By Noël M. Lawrence*
Times are tough. According to the United States Department of Labor, Bureau of Labor Statistics, employment in the U.S. continued to decline throughout the spring of 2009, another 267,000 jobs were lost in July, and as of the end of that month, employment stood at 9.4% nationwide. The situation is significantly worse in the Golden State. As of the end of July, 2009, the Employment Development Department of the State of California reported that well over two million Californians are jobless and that the unemployment rate statewide had reached 11.9 %. California’s current rate of unemployment exceeds that of all other states with only four exceptions: Michigan (15%), Nevada (12.5%), Rhode Island (12.7%) and Oregon (tied with California at 11.9%).
And, as most California lawyers are well aware, the economic crisis is being felt severely within the legal community. The Los Angeles Times cites “lackluster spending” in certain areas, including “legal services,” which has “left California’s economy listless, just about guaranteeing that the state’s … unemployment [rate] will march upward at least until the end of the year….”
According to the New York Times Editorial Observer, Adam Cohen, “[t]he economic downturn is hitting the legal world hard …. Top firms are rapidly thinning their ranks and several – including Heller Ehrman, a venerable 500-plus-lawyer firm founded in 1890 – have closed….”
In particular, the downturn has resulted in a reexamination of the manner in which attorneys charge for their services. As observed in a recent New York Times article, “Lawyers are having trouble defending the most basic yardstick of the legal business – the billable hour. Clients have complained for years that the practice of billing for each hour worked can encourage law firms to prolong a client’s problem rather than solve it. But the rough economic climate is making clients more demanding, leading many law firms to rethink their business model.” The article quoted Evan R. Chesler, of Cravath, Swaine & Moore: “[I]nstead of paying for hours worked, more clients are paying flat fees for handling transactions and success fees for positive outcomes.”
There will always be good clients with meritorious cases who are unable to compensate their attorney currently and out of pocket. The present economic crisis can only have swollen their ranks.
For the attorney who is in a position to assume some degree of risk, a contingent fee offers a way of addressing the problem of a would-be client who lacks the means of paying for legal services, and of the attorney who has seen a slowdown in demand for legal services brought about by the current economic crisis.
This article will discuss the practicalities of assuming representation of a client on a contingent fee basis in estate and trust litigation matters. This article will review the rules applicable to contingent fee arrangements in general, as well as the statutory and case law unique to contingent fee arrangements entered into by the personal representative of an estate or by a beneficiary of an estate or trust.
II. The Law Governing Contingent Fee Contracts
Witkin defines a continent fee contract as “one providing for a fee the size or payment of which is conditioned on some measure of the client’s success.” Under a contingent fee agreement, the attorney’s right to receive the fee is conditioned on obtaining a successful outcome for the client. Typically the attorney agrees to provide legal services in return for a percentage of the client’s recovery. If no recovery is made, the attorney does not receive a fee. The justification for the contingency fee arrangement is that it allows individuals who might not otherwise be able to afford legal representation an opportunity to protect their legal rights. Contingent fee arrangements are common in actions on behalf of persons claiming interests in estates, and their validity is well established.
A. Professional Ethics Rules
The basic requirements for a fee agreement between a lawyer and his or her client are set forth in California Business & Professions Code section 6148. That section is, however, expressly inapplicable to contingent fee arrangements. Instead, Section 6147 sets forth special requirements for a contingent fee agreement.
Section 6147 begins by requiring that the attorney provide to the client (or to the client’s guardian or representative) a duplicate copy of the contingent fee agreement, signed by both the attorney and the client (or signed by the client’s guardian or representative). The statute further provides, in pertinent part, that such a contract must include all of the following:
- A statement of the contingency fee rate that the client and attorney have agreed upon.
- A statement as to how disbursements and costs incurred in connection with the prosecution or settlement of the claim will affect the contingency fee and the client’s recovery.
- A statement as to what extent, if any, the client is required to pay any compensation to the attorney for related matters that arise out of their relationship not covered by the contingency fee contract. This may include any amounts collected for the plaintiff by the attorney.
- Unless the claim is subject to the provisions of Section 6146 [having to do with contingent fee cases against health care providers and therefore not applicable to estate and trust litigation] a statement that the fee is not set by law, but is negotiable between attorney and client.
Failure to comply with any provision of Section 6147 renders the agreement voidable at the option of the client.In that event, the attorney is entitled to collect a reasonable fee. Where only part of the agreement fails to comply with Section 6147, the client can void part, but not all, of the contingency fee contract. And, not surprisingly, modifications to a contingency fee contract also must comply with Section 6147.
The American Bar Association expressly approves contingent fee agreements and provides the following guidance in its Model Rules of Professional Conduct, Rule 1.5 Fees:
(a) A lawyer shall not make an agreement for, charge, or collect an unreasonable fee or an unreasonable amount for expenses. The factors to be considered in determining the reasonableness of the fee include the following:
. . .
(4) the amount involved and the results obtained.
. . .
(8) whether the fee is fixed or contingent.
. . .
(c) A fee may be contingent on the outcome of the matter for which the service is rendered, except in which a contingent fee is prohibited [in domestic relations cases and in criminal cases].
Similarly, the California Rules of Professional Conduct, rule 4-200, provides that a member shall not charge an unconscionable fee. Among the criteria for determining whether a fee is unconscionable are the following:
1. The amount of the fee in proportion to the value of the services performed.
. . .
5. The amount involved and the results obtained.
. . .
9. Whether the fee is fixed or contingent.
10. The time and labor required.
When entering into a contingent fee contract, practitioners should also be mindful of California Rules of Professional Conduct, Rule 3-300:
A member shall not enter into a business transaction with a client; or knowingly acquire an ownership, possessory, security, or other pecuniary interest adverse to a client unless each of the following requirements have been satisfied:
(A) The transaction or acquisition and its terms are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner which should reasonably have been understood by the client; and
(B) The client is advised in writing that the client may seek the advice of an independent lawyer of the client’s choice and is given a reasonable opportunity to seek that advice; and
(C) The client thereafter consents in writing to the term of the transaction or the terms of the acquisition. (Emphasis added.)
B. The Customary Contingent Fee Percentage
There are no hard and fast rules concerning the permissible contingent fee percentage. The California Court of Appeal, in Hendricks v. Sefton, gave voice to the commonly held view that a contingent fee of one third of the recovery is common and is fair and equitable, and noted that ‘[c]ontracts calling for a greater percentage have been upheld.”
In Swanson v. Hempstead, the court allowed for the possibility of a contingent fee of 50 percent of the recovery. The court refused to characterize a fee of 50 percent as “unconscionable” and went on to describe an unconscionable contract as one “such as no man in his senses and not under a delusion would make on the one hand, and as no honest and fair man would accept on the other.”
The court in Estate of Raphael observed that a “contingent fee contract, since it involves a gamble on the result, may properly provide for a larger compensation than would otherwise be reasonable” and that “[c]ontingent fees of 50 per cent have been upheld in this state and by many other courts.” A few years later, the Court of Appeal ruled that a 50 percent contingent fee and assignment of claims was not unconscionable.
A contingent fee equal to more than 50 percent of the recovery will probably be very difficult to enforce. According toWitkin, “if the services are slight, or though substantial, the amount of the fee is more than one-half, a court may refuse to enforce the provision.”
C. Treatment of Out-Of-Pocket Costs
The manner in which out of pocket costs will be paid should be articulated in the fee agreement. Specifically, Business and Professions Code section 6147(a)(2) requires that the contingency fee contract state how case related disbursements and costs will affect the client’s net recovery and the attorney’s total fee.
California Code of Professional Conduct, Rule 4-210 makes clear that it is permissible for the attorney to advance the costs associated with litigation whether or not those costs might or might not be reimbursed. Rule 4-210 provides that while a member of the bar is prohibited from paying the personal or business expenses of a client, there is no prohibition upon “advancing the costs of prosecuting or defending a claim or action or otherwise protecting or promoting the client’s interests, the repayment of which may be contingent on the outcome of the matter. Such costs … shall be limited to all reasonable expenses of litigation or reasonable expenses in preparation for litigation or in providing any legal services to the client.” (Emphasis added.)
Moreover, the American Bar Association Model Rules of Professional Conduct speak to the issue of costs in a contingent fee matter. Rule 1.5, part (c) provides:
A contingent fee agreement shall be in a writing signed by the client and shall state … litigation and other expenses to be deducted from the recovery; and whether such expenses are to be deducted before or after the contingent fee is calculated. The agreement must clearly notify the client of any expenses for which the client will be liable whether or not the client is the prevailing party.
Whatever the method for paying costs, and for reimbursing costs, it should be clearly set forth in the fee agreement. Who will advance the costs? How will costs be reimbursed? Will the costs come “off the top,” with the result that the client’s recovery and the attorney’s fee will be proportionately burdened by the costs? Or, will the attorney’s fee come off the top, and the client’s share of the recovery bear all the costs? Finally, what if there is no recovery? Is the attorney ultimately responsible for the costs in that case, or is the client responsible under those circumstances?
One method that is particularly favorable to the attorney calculates the attorney’s fees based the gross recovery rather than the net recovery after costs (meaning the attorney’s share is not burdened by the costs). California Forms of Pleading and Practice explains the distinction between gross and net fee accounting methods for handling case costs, as follows:
The gross fee or recovery method. Under this method the contingency fee is calculated on the gross recovery, costs and expenses are deducted from the remainder, and the client receives the balance ….
The net fee recovery method. Under this method, the costs and expenses are deducted from the gross recovery, the contingency is calculated on the remainder, and the client receives the balance.” The California Court of Appeal has held that the gross fee method is not unfair to the client, where the fee did not thereby become “so exorbitant and wholly disproportionate to the services performed [by the attorney] as to shock the conscience.
In addition, the fee agreement should make clear that the contingent fee nature of the arrangement does not mean that the litigation is totally risk free for the client. Even if the cost arrangement is most favorable to the client, i.e. the attorney advances the costs with no expectation of reimbursement if the case is unsuccessful, the client should be made aware that if the client loses the case, the opponent’s costs may be awarded against the client as provided for in California Code of Civil Procedure Section 1032 et seq. One must not let the basic simplicity of a contingent fee arrangement induce the client to assume that he has no risk if indeed he or she loses the case.
As articulated in Code of Civil Procedure section 1033.5(c) (2) and (3), not every out of pocket cost is recoverable by the prevailing party to litigation. Only those that are “reasonable in amount” and “reasonably necessary to the conduct of the litigation.” For instance, Code of Civil Procedure sections 1032 and 1033.5(b) do not allow for reimbursement of the following sorts of costs: private investigator fees, postage, telephone expenses, fees of experts not ordered by court and transcripts of court proceedings not ordered by the court. The Rutter California Practice Guide on civil trials and evidence provides a good discussion of recoverable costs by the prevailing party.
D. Securing Payment of the Contingent Fee
There are several methods to secure the payment of the contingent attorney’s fee. One is by a lien on the recovery, i.e. a lien on the money or property secured by the client as a result of successful litigation.
Regardless whether the attorney decides to rely on a lien, or some other method to secure the payment of the attorney’s fee, if the contingent fee contract provides for payment of the attorney’s fee out of the recovery secured by reason of the litigation, the attorney will have an equitable lien on that recovery. “Resulting trusts, constructive trusts and equitable liens are very much akin to each other, and their basic purposes is to identify and impress upon certain property the beneficial rights that have arisen in an innocent party who in some way contributed to the acquisition, protection or improvement of that property ….” An equitable lien is a direct charge or encumbrance on property such that “the property itself may be proceeded against in an equitable action and either sold or sequestered and its proceeds applied in favor of the person in whose favor it exists.”
Civil Code section 2881 provides that a lien is created “by contract of the parties” or “by operation of law.” And Civil Code section 2884 provides, “A lien may be created by contract [such as a contingent fee contract] as security for the performance of future obligations [such as paying for legal services].” Civil Code section 2883(a) provides:
An agreement may be made to create a lien upon property not yet acquired by the party agreeing to give the lien, or not yet in existence. In that case the lien agreed for attaches from the time when the party agreeing to give it acquires an interest in the thing, to the extent of such interest.
Section 2883(b) is explicit as to when a lien attaches with respect to real property of an estate which has yet to be distributed – as for instance, when a contingent fee is entered into and the subject matter of the litigation is entitlement to distribution of an item of real property from an estate. Subdivision (b) provides:
For purposes of subdivision (a) [of Civil Code section 2883], an agreement by a beneficiary of an estate that is subject to administration … to create a lien upon real property in the estate that is undistributed at the time the agreement is entered into, shall create no lien upon the real property unless and until the real property is distributed to that beneficiary.
Subdivision (b) further provides, “[u]pon recordation of an order confirming the sale of the real property pursuant to Probate Code section 10313 of the and the recording of a duly executed deed in accordance therewith, any expectancy of a lien in the real property under the agreement shall be extinguished.”
Hence, a valid sale of real property during estate administration eliminates any future interest in that property on the part of the lien holder. Of course, the lien holder still has a lien on those estate assets the lien holder secures for his client apart from real property sold before distribution, which assets might include the sale proceeds.
In Estate of Kerr, the California Supreme Court both upheld a 50 percent contingent attorney’s fee and sustained the lower court’s ruling that the attorneys had a lien on the estate assets to secure payment of their fees. “Their contract with [client] specifically gives them a lien on his claim to the estate or ‘any sum recovered by way of settlement.’ No impropriety is shown.”
A fee agreement should include a lien provision because the client has the absolute right to discharge the attorney with or without cause. The lien will survive a discharge. After discharge, however, the attorney may not recover the full contingent fee but rather the reasonable value of the legal services.
The following is a lien provision from the Sample Written Fee Agreement Forms approved by the State Bar Board of Governors:
[ ] LIEN. You hereby grant __________ a lien on any and all claims or cause of action that are the subject of our representation under this Agreement. Our lien will be for any sums owing to us for any unpaid costs, or attorney’s fees, at the conclusion of our services. The lien will attach to any recovery you obtain, whether by arbitration award, judgment, settlement or otherwise.
As an alternative form of security for payment of the attorney’s fee, the attorney can take a promissory note from a client. In so doing, the attorney must comply with California Rules of Professional Conduct, rule 3-300 quoted above. Similarly, the attorney can secure the payment of his fee with a Deed of Trust, subject to the same requirements of California Code of Professional Conduct, rule 3-300.
Another method of securing the payment of the attorney’s fee is by means of an assignment. Probate courts are accustomed to assignments because it is by way of assignment that heir hunters secure payment of their fees. And, indeed, Probate Code section 1020.1, the predecessor code section to Probate Code section 11604, was originally enacted to give the court authority to review the fairness of those heir hunter assignments. Courts later construed that code section to have application to assignments whose purpose was to secure payment of attorneys’ fees.
Just as Section 11604 provides protection to estate beneficiaries who execute an assignment of a share of their inheritance, an attorney holding a valid assignment acquires rights customarily held by the beneficiary by reason of being the holder of that assignment. Where an heir or beneficiary has assigned his interest, the assignee is entitled to receive distribution directly under the order for distribution. Obviously direct distribution is desired as it eliminates the possibility that once the distribution is in the hands of the client, the client might fail to honor the contingent fee contract.
Moreover, the attorney as assignee of a share of an estate is an “interested person,” and as such has standing to bring a petition for preliminary or final distribution under Section 11600.
Similarly, an attorney who has a contingent fee agreement with an estate beneficiary has standing to file a Section 11700 to determine who is entitled to succeed to the property of a decedent’s estate and in what shares or amounts. Section 11700 provides:
Any time after letters are first issued to a general personal representative and before an order of final distribution is made…any person otherwise entitled to distribution of a share of the estate, may file a petition for a court determination of the persons entitled to distribution of the decedent’s estate. The petition shall include a statement of the basis of the petitioner’s claim.
One can imagine a number of instances in which the attorney holding an assignment from an estate beneficiary might employ Section 11700, including in the event that the client has changed attorneys and the payment of the fee is in question. Section 11700 can provide an expeditious means of resolving the issue.
E. What if the Need to Secure Payment of Attorney’s Fee Extends Beyond the End of the Case?
Even if the payment of the attorney’s fee has been secured by a lien, an assignment or some other means, what if at the end of the case, the time is not ripe for payment? For example, what if the recovery consists of an item of real property, and because of a softening of the market, the client and the attorney agree the time is not right to sell the property?
The lawyer could take a fractional undivided interest in the property in payment of the fees. Receiving such a deed in payment of the fees would raise tax related issues, including income tax and reassessment of the property for property tax purposes. Instead, the lawyer might be better served by ensuring that the property will remain in tact until it is finally sold and the proceeds are distributed in the agreed upon percentages.
The form of security previously put in place will probably suffice to ensure payment. However, once the case is concluded, the attorney and the client will almost certainly not be communicating so frequently. Through the passage of time, circumstances could change. For instance, the client might pass away without the lawyer’s knowledge. Accordingly, the lawyer might consider asking the client to sign a writing, in recordable form, to the effect that the property will not be encumbered or conveyed without the express written consent of the lawyer. That writing could then be recorded, thereby putting the world on notice of the rights of the attorney.
III. Restrictions on Entering into a Contingent Fee Agreement for Estate and Trust Litigation
A. Must a Trustee Seek Court Approval Before Entering Into a Contingent Fee Agreement?
There is no requirement that a trustee seek court approval before entering into a contingent fee agreement. The trustee will want to review his powers as articulated by the trust instrument and, probably, if cautious, may want to petition the court for instructions pursuant to Section 17200(b)(6) authorizing the retention of an attorney on a contingent fee basis.
There are no reported decisions regarding the filing of a petition under Section 17200 seeking approval of entering into a contingent fee agreement by the trustee. But it is clear from subdivision (b) of that section that the sorts of proceedings set forth in the statute, i.e. proceedings “concerning the internal affairs of a trust” are not exclusive. “The list of grounds for a petition concerning the internal affairs of a trust under subdivision (b) is not exclusive and is not intended to preclude a petition for any other purpose that can be characterized as an internal affair of the trust.”
B. Must the Personal Representative of An Estate Seek Court Approval Before Entering Into a Contingent Fee Agreement?
Unlike a trustee, the personal representative of an estate has an affirmative duty to seek court approval if he or she wishes to hire an attorney to perform extraordinary services on behalf of a decedent’s estate. Section 10811(c) provides:
An attorney for the personal representative may agree to perform extraordinary services on a contingent fee basis subject to the following conditions:
(1) The agreement is in writing and complies with all the requirements of Section 6147 of the Business & Professions Code;
(2) The agreement is approved by the court following a hearing noticed as provided by Section 10812.
(3) The court determines that the compensation provided in the agreement is just and reasonable and the agreement is to the advantage of the estate and in the best interests of the persons who are interested in the estate.
It should be noted that California Rule of Court 7.703 tracks the provisions of Section 10811, and adds:
In the absence of an emergency or other unusual circumstances, the personal representative must obtain the court’s approval of the contingency fee agreement before the services are performed under it.
C. Are There Any Restrictions on a Trust Beneficiary Or an Estate Beneficiary Entering Into a Contingent Fee Agreement?
The Probate Code places no restrictions on a trust beneficiary entering into a contingent fee agreement. However, the trust instrument may well contain a spendthrift provision. The following is an example of a simple spendthrift clause from CEB’s Drafting California Revocable Trusts Section 19.13 (4th ed. 2008):
The interests of the beneficiaries in the income and principal of the trusts created by this document are not subject to voluntary or involuntary transfer.
The usual spendthrift provision provides that the beneficiary shall not anticipate his or her interest by way of assignment. An attempted assignment in violation of a spendthrift clause gives the assignee no rights in the property or against the trustee, and the latter may deliver the property to the beneficiary in accordance with the terms of the trust. But the purported assignment is treated as a contract to assign, between the beneficiary and assignee, giving the latter the usual remedies for breach.
Thus, while a trust beneficiary is free to enter into a contingent fee agreement, if there is a spendthrift clause, the trustee should ignore the assignment of a share of the recovery to the attorney. The trustee must distribute to the beneficiary in accordance with the terms of the trust. The attorney must then look to the beneficiary to honor the contingent fee contract by delivering the attorney’s share of the trust distribution to the attorney.
By contrast, the Probate Code places no restrictions upon an estate beneficiary entering into a contingent fee agreement. The beneficiary of an estate can sell or transfer his expectant interest for fair consideration.
D. Is the Probate Court Empowered to Review a Contingent Fee Arrangement Entered Into by a Trust Beneficiary or an Estate Beneficiary?
1. A Trust Beneficiary Entering Into a Contingent Fee Contract
There is no Probate Code provision that explicitly empowers the court to review a contingent fee agreement entered into by a trust beneficiary. As mentioned previously, Section 17200 is very broad and states explicitly that the matters as to which a court order can be sought include those listed in that section, but are not limited to those listed therein.
There are no reported decisions construing Section 17200 to empower the court to review a contingent fee agreement entered into by a trust beneficiary. Would the court find that such an agreement concerns the internal affairs of the trust such as to give the court jurisdiction pursuant to Section 17200? Perhaps, if the trustee were in doubt as to whether to honor an assignment made by a trust beneficiary to the beneficiary’s lawyer pursuant to a contingent fee agreement. Could a beneficiary use Section 17200 himself to file a petition challenging the agreement he entered into and seek relief from the Probate Court? In the absence of case law on this issue, the answer is unclear.
2. An Estate Beneficiary Entering Into a Contingent Fee Contract
By contrast, the probate court has explicit—and very broad—powers to review a contingent fee contract entered into by an estate beneficiary after the contract has been entered into but before a share of the estate is paid to the attorney under the said agreement. So, while Section 10811 provides for court review of a contingent fee arrangement before the personal representative enters into it, Section 11604 allows for an examination of such an agreement entered into by an estate beneficiary after the fact.
Section 11604 applies where distribution is to be made to (1) the transferee of a beneficiary; or (2) any person other than a beneficiary under an agreement, request, or instructions of a beneficiary or the attorney in fact of a beneficiary. Under subdivision (b), “[t]he court on its own motion, or on motion of the personal representative or other interested person or of the public administrator, may inquire into the circumstances surrounding the execution of, and the consideration for, the transfer, agreement, request, or instructions, and the amount of any fees, charges, or consideration paid or agreed to be paid by the beneficiary.”
Section 11604(c) empowers the court to refuse to order distribution, or to order distribution on any terms that the court deems just and equitable, if the court finds either of the following: (1) The fees, charges, or consideration paid or agreed to be paid by a beneficiary are grossly unreasonable or (2) the transfer, agreement, request or instructions were obtained by duress, fraud or undue influence.
When the client who has hired the lawyer on a contingent fee basis is the beneficiary of an estate, the fees, charges or consideration paid or agreed to be paid by a beneficiary, can be reviewed by the probate court under Section 11604. While the predecessor to Section 11604 (Section 1020.1) was originally enacted to protect beneficiaries from “grossly unreasonable” amounts charged by heir hunters, that section consistently has been held to apply more broadly to assignees and transferees generally.
The authority of the probate court, on its own motion, to inquire into the consideration paid for the assignment is permissive rather than mandatory. The statute gives discretion to the probate judge to inquire into the circumstances; it does not impose a duty to conduct a full inquiry on every assignment. An order under Section 11604 is appealable.
Notice of the hearing on a Section 11604 motion must be served on the beneficiary, on the transferee of the beneficiary, and on any person other than a beneficiary under an agreement, request or instructions of a beneficiary, or the attorney in fact of a beneficiary at least 15 days before the hearing in the manner provided by Code of Civil Procedure section 415.10 (personal delivery) or 415.30 (service by mail).
As to the reasonableness of consideration paid for an assignment of an interest in a probate estate, the probate judge is empowered to give much stricter scrutiny to the fairness of the consideration than would be the case under ordinary contract principles.
The probate court has jurisdiction to rescind and set aside an assignment of interests in a decedent’s estate. The court can also set aside and rescind a settlement agreement requiring such an assignment, or it can modify the agreement to the extent it finds the consideration grossly unreasonable. The Probate Court cannot, however, arbitrarily refuse to honor a perfectly proper assignment of an interest in an estate.
The scope of the probate court’s review under Section 11604 is broad. The court can even review an agreement that includes property that isoutside of the probate estate. In Estate of Stanley, consent to distribution between heirs embraced both property that was a part of the estate and property that was not a part of the estate. The probate court asserted jurisdiction to determine rights under contracts ancillary to its probate jurisdiction. The California Supreme Court affirmed, holding that the probate court had jurisdiction to determine the validity of the entire agreement.
In Estate of Brown, the court of appeal held that the probate court could alter the amount of the fee and the nature of the fee. More specifically, the Brown court held that under the statutory power to review the fairness of an assignment of heir’s interest, the court has both the power to reduce attorney’s fee arrangement in amount and the power to substitute a fixed fee for an indefinite contingent one.
The Brown court further explained that if the probate court finds that an assignee or attorney has already received from the heir as much as the court deems fair and equitable, the court has the power to deny any further distribution on the assignment. Moreover, if after examining all surrounding circumstances the court finds that the assignee or attorney has been overpaid in some collateral matter, it may legitimately deem that it would be fair and equitable for the heir to offset that overpayment against a probate assignment or fee and to deny further distribution out of probate estate. In short, the court can bring a halt to any further payments of attorneys’ fees.
In Burchell v. Strube, the California Supreme Court held that where the consideration for an assignment of interest in a decedent’s estate by an heir to an heir hunter or another is “grossly unreasonable,” the burden is on assignee to prove the real value of the consideration. Burchell seems to contemplate an initial determination of the nature of the fee, and if it is found to be grossly unreasonable, the case proceeds with the burden of proof borne by the assignee.
The Probate Court’s wide latitude under Section 11604 does have limits. The court has no jurisdiction to adjudicate a claim to distribution by an assignee or grantee of an heir under a conveyance made prior to the ancestor’s death.
In Estate of Boyd, the Court of Appeal held that while Section 11604 is intended to protect beneficiaries from unfair agreements, it is not intended to relieve beneficiaries of the effects of circumstances which changed after the agreement was entered into. In Boyd, the decedent’s will gave a parcel of real property to his nephew. After the decedent’s death, the nephew unsuccessfully tried to obtain an advance from the estate to care for his ill mother. The nephew was then introduced to a real estate broker who offered him $16,500 for the property. The nephew agreed on condition he immediately be paid $3,000. The nephew later challenged the agreement, arguing the consideration was insufficient because at the time of the hearing the property was worth over $51,000. The trial court found consideration was sufficient. The court of appeal affirmed, holding that the value of consideration for an estate assignment is properly determined as of the date the assignment was made.
The attorney expecting to be paid from an estate pursuant to an assignment from his or her client should consult local court rules for any requirement that the assignment be put before the court at the time a petition for distribution of the estate is filed. For example, Los Angeles County Local Rule 10.60 provides that such a petition must include an allegation concerning the specifics of the assignment or transfer, and requires that the assignment or other document of transfer be filed with the court. If there is no separate assignment, arguably the “document of transfer” could be the fee agreement itself. Under the Los Angeles rule, however, it would normally be preferable to use a separate assignment so that the fee agreement, which necessarily contains confidential attorney-client communications, need not be filed with the court.
The San Francisco local rules have also addressed the issue of assignments. San Francisco Superior Court Local Rule 14.79, parts D and E, require filing the original written assignment agreement with the court. Given that the San Francisco rule speaks only of the assignment, and not of a “document of transfer” as does the Los Angeles rule, the attorney might do well to obtain an assignment separate from the fee agreement.
E. Is an Assignment the Preferable Method for Securing Payment of the Attorney’s Fee, or Does a Lien Better Serve the Purpose?
An assignment holds the promise of direct payment from the party holding assets for distribution – a party such as a trustee or the personal representative of the estate. By contrast, if the lawyer is relying on a lien, the attorney will have to perfect or enforce his lien by judicial action.
Where, however, the assignment is one made by an estate beneficiary, local court rules may require submission of the assignment to the court. The submission of the assignment to the court might in turn prompt the Probate Court on its own motion to review the underlying fee agreement under Section 11604. Once the court does that, the possibility that the agreement will be altered comes into play, which argues against use of an assignment in the estate setting.
Moreover, as discussed above, it may be that a spendthrift clause will thwart any distribution from being made directly from the custodian of the funds to the attorney in payment of his fees.
One should review California Forms of Pleading and Practice, Attorney Practice Section 72.196 for a comprehensive discussion of contingent fee agreements see. For State Bar sample contingent fee agreement forms see sections 72.675 and 72.676 in California Forms of Pleading and Practice.
IV. Estate-Tax Deductibility of Attorneys’ Fees
If the litigation involves a contested inheritance from an estate or from a trust, and the decedent had a taxable estate, the beneficiary’s recovery could be enhanced, perhaps significantly, by deducting the attorney’s fee for federal estate tax purposes. This is true in any case, not solely in cases involving a contingent fee arrangement.
Administration expenses are deductible for federal estate tax purposes under IRC section 2053(a)(2). The related Treasury Regulations provide that, to be deductible, an administration expense must be incurred “in the administration of the decedent’s estate; that is, in the collection of assets, payment of debts, and distribution of property to the persons entitled to it.” Attorneys’ fees are specifically identified as a permissible administration expense.
The regulations provide that administration expenses are not deductible if they are “not essential to the to the proper settlement of the estate, but incurred for the individual benefit of the heirs, legatees, or devisees…” With respect to attorneys’ fees, the regulations state that fees incurred in litigation with respect to beneficiaries’ respective interests “are not deductible if the litigation is not essential to the proper settlement of the estate…” Stated positively, attorneys’ fees incurred in litigation necessary to the proper settlement of the estate are deductible.
Whether or not the attorneys’ fees will be deducible will turn on the nature of the dispute. In Pitner v. United States, a will leaving all but $100 of the estate to one beneficiary was contested by the decedent’s sister, the sole heir, and by the decedent’s nieces, based on an oral contract to make a will. Each of the potential beneficiaries employed her own attorney under separate fee agreements. The U.S. Court of Appeals for the 5th Circuit held that the fees were deductible even though the litigants were acting in their own self-interest: “[i]f the litigation in which the expenses were incurred facilitated the distribution of the property to the persons entitled to it then the expenses come within the statute.”
The court narrowly interpreted Treasury Regulation section 20.2053-3(c), which disallows a deduction for attorney fees incurred by beneficiaries in litigation as to their “respective interests.” The court held that the regulation refers to situations where “beneficiaries are suing to determine their share in the estate as against other beneficiaries, not as here, where parties have sued to have their interest in the estate in general… recognized.” Thus, the rule articulated by Pitner is that if the litigation raises the issue of who are beneficiaries of the estate, the attorneys’ fees are deductible; but if the litigation merely concerns how much each beneficiary is to receive, the fees are not deductible.
To be deductible, the attorneys’ fees need not be incurred in a winner-take-all context. Sussman v. United States involved a will disinheriting the decedent’s daughter. Her contest of the will resulted in a settlement that gave her half of the residuary estate. The settlement agreement provided that the attorneys’ fees of both the daughter and the executor were to be charged to the estate.
The fee was fixed and ordered by the Surrogate Court in New York. The Federal District Court determined that the fees were deductible for estate tax purpose. The fact that the fees were ultimately paid pursuant to court order seemed important to reaching the result upholding the deduction. The deduction was sustained even though the will contest settlement was in the nature of a compromise between the contestant and the defendants.
The Sussman court reasoned: “[I]f the test [of deductibility] is benefit to the estate, at best a loose if not illusory one, the test ought not to be incapable of embracing the idea that achieving a correct result is beneficial to the estate. … [T]he question in a contested will case is determination of the intention of the decedent and hence whoever prevails should be able to charge his fee to the estate.” The court concluded: “Wills that are so drafted or drafted in such circumstances that they are set aside without trial to the extent of half their dispositive effect must in the generality of instances provoke special classes of administration expense of which the legal cost of the contest to arrive at the right rule of distribution of the estate is one.”
This author has been involved in three taxable estates where attorney’s fees earned on a contingent fee basis were claimed as a deduction on an amended estate tax return. In each instance the deduction was allowed, and a refund resulted. Moreover, in each instance, the return contemplated a refund, and claimed a further deduction for the share of the refund to be paid as a contingent fee. The additional payment of fees, resulted in another deduction, another refund, another contingent fee and so the calculation continued until the refund and the contingent fee vanished to zero. In other words, in all instances, the IRS accepted the deduction on the amended return, made the refund, and further accepted that the refund resulted in further fees which were also deductible and in their turn resulted in further refunds and fees and so forth.
The areas of estate and trust litigation are particularly well suited to representation on this basis because both areas involve an identifiable source for payment of the fees – the estate, or the trust upon ultimate distribution, which money or property is held safe by a trustee or a personal representative pending resolution of the litigation. The contingent fee presents attorneys with a way to provide legal services to the public during a time when, for many, financial constraints are an obstacle to accessing the legal system and hence an obstacle to clients in protecting and asserting their rights.
*San Francisco, California.