The defendant and appellant Leslie Fox hired the plaintiff and appellee law firms after she and her husband were divorced and a receiver placed their principal asset into Bankruptcy.  The law firms were initially paid by the hour, and their fees were approved by the Bankruptcy Court.  However, because the firms believed it was highly unlikely that the Bankruptcy Court would approve another substantial contribution claim, they proposed a contingency fee agreement, which assigned the law firms up to a 35% interest in the gross proceeds (whether cash or property) that Fox received for her claims against the Bankruptcy Estate and as an equity owner of the estate of her husband.

An approved Plan of Reorganization granted Fox 100% interest in the relevant holding company; but Fox could not receive her interest until all creditors were paid, Louisiana gaming authorities approved the transfer, and Fox obtained a final, unappealable divorce decree and community partition. The law firms, at that point, informed Fox that their work was complete and increased the contingency fee to 40% of the gross proceeds, including her proceeds as the full equity owner of the holding company, from the Bankruptcy proceedings.

Before Fox received full ownership and control of the holding company, the law firms asked her to execute a new contingency fee agreement which would allow the firms receive 40% of any distributions of property or cash received, rather than any outright ownership. Though they had not done so with the previous agreements, the law firms recommended that Fox seek independent legal advice about whether to execute this new, eleven-page contingency agreement. Fox did, and her independent counsel advised against executing the revised agreement.

Ultimately, the law firms sued Fox to collect the fee.  Although the District Court enforced the contingency fee agreement, the U.S. Fifth Circuit reversed:

“The Firms argue – and the district court concluded – that the 2013 contingency fee agreement was not a business transaction because it did not convey an interest in property; it only provided the Firms a future claim to 40% of the proceeds of the bankruptcy proceedings, to the extent there were any.  But this strained definition of ‘business transaction’ deprives Rule 1.8(a) of its very purpose and borders on (if not crosses over into) absurdity.  As members of this court have urged, Rule 1.8(a) exists to impose prohibitions and restrictions aimed at preventing conflicts between the client’s and the lawyer’s own interests. And as the Nevada Supreme Court ably explained, ‘a business transaction occurs when an attorney places himself in a position wherein the exercise of his professional judgment on behalf of his clients would be affected by his own financial interest.’

“Contrary to the Firms’ suggestion otherwise, it seems such potential conflicts are rarely more present than during a contingency fee relationship where the attorney seeks to gain a property interest in the client’s business at the end of the representation. At bottom, the risk of conflict, and in turn the appearance of impropriety, is certainly no less present where an attorney possesses a future interest in a client’s property as opposed to a present interest. For example, in this case, the Firms had a financial interest in Fox obtaining a loan to pay off LTSG’s creditors more quickly. Yet, it was Fox, not the Firms, who had to bear the risk of personally guaranteeing that loan. Regardless of whether paying off the creditors sooner was in Fox’s best interest, it is certainly true that because of the 2013 contingency fee agreement, the Firms had their own financial interest in Fox obtaining the loan.  Louisiana has not squarely answered whether a contingency fee agreement for an ownership interest in a client’s company raises Rule 1.8(a) concerns, but it has recognized that at least some contingency fee agreements implicate the Rule, irrespective of the fact that contingency fee agreements, by their nature, provide a future interest. [FN: In re Curry, 16 So.3d 1139, 1154 (La. 2009) (finding that attorney violated Rule 1.8(a) where client and attorneys entered into contingency fee agreement though attorneys did not urge their client to seek the advice of independent counsel)] This conclusion alone belies the Firms’ argument that future interests cannot amount to business transactions.  And though few courts have addressed the exact question before us now, those who have expressly reject the Firms’ argument.  For instance, the Eleventh Circuit determined that a contingency fee agreement providing counsel stock in the client’s corporation amounts to a business transaction.  The court reasoned that such an agreement carries the risk that the attorney will overreach in advising his client because of his own financial interests in the matter.  The Southern District of New York, the Western District of Kentucky, and a California state court – from sea to shining sea – all reached the same result.  Similarly, the American Bar Association recognizes that a fee arrangement that results in an attorney receiving stock in exchange for his services is subject to Model Rule of Professional Conduct 1.8(a), a substantively identical rule to Louisiana’s Rule 1.8(a).

“We agree with these courts that a contingency fee arrangement resulting in an attorney owning part of the client’s business is a business transaction under Rule 1.8(a). Because the terms of the 2013 contingency fee agreement give the Firms an ownership interest in LTSG, Rule 1.8(a) applies, and the Firms were required to advise Fox to seek the advice of independent counsel. Fox did not have to take this advice, but the Firms were obligated to give it.  Thus, the 2013 CFA is void.  To the extent the Firms seek to revert to the original CFA, executed in 2010, it is likewise void for the same reason.”

 

Wiener Weiss & Madison v. Fox, No.19-30688, 2020 WL 4914014 (5^th Cir. Aug. 21, 2020).