Under The Banner Of Hope

The Iowa Supreme Court has affirmed  and reversed in part and remanded a fee fight among attorneys but split 4-3 on whether the firm that received the funds had converted them by violating the ethical rule on safekeeping disputed funds

The Hope Law Firm agreed to represent a client in a contingent-fee case. Lawyer James Larew had an of-counsel arrangement with the Hope Law Firm and agreed to work on the client’s case in exchange for a portion of the firm’s fee. But during the course of the case, Larew’s relationship with Andrew Hope (the Hope Law Firm’s owner) soured, and Larew and the firm ended the of-counsel arrangement. Larew nonetheless continued to work on the case, ultimately winning a large judgment at trial. Litigation ensued over the disposition of the fee. In this appeal, we address a bevy of claims in “the lawsuit after the lawsuit” between dueling lawyers.

The complicated history of the fee situation is set forth at length

We recognize, as an initial matter, that this appeal presents a civil action and not an attorney disciplinary case, and for that reason our analysis concentrates on the legal issues that the parties have brought before us. But we would be remiss in failing to note—indeed, to underscore—that Iowa Rule of Professional Conduct 32:1.4(b) imposes an unequivocal duty on lawyers to explain matters to their clients “to the extent reasonably necessary to permit the client to make informed decisions regarding the representation.” Both Larew and Hope failed to inform Anderson of Larew’s separation from the Hope Law Firm, either when it happened or in the many months after and through the trial. Had Larew or Hope actually fulfilled this ethical duty, the client would have been permitted to decide with whom and on what terms it would continue the representation—consistent with the client’s role and right. The clarification in responsibilities and compensation that likely would have flowed from that required disclosure (lawyer ethics rules operating, as they often do, to the benefit of both lawyer and client) almost certainly would have avoided many of the disputed issues over which they’ve battled in this case.

The court upheld the lower court's fee calculation but reversed the finding that the Hope firm successor is not liable

We...reverse the district court’s ruling and hold that Hope Law Firm & Associates, P.C., is a successor entity to Hope Law Firm, P.L.C., and liable for the judgment entered in this case.

Larew claimed conversion, relying on Rule 1.15, a contention the court majority rejected

Assuming (without deciding) that an argument creating a property interest based on rule 32:1.15 has been preserved, consideration of a different ethics rule, rule 32:1.5, supports the district court’s rejection of Larew’s conversion claim. That rule restricts lawyers’ ability to divide fees on a case when they are not in the same firm. Iowa R. Prof’l Conduct 32:1.5(e). Fees divided among lawyers in different firms must be split “in proportion to the services performed by each lawyer or each lawyer assumes joint responsibility for the representation,” and the client must “agree[] to the arrangement, including the share each lawyer will receive” with that agreement “confirmed in writing.” Id. Larew unquestionably operated as of-counsel within the Hope Law Firm while the of-counsel agreement remained in effect, thus making a separate fee agreement between Larew and the client unnecessary under the rule. Larew and Hope, in other words, were not serving under the banners of separate firms but were working on the case as members of one firm: the Hope Law Firm. Plenty of evidence in the record supports this, including the of-counsel agreement itself, Larew’s inclusion on the Hope Law Firm’s letterhead and website, and the agreement to split fees untied to the actual amount of work that each lawyer would actually perform on the case (e.g., Larew would be doing the lion’s share but receiving less than half (40%) of any recovery).

When Larew and Hope ended the of-counsel arrangement, neither one contacted the client to set up a new arrangement that would split their fee between two different firms. We must construe an attorney’s conduct as consistent (not inconsistent) with the requirements of our ethics rules unless proved otherwise.

Dissent in part by Justice Waterman

I join the majority opinion except as to part IV and on the issue of the availability of punitive damages. In my view, Iowa Rule of Professional Conduct 32:1.15 required Andrew Hope and his law firm not to take into income—but instead to disburse—funds that were indisputably owed to a separate law firm, James Larew’s firm. The breach of that duty could support a conversion claim for which punitive damages are allowed. The district court erred by failing to apply that rule. I would reverse the district court ruling on Larew’s conversion and punitive damages claims and remand the case to apply the proper standard.

Application of Rule 1.15

Every court to reach the issue has held this rule applies to fee disputes between co-counsel in separate firms.

...Hope can’t avoid rule 32:1.15 by arguing Larew was like an associate in the Hope Law Firm. For one thing, by the time the funds were paid to Hope, the parties had already terminated the of-counsel agreement and clearly were in separate firms. Even while the of-counsel agreement was in effect, Larew was never an employee of Hope Law Firm, and his compensation was specific to each case on which the parties worked together and based only on the receipts for that case. Moreover, the majority can’t consistently say that Hope and Larew had an ethical duty to inform the client of their fee-splitting arrangement and then maintain elsewhere in the opinion that Hope and Larew were part of the same firm.

Hope offered no valid reason for failing to keep the disputed funds separate as required by the rule. Hope admitted Larew was entitled to $130,000 to $150,000. Instead of promptly paying Larew what he owed as required by rule 32:1.15(d), or escrowing the disputed funds until the dispute was resolved as required under rule 32:1.15(e), Hope wrongfully diverted and then retained Larew’s share in the firm’s general account.

Rule 32:1.15 effectively provides Larew with a security interest in his share of the funds recovered in the lawsuit. Hope can’t avoid conversion liability by commingling the lawsuit proceeds in his general account to argue the money is no longer identifiable. We can follow the money to which Larew’s interest attached under rule 32:1.15.

Chief Justice Christensen and Justice Mansfield  joined the concurrence in part and dissent in part. (Mike Frisch)