State Bar of Arizona Ethics Opinions
96-04: Conflicts of Interest; Multiple Representation; Automobile Accident; Fee Sharing Among Lawyers
This opinion discusses the conflict of interest issues and fee issues when a law firm initially represents both a driver and passenger in a personal injury case against another driver and eventually the firm refers out the passenger for separate representation. There is a non-waivable conflict if the firm continues to represent the driver, yet has an interest in recovering a portion of the fees retrieved by the passenger. [ERs 1.5, 1.7, 1.8, 1.9, 1.16]
Law Firm A is retained to represent the interests of the Driver (A) and a Passenger (B) in a vehicle that was involved in an accident with an adverse Driver (C). After representing A and B for a period of time, and after making a demand upon C's insurance carrier, the carrier asserts that Driver A is totally at fault for the accident and refuses to make payment on the claim.
Law Firm A advises Passenger B of the position taken by C's carrier and notes the potential conflict of interest. Law Firm A then refers Passenger B to Law Firm B, citing the possibility of a conflict of interest as litigation ensues.
Law Firm A proceeds to litigation with A's claim against C. A is found to be 60% responsible for the occurrence and C is found 40% at fault. Law Firm B, on behalf of Passenger B, is successful in obtaining a 40% recovery from C's carrier and a 60% recovery from her own uninsured motorist carrier, because Driver A was uninsured.
Law Firm A and Law Firm B agree that Law Firm A has performed work equivalent to 25% of that performed in the entirety for Passenger B. Law Firm A wishes, therefore, to receive 25% of the attorney's fees that Law Firm B will be entitled to as a result of its settlement with C's carrier and Passenger B's uninsured motorist carrier, who will have a subrogation right against Law Firm A's driver-client.
1) May Law Firm A accept 25% of the fees going to Law Firm B under the circumstances set forth above?
2) Was it appropriate for Law Firm A to continue to represent driver A in the litigation against C?
RELEVANT ETHICAL RULES
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ER 1.5 Fees
(a) A lawyer's fees shall be reasonable ....
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(e) A division of fee between lawyers who are not in the same firm may be made only if:
(1) the division is in proportion to the services performed by each lawyer or, by written agreement with the client, each lawyer assumes joint responsibility for the representation;
(2) the client is advised of and does not object to the participation of all the lawyers involved; and
(3) the total fee is reasonable.
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ER 1.7 Conflicts of Interest: General Rule
(a) A lawyer shall not represent a client if the representation of that client will be directly adverse to another client, unless:
(1) The lawyer reasonably believes the representation will not adversely affect the relationship with the other client; and
(2) each client consents after consultation.
(b) A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer's responsibilities to another client or to a third person, or by the lawyer's own interests, unless:
(1) the lawyer reasonably believes the representation will not be adversely affected; and
(2) the client consents after consultation. When representation of multiple clients in a single matter is undertaken, the consultation shall include explanation of the implications of the common representation and the advantages and risks involved.
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ER 1.8 Conflict of Interest: Prohibited Transactions
(a) A lawyer 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:
(1) the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner which can be reasonably understood by the client;
(2) the client is given a reasonable opportunity to seek the advice of independent counsel in the transaction; and
(3) the client consents in writing thereto.
(b) A lawyer shall not use information relating to representation of a client to the disadvantage of the client unless the client consents after consultation.
ER 1.9 Conflict of Interest: Former Client
A lawyer who has formerly represented a client in a matter shall not thereafter:
(a) represent another person in the same or a substantially related matter in which that person's interests are materially adverse to the interests of the former client unless the former client consents after consultation; or
(b) use information relating to the representation to the disadvantage of the former client except as ER 1.6 would permit with respect to a client or when the information has become generally known.
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ER 1.16 Declining or Terminating Representation
(a) Except as stated in paragraph (c), a lawyer shall not represent a client or, where representation has commenced, shall withdraw from the representation of a client if:
(1)the representation will result in violation of the Rules of Professional Conduct or other law;
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(d) Upon termination of representation, a lawyer shall take steps to the extent reasonably practicable to protect a client's interests, such as giving reasonable notice to the client, allowing time for employment of other counsel, surrendering papers and property to which the client is entitled and refunding any advance payment of fee that has not been earned. The lawyer may retain papers relating to the client to the extent permitted by other law.
RELEVANT PRIOR ETHICAL OPINIONS
Research has not revealed any prior ethical opinions relevant to the issues posed by this inquiry.
As a prefatory comment, the Committee notes that joint representation of a driver and the driver's passenger by one attorney in a tort case presents numerous opportunities for conflicts of interest to arise. Even where the liability of the opposing party is reasonably clear, that party and the party's insurance company may still contend that the other driver was in some manner at least partially at fault for the accident. Moreover, as the circumstances of this inquiry illustrate, an attorney may often be substantially in error as to his evaluation of the likely allocation of percentages of liability between responsible parties. We thus urge the utmost caution whenever an attorney is confronted with simultaneous representation of a driver and passenger. Unless an attorney can be reasonably certain that the liability allocation is clear, and that the respective claims, when compared with available coverage, will not lead to possible conflicts, the attorney should decline to undertake the joint representation.
In the present case, the Committee assumes that the conflict between Driver A and Passenger B was not apparent when the case was first accepted and could not have been discovered by a reasonable investigation. If the conflict should have been apparent or could have been reasonably discovered through investigation, it is obviously inappropriate to simultaneously represent Passenger B and Driver A. See ER 1.16(a). If Law Firm A accepted the case on behalf of Driver A to make a claim against Driver C, and simultaneously represents Passenger B where law Firm A knows or should know B has claims against both A and C, the attorney cannot reasonably believe under ER 1.7(a) that the representations will not adversely affect his relationships with his respective clients. If the attorney nevertheless accepts the case where he knows he has an impermissible conflict of interest, proceeds to do work, and then demands a fee, the fee would be inherently unreasonably since the attorney was prohibited under ER 1.7(a) from ever accepting both cases. A fee under those circumstances would not be "reasonable" as required by ER 1.5(a).
Assuming that the conflict was not apparent initially and could not have been discovered through reasonable investigation, we now examine whether the proposed 25% share of the fee paid to Law Firm B can be paid to Law Firm A without any ethical impropriety. Under the facts presented, B's policy with his carrier allows the carrier to be subrogated to B's rights after the carrier has paid B's uninsured motorist claim. Thus, Law Firm A will be accepting a fee for work done on B's case under circumstances where its other client (Driver A) will ultimately be responsible for the settlement or judgment amount, part of which includes Law Firm A's fee. We note that the harm that Driver A faces, should a subrogation action be brought against him by B's carrier, will be exactly the same whether Law Firm A receives 25% of the fee or whether the entire fee is retained by Law Firm B.
Nevertheless, the provisions of ER 1.8(a) are implicated in this situation. Thus, Law Firm A has acquired a pecuniary interest adverse to Client A because 1) Law Firm A is entitled to share in the fee earned by Law Firm B upon settling Passenger B's uninsured motorist claim with B's own carrier and, 2) a subrogation action can be brought by B's carrier against A.
If Law Firm A's interest in B's recovery might affect its representation of A the conflict cannot be waived. For example, assume that C has only $15,000.00 of coverage, B has injuries that would entitle him to compensation of $100,000.00, and B has $100,000.00 of uninsured motorist coverage but no underinsured coverage. If Law Firm A receives 25% of the fee on B's recovery, Law Firm A will receive more compensation as greater percentages of liability are placed on A rather than C. If C is 100% at fault, Law firm A receives 25% of $5,000.00 (assuming that B and Law Firm B had a one-third contingent fee agreement). Alternatively, if Driver A is 100% at fault, Law Firm A receives 25% of Law Firm B's $33,333.33 (one-third of $100,000.00 recovered from B's uninsured motorist carrier). Law Firm A thus has an inherent conflict under ER 1.7(b) in attempting to simultaneously represent A, and ensure that A places as much of the liability as possible on C to increase A's award, while Law Firm A at the same time may benefit substantially (via its share of B's recovery) if more of the liability can be placed on A. Under those circumstances, it is inherently unfair and unreasonable under ER 1.8(a)(1) to ask A to waive the conflict.
The decision in Matter of Breen, 171 Ariz. 250, 254, 830 P.2d 462 (1992), is instructive on this issue:
[W]hen a lawyer receives a personal benefit apart from the client's fee from a transaction in which he represents a client, the lawyer's ethical obligation is not always fulfilled by merely disclosing the existence of the personal stake, explaining the potential consequences, and obtaining the client's consent. There is an inherent potential for a conflict of interest in such situations, and the lawyer must always ensure that his or her personal interest does not interfere with the unfettered exercise of professional judgment the client is entitled to expect under the circumstances. The best way to achieve this, of course, is to see that the client has independent advice. [Footnote omitted].
We concede that there may be factual scenarios where there is not a conflict in Law Firm A having an interest in client B's fee. While the Committee has difficulty in envisioning a situation where the circumstances are nevertheless fair and reasonable to Client A, we simply note that in that event ER 1.8(a) must be fully complied with, including written disclosure to A, allowing A to seek independent counsel, and requiring that A consent in writing.
Since we assume that the conflict here was non-waivable, and Law Firm A nevertheless continued to represent A, we find that Law Firm A is not entitled to any fee on B's case. In order to still be entitled to a fee, Law Firm A would have to withdraw from its representation of Client A prior to reaching any agreement with Law Firm B as to how the fee on B's uninsured motorist case is to be divided. Assuming that Law Firm A withdraws from its representation of A, Law Firm A could then reach an agreement under ER 1.5(e) with Law Firm B, with B's consent, and receive a portion of the fee.
We next examine whether it was appropriate for Law Firm A to continue to represent Driver A in the action by A against C. If Law Firm A is still claiming an interest in B's case, Law Firm A cannot continue to represent A since we found that the conflict was non-waivable. We thus assume for the purposes of this discussion that Law Firm A has waived any interest in the fee in Client B's case.
The facts presented do not indicate whether Passenger B also filed litigation against Driver C or simply stood by to await the outcome of A's action against C. If B was not a party to that action, and if A and B are the only claimants, we find no ethical impropriety in Law Firm A continuing to represent Driver A in litigation against Driver C. If there are other claimants, a conflict may arise. For example, assume the following facts: A has damages of $15,000.00 and is uninsured; B has damages of $15,000.00 and has no underinsured coverage; a passenger in C's vehicle also has damages of $15,000.00 and has no underinsured coverage; C has limits of $15,000/30,000 and is 100% at fault for the accident. Under those facts, if Law Firm A continues to represent A and ultimately recovers $15,000.00 from C, C's passenger and B are left to split $15,000.00 of coverage when each has a claim worth $15,000.00. By proceeding to litigation with A's claim, Law Firm A has thus preserved A's rights, but in the process diminished the potential recovery of B. Under ER 1.9(a), Law Firm A would be precluded from such a course of action absent consent from B, since A's and B's interest in a limited insurance pool are materially adverse to one another.
If we assume, alternatively, that a claim was made by B against A in the litigation filed by A against C, ER 1.9(a) would again be directly implicated. Thus, Law Firm A, having formerly represented B, could not now continue to represent A in the action against C since B has also brought a claim against both A and C. The interests of A and B would be materially adverse such that the Committee believes that the conflict could not be waived even if both A and C were willing to consent. The Comment to ER 1.9 is specific on this issue: "When a lawyer has been directly involved in a specific transaction subsequent representation of other clients with materially adverse interests is clearly prohibited."
Finally, if we assume that Passenger B simply joins in the litigation with Driver A against Driver C, but makes no independent claim against Driver A (presumably preferring to wait for the outcome of that litigation and then pursue an uninsured motorist claim against B's own carrier, if appropriate), there does not appear to be a patent conflict of interest. Nevertheless, Law Firm A still must be sure to comply with ER 1.9(b) and ER 1.8(b). Law Firm A has received confidential information from B and is prohibited from using such information in the underlying litigation against C to the disadvantage of B.
Under the facts presented, we find that Law Firm A has a non-waivable conflict to the extent that Law Firm A continues to represent Client A and yet has an interest in Client B's fee. Accordingly, Law Firm A must either withdraw from the representation of A prior to reaching any agreement with Law firm B as to the division of the fee, or alternatively, must waive any fee in B's case. Finally, depending on the circumstances, an impermissible conflict may arise should Law Firm A waive its interest in the fee and nevertheless continue to represent A in the action against C. Moreover, even if an impermissible conflict of interest is not presented such that Law Firm A can continue to represent Client a, Law Firm A must still be sure to comply with ER 1.9(b) and ER 1.8(b).
Formal opinions of the Committee on the Rules of Professional Conduct are advisory in nature only and are not binding in any disciplinary or other legal proceedings. ã State Bar of Arizona 1996
Absent an agreement between Law Firm A and Law Firm B that Law Firm A had performed 25% of the work for B and was entitled to 25% of the fee, Law Firm A would be entitled only to recovery on a quantum meruit bases. See State Farm Mutual Insurance Company v. St. Joseph's Hospital, 107 Ariz. 498, 502, 489 P.2d 837 (1971); Walker v. Wright, 28 Ariz. 235, 236 P. 710 (1925).
Under the Committee's rules, we normally would not reach this issue as it involves past and not prospective conduct. In order to attempt to provide some guidance to the bar, we will nevertheless address this question.