Colorado's Different Ethics Approach to Litigation Expenses
By Angela Foster, Litigation News Contributing Editor – August 27, 2012

The Colorado Supreme Court analyzed the distinction between permissible and impermissible litigation advances that creates a potential disagreement among courts and concern among professional responsibility litigators. In Mercantile Adjustment Bureau LLC v. Flood [PDF], the court in a 5–2 decision held that an attorney does not violate the rules of professional conduct when paying the fees of an appellate attorney retained to represent his client on appeal.

Financial Assistance under Rule 1.8(e)
Identical to the ABA Model Rule 1.8(e), the Colorado Rule of Professional Conduct 1.8(e) prohibits lawyers from financially assisting clients in connection with pending or contemplated litigation, except for advancing court costs and expenses of the litigation. Both rules allow repayment contingent upon the outcome of the litigation and permit lawyers representing indigent clients to pay the costs of litigation without obligation of repayment.

Background of Mercantile
After losing a fair debt collection claim at trial, plaintiff’s trial counsel paid the fees of several attorneys who handled the appeal. Trial counsel took the case on a contingent fee basis, paying the appellate attorneys in hourly fees with the understanding he would be reimbursed from any fee awarded to his client. Under the Colorado Fair Debt Collection Practices Act, attorney fees and costs are awarded to the prevailing party.

Plaintiff prevailed on appeal and was awarded attorney fees. The state supreme court remanded the case to the trial court to determine the amount of attorney fees. On remand, the defendant debt collector argued the plaintiff was not entitled to the appellate attorney fees because trial counsel’s payment of the appellate fees constituted unethical financial assistance to a client in violation of Rule 1.8(e).

Rejecting this argument, the trial court held the expense of the appellate counsel is related to conducting litigation and payment of the appellate counsel’s fees is within the exception for litigation expenses in Rule 1.8(e). After several appeals, the state supreme court affirmed plaintiff’s award of the maximum statutory damages of $1,000 and $184,297.59 in attorney fees.

The Colorado Supreme Court in Mercantile held “the division between permissible and impermissible advances under 1.8(e) is based upon the purpose of the expenditure.” The court noted that “an expense of litigation is an expenditure of money, time, labor, or resources to accomplish the process of carrying on a lawsuit.” The Mercantile dissent, on the other hand, cautioned that the majority’s decision permits attorneys to personally invest in their client’s lawsuit without regard for amount, risk, or motivation to the extent of retaining other attorneys to conduct their litigation.

Possible Tension
The holding in Mercantile may create tension with Florida Bar v. Patrick [PDF], in which the Florida Supreme Court held the payment of another attorney fees is not listed as a permissible litigation expense. In Patrick, plaintiff’s attorney persuaded plaintiff to reject a settlement that would have satisfied plaintiff’s two personal injury protection (PIP) claims. The attorney worked approximately 60 hours on the case on a contingency basis. His normal hourly rate was $225. Pursuant to plaintiff’s insurance contract, attorney fees and costs are awarded to the prevailing party in a PIP claim contest. If the attorney had accepted the settlement offer, he would have received less than $2,500. The two PIP claims proceeded to trial and appeal.

The defendant was granted summary judgment for one PIP claim and awarded $10,000 in attorney fees. At trial, plaintiff prevailed on the second claim and was awarded $24 in damages and $120,000 in attorney fees; however, defendant appealed. Plaintiff’s attorney retained and paid the fees of another attorney to handle the appeal. After several appeals, defendant prevailed on both claims and was awarded attorney fees.

Because costs and prevailing party attorney fees were applicable, plaintiff was responsible for the defendant’s attorney fees. Plaintiff was under the belief that his attorney would be responsible for all attorney fees. An ethics complaint was filed against plaintiff’s attorney.

The Patrick court held the attorney violated the ethics rule by paying a portion of the appellate attorney fees because he moved from representing his client in the lower court to being an individual with a significant stake in the outcome of the appeal.

Litigation Expense or Financial Stake?
The Mercantile decision “appears to be a result-oriented decision at odds with the purpose of the rule,” says Nicholas B. Reuhs, Washington, DC, cochair of the Conflict of Interest Subcommittee of the ABA Section of Litigation’s Ethics and Professionalism Committee. Agreeing with the dissent in Mercantile and the analysis in Patrick, Reuhs states a lawyer’s payment of appellate attorney fees is not a litigation expense.

Distinguishing Patrick, Thomas G. Wilkinson Jr., Philadelphia, cochair of the Conflict of Interest Subcommittee of the Section’s Ethics and Professionalism Committee, says in Mercantile, the client recovered nothing in the trial court, was not offered any settlement, and had everything to gain by an appeal. “I think the outcome in Mercantile made sense since you don’t want a judgment to be undermined by an inability to fund out-of-pocket expenses for the appeal,” says Wilkinson.

The problem is “the rule is based on common law concepts of anti-assignment and privity notions that some feel may have outlived their usefulness,” explains Wilkinson. “Here, the trial counsel apparently needed a competent appellate lawyer to undertake the appeal, and it was clear the client was unable to fund those fees. If the appellate fees were deemed a prohibited advance under Rule 1.8(e), then the client would have been deprived of a remedy.”

Candid Advice
No matter whether they agree on the outcome of the case, observers agree there are lessons to be learned. “The Mercantile case notwithstanding, you have to be cognizant of the line between being an advocate and taking a financial stake in litigation,” says Reuhs. “Depending on the circumstances, a financial stake, no matter how small, can create a conflict of interest, blur the decision-making process, and put you at risk of violating the Rules for Professional Conduct.”

Wilkinson cautions lawyers regarding requests from clients to fund their expenses. He says even covering cab fees to your office may create a client expectation that other expenses may be advanced. For example, he notes the Nebraska Supreme Court suspended a lawyer from legal practice for 60 days for advancing money to a personal injury client, including cab fare, so she could obtain medical treatment.

“A careful lawyer will still examine the issue of assisting a client financially on a jurisdiction by jurisdiction basis, as the rules and their interpretation differ,” warns Gregory R. Hanthorn, Atlanta, cochair of the Section’s Ethics and Professionalism Committee.

Keywords: ethics, advances, litigation expenses, Rule 1.8

 

 
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