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  • WisBar News
    October 23, 2019

    Attorney Fees: Courts Have Discretion on ‘Reasonable Costs of Collection’

    A circuit court awarded all reasonable costs of collection to one law firm, zero to another, despite a statute that provides for division in third-party liability lawsuits. An appeals court affirmed.

    Joe Forward

    Attorney Fees

    Oct. 23, 2019 – Brian Sinkler received about $51,000 in worker’s compensation after he was injured in a car accident. Then he filed a third-party liability claim against the other driver, alleging negligence, and the case ultimately settled for about $175,000. 

    About $52,000 of the settlement went to Sinkler’s wife, for her loss of consortium claim, which left around $122,000. That amount was subject to contingency fee agreements between Sinkler and his lawyer, and the worker’s compensation insurer and its lawyer.

    Under Wis. Stat. section 102.29(1)(a), someone who receives a worker’s compensation award can still pursue a tort liability claim against a third-party. A worker’s compensation insurer can join the lawsuit to recover funds paid as worker’s compensation.

    That is what happened in Sinkler’s case. Sinkler agreed to pay his lawyer one-third of any gross recovery in the case. And the worker’s compensation insurer, EMASCO Insurance Co. (EMC), agreed to pay its attorney one-third of any gross recovery.

    Dividing Reasonable Costs of Collection

    Wis. Stat. section 102.29(1)(b) sets out the formula for dividing proceeds in third-party liability actions. First, there is a deduction for the “reasonable costs of collection.”  The reasonable costs of collection include attorney fees, under contingency agreements.

    One-third of the remaining proceeds go to the injured employee. The balance goes toward reimbursing the worker’s compensation insurer (or other payer). If funds remain after the reimbursement, the remainder is paid to the injured employee.

    Under section 102.29(1)(c), if the employee and the worker’s compensation insurer join in pressing the claim and are represented by counsel, “the attorney fees allowed as part of the costs of collection shall be, unless otherwise agreed upon, divided between the attorneys for those parties as directed by the court or by the department or the division.”

    A dispute arose as to the “reasonable costs of collection” to be paid to the respective law firms. Sinkler asserted that his lawyer (firm) should get one-third of the $122,000 award, about $41,000 plus $2,300 in litigation costs. After deducting that amount, there would be about $80,000 remaining. One-third, $26,500 would go to Sinkler.

    The remaining balance, about $53,000 would go to EMC to fully reimburse the amount paid to Sinkler in worker’s compensation benefits. Almost nothing would be left. This calculation provided no “reasonable cost of collection” for EMC’s lawyer.

    EMC, on the other hand, argued that the “cost of collection” should be determined on a pro rata basis, according the clients’ respective recoveries. Under this calculation, since Sinkler recovered $26,500 and EMC recovered about $53,000, Sinkler received about 35 percent of the total award and EMC received about 65 percent of the total.

    Thus, EMC argued that its lawyer should get 65 percent of the total “cost of collection award,” or $26,700, and Sinkler’s lawyer should get 35 percent, or $14,000.

    Who Gets What?

    The circuit court ruled that Sinkler’s lawyer was entitled to recover the full $43,000 as the cost of collection, and awarded no portion of that amount to EMC’s lawyer (firm). EMC appealed, and the District III Wisconsin Appeals Court upheld the decision.

    In Sinkler v. American Family Ins. Co., 2019AP88 (Oct. 22, 2019), a three-judge panel acknowledged that Sinkler’s lawyer and EMC’s lawyer “pressed” the third-party claim, but the circuit court properly determined how to divide the costs of collection.

    “The division of the reasonable cost of collection is a third-party lawsuit is discretionary, and we will affirm the circuit court’s ruling as long as the court properly exercised its discretion,” wrote Judge Lisa Stark. “A court properly exercises its discretion when it employs a logical rationale based on the facts of record and the appropriate legal principles.” In this case, the appeals court found a logical rationale for the decision.

    The circuit court, citing a persuasive affidavit from an outside attorney, had noted the importance of contingency fee agreements in allowing injured parties to pursue claims.

    It also recognized that Sinkler’s lawyer, Habush attorney Ralph Tease – who has been practicing law for 36 years, 22 devoted to personal injury cases – expended considerable time and labor in representing his client, and undertook significant risk.

    EMC did not dispute that Tease’s attorney fees were reasonable, but argued that the circuit court erred because its attorney also “pressed” for a recovery in the third-party liability claim, and Sinkler’s lawyer was not entitled to a piece of EMC’s award.

    “We reject EMC’s interpretation of the Habush firm’s fee agreement,” Judge Stark wrote. “The agreement provided that [Sinkler] would pay the Habush firm one-third of ‘the recovery from the case,” not one-third of ‘my recovery.’”

    What About EMC’s Lawyer?

    The appeals court noted that the circuit court also looked at the reasonableness of the contingency fee agreement between EMC and its law firm.

    The circuit court determined that it was unreasonable because the firm’s participation was limited to mediation and was performed by an associate admitted in 2015 who had “expended far less time and effort to acquire expertise in the area of 102.29 actions.”

    In addition, the circuit court determined that contingency fee agreements are not customary in representing worker’s compensation insurers, and EMC’s award was “guaranteed by the statutory formula” even if EMC did not hire its own counsel.

    The circuit court pointed to other evidence to conclude that EMC’s counsel had minimal participation and insignificant impact in obtaining the $175,000 settlement.

    “For all the reasons discussed above, the court could reasonably conclude that even though EMC and Harmeyer firm joined in the pressing of the third-party liability claim, the impact of the Harmeyer firm’s work on EMC’s recovery was minimal,” Stark wrote.

    The circuit court considered whether EMC’s attorney could obtain the reasonable value of services under a lodestar or quantum meruit analysis, but determined that was not possible because the firm presented no evidence regarding the hours worked, a reasonable hourly rate, or the number of hours other firms might incur on similar cases.

    “While a determination that the reasonable value of an attorney’s fees is $0 is not a typical result, a court has discretion to make that determination, as long as it provides an adequate explanation of its decision,” Judge Stark wrote for the appeals panel.

    No Per Se Rule

    The appeals court declined to adopt a per se rule, proposed by EMC, that would automatically require the “reasonable cost of collection” to be divided in proportion to the clients’ recoveries, pro rata, when there are competing contingency fee agreements.

    “[R]equiring a pro rata distribution of the cost of collection in all third-party liability cases would be unreasonable because, in many such cases, the amounts recovered by the employee and the worker’s compensation employer bear no relationship to the work performed by their respective attorneys,” Judge Stark wrote.

    The panel noted that a per se rule would “deter attorneys from representing employees in third-party liability actions because they would know that regardless of how much work they performed on an employee’s behalf, their fee would be limited to the statutory distribution formula.”

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