Update 11/15/20: The NYT continues its coverage on legal fees this morning with a front page story, Putting Money on Lawsuits, Investors Share in the Payouts: Betting on Justice, Borrowing to Sue, available here, along with an interactive timeline, Legal Pathway to Lawsuit Lending, available here.
I posted earlier this week about the NYT's coverage on what Florida foreclosure lawyer Peter Ticktin is quoted as describing as "a new model, a new paradigm" for paying legal fees--a reverse contingency fee paid with a second mortgage on the client's home. We covered attorney fees this week during my Professional Responsibility course, and so I decided to use the NYT article as a discussion problem in class. This semester I'm teaching from Lerman & Schrag's Ethical Problems in the Practice of Law along with Giller's Essentials: Regulation of the Legal Profession, and both offer an excellent background on the contingency fee and the potential conflicts inherent in that arrangement. But the second mortgage reverse contingency fee scenario provides a great opportunity to explore the issues in a different light with a literally ripped-from-the-headlines problem. I thought it might be helpful for those of you teaching PR this semester (or in the future) to share the mini-discussion guide I created for my class. You'll find it after the jump.
Here is the mini-discussion guide I created for my class on the use of a reverse contingency fee funded with a second mortgage. (After the notes and questions, I repeat the questions with responses generated in the discussion I facilitated with my students.) Feel free to use this guide, adapt it, and of course, weigh in if you have thoughts on the way my class and I analyzed the fee arrangement. You can access the NYT article here. News clips about the Ticktin Law Group's foreclosure work are available here. (I played the 2 minute clip from Channel 5 in class as a set up to the discussion.)
Notes and questions on the NYT Foreclosure Lawyer article.
Here is a summary of the Ticktin Law Group payment plan for foreclosure clients (under a best-case scenario):
If original mortgage is nullified or reduced because of bank’s misdeeds, then client must take out a new mortgage for 40% of the savings.
Client’s mortgage on the foreclosed home $500,000
Bank renegotiates amount owed to $200,000
Client owes 40% of the savings, $300, 000, or $120,000 minus any of the legal fees paid by the losing bank. Client must take out a second mortgage on the home for $120,000 (plus interest, Ticktin charges 4%).
Client continues to owe $200,000 on the first mortgage and $120,000 on the second mortgage, for a total of $320,000. So client ends up saving $180,000 (less interest), plus avoids foreclosure and remains in home.
This arrangement is a known as a reverse contingency fee, meaning that it "allows a lawyer to collect the difference between the amount a third party is demanding from the client and the amount that is ultimately obtained from the client, either by settlement or judgment." ABA/BNA Lawyers' Manual on Prof. Conduct, 25 LMPC 168 (2009). This kind of fee agreement is not expressly covered by the Model Rules, though both MR 1.5 and MR 1.8 offer important guidance. See ABA Formal Ethics Op. 93-373.
Consider the following questions:
1. What concerns do you have about this fee arrangement? Are you troubled by the idea that a client going through foreclosure for the failure to pay one mortgage must obtain a second mortgage to pay for a lawyer?
2. Does MR 1.5 permit a reverse contingency fee?
3. How does the use of a second mortgage to finance the reverse contingency fee complicate the arrangement? Who is providing the second mortgage? Does it matter?
4. What happens if the client is unable to pay the second mortgage?
5. What alternatives are available to this kind of fee structure if the client is unable to pay an hourly rate? Do we need reform?
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Responses
1. What concerns do you have about this fee arrangement? Are you troubled by the idea that a client going through foreclosure for the failure to pay one mortgage must obtain a second mortgage to pay for a lawyer? Consider the concerns of other attorneys quoted in the article. Cardozo Law Professor Brickman says this fee arrangement makes him "queasy." Attorney Golant, out of Boca Raton, says she only takes on clients who can pay as they go, because "I don't want to be my client's creditor. I want to be on their side." Attorney Ice of Royal Palm Beach expresses concern that a client might be forced to reject a banks' offer if it doesn't allow for enough money in his budget every month to also pay the second mortgage to the lawyer. He says, "It's touchy. I don't ever want to have a client say, I'm not taking the deal because I can't afford to pay you." This is a striking example of inadequate access to affordable legal representation in this country. Foreclosure clients desperately need legal representation but may not have sufficient funds to pay for an attorney (they are, afterall, in foreclosure). Yet, the misdeeds of large mortgage companies may not be discovered if an attorney is not involved, especially if the misdeed is something like a fraudulently executed mortgage.
2. Does MR 1.5 permit a reverse contingency fee? MR 1.5c covers contingency fees, but it does not specifically cover reverse contingency fees (the language of 1.5c contemplates a "recovery" and there is no recovery in a reverse contingency fee arrangement). Because the rule does not explicitly prohibit them (see MR 1.5 d for prohibited contingency fees), the rule has been interpreted by ABA Formal Ethics Op. 93-373 as permitting a reverse contingency fee "so long as the amount of the fee is reasonable under the circumstances and the client has given fully informed consent."
3. How does the use of a second mortgage to finance the contingency fee complicate the arrangement? Who is providing the second mortgage? Does it matter? In the article, the lawyers are providing the second mortgage, but it may be that a third-party, even another bank, could attempt to do so. Certain provisions of MR 1.8 may be triggered depending on whether the second mortgage is financed by a lawyer or a third-party. Under MR 1.8f, a third-party can pay only if certain conditions are satisfied. Under MR 1.8i, a lawyer may acquire a lien authorized by law to secure the lawyer's fee or expenses. While MR 1.8a may not be triggered here (see Comment 16), taking the steps required under MR 1.8a will help ensure that the client has given the fully informed consent to the arrangement as required by ABA Formal Ethics Op. 93-373.
4. What happens if the client is unable to pay the second mortgage? While the attorney quoted in the article says the firm has no intention of foreclosing on a client, this places the attorney in a position, as the client's creditor, to potentially do so, raising concerns about conflicts of interest, fiduciary duties, and the use of the client's confidential information. Should an attorney, hired to save a client's home, be in a position to then take the client's home away?
5. What alternatives are available to this kind of fee structure if the client is unable to pay an hourly rate? Do we need reform? We discussed fee-shifting statutes, loser-pays systems, pro bono work, government-funded legal aid for civil matters like foreclosure, more client-protective regulation of reverse contingency fees, etc.
For additional guidance on the reverse contingency fee, see District of Columbia Bar Ethics Committee Op. 347 (2009) (finding that reverse contingency fee is not prohibited; dissent would require a written explanation of how the lawyer and client estimate the client's exposure, but majority required only an oral explanation); Jim O. Stuckey, "Reverse Contingency Fees": A Potentially Profitable and Professional Solution to the Billable Hour Trap, 16 No. 3 Prof. Law. 25 (2005); Kentucky Ethics Op. E-359 (1993) (reverse fee allowed but lawyer must demonstrate fee and method of computation are reasonable); Pennsylvania Ethics Op. 92-76 (permitting reverse fee in tax dispute where amount owed "would be determined by a percentage...of the tax saved upon successful appeal" but counseling that the lawyer "must draft his fee agreement scrupulously so that the client knows just what the fee will be and how it will be calculated"); Brown & Sturm v. Frederick Rd. LP, 786 A.2d 62 (Md. Ct. Spec. App. 2001) (invalidating contract for reverse contingency fee based on lawyers' overreaching).