BEWARE THE HIDDEN LAWYER By Fred A. Simpson and John R. Clayton1
When your civil defendant-client lawsuit settles with plaintiff for $100,000, and your client is released from all plaintiff claims, that should be the end of it for you, right? But, what if another lawyer later comes forward with a piece of paper that shows a property interest in plaintiff’s lawsuit against your client? That’s not your problem, right? Maybe it is your problem. Your defendant-client in this hypothetical may owe plaintiff another $30-$40,000. The “hidden lawyer” was once hired by plaintiff but later fired and replaced by his client with another. The hidden lawyer contracted with the plaintiff under a fee arrangement that was secured by an interest in the lawsuit and in anything of value that may change hands in favor of the plaintiff, a rather common arrangement in our litigious society.
Plaintiffs typically engage lawyers soon after tort or contract claims arise. Plaintiffs bind themselves to contingent fee arrangements only to learn later that their chosen lawyer is too busy, or there is some other compelling reason for plaintiff to part company with the first lawyer. The disenchanted plaintiff hires a second (or a third) lawyer, perhaps signing another contingent fee contract with the belief that any new fee arrangement with the new lawyer totally supersedes any old one. This leads to some interesting situations. If plaintiff contracts with 3 consecutive attorneys, promising each of them a one-third interest in the lawsuit, plaintiff ends up with no residual interest whatsoever in the trial outcome.
If a hidden lawyer can show that the unwary defendant in our hypothetical had reason to know of the hidden lawyer’s vested interest in the lawsuit, our defendant/client may have a problem, so may that defendant’s attorney, and so may any insurer compelled to indemnify under an insurance policy. Why? Because all the claims are not paid.
Notice or knowledge of the hidden lawyer takes several forms:
1. Actual knowledge Actual notice Constructive notice Inquiry notice
What law validates the hidden lawyer’s claim?
The principle under which the hidden lawyer makes a valid claim against exists under the rules of agency. The orthodox agency power, if coupled with an interest, is generally held to be irrevocable, even by the principal’s death or disability, as shown by a decision that defines the hidden lawyer’s interest as:
an interest or estate in the thing itself, concerning which the power is to be exercised, arising from an assignment, pledge or lien created by the principal, coupled with which is the power to deal with the thing itself in order to make the assignment, pledge or lien effectual.
Pan American Petrol. Corp. v. Cain, 355 S.W.2d 506, 508 (Tex. 1962).
Incidentally, although the authors’ specific citations are to Texas cases, the jurisdiction of their practice, equitable assignment is an established part of agency law that extends to other jurisdictions, all as shown in commentary such as 28 ALR 2d 1243, “What constitutes power coupled with interest within rule as to termination of
agency?” See also RESTATEMENT (SECOND)OF AGENCY § 464, and comments thereto.
Although some states don’t allow lawyers to acquire proprietary interests in the subject matter of lawsuits, there may be relief from that prohibition under agency law. See
Under the agency law principle concerning a vested interest in the subject matter, a plaintiff may rightfully fire his lawyer, but plaintiff cannot invalidate the attorney’s financial interest assigned at the outset of the relationship. There is one other necessary element to make the concept work, however: the terminated lawyer must partially perform. See Bryan v. Ross, 214 S. W. 524 (Tex. Civ. App. – Amarillo 1919), aff’d 247 S. W. (Tex. 1923) But from a practical standpoint, partial performance is easy for a plaintiff’s lawyer to show because of the essential nature of initial interviews, note taking, preliminary research, etc.
Often the ousted plaintiff’s lawyer comes forth and gives express notice to the defendant and/or the defendant’s insurer when replacement occurs, or he files a formal intervention in the lawsuit to protect his financial interests, if any. Other times, there truly a hidden lawyer who learns of his former client’s settlement or judgment only after full payment has been made to plaintiff by defendant or defendant’s insurer. At that latter point, the hidden lawyer not only has his right of action against his former client, he has claims against the defendant, but only if the hidden lawyer can show either that the defendant knew, had notice, or had a duty to inquire about the hidden lawyer’s claims.
Forms of notice or knowledge.
There are no special rules to show what is sufficient notice of the hidden lawyer’s claim. However, a defendant’s actual notice of the hidden lawyer’s interest is as effective as statutory notice. See Gibson v. Texas Pac. Coal Co., 266 S.W. 137, 139 (Tex. Comm.
20th Century, a contemporary case describing notice says: “`Actual notice’ embraces those things that a reasonably diligent inquiry and exercise of means of information at hand would have disclosed.” Robert Parker’s Truck and Trailer Repair, Inc. v. Speer, 722 S.W.2d 45, 48 (Tex. App. — Houston [1st Dist.] 1986 no writ). An early case suggests a high degree of care is required:
Where such facts or circumstances are known to a person in relation to a matter in which he is interested as are sufficient to make it his duty as an honest and prudent man to inquire concerning the rights of other persons in the same matter, and the course of inquiry thus suggested would, if followed with due diligence, lead to a discovery of rights in conflict with his own, the general rule is that he will be held chargeable with notice of all that he might thus have discovered, and will not be heard to say that he did not actually know of the fact or claim in question. Means of knowledge, with the duty of using them, are deemed equivalent to knowledge itself, and passive good faith will not serve to excuse willful ignorance.
San Antonio & A.P. Ry. Co. v. Sehorn, 127 S.W. 246, 247 (Tex. Civ. App. 1910, no writ)
What contract types give rights to the hidden lawyer?
A simple contingent fee contract that only grants a lawyer’s fee if there is a recovery does not usually produce any problems of assigned interests. But a simple contingent fee contract, if properly worded, may assign a part of the cause of action.
Dow Chemical Co. v. Benton, 357 S.W.2d 565,568 (Tex. 1962). The important
difference is plaintiff’s intent to transfer a present interest in the claims, as the law shows:
In order that an agreement for a contingent fee may operate as an equitable assignment, there must be in effect a constructive appropriation of so much of the amount to be recovered as will confer upon the attorney a complete
and present right to receive the same without the further intervention of the client.
Carroll v. Hunt, 168 S.W.2d 238, 241 (Tex. 1943).
The interest is in the nature of a property vesting absolutely in the assignee attorney:
[It is a] fixed rule that an agreement between client and attorney, by which the attorney is to have for his services a fixed portion of whatever amount of money shall be realized or received, whether on settlement or without settlement, on account of such claim as shall be put to suit, whether of tort or contract, constitutes an equitable assignment pro tanto.
Northern Texas Traction Co. v. Clark & Sweeton, 272 S.W. 564, 567 (Tex. Civ.
App.Texarkana 1925, no writ)
However, the following words created only an executory contract for a contingent fee because of the intent to pay only after successful termination of the litigation: “we agree to give you as compensation therefore 1/8 of the property recovered.” Carroll v.
Hunt, 140 Tex. 424, 168 S.W.2d 238 (1943), citing to Spellman v. Bankers Trust Co., 6
F.2d 799, 800 (6th Cir. 1925) (contingent fee agreement is not an equitable assignment). In contrast, these words show the clear present intent to assign an interest in a cause of action, “I agree to give and hereby assign to them (lawyers) one-third of whatever may be recovered in said suit, or by way of compromise.” Galveston, H & S. A. Ry. Co. v.
Ginther, 96 Tex. 295, 72 S.W. 166, 167 (1903). The following words were also a valid
assignment of interest:
In order to secure the services as attorneys in the case of the death of my husband, . . . I hereby set over to said attorneys one-third of same against all parties and especially the Wichita Falls Electric Company, as well as
litigation or compromise, but no compromise shall be made without the written consent of both parties.
Wichita Falls Electric Co. v. Chancellor & Bryan, 229 S.W.649, 650 (Tex. Civ. App. —
Amarillo 1921, writ ref’d)
This type of provision in a contingent fee contract clearly constitutes a general power of attorney that acts to confirm the agency coupled with an interest:
... all necessary releases, receipts, acquittances, settlements, discharges, notices and satisfactions of awards, judgments or recoveries of whatsoever character, and generally do all acts and things which in their judgment are essential to handling of this matter.
Mandell & Wright v. Thomas, 441 S.W.2d 841, 846 (Tex. 1969).
How can a defense attorney protect against the hidden lawyer?
Much can be dome to avoid the hidden lawyer’s future sting:
1. Inquire of the defendant/client about his knowledge of plaintiff’s earlier attorney, if any.
2. Ask insured’s claims representative. 3. Review all early pleadings.
4. Submit discovery requests about previous attorneys.
5. Ask deposition questions about the history of plaintiff’s attorney engagement.
6. Cross-examine plaintiff’s attorneys when they testify about fees.
7. Use mediation settlement memoranda to assert the lack of previous attorneys.
8. Use settlement agreements to show the lack of previous attorneys, including rep representations by plaintiff’s attorney about his inquiry.
On the latter several of these suggestions, this language has proved to be effective: My interests in this lawsuit have been fully protected and there are no outstanding assignments or claims of any type for attorneys’ fees or expenses associated with the said lawsuit. It shall be my obligation to fulfill or pay from the proceeds of this settlement any interest, fees, costs, expenses, and/or claims made by any other attorney, and I hereby indemnify and agree to hold the settling defendants and their insurers and all their attorneys of record harmless from any obligations owed or claimed
to be owed by any other attorneys out of the settlement fund arising from or under the accompanying agreement and release.
The body of the settlement agreement may also cause plaintiff and his lawyer to ask about the hidden lawyer, showing that defendant made a reasonable inquiry. Such an example is as follows:
None of Plaintiff’s claims in the lawsuit have been assigned, pledged, or otherwise in any manner whatsoever sold or transferred, either by written instrument or otherwise, to any attorney, agent or other person or entity, except possibly as to the fees owed by plaintiff to plaintiff’s attorney of record in this lawsuit.
Conclusion
Every defense lawyer is charged with extreme due diligence under the rules of disciplinary conduct as well as under common law fiduciary duties. Malpractice lawsuits freely emerge these days for many reasons that seem not to have not existed. The prudent defense lawyer asks more questions to protect his client, from paying the hidden lawyer what the law says he is owed. An imprudent lawyer may become an unwilling indemnitor.
