July 10, 2013 – A woman who entered into a contingency fee agreement with two law firms, and then fired one, may owe the discharged firm contract damages even though the firm did not provide substantial services, a state appeals court has ruled.
Doreen Tesch, injured in an accident, first signed an agreement with the law firm of Laufenberg, Stombaugh & Jassak (the Laufenberg firm).
Several days later, she signed another agreement with Habush, Habush & Rottier (the Habush firm), and discharged Laufenberg. Both agreements allowed the law firm to collect one-third of any recovery in her underlying personal injury suit.
After Habush obtained a settlement, Laufenberg sought a fee under its agreement with Tesch. But Tesch filed a complaint in circuit court, seeking a declaratory judgment that her contract with Laufenberg was void. She alleged that she lacked the mental capacity to enter that contract. Tesch also alleged that she fired the Laufenberg firm with cause.
Laufenberg denied the allegations, counterclaimed for breach of contract, and joined the Habush firm as a third-party defendant, seeking disgorgement of a $650,000 settlement.
The Laufenberg firm sought an equitable portion of the Habush firm’s contingency fee, asserting that its own contingency fee agreement was enforceable, but with a declaration that Tesch was not liable for more than a single contingency fee.
But the circuit court dismissed Habush from the suit, ruling that Laufenberg had no claim to fees against Habush since Laufenberg did not perform substantial services for Tesch.
In Tesch v. Laufenberg, Stombaugh & Jassak S.C., 2012AP2539 (July 3, 2013), a three-judge panel for the District IV Court of Appeals ruled that Habush is not a necessary party to the suit, but Laufenberg’s contract claim against Tesch can proceed.
Laufenberg, the appellant, had invoked a 1959 case to argue that Tesch still has an obligation to pay Laufenberg, even though the firm did not perform substantial services.
In Tonn v. Reuter, 6 Wis. 2d 498, 95 N.W.2d 261 (1959), the Wisconsin Supreme Court held that an attorney has a cause of action against a client for breach of contract if the parties signed a contingency fee agreement and the lawyer was fired without cause.
“We conclude that Tonn applies regardless whether the discharged attorney can prove that the attorney performed substantial services,” wrote Judge Brian Blanchard.
“Even if Tonn could be read as leaving open the possibility that a different rule applies when the discharged attorney did not perform substantial services, subsequent case law appears to have foreclosed that possibility,” Judge Blanchard continued.
The appeals court panel explained that, assuming Laufenberg was discharged without cause, the circuit court should determine Laufenberg’s contract damages by subtracting the value of unperformed work from Laufenberg’s alleged contingency fee.
Thus, the appeals court ruled that Habush was not a necessary party to make this determination, because Tesch has two contract obligations, not one, and making Tesch pay contract damages and a contingency fee is not necessarily unfair.
“Tonn plainly contemplates that, depending on the circumstances, the client may be liable to the attorneys for more than the amount the client would have owed under one contingency fee agreement,” wrote Judge Blanchard, distinguishing contingent fees from contract damages.
Laufenberg had wanted a declaration, on the grounds of bad public policy, that Tesch was not required to pay more money than one contingency fee agreement would require, but the court rejected this “single attorney fee” theory.
“Laufenberg may be on the right track insofar as its arguments suggest that Tonn is ripe for review by our supreme court,” Blanchard wrote. “However, as we have repeatedly said, we are bound by Tonn.”
The appeals court noted that under Tonn, Tesch's total liability to the Habush and Laufenberg firms could be more than her obligation under one fee agreement, but circuit courts may exercise supervisory authority to determine whether fee agreements are reasonable.