Unpublished Disposition, 912 F.2d 471 (9th Cir. 1987)

MEMORANDUM^* 

Defendant-Appellant Patrick Prindle appeals the district court's summary judgment awarding his former employer, a law firm, the full amount of a contingent attorney's fee less the reasonable value of services rendered by Prindle after he left the firm's employ.

We have jurisdiction pursuant to 28 U.S.C. § 1291 over this timely appeal from a final judgment in an action brought in federal court under diversity jurisdiction. We reverse and remand.

FACTS AND PROCEDURAL HISTORY

Appellant Prindle worked as a salaried associate at the Billings, Montana law firm of Kelly & Halverson ("the Firm") from February 2, 1983 until he left on January 15, 1986 to join another firm in San Diego, California. While Prindle was at Kelly & Halverson, Robert, Karen, and Kari Ostrum retained Prindle and the Firm to represent them in an insurance dispute. The Attorney-Client Agreement entered into between the Ostrums and the Firm provided for a contingent fee of 33.3% of any settlement achieved prior to the filing of a court action, and 40% of any amount if recovered after commencement of an action.

The Ostrums' suit arose out of a single vehicle accident. Robert and Karen's son, Chad, was injured when riding as a passenger in a Ford pick-up truck driven by his sister Kari. The Ostrum family filed three separate suits. Prindle filed a "bad faith" suit against the Ostrum's insurance company, Fireman's Fund Insurance Co., and its adjusting office, Crawford & Co., on behalf of Robert, Karen, and Kari. Chad was represented by another firm, Herndon, Harper & Munro ("Munro"), which filed a separate action on Chad's behalf against the Fireman's Fund for bad faith handling of the policy covering Robert and Karen. Chad also filed a personal injury suit against his parents, his sister, and the Ford Motor Company. This latter case settled in 1985 and is not at issue in this appeal.

In mid-January 1986, Prindle resigned from the Firm and moved to San Diego. He had written to the Ostrums in December advising them of his move and assuring them that competent attorneys at the Firm would be available to continue representing them. The Ostrums, however, said they wanted Prindle to continue representing them. Prindle then told Victor Halverson, a Firm partner, that he planned to continue to represent the Ostrums, but Prindle and the Firm made no arrangements regarding this transition prior to Prindle's departure on January 15, 1986. On March 27, 1986, the Firm executed a "substitution of attorney" form consenting to Prindle's representation of the Ostrums. At the same time, the Firm filed a Notice of Attorney's Lien for services rendered to Robert, Karen, and Kari Ostrum. The lien claimed $2,328.25 for costs and "a reasonable amount in attorneys' fees to be set by the Court upon the conclusion of this case."

In April, Prindle negotiated a $10,000 settlement with Crawford, a defendant in the Ostrums' bad faith action against the insurance company. Prindle and the Firm agreed to split the contingent fee derived from this settlement one-third to the Firm and two-thirds to Prindle. On June 30, 1986, the Ostrums paid $3,661 to Kelly & Halverson, apparently in the belief that this payment would satisfy the lien.

In June 1986, Prindle and Munro consolidated the two remaining bad faith actions against Fireman's Insurance. The two attorneys agreed that any fee resulting from the consolidated cases would be divided equally. The case went to trial, but settled before judgment for the sum of $287,500: $267,500 to Chad Ostrum, $15,000 to Robert and Karen Ostrum, and $5,000 to Kari Ostrum. Of this recovery, $96,480 was set aside to cover attorneys' fees and costs. Munro received $48,564 in accordance with the agreement between Prindle and Munro. In light of the Firm's lien on settlement proceeds, the remaining $47,916 was deposited into the court registry.

The Firm filed this action on May 7, 1987 against Prindle. Both parties filed motions for summary judgment asking the court to award them the full fee award, $47,916, less the reasonable value of services rendered by their opponent. The district court found in favor of the Firm, and held an evidentiary hearing to establish the reasonable value of services rendered by Prindle after he left the Firm in January. The court ultimately awarded $15,000 plus $650 costs to Prindle with the remainder going to the Firm. Prindle appeals from this award.

DISCUSSION

On appeal, Prindle argues that the district court erred in its determination of the factual issues, that the Firm's complaint failed to state a cause of action, and that the court improperly determined the measure of compensation due an attorney retained pursuant to a contingent fee contract but discharged before the happening of the contingency. Alternatively, Prindle contends that even if the district court correctly applied the law governing the disposition of the contingent fee award, the court improperly calculated the reasonable fee due Prindle.

Prindle's claim that the district court improperly and erroneously made determinations of certain factual issues might better be stated as a claim that there existed genuine issues of material fact and, therefore, that the court erred in granting summary judgment. We disagree. We find no issues of material fact existed to preclude a grant of summary judgment. However, that finding does not presage the same result that the district court reached.

The district court's theory of the case focused on the findings it made that Prindle took the Ostrum's case file without the Firm's permission and without reaching an understanding as to the distribution of the attorney's fees, and that Prindle "unilaterally" took the client. These findings are not relevant to any theory applicable to the division of the attorney's fees. (The Firm does not contend that by taking the case file, Prindle deprived them of the opportunity to exercise their right to place a lien on the file itself.)

Whatever method is used to divide the fund, we must identify as an initial proposition what portion of the fund each of the parties has an interest in. The former clients of the Firm were Robert, Karen, and Kari. The Firm presents no facts or theory that would entitle it to a fee generated from any source other than the settlement awarded their former clients. What is in dispute, then, is the contingent 40% of $20,000 or $8000.00. The balance of the fund is clearly Prindle's for his services, whatever they might have been, to the benefit of the Chad litigation after the consolidation.

The other essential that has been stipulated in part by the parties is the respective effort expended by each of the parties in the litigation. The parties have stipulated that the Firm through Prindle expended 37 hours on the case before Prindle left the Firm, and that Prindle expended 150 hours after he left the Firm. The parties talk about alleged agreements as to how to split fees but the record shows that the parties were in the process of negotiations, never consummated. This is clearly reflected in Victor Halverson's testimony:

On March 21, 1986, attorney Prindle telephoned me to state that District Judge William Spear had consolidated the bad faith actions of Chad, Robert, Karen and Kari Ostrum. Mr. Prindle stated that given the consolidation with Chad Ostrum's case (who was represented by attorney Greg Munro), the potential fee in the matter would be cut by one-half. He further stated that the Ostrums pending claim against Crawford & Company could be settled in the near future for around $8,000-$10,000, and that on that recovery he would agree to re-paying the costs advanced by [the Firm] in addition to a fee split of two-thirds ( 2/3) to him, one-third ( 1/3) to the law firm. No agreement was reached as to the percentage split for any potential fee on the Ostrums' pending claim against Fireman's Fund, although attorney Prindle proposed a split of 75 percent to him, 25 to the Kelly firm. Prindle represented that although the one-third/two-third agreement was agreeable to him for the recovery against Crawford & Company, that arrangement was not acceptable to him on the Fireman's Fund case because he felt the potential attorney's fees would be reduced by reason of the consolidation.

Thereafter, I discussed Mr. Prindle's fee split proposals with William T. Kelly, and it was agreed that we accept the one-third/two-third fee split and full repayment of costs advanced on the recovery against Crawford & Company, but that we reject the 25%-75% proposal regarding the action against Fireman's Fund, and that since no agreement could be reached with Mr. Prindle, our attorney fee lien filed in March of 1986 would remain pending. (ER 29 at 4-5).

II

Prindle argues that the Firm failed to state a cause of action. Although the Firm's claim is somewhat opaque, the Firm does request that the court allocate the fund between the Firm and Prindle. The suit is somewhat analogous to an interpleader action, the Firm laying claim based on equitable considerations or some other implicit and unarticulated theory that entitles it to the contingent attorneys' fee.

Prindle, on the other hand, in his answer contends that the proper measure of compensation due an attorney retained pursuant to a contingency fee contract, but discharged prior to the occurrence of the contingency is quantum meruit for the reasonable value of his services. He, Prindle, the substituted lawyer, should get the rest. The Firm correctly counters that the issue actually is the proper measure of compensation due from the client to the law firm when a client and the law firm enter into a contingent fee contract, and an employee-associate, upon quitting his employment with the firm, takes the case and client with him to his new employment and subsequently settles the case.

Prindle argues that the court should adopt the Fracasse v. Brent, 6 Cal. 3d 784, 494 P.2d 9 (1972) rule that an attorney who is discharged under a contingent fee agreement is entitled to compensation on a quantum meruit basis because a client has an absolute right to discharge an attorney. It is true that a client has the right to choose his lawyer. Prindle harps on this point as though it disposed of the issue, but the fact that a client may discharge an attorney does not determine what the client must pay for the attorney's services rendered up to the time the attorney is discharged, let alone how a discrete sum of money set aside for the former and current attorneys should be divided.

The Firm distinguishes the cases relied upon by Prindle for the proposition that the Firm is entitled only to a reasonable fee; those cases involved suits by discharged attorneys against their clients rather than suits by one attorney against another. However, the Firm presents no authority or theory to support its position that it is entitled to the contingent fee and the departing associate to only the "reasonable fee." The gist and, it is fair to say, the extent of the Firm's argument is that it would be dangerous and unfair to reward an associate who leaves a firm and "unilaterally" takes a case with him.

State courts faced with the problem of determining the proper compensation for an attorney employed under a contingent fee contract and discharged before the contingency occurs have adopted one of three general approaches. These apply as well where there has been a substitution of another attorney.

Some jurisdictions treat the client's decision to discharge an attorney as a breach of contract. The client has the right to breach, but must pay damages in the form of full compensation on the contract, i.e., the contingent fee as agreed upon when the client retained the firm.

Other jurisdictions take the position that this rule is inconsistent with the strong policy in favor of a client's absolute right to discharge an attorney at any time; they reason the right to discharge is of little value if the client is forced to choose between continuing the employment of an attorney in whom he has lost faith, or risking the payment of double contingent fees. The client's action is viewed not as a breach, but rather as a termination of the contract. Under this theory, the discharged attorney is entitled to recover quantum meruit for the reasonable value of his services. This is the position adopted by California in Fracasse v. Brent, 6 Cal. 3d 784, 494 P.2d 9, and urged by Prindle.

Finally, some courts have found the discharged attorney entitled to recover the full contingent fee less a fair allowance for the services and expenses which would have been expended by the discharged attorney in performing the balance of the work. The amount of expenses saved typically is considered to correspond to the reasonable value of services performed by the new attorney. This is the position Idaho adopted in Anderson v. Gailey, 100 Idaho 796, 609 P.2d 90 (1980).

Montana has not yet determined which approach it will follow. The lower court applied Anderson. The court rejected Fracasee, which would have given Prindle the full value of the contingent fee minus a reasonable value for the services rendered by the Firm, because it believed that to do so would be inequitable:

Instead, the Firm is entitled to recover the full amount of attorneys fees due under the contract, with defendant's recovery calculated on a quantum meruit basis. To hold otherwise would encourage associate attorneys such as defendant to further their own financial gain at the expense of their employers, by appropriating lucrative case files without the knowledge or consent of the Firm at the end of the employment. This type of conduct should not be condoned. ER 47 at 6-7.

However, there is no evidence that Prindle's conduct calls for punishment.

Second, the district court emphasized that the facts of Anderson are more analogous to the present case than is Fracasse. We agree. In Fracasse a discharged firm was trying to obtain money from a former client; in Anderson two attorneys were disputing their relative entitlements to a discrete attorneys' fee fund. However, the Anderson court did not base its holding on this difference; it simply rejected the Fracasse court's reasoning.

Further, the principle behind the Anderson approach of giving the full value of the contingent fee contract to the discharged attorney is that the client breached her contract. This approach may not be appropriate in the situation where the client is following an attorney who is changing firms; the clients in our case simply were trying to stay with the attorney whom they chose and with whom they had developed a professional relationship.

This case does not require us to establish Montana law. The district judge properly emphasized the relationship between the attorneys; also there is some indication of the parties' intent. All the evidence suggests that the parties intended to divide the contingent fee. The evidence suggests that the contingent fee should be divided between Prindle and the Firm. In its lien, the Firm claimed costs advanced and "a reasonable amount in attorney's fees to be set by the Court upon the conclusion of this case." (Emphasis added). ER 15, Ex. 2. This suggests that the Firm sought recovery, not under the breach of contract theory, but rather under the quantum meruit rule. There is testimony by both parties that they contemplated splitting the fee resulting from settlement or judgment and that both sides accepted that Prindle would continue to represent the Ostrums. Prindle, Kelly, and Halverson each testified that they had negotiated for a fee split.

Among the factors that the court should consider on remand to determine what constitutes a reasonable division of the attorney fee are the relative time spent on the Firm clients' case by each party as well as the relative risk assumed by each that they would earn no money for their efforts.

CONCLUSION

We reverse the district court's order awarding the contingent fee to the Firm and a reasonable hourly fee to Prindle. We hold that Prindle and the Firm each are entitled to a share of the $8000 attorney fee attributable to the settlement of the suit brought by Karen, Robert, and Kari Ostrum. Prindle is entitled to the balance of the fund over and above the portion of the $8000 awarded to the Firm. We remand the case to the district court for determination of the reasonable division of the $8000.00 consistent with evidence of the parties' intent, the respective amount of time spent by each party on Robert, Karen and Kari's case and the respective risk of no recovery each party bore.

REVERSED and REMANDED.