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May 3, 2007

Fergus v. Songer (2007) 150 Cal. App. 4th 552 (rev. den. 7/25/07)

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The Second District holds that an attorney’s reasonable fee cannot be measured by a contingent fee under a void contingency fee agreement.  The court also held that an attorney’s innocent spouse can enforce an oral partnership agreement with the attorney’s client.

Songer obtained a judgment against Bordan, the owner of the Pismo Beach Hotel.  Fergus and Songer entered into a 45% contingency fee agreement to collect the judgment, but it violated Business & Professions Code § 6147 because it failed to state that the fee was negotiable and not set by law.

Songer, through Fergus’s efforts, became the owner of the hotel.  Because Songer needed funds to refurbish the hotel, Songer and Fergus increased the contingency fee agreement to 50% and Fergus agreed to loan money to improve the hotel.  With the understanding that she and her husband would be 50% partners with Songer, Susan Fergus orally agreed to provide her community property funds for hotel improvements.  Songer sent Fergus a letter acknowledging 50-50 ownership of Bordan’s properties. 

After the hotel was sold for a substantial profit, Songer refused to pay Fergus and refused to honor the agreement with Susan Fergus.  They sued Songer for breach of the contingent fee agreement and the oral partnership agreement with Susan Fergus.

At trial the court granted a motion in limine precluding any damage theory for fees other than the reasonable value of Fergus’s services because both contingency fee agreements were unenforceable.  The court also found that there was no way to adequately sever Fergus’s wife’s oral partnership agreement from the underlying unenforceable fee agreement and precluded that evidence as well. 

The court limited Fergus’s quantum meruit recovery to a reasonable hourly rate for hours actually worked.  However, to explain his lack of time records, Fergus was allowed to testify that he had a contingent fee arrangement with respondent whereby he would be paid at the end based on the result and not on the number of hours worked.  Fergus testified that he worked more hours than shown on his computer time records, but could not give an estimate of the additional hours worked.  The jury awarded a reasonable attorney fee of $1,200,000 and repayment of the loan.

The trial court granted a motion for new trial on the grounds that the evidence did not support the $1,200,000 award when the only evidence of hours actually spent by Fergus would suggest a lower award.  The Court of Appeal overturned the grant of new trial on these grounds for jurisdictional reasons.

In addition, the Court found the jury’s verdict was supported by substantial evidence.  The jury could conclude that Fergus was entitled to an hourly fee in excess of his normal hourly rate due to his extraordinary services and the fact that Fergus was precluded from accepting other employment.  The jury was entitled to believe that Fergus worked far more hours than his time records indicated.  Evidence included Fergus’s 24 banker’s boxes and a detailed summary of the work performed showing 32 matters in 14 courts and tribunals, as well as 390 pleadings and 57 hearings.

Fergus and his wife appealed from the court’s ruling in limine precluding evidence of the 50% partnership agreement.  The court agreed that the original contingency fee agreement was void and the unsigned amended agreement did not render it valid.  The court rejected the notion that Songer ratified the agreement.  Even if ratification of a voidable contingency fee agreement was possible, to ratify an agreement the obligor must know of his right to void the agreement and there was no evidence that Songer did so.

The Court disagreed that the jury could consider a contingent fee in light of the voidable contingency fee contract.  Section 6147 (b) specifically allows a client to void an improper contingency fee agreement and limit the attorney to a reasonable fee.  Section 6147 would neither deter an attorney nor protect a client if interpreted to allow a contingent fee based on the contingent risk factor.

 The Court then turned to Susan Fergus’s claims.  The Court agreed that she had a right to enforce Songer’s promise to her separately from the restrictions imposed on her husband as Songer’s attorney.  Susan Fergus was not Songer’s attorney and not bound rules pertaining the attorney-client relationship.  She engaged in no wrongdoing.  There was no evidence that she was aware of Fergus’s failure to comply with legal requirements or that she participated in a scheme to help her husband avoid ethical rules.  She put her home at risk to obtain funds to refurbish the hotel.

The trial court’s ruling extinguished her reasonable expectation in the partnership and provided an unconscionable windfall to Songer, who had accepted the benefits of his bargain with Susan Fergus.  The court emphasized that Susan Fergus’s agreement carried substantial risk and that Songer needed Susan Fergus’s consent to obtain the funds.  Songer did not dispute that he agreed to a 50-50 partnership in exchange for the funds.

The Court distinguished precedent that did not sever a third party’s contract from an unenforceable contract between an attorney and client because the contract had been obtained by undue influence.  Susan Fergus did not participate in an undue influence scheme; Songer promised Susan Fergus substantial wealth and promised to sign any documents necessary to formalize their agreement.  Nor was the agreement between Susan Fergus and Songer unfair.  Under the circumstances, Susan Fergus’s rights were severable from her husband’s.  Susan Fergus was entitled to a new trial based on her partnership rights.  However, the Court held that if the 50-50 partnership with Susan Fergus was enforced against Songer, her portion would be inclusive of her husband’s attorney’s fees to avoid unjust enrichment to the Ferguses due to the prior jury award of fees.

Comment: The result for Fergus and his wife are due to the happenstance that Songer needed Susan Fergus’s consent for the loan.  A far easier path would have been to secure a proper fee agreement from Songer initially, which could have precluded years of litigation.

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