects, we affirm its judgment in part, reverse in part, and remand this case to the court of appeals.

II Discussion

When interpreting and enforcing attorney-client fee agreements, it is "not enough to simply say that a contract is a contract. There are ethical considerations overlaying the contractual relationship." Lopez v. Muñoz, Hockema & Reed, L.L.P., 22 S.W.3d 857, 868 (Tex.2000) (Gonzales, J., concurring and dissenting).

In Texas, we hold attorneys to the highest standards of ethical conduct in their dealings with their clients. The duty is highest when the attorney contracts with his or her client or otherwise takes a position adverse to his or her client's interests. As Justice Cardozo observed, "[a fiduciary] is held to something stricter than the morals of the marketplace. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior." Accordingly, a lawyer must conduct his or her business with inveterate honesty and loyalty, always keeping the client's best interest in mind.

Id. at 866-67 (alteration in original) (citations omitted). The attorney's special responsibility to maintain the highest standards of conduct and fair dealing establishes a professional benchmark that informs much of our analysis in this case.

Although contingent fee contracts are increasingly used by businesses and other sophisticated parties, their primary purpose is to allow plaintiffs who cannot afford an attorney to obtain legal services by compensating the attorney from the proceeds of any recovery. Arthur Andersen & Co. v. Perry Equip. Corp., 945 S.W.2d 812, 818 (Tex.1997). The contingent fee offers "the potential of a greater fee than might be earned under an hourly billing method" in order to compensate the attorney for the risk that he or she will receive "no fee whatsoever if the case is lost." Id. In exchange, the client is largely protected from incurring a net financial loss in connection with the representation.³ This risk-sharing feature creates an incentive for lawyers to work diligently and obtain the best results possible.⁴ A closely related benefit is the contingent fee's tendency to reduce frivolous litigation by discouraging attorneys from presenting claims that have negative value or otherwise lack merit.⁵

In Texas, if an attorney hired on a contingent-fee basis is discharged without cause before the representation is completed, the attorney may seek compensation in quantum meruit or in a suit to enforce the contract by collecting the fee from any damages the client subsequently recovers. Mandell & Wright v. Thomas, 441 S.W.2d 841, 847 (Tex.1969) (citing Myers v. Crockett, 14 Tex. 257 (1855)). Both remedies are subject to the prohibition against charging or collecting an unconscionable fee. TEX. DISCIPLINARY R. PROF'L CONDUCT 1.04(a), reprinted in TEX. GOV'T CODE, tit. 2, subtit. G app. A (TEX. STATE BAR R. art., § 9).⁶ Whether a particular fee amount or contingency percentage charged by the attorney is unconscionable under all relevant circumstances of the representation is an issue for the factfinder.⁷ See, e.g., Curtis v. Comm'n for Lawyer Discipline, 20 S.W.3d 227, 233 (Tex.App.-Houston [14th Dist.] 2000, no pet.) (concluding that the evidence was sufficient to support a finding that a contingent fee equaling 70-100% of the client's recovery was unconscionable). On the other hand, whether a contract, including a fee agreement between attorney and client, is contrary to public policy and unconscionable at the time it is formed is a question of law. See, e.g., TEX. BUS. & COM.CODE § 2.302 (courts may refuse to enforce contracts determined to be unconscionable as a matter of law); Ski River Dev., Inc. v. McCalla, 167 S.W.3d 121, 136 (Tex.App.-Waco 2005, pet. denied) ("The ultimate question of unconscionability of a contract is one of law, to be decided by the court."); Pony Express Courier Corp. v. Morris, 921 S.W.2d 817, 821 (Tex.App.-San Antonio 1996, no writ) (distinguishing procedural and substantive aspects of unconscionability).

Hoover's termination fee provision purported to contract around the Mandell...