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November 29, 2010

Arnall v. Superior Court (Liker) (2010) 190 Cal.App.4th 360

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The Second District holds that a client may void a contingent fee in a contract that failed to include statutory language about the negotiability of the fee.

Alan Liker, an attorney specializing in taxation matters and complex business transactions, entered into two agreements with Dawn Arnall and her companies to provide tax advice.  He was to receive a monthly stipend as well as a “success fee.”

Arnall terminated the agreements and asserted the agreements were void under Business & Professions Code § 6147.  Liker filed a complaint for breach of contract, breach of the implied covenant of good faith and fair dealing, recovery in quantum meruit, and declaratory relief.  Arnall sought summary judgment on all claims except quantum meruit maintaining the agreements were void because they failed to state that the “success fee” was “not set by law but [was] negotiable between attorney and client” pursuant to § 6147(a)(4).

The Court of Appeal reversed the trial court’s denial of summary judgment.  The trial court had relied on a case interpreting a prior version of § 6147 that held the language was only mandated in fee agreements pertaining to litigation matters.  The statute was amended and the current version of § 6147 (a)(4) refers not to “plaintiffs” but to “clients.” The Court concluded that the amendments were meant to encompass contingent fee arrangements regarding litigation and transactional matters.

Section 6147(b) renders the agreement voidable at the option of the “plaintiff” in the event the statutorily mandated language is not present.  The Court of Appeal rejected Liker’s argument that use of the word “plaintiff” in subsection (b) rendered the statute inapplicable to his agreements.  It was clear that the amendment to subsection (a) was intended to encompass all contingency fee agreements.  Subsection (b) functions as the enforcement provision of section 6147 and the failure to replace “plaintiff” with “client” in subdivision (b) appears to be an oversight or drafting error.

The Court of Appeal found there was no other basis to deny summary judgment in favor of the client.  Precedent established that contingency agreements without the mandatory language are voidable.

Liker argued that the hybrid arrangement of a fixed monthly fee and a variable, low percentage, success fee was not a contingency fee contract.

Section 6147 does not define “contingent fee.” The plain meaning of the term is ordinarily understood to encompass any arrangement that ties the attorney’s fee to successful performance, including those which incorporate a non-contingent fee based on a fixed rate of payment.  The Supreme Court has characterized at least one contract of this type as “a contingent fee contract.”

An attorney representing a plaintiff in a medical malpractice action for a fixed contingency as limited by Business & Professions Code § 6146 cannot enhance that fee by charging an additional non-contingent hourly fee for work on appeal.

Thus the court concluded that the § 6147 requirements, like the related requirements in § 6146 apply to hybrid agreements.  This comports with the language of the statute and promotes the Legislative goal of protecting clients by ensuring that contingency fee agreements are fair and understood.

The requirements applied to the low percentage success fee for the same reasons.  The Court noted that even with the low percentage, the fee was substantial.

The Court disagreed that its interpretation of § 6147 amounted to a forfeiture.  Under § 6147 (b) Liker may collect “a reasonable fee,” notwithstanding the invalidity of the contract.

When a statute protects the public by denying compensation to parties who fail to meet regulatory demands, the statute constitutes a legislative determination that the need for compliance outweighs any resulting harshness.

Comment: Attorneys drafting fee contracts are well advised to refer to applicable statutes and rules to avoid the harsh result of this case.  This is but one of a line of cases that hold attorneys must follow statutory and ethical rules to enforce their fee agreements.


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