Fee Fight Resolved; Texas Ethics Rules Applied In Delaware Litigation

The Delaware Court of Chancery found a fee-sharing agreement between counsel was unenforceable  under Texas law but that an attorney was entitled to reasonable compensation (nearly $16 million) for services rendered as co-counsel in litigation against AT&T.

The case is significant in its application of choice-of-law analysis to matters involving legal fee disputes.

Partners holding minority interests in an array of partnerships hired solo practitioner Michael A. Pullara to pursue claims for breach of fiduciary duty against the partner holding the majority interest. The client agreements authorized Pullara to hire “joint venture counsel” and noted that Pullara intended to retain Ajamie LLP. Pullara and any joint venture counsel agreed to accept a 50% discount to their hourly rates in exchange for the opportunity to receive a contingency fee if they prevailed. Pullara subsequently brought on Ajamie as joint venture counsel, and Pullara and Ajamie entered into a fee-sharing agreement.

After lengthy litigation, the minority partners reached a favorable settlement with the majority partner. By that point, however, Pullara and Ajamie were squabbling over the fee. Pullara had the primary relationship with the clients, and many of them joined Pullara in disputing Ajamie’s right to a share of the fee.

Ajamie responded by filing this action to secure a charging lien and recover its fee. The court granted a charging lien to preserve Ajamie’s claim against the settlement proceeds. Ajamie now seeks to enforce the lien.

This decision holds that the fee-sharing agreement is unenforceable under the Texas Disciplinary Rules of Professional Conduct (the “Texas Rules”), but that does not deprive Ajamie of its right to a fee. Instead, it means that Ajamie is entitled to reasonable compensation under principles of quantum meruit. Ajamie is awarded a fee of $13,014,721.87 plus pre- and post-judgment interest as specified in this opinion.

Facts

Pullara is a Texas-based solo practitioner who litigated successfully against AT&T after a first round of squeeze-outs. When AT&T engaged in a second round of squeeze-outs, many of the minority partners (the “Clients”) signed agreements retaining Pullara as counsel (the “Client Agreements”). The Client Agreements contained choice-of-law provisions selecting Texas law and noted that the State Bar of Texas regulated the conduct of Texas attorneys.

Because Pullara is a solo practitioner, he needed help to litigate against AT&T. To that end, each Client Agreement specified that Pullara could “at his sole  discretion, associate any other licensed attorney in the representation” to serve as joint venture counsel.

Under the Client Agreements, Pullara and joint venture counsel agreed to charge fees calculated at 50% of their published hourly rates, as adjusted from time to time. As additional compensation, Pullara and his joint venture counsel would receive a contingency fee equal to 20% of any recovery (the “Contingency Fee”). Some of the Clients subsequently signed amendments to their Client Agreements that eliminated their obligation to pay any further hourly fees in return for raising the Contingency Fee percentage to 30%.

The Client Agreements made clear that adding joint venture counsel would not affect the size of the Contingency Fee. Instead, “the fees, if any, due to Joint Venture Counsel will be a portion of those fees earned by [Pullara].”

The Client Agreements explicitly stated that it was Pullara’s “current intention” to work with Ajamie.  As that language foreshadowed, Pullara selected Ajamie as joint venture counsel. Pullara and Ajamie then entered into a separate agreement to govern how they would share any fee among themselves (the “Sharing Agreement”). That agreement was drafted in Texas, signed in Texas, and called for any disputes to be arbitrated in Texas.

The Sharing Agreement provided for Pullara to receive a fixed 30% of the Contingency Fee and Ajamie to receive a fixed 20%. It stated that Ajamie and Pullara would divide the remaining 50% based on their relative contributions to the case. That allocation would turn on their “time value of work,” calculated by multiplying the total hours worked times their published hourly rates.

Recognizing that Ajamie was part of the team, the Clients sent retainers to an Ajamie trust account. Over the ensuing years, the Clients periodically received invoices from Ajamie for fees and expenses. Although the Client Agreements authorized Ajamie to increase its rates, Ajamie never applied its annual rate increases to the minority partners. In other words, Ajamie only billed at 50% of its 2011 rates. The litigation took a long time. In 2022, the court issued its post-trial decision in a bellwether case. In 2023, the Delaware Supreme Court affirmed that judgment. Afterwards, the parties reached settlements modeled on the bellwether result.

Falling out

During settlement negotiations, the relationship between Ajamie and Pullara became strained, and a dispute arose over how they would share the Contingency Fee. Pullara had the principal relationship with the Clients, and they aligned themselves with Pullara.

Acting through Pullara, seventy-nine of the eighty-three Clients terminated Ajamie’s representation in August 2023. By October, three additional Clients had followed suit. In January 2024, one Client asserted that the Sharing Agreement was void under the Texas Rules.

To protect its claim for compensation, Ajamie filed this action and sought a charging lien against the settlement proceeds. Over the Clients’ opposition, the court granted “a lien against all amounts paid in settlement in these actions up to the amount of a reasonable attorneys’ fee and costs incurred.” In compliance with that order, the parties placed in escrow amounts sufficient to satisfy Ajamie’s claim.

The court looked to choice of law in bar discipline rules, which differ in Texas and Delaware

The Delaware Rule thus does not require the same level of formal, upfront client consent that the Texas Rule demands.

Notwithstanding that the litigation landed in Delaware

Here, the Delaware litigation was not yet pending when Pullara and Ajamie entered into the Sharing Agreement. At the time, Pullara and Ajamie were evaluating various jurisdictions and planned to file in Texas. The litigation only ended up in Delaware after AT&T filed preemptive declaratory judgment actions in this court. Pullara and Ajamie thus did not enter into the Sharing Agreement “in connection with a matter pending before a tribunal.”

Nor is there any basis to conclude that the predominant effect of the Sharing Agreement would be felt in Delaware.

 The court found Texas law applicable and the fee-sharing agreement unenforceable.

Delaware Rule 8.5(b)(2) calls for applying Texas law because Texas is where the lawyer’s conduct occurred: Pullara and Ajamie entered into the Sharing Agreement in Texas. That is the relevant conduct, making Texas law the relevant law.

The Clients did not approve the terms of the Sharing Agreement or how the Contingency Fee would be allocated.

The Sharing Agreement therefore did not satisfy the requirements of Texas Rule 1.04(f).

Clients sought to escrow the fee

the Clients have not so much as attempted to explain why an award of damages from the Texas court would not provide adequate relief. They say the injunction they want “would ensure that [the Clients] retain the ability to recover any award in the Texas action.” Likely so, but that is not the test. “If the property [for which injunctive relief is sought] is money, then there must be a concrete threat that the defendant intends to render itself insolvent and judgment-proof.” Nothing suggests that here.

The request to escrow Ajamie’s fee is denied.

Among the relavant factors

The fourth Mahani factor is the “amount involved and the results obtained.” Ajamie and Pullara successfully recovered $9,311,695 plus interest in the bellwether case.  The parties later reached a series of settlements in the remaining ten cases. The total consideration obtained from AT&T was $134,371,982.85.92

That is a significant result that warrants a significant fee.

Conclusion

Ajamie is entitled to reasonable attorneys’ fees consisting of $15,814,340.14 plus pre- and post-judgment interest as specified above. Since the Clients have already paid $2,799,618.27, Ajamie has a right to an additional $13,014,721.87 plus interest. The escrow agent must release this amount to Ajamie.

(Mike Frisch)