Colorado Court of Appeals Holds that Contingent Fee Recovered After Dissolution of Law Firm Is an Asset of the Firm

Kyle C. Velte[1]

On February 16, 2012, the Colorado Court of Appeals answered an open question in Colorado law:  What happens to a contingent fee that is recovered after a law firm organized as a limited liability company (“LLC”) dissolves and the client continues to be represented by a former member of the LLC?  In a well-reasoned and persuasive opinion in LaFond v. Sweeney,[2] the Court of Appeals adopted the majority rule and held that the post-dissolution recovery of a contingent fee generated by a pre-dissolution contingent case is an asset of the dissolved law firm and must be allocated according to the LLC members’ pre-dissolution agreement. The opinion provides clarity on a question of first impression as well as guidance for attorneys who wish to proactively avoid fee disputes in the event of the dissolution of a law firm.

Background of LaFond v. Sweeney

Attorneys Richard LaFond and Charlotte Sweeney formed a law firm as an LLC and orally agreed to share equally in the firm’s profits and losses regardless of who brought cases into the firm or who did work on them.[3]  When the firm dissolved, there were several cases pending, including a contingent fee case involving a qui tam whistle-blower action brought under the False Claims Act (“the disputed case”).[4]  After dissolution, LaFond continued to represent the client in that case. When LaFond and Sweeney were unable to agree on the division of the fees that might be earned in the case, Sweeney filed a notice of attorney’s lien on behalf of herself and the law firm to protect their interest in any fees, costs, or reimbursement that might be generated by the case.[5]  In response, LaFond filed a declaratory judgment action to determine how the fees should be distributed.

The trial court found that an oral agreement between LaFond and Sweeney required that any profit from the disputed case be divided equally.[6]  The trial court held that the disputed case was an asset of the firm and that its value should be determined as of the date of the firm’s dissolution; the court calculated the value by multiplying the number of hours worked by the hourly billing rate and then added costs, resulting in a total value of for the disputed case—at the time of dissolution—of $597,179.88.[7]  The trial court thus applied a quantum meruit theory to value the disputed case, notwithstanding that the ultimate value of the case might be much higher should the contingent fee be realized.[8] 

Sweeney appealed, arguing that she and the law firm are entitled to one half of the entire contingent fee awarded in the disputed case, rather than half of the quantum meruit value of the case at the time of the dissolution.[9]  The Court of Appeals agreed with Sweeney.

The Court of Appeals Opinion: A Blend of Ethics and Business Law

The Court of Appeals grounded its decision on this question of first impression on three principles, taken both from the Rules of Professional Conduct and Colorado statutes governing LLCs and partnerships: (1) cases belong to clients, not to attorneys; (2) contingent fee agreements provide an attorney with certain rights; and (3) under LLC law and partnership law, a contingent fee may be an asset of a dissolved law firm to be divided among its members once it is earned.[10]

The First and Second Principles:  Application of Well-Settled Rules

The first two principles are well-settled and should be uncontroversial if the Colorado Supreme Court grants certiorari in the case. The court began its analysis with the well-settled ethical principles that a client may discharge a lawyer at any time, with or without cause, and a client has “a nearly unfettered right to choose” whether to follow a lawyer who leaves a firm, or to keep his or her case with the firm.[11]  Thus, a case “belongs” to a client, not to an attorney or to a law firm, and a dispute between attorneys over a fee should not impact a client’s right to freely choose counsel.[12]

Second, the court laid out the unremarkable principle that a contingent fee agreement that complies with the requirements of Chapter 23.3 of the Colorado Rules of Civil Procedure is enforceable, thereby creating rights in the attorney who is a party to that agreement.[13]  

The Third Principle:  A Contingent Fee May be an Asset of the Dissolved Law Firm

The first two principles on which the Court relied to reach its decision are well-settled and uncontroversial. However, the third principle—a contingent fee may be an asset of a dissolved law firm that must be divided once it is earned—is noteworthy because the Court applied principles of Colorado’s partnership statute, as well as extra-jurisdictional case law applying partnership law, to an LLC. While noteworthy because of its novelty in Colorado case law, the Court’s approach was reasoned, appropriate, and consistent with the majority rule. As a result, the opinion is a legally sound outcome in a case of first impression.

There is no Colorado case law addressing either the determination of whether a contingent fee is an asset of a dissolved LLC, or the distribution of assets of a dissolved LLC.[14] The Court concluded that reference to the Colorado Uniform Partnership Act (UPA) was proper for guidance when examining the end stages of an LLC because LLCs share many characteristics of partnerships, including:

  • Nearly identical duties that member-managers of LLCs owe to each other and that partners owe to each other;
  • The Colorado LLC Act and the Colorado UPA both control in the absence of a written operating or partnership agreement, respectively;
  • Neither an LLC nor a partnership is terminated by dissolution; instead, each entity continues to exist for the sole purpose of winding up its business; and
  • Members of an LLC and partners in a partnership are required to account to the respective entity and “hold as trustee or it any property, profit, or benefit derived” by the partner or member in the winding up of the entity.[15]

Further, because Colorado’s UPA is based on the Uniform Partnership Act, the Court could, and did, look to other states’ decisions interpreting and applying the UPA in the context of a dissolving law firm partnership and considered such decisions to have “significant persuasive value.”[16]

Applying Colorado’s LLC statute and, where necessary, extra-jurisdictional case law construing the UPA, the Court concluded that the disputed case was unfinished business to be completed in the winding down of the LLC.[17]  Specifically, the Court found that a contingent fee case pending at the time a law firm dissolves is a form of executory contract between the firm and the client, which is not negated through the act of the firm’s dissolution. Rather, when an attorney completes the representation of the client in a contingent fee case in the post-dissolution winding up of a law firm dissolves, he or she does so on the firm’s behalf.[18]  The determination of what constitutes “unfinished business” of the LLC is made by looking at the circumstances at the time of dissolution, not by looking at post-dissolution events such as whether the case followed a former member of the LLC to that member’s new firm.[19] Thus, any income received by a member from the winding up of unfinished business belongs to the dissolved firm; any effort by the member to convert the business to his or her own business violates the member’s fiduciary duty to other members and the firm.[20]

Applying these principles to the present case, the Court held that the contingent fee ultimately earned in the disputed case was an asset of the dissolved firm, which had to be apportioned among LaFond and Sweeney according to their oral agreement to equally share in the firm’s profits.[21] 

This holding is the correct result. It reflects a correct application of Colorado’s LLC Act to the facts of the case, and where the LLC statute does not give specific guidance, the correct application of principles of partnership law. The opinion adopts the majority rule.[22]  It also reflects important policy considerations. If the court had reached a contrary decision, it would encourage members of a law firm LLC to compete for the most lucrative cases during the firm’s existence into order to keep them should the firm dissolve, encourage members of the dissolving firm to scramble to seize client files and solicit clients, and it would undermine the fiduciary duty that members of a law firm LLC own to each other.[23] 

The Court’s Holding Does Not Violate a Client’s Right to Choose Counsel

The Court drew a careful distinction, often neglected in similar cases decided in other jurisdictions, between a pending contingent fee case as unfinished business of an LLC to be completed in winding up a firm and the fee generated by the case as property of the firm.[24]  This distinction is an important one: To conflate a case and the fee it generates would undermine or negate the first principle articulated by the Court—a case belongs to a client not to a law firm or lawyer.[25]  The client in the disputed case could have chosen to discharge both LaFond and Sweeney upon dissolution of the firm; the Court’s opinion does not take a similar right away from future litigants. It was because the client in the disputed case chose to have LaFond continue to represent him that the contingent fee ultimately realized was an asset of the dissolved firm.[26]

In sum, the Court correctly rejected LaFond’s “you are taking important rights away from clients” argument as a red herring: “‘The right of a client to the attorney of one’s choice and the rights and duties as between partners with respect to income from unfinished business are distinct and not offend one another.’”[27]  The Court’s rejection of LaFond’s argument is further supported by the fact that “[o]nce the client’s fee is paid to an attorney, it is of no concern to the client how that fee is allocated among the attorney and his or her former partners.”[28]

Conclusion and Lessons for Going Forward

 In a case involving a question of first impression, the Court of Appeals correctly applied Colorado statutory law and extra-jurisdictional case law to adopt the majority view that a contingent fee earned during the winding up of a law firm is subject to the fee-sharing agreement that existed at the time of the law firm’s dissolution, whether the law firm was an LLC or a partnership. In so holding, the Court preserved the well-established right of a client to freely choose his or her counsel while at the same time honoring the statutes governing LLCs and partnerships.

In addition, the Court of Appeals gave guidance to practicing lawyers in Colorado who would like to avoid the result in the LaFond case should their firm dissolve at some point in the future. The Court suggested that the members (if an LLC) or partners (if a partnership) of a law firm can avoid the result of the LaFond case by including a provision in the operating agreement or partnership agreement stating that if the firm dissolves, each lawyer keeps the fees generated in cases that the lawyer completes after dissolution.[29] 

 

 


[1] Lecturer, University of Denver Sturm College of Law.

[2] No. 10CA2005, 2012 WL 503655 (Colo. App. Feb. 16. 2012).

[3] Id. at *1.

[4] Id. at *2.

[5] Id.

[6] Id.

[7] Id.

[8] Id. The trial court reinforced that it was applying only a quantum meruit theory when it held: “[I]f LaFond recovered contingent fees from the [disputed] case, Sweeney would be entitled to one half of them up to a ceiling of $597,179.99, or a maximum of $298,589.94.”  Id. While the trial court’s decision was on appeal, the disputed case settled and a contingent fee of $1,487,762.60, plus costs and interest, was realized by the firm. Id.; see also Supplemental Correspondence to the Colorado Court of Appeals from Jennifer Osgood (Jan. 11. 2012).

[9] Id.

[10] Id. at *3–5.

[11] Id. at *3, citing Colo. RPC 1.16(a)(3).

[12] Id. at *4, citing Colorado Bar Ass'n, Formal Op. 116, Ethical Considerations in the Dissolution of a Law Firm or a Lawyer's Departure from a Law Firm (2007).

[13] Id. at *4. The court noted that, in instances where the client discharges the attorney prior to the resolution of the contingent matter, or where the attorney withdraws from a contingent matter prior to its resolution, the attorney’s only remedy for fee recovery is under the doctrine of quantum meruit. Id. at *5. However, because the client in the disputed case did not discharge LaFond, the court held that the quantum meruit doctrine was inapplicable. Id.

[14] Id. at *5.

[15] Id. at *6, citing Colorado Uniform Partnership Act, Colo.Rev.Stat. §§ 7-64-101 to 1206 (2011) and Colorado Limited Liability Company Act, Colo.Rev.Stat. §§ 7-80-101 to 1101 (2011).

[16] Id.

[17] Id. at *7, citing Colo.Rev.Stat. § 7-80-803(1)(e) (2011).

[18] Id. at *7, citing Colo.Rev.Stat. §§ 7-80-404(1)(a), (b) (2011).

[19] Id.

[20] Id.

[21] Id. at *10. In addition to reaching the central question of first impression—is a contingent fee an asset of a dissolved law firm LLC—the court also addressed the question of whether an attorney who winds up a contingent fee case on behalf of a dissolved law firm is entitled to compensation beyond a share of the contingent fee. Id. at *13. The Court noted that on this question, the Colorado LLC Act and the Colorado UPA differed significantly:  While the Colorado UPA expressly permits for such additional compensation, the Colorado LLC Act does not. Id. Finding that the exclusion of such language from the LLC Act to be an intentional legislative choice, the Court held that LaFond was not entitled to additional compensation for the post-dissolution work he did on the disputed case. Id. at *13–14.

[22] In so holding, the Court rejected the minority rule urged by LaFond and articulated in Welman v. Parker, 328 S.W.2d 451 (Mo. Ct. App. 2010). As of the date of this article, Welman has not been cited by any other court in the country, except the LaFond case, which rejected it.

[23] Id. at *11.

[24] Id. at *10, citing Jewel v. Boxer, 156 Cal. App. 3d 171 (Cal. Ct. App. 1984).

[25] Id. at *11, citing Colo. RPC 1.16 cmt [4].

[26] Id. at *8–9. Had the client in the disputed case elected to discharge both LaFond and Sweeney and retain new counsel, he would only have been liable to the dissolved law firm in quantum meruit for the work done by the firm prior to dissolution. Id. at *8.

[27] Id. at *13, quoting Jewel, 156 Cal. App. 3d at 178.

[28] Jewel, 156 Cal. App. 3d at 178.

[29] Id. at *8, citing Meehan v. Shaughnessy, 535 N.E.2d 1255, 1260 (Mass. 1989); see also Jewel, 156 Cal. App. 3d at 179–80. Such provisions are commonly known as “Anti-Jewel” provisions based on the seminal Jewel case.