Mitzel v. Westinghouse Elec. Corp., 94-5666

• Decision Date: 17 July 1995
• Docket Number: No. 94-5666,94-5666
• Citation: 72 F.3d 414
• Parties: Kirk MITZEL; Janet Mitzel, h/w v. WESTINGHOUSE ELECTRIC CORPORATION; Dravo Corporation; Dick Corporation; Cortec Industries, Inc., t/a, d/b/a Inland Buildings; Davy McKee Corporation, t/a, d/b/a Davy Dravo; Dravo Engineering Companies, Inc.; Cortec Industries, Inc., t/a, d/b/a Summit Buildings; S.B. Acquisition Company, t/a, d/b/a Summit Buildings, DICK CORPORATION; Dravo Corporation, Third-Party Plaintiffs, v. A.C. DELLOVADE, INC.; Davy McKee Corporation, t/a, d/b/a Davy Dravo, Third-Party Defendants, Kirk Mitzel and Janet Mitzel, by and with their Attorneys, A Dragon Associates, Appellants. . Submitted Pursuant to Third Circuit LAR 34.1(a)
• Court: U.S. Court of Appeals — Third Circuit

Page 414

72 F.3d 414

Kirk MITZEL; Janet Mitzel, h/w v. WESTINGHOUSE ELECTRIC CORPORATION; Dravo Corporation; Dick

Corporation; Cortec Industries, Inc., t/a, d/b/a Inland

Buildings; Davy McKee Corporation, t/a, d/b/a Davy Dravo;

Dravo Engineering Companies, Inc.; Cortec Industries, Inc., t/a, d/b/a Summit Buildings; S.B. Acquisition Company, t/a, d/b/a Summit Buildings, DICK CORPORATION; Dravo Corporation, Third-Party Plaintiffs, v. A.C. DELLOVADE, INC.; Davy McKee Corporation, t/a, d/b/a

Davy Dravo, Third-Party Defendants,

Kirk Mitzel and Janet Mitzel, by and with their Attorneys, A

Dragon Associates, Appellants.

No. 94-5666

United States Court of Appeals, Third Circuit.

Submitted Pursuant to Third Circuit LAR 34.1(a)

July 17, 1995.

Decided Dec. 29, 1995.

Arlin M. Adams, Schnader, Harrison, Segal & Lewis, Philadelphia, PA (Kaethe B. Schumacher, Schnader, Harrison, Segal & Lewis, Philadelphia, PA, Albert Dragon, Litvin, Blumber, Matusow & Young, Philadelphia, PA, of counsel), for Appellants.

Before: SLOVITER, Chief Judge, SCIRICA, Circuit Judge, and AMBROSE, District Judge ^*.

OPINION OF THE COURT

SLOVITER, Chief Judge.

A Pennsylvania law firm, A Dragon Associates, and its clients, Kirk and Janet Mitzel, challenge the district court's application of the New Jersey State Court Contingency Fee Rule to a two-million-dollar settlement received by the Mitzels in a case Dragon filed for them in federal court in New Jersey. They argue that the district court erred in applying New Jersey rather than Pennsylvania law, and, in the alternative, that even if the New Jersey rule is applicable, Dragon is entitled to an increased fee under the terms of the rule because of the extraordinary time and effort it devoted to this case. We have jurisdiction under 28 U.S.C. Sec. 1291. As none of the defendants have filed briefs, this matter is before us on appellants' brief only. Although the appeal was filed on behalf of both Dragon and the Mitzels, we will treat only Dragon as the appellant.

I.

Kirk Mitzel was severely injured at a construction site in New Jersey when a steel beam on which he was working collapsed and fell 26 feet to the ground. Mitzel and his wife, Janet, were Pennsylvania residents at the time and retained Dragon to pursue worker's compensation and personal injury claims on their behalf. On July 26, 1990, the Mitzels signed a contingency fee agreement with Dragon in which the law firm agreed to represent them in return for 40% of any net recovery. At some point after signing this agreement, but before the complaint was filed, the Mitzels moved to North Dakota.

Dragon filed a complaint on December 30, 1991 in the District Court of New Jersey based on diversity jurisdiction, naming as defendants the primary and general contractors and the companies that designed the equipment and materials involved in the accident. Two attorneys from the firm were admitted pro hac vice to the District Court of New Jersey on May 18, 1992, pursuant to the district court's Local Rule 4(c).

Dragon asserts that during the following two-and-a-half years it invested over 5100 attorney hours in discovery, taking nineteen depositions, accumulating fifty-two expandable files of documents that are over twenty-two feet thick, arguing nearly twenty oral and written motions, reviewing hundreds of thousands of records, and consulting more than ten experts. It also claims to have incurred considerable costs in travelling to Pittsburgh and Orlando to inspect documents.

Ultimately, in mid-1994 the defendants offered the Mitzels two million dollars, and Dragon volunteered to reduce its contingency fee from 40% to one-third in order to facilitate a settlement at this amount. The Mitzels agreed and, on July 25, 1994, filed a motion with the district court asking it to confirm the settlement and approve the one-third counsel fee in the amount of $648,403.28. The motion was referred to a magistrate judge, who instead recommended application of New Jersey Court Rule 1:21-7, and a counsel fee award of $435,181.47. The district court adopted the magistrate's recommendation and denied plaintiffs' motion for reconsideration. This appeal followed.

II.

A. Choice of Law

New Jersey Court Rule 1:21-7(c), which sets a schedule of maximum limits on the contingency fees that New Jersey attorneys can collect in tort litigation, provides:

In any matter where a client's claim for damages is based upon the alleged tortious conduct of another, ... an attorney shall not contract for, charge, or collect a contingent fee in excess of the following limits:

(1) 33 1/3% on the first $250,000 recovered;

(2) 25% on the next $250,000 recovered;

(3) 20% on the next $500,000 recovered; and

(4) on all amounts recovered in excess of the above by application for reasonable fee in accordance with the provisions of paragraph (f) hereof....

N.J. Court Rules, 1969, R. 1:21-7(c). Paragraph (f), referred to in subparagraph (4) above, provides that "[i]f at the conclusion of a matter an attorney considers the fee permitted by paragraph (c) to be inadequate, an application on written notice to the client may be made to the Assignment Judge for the hearing and determining of a reasonable fee in light of all the circumstances." R. 1:21-7(f).

The New Jersey district court has incorporated New Jersey's contingency fee rule into its local rules through Local Rule 4(c), which provides that "[a] lawyer admitted pro hac vice [to the federal court] is deemed to have agreed to take no fee in any tort case in excess of the New Jersey State Court Contingency Fee Rule (N.J.Court Rules, 1969, R. 1:21-7 as amended)."

Dragon argues that the district court erred in holding that New Jersey law rather than Pennsylvania law was applicable to its decision as to the amount of the contingency fee. Pennsylvania courts will uphold contingency fee agreements voluntarily entered into by the parties as long as they are not excessive and do not take "inequitable advantage of the payer." Richette v. Solomon, 410 Pa. 6, 187 A.2d 910, 919 (1963). A one-third contingency fee is not considered excessive, see id., and fees as high as 40% have been enforced by Pennsylvania courts. See, e.g., Oliastro v. Borough of Ellwood City, 337 Pa.Super. 181, 486 A.2d 966 (Pa.Super.Ct.1984). We apply plenary review to the district court's decision that New Jersey law is applicable here. See Linan-Faye Constr. Co. v. Housing Auth. of Camden, 49 F.3d 915, 919 (3d Cir.1995).

Dragon presents the choice as one between Pennsylvania and New Jersey law, but it has apparently failed to consider the possibility that under the rules established by Erie R.R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), and its progeny, an attorney's fee issue affecting the allocation of funds between attorney and client presented in a diversity case is a matter of procedure governed by the law of the forum.

Generally, the right of a party or an attorney to recover attorney's fees from another party in a diversity action is a matter of substantive state law. See Alyeska Pipeline Serv. Co. v. Wilderness Soc'y., 421 U.S. 240, 260 n. 31, 95 S.Ct. 1612, 1623 n. 30, 44 L.Ed.2d 141 (1975); Abrams v. Lightolier Inc., 50 F.3d 1204, 1224 (3d Cir.1995); Montgomery Ward & Co. v. Pacific Indem. Co., 557 F.2d 51, 55-58 (3d Cir.1977); see also 1A James W. Moore et al., Moore's Federal Practice p O.309, at 3109-10 & n. 46 (2d ed. 1995). In contrast, contingency fee agreements have been treated differently.

Contingency fee agreements apportion resources between plaintiffs and their counsel rather than plaintiffs and defendants, and therefore are collateral to the substantive merits of lawsuits in a way that awards of attorney's fees between parties are not. Furthermore, because of the imbalance of power that may exist between client and attorney, we have held that "contingency fee agreements are of special concern to the courts," Dunn v. H.K. Porter Co., 602 F.2d 1105, 1108 (3d Cir.1979), and fall within a court's "supervisory power over the members of its bar," Schlesinger v. Teitelbaum, 475 F.2d 137, 141 (3d Cir.), cert. denied, 414 U.S. 1111, 94 S.Ct. 840, 38 L.Ed.2d 738 (1973); see Dunn, 602 F.2d at 1110 n. 8.

In Elder v. Metropolitan Freight Carriers, Inc., 543 F.2d 513 (3d Cir.1976), this court was faced with an attorney's challenge to a federal court's limitation of his contingency fee under facts strikingly similar to those before us. Mrs. Elder, the widow of a New York resident killed in an accident in New Jersey, filed suit in New Jersey federal court seeking recovery under state tort law. Id. at 515. Both Mrs. Elder and her lawyer were residents of New York and they had signed a fee agreement there promising the attorney a one-third contingency fee. The lawyer was admitted pro hac vice to the New Jersey district court, where the suit proceeded. After some discovery, the parties agreed to a settlement. Id. The New York Surrogate Court approved distribution of the proceeds to the widow and children, and set the counsel fees pursuant to the one-third agreement, which would have led to a fee substantially in excess of the amount allowable under the New Jersey rule. A proposed order for payment of the one-third fee was then presented for approval to the district court. It declined to follow New York law and instead reduced the contingency fee under the formula set forth in New Jersey Court Rule 1:21-7, which was then, as now, incorporated into the district court's local rules. Id. at 515-16.

Counsel appealed to this court, and we affirmed the district court's decision. Id. at 517-19. We rejected an argument, proffered by Dragon here as well, that we should apply the choice of law analysis of Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). We reasoned as follows: "Rules regulating contingent fees pertain to conduct of members of the bar, not to substantive law which determines the existence or...