Wednesday, December 6, 2006

Case Law Development: Contingent Fees in Action to Rescind Divorce Settlement Prohibited

The Nevada Supreme Court addresses its rules of professional conduct that prohibit contingent fees in domestic relations matters in a case involving litigation over a 25-year-old divorce settlement.  The agreement addressed alimony and community property distribution through a $600,000 promissory note in which Husband was to pay Wife for her half of the community property by paying up to $ 50,000 per year in principal and monthly interest-only payments, beginning at a rate of 6%. The increase in interest payments each year, based on annual adjustments according to the consumer price index, served as Wife's alimony. The note prohibited Husband from prepaying principal, and instead provided that Wife could demand up to $ 50,000 of principal annually. If Wife never demanded principal, interest would accrue indefinitely; if she requested the maximum every year, then the note would be fully paid in twelve years.  25 years later, with Husband having paid a total over over twice the original note amount and with monthly payments of $8,500, he brought a civil action to reform, rescind, or recover damages based on usury, unconscionability, and fraud.

Wife's attorneys  offered her the choice of a $ 5,000 retainer with hourly billing or a one-third contingency fee.  She insisted on a contingency arrangement. Ultimately, the firm negotiated a settlement for Wife of a $ 600,000 lump sum payment, an amount that was more than she had indicated she would be willing to settle and which entitled the firm to $ 200,000 fees.

In this action, seeking a writ to review the trial court's decision to enforce the contingent fee agreement, the Nevada Supreme Court found that the fee was indeed contingent and involved alimony, thus violating the rule of professional conduct.  The court reviewed decisions from other states, some of which recognized exceptions to the contingent fee prohibition for collecting past due support, but concluded that in the context of this action, this was not an action for past due support but an action whose outcome would determine the amount of future alimony Wife would receive. 

A dissenting judge would interpret the rule to permit such a contingency fee agreement and urged the court to modify its rule in the future.

Marquis & Aurbach v. Eighth Judicial Dist. Court, 122 Nev. Adv. Rep. 97 (November 30, 2006)
Opinion on web (last visited December 5, 2006 bgf)

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