In re Plaza

• Decision Date: 23 February 2007
• Docket Number: No. 05-32524.,05-32524.
• Citation: 363 B.R. 517
• Parties: In re Kenneth PLAZA, Debtor(s).
• Court: U.S. Bankruptcy Court — Southern District of Texas

363 B.R. 517

In re Kenneth PLAZA, Debtor(s).

No. 05-32524.

United States Bankruptcy Court, S.D. Texas, Houston Division.

February 23, 2007.

COPYRIGHT MATERIAL OMITTED

Peter A. Bergman, Kingwood, TX, for Debtor.

David Ronald Jones, Porter and Hedges LLP, Houston, TX, for Trustee.

MEMORANDUM OPINION

MARVIN ISGUR, Bankruptcy Judge.

The Trustee asks this Court to allow assumption of a contingency fee agreement between the Debtor and Shane Kadlec [doc. no. 18]. As part of that assumption, the Trustee asks that the Court approve full payment of Kadlec's attorney's fees. Based on the findings of fact and conclusions of law stated below, the Court does not approve assumption of the contingency fee agreement by the estate. Kadlec and the Trustee are directed to provide further information consistent with this memorandum opinion so that the Court can determine the proper treatment of Kadlec's quantum meruit claim. A separate order will issue.

Background

The Debtor, Kenneth Plaza, was involved in an automobile accident on Au gust 13, 2002. Plaza was struck by an SUV operated by Levenia Burns. Plaza hired Shane Kadlec, of Ivey & Kadlec to represent him in dealing with U.S. Auto Insurance Services, Inc., the liability carrier for Burns. Plaza's agreement with Ivey & Kadlec was a contingency fee agreement, granting the firm one-third of any gross recovery if the claim was settled prior to filing suit, and if suit was filed, granting the firm forty percent of any gross recovery.

On February 29, 2004, Plaza filed suit against Burns in county civil court.

On February 19, 2005, Plaza filed for chapter 7 bankruptcy. Plaza was granted a discharge on August 2, 2005.

In 2006, with discovery complete in Plaza's county civil suit, counsel for Burns offered to settle the matter for $20,048. Plaza agreed to settle. However, prior to finalizing the settlement, Plaza discovered that certain medical bills resulting from injuries sustained in the accident had not yet been resolved. Kadlec contacted the chapter 7 trustee, as well as Plaza's earlier bankruptcy attorney, and the parties in interest agreed to reopen the chapter 7 case.

On October 19, 2006, the Trustee filed an application to compromise the automobile claim, as well as a request to pay Kadlec the contingency fee in accordance with the employment agreement entered into in 2002.

At a hearing on the motion to compromise and pay attorney's fees, the Court raised concerns over a provision of the contingency agreement that was arguably unconscionable. Kadlec was asked to brief the issue of unconscionability, as well as whether a trustee may assume a contract with an unconscionable clause.

The Consent Clause

The contingency agreement between Plaza and Kadlec includes the following clause ("Paragraph 11"):

The client will not make settlement of the mentioned claim, or accept any sum as reimbursement for any of the client's injuries or expenses, without the attorney's consent.

(Contingency fee agreement, ¶ 11 at 3).

At the hearing on the motion to pay fees the Court expressed concern that this clause takes the final decision regarding settlement away from the client, in favor of the attorney. The clause requires the attorney's consent to any settlement or acceptance of a reimbursement amount. In this way, the clause amounts to a veto power for the attorney over a settlement. This allocation of power appears to be directly at odds with the well accepted principle that it is the client who has exclusive control over whether to settle, compromise or adjust the cause of action. See e.g., C.I.R. v. Banks, 543 U.S. 426, 436, 125 S.Ct. 826, 160 L.Ed.2d 859 (2005)("The client may rely on the attorney's expertise and special skills to achieve a result the client could not achieve alone. That, however, is true of most principal-agent relationships, and it does not alter the fact that the client retains ultimate dominion and control over the underlying claim. The control is evident when it is noted that, although the attorney can make tactical decisions without consulting the client, the plaintiff still must determine whether to settle or proceed to judgment and make, as well, other critical decisions.")

In his brief supporting the payment of fees, Kadlec first argues that Paragraph 11 is not unconscionable because an attorney may acquire a lien on a client's cause of action to secure fees or expenses as well as contract for a contingency agreement. The Court does not understand how this argument addresses Paragraph 11's apparently impermissible allocation of decision making between attorney and client.

Kadlec goes on to argue the practicality of Paragraph 11:

The language in paragraph 11 requires that the client agree to inform the lawyer of his intention of settling the claim; thereby, giving the attorney the opportunity to properly negotiate and conclude any potential settlement of the client's claims.... This aspect of a lawyer's representation is essential for the attorney to properly effectuate any settlement, so as to be sure that the settlement agreement and release are appropriately worded, for the protection of both the client and his counsel.

(Brief, ¶ 16).

The Court understands the contribution an attorney makes in negotiating a settlement. However, Kadlec understates the effect of Paragraph 11. The clause does more than require that the client inform the lawyer of his intention to settle. The plain language of the clause requires that the client not settle the claim without the consent of the attorney.

Next, Kadlec argues that consent clauses in contingency fee contracts have long been recognized as valid in Texas. Kadlec directs this Court to Hill v. Cunningham, 25 Tex. 25 (1860). That court stated:

... [W]here the attorney contracts with the client for a contingent fee, to depend upon the result of the suit, if the client compromises the suit without consulting the attorney, and without the attorney's consent, then the attorney will be entitled to recover the whole amount of the fee in like manner as if the contingency had transpired, upon which the payment of the fee was made to depend. In such cases it would become the duty of the client to consult the attorney, and to obtain his consent to the compromise of the suit upon such definite agreement in relation to the attorney's fee as the parties might think proper to make.... Cases might undoubtedly present themselves in which the attorney would not be permitted to control the suit, so as to prevent a compromise, or in other words, where the attorney would not be permitted to continue the litigation to the injury of the client.

Hill, 25 Tex. at *5.

The Court does not find Hill applicable to the question currently under consideration. Hill deals with enforcement of a contingency fee agreement in a case that was settled by the parties themselves, without attorney consent. Whether an attorney can enforce a contingency agreement against a client who has settled without the attorney's knowledge is not the question before this Court. The present issue is whether an attorney can contract for a veto power regarding a client's choice to settle a lawsuit.

To whatever extent Hill can be read to grant an attorney the power to withhold the right to comprise from a client, it no longer accurately reflects the law. See e.g., C.I.R. v. Banks, 543 U.S. at 436, 125 S.Ct. 826. Additionally, since Hill was decided in 1860, the Texas State Bar has adopted various rules of professional ethics which govern the relationship between attorney and client. Today, the conduct of attorney behavior in Texas is governed by the Texas Disciplinary Rules of Professional Conduct.

Disciplinary Rule 1.02 provides that:

(a) Subject to paragraphs (b), (c), (d), and (e), (f), and (g), a lawyer shall abide by a client's decisions:

(1) concerning the objectives and general methods of representation;

(2) whether to accept an offer of settlement of a matter, except as otherwise authorized by law;

(3) In a criminal case, after consultation with the lawyer, as to a plea to be entered, whether to waive jury trial, and whether the client will testify.

TEXAS DISCIPLINARY RULES OF PROF'L CONDUCT R. 1.02 (1990).

Hence, according to the Texas Disciplinary Rules, it is the lawyer who must abide by the client's decision regarding settlement, not vice versa. Similarly, the ABA Committee on Professional Ethics issued a formal opinion quoting the following with approval:

A clause in a retainer agreement prohibiting the client from settling without the attorney's consent is void as against public policy; as is an agreement with the client that no part of the retainer shall be refunded in the event of a reconciliation between the parties.

ABA COMM. ON ETHICS AND PROF'L RESPONSIBILITY, FORMAL OP. 326 (1970)(quoting Henry S. Drinker, Legal Ethics, 101 (Columbia Univ. Press 1953)).

The Fifth Circuit has also noted that the consensus view is that clauses such as Paragraph 11 are against public policy: "Clauses in a contract between attorney and client which prohibit a settlement by the client without his attorney's consent are generally held to be unenforceable as against public policy." Lewis v. S.S. Baune, 534 F.2d 1115, 1122 (5th Cir.1976) (citations omitted); Singleton v. Foreman, 435 F.2d 962, 970 (5th Cir.1970)("More over, it is clear that an attorney never has the right to prohibit his client from settling an action in good faith."). Essentially, giving an attorney decision making power over whether to settle a case or proceed to trial, could force a litigant to hazard the outcome of litigation in order to secure a higher contingency fee for the attorney. Sentco, Inc. v. McCulloh, 84 So.2d 498, 499 (Fla.1956). "A client by virtue of a contract with his attorney is not made an indentured servant, a puppet on counsel's string, nor a chair in the courtroom. Counsel should advise, analyze, argue, and recommend, but, his role is not that of an...