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Ethics Opinion

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THIS OPINION HAS BEEN REPLACED BY RI-342 AND IS FURTHER DISCUSSED IN RI-350.

RI-304

December 18, 1997

SYLLABUS

    A lawyer is permitted to enter into a contingent fee agreement with a fiduciary for a legally incapacitated person, based upon a recovery which includes, in part, a portion of the insurance benefits to be paid to a health care provider or facility. Such an agreement must be in writing, and must state the method by which the fee is to be determined. The client is the conservatorship as an entity, not the health care provider or the facility, since, in most circumstances, simultaneous representation of the health care provider or facility would present an impermissible conflict of interest. While waivers of future conflicts are sometimes permissible, no waiver is required in this case.

    References: MRPC 1.0, 1.4, 1.5(c), 1.6, 1.7, 1.8(g) and (f), 1.13, 1.14, 1.17; RI-140; ABA Formal Opinions 93-372 and 94-380; MCL 700.484; MCL 700.476; Steinway v. Bolden, 185 Mich App 234; 460 NW2d 306 (1990); Hazard, Triangular Lawyer Relationships: An Exploratory Analysis, 1 Georgetown Journal of Legal Ethics 15 (1987).

TEXT

A lawyer has inquired whether a lawyer may enter into a "one third" contingent fee agreement on behalf of a fiduciary for a legally incapacitated person, regarding a dispute concerning insurance benefits for payments to a health care provider or facility ("the Facility"). The fiduciary is the child of the parent/ward, who suffered a closed head injury, in relation to which there was no tort recovery. Following the accident, the fiduciary attempted to take care of the parent by hiring twenty-four (24) hour at home care; however, the parent's condition worsened, and needed the care provided by the Facility. The health care insurer has disputed coverage and refused to cover the expense of Facility care, which has been paid out of the ward's other assets.

The Facility offers multiple levels of care, at differing rates. The current level of care is appropriate under the circumstances, but is less than the optimal amount of care necessary to maximize the chances of the ward for a fuller recovery. According to the Facility, the cost for the "optimum care level" is approximately twice that of the cost of the current level of care provided.

The fiduciary wishes to retain the lawyer to seek relief against the health care insurer to pay not only for those expenses already incurred at the Facility, but also for future expenses for the "optimum level" of care at the Facility. There may not be adequate assets available to pay legal counsel on an hourly rate to secure services for this engagement.

In addition, the Facility has informed the fiduciary that the Facility would be willing to pay to the lawyer one-third (1/3) of any amount recovered and paid to the Facility by the insurer for future expenses in excess of the current per diem rate being paid, and that the Facility would, nevertheless, agree to provide the full level of care which otherwise would be purchased by any additional amount obtained by the recovery from the health insurer before the contingent fee was subtracted.

The inquiring lawyer further seeks to know if the Facility should also be a client of the lawyer or merely regarded as a third-party, and, if the Facility is also to be a client, whether it is permissible to obtain from it a waiver of any future conflict of interest, such that the lawyer could represent the fiduciary or the ward as an adversary of the Facility.

1. Who is the Client?

The first and most important issue is to determine who is to be the client. This determination has important implications regarding to whom the lawyer owes various duties, as well as whether certain communications will be protected information under MRPC 1.6 and under the lawyer-client privilege. It also is key to the analysis of any conflict of interest.

Several ambiguities frequently accompany fiduciary engagements. Under principles of agency law, a disabled principal, if incompetent, does not possess sufficient authority to empower an agent, including a lawyer. The lawyer representing an incompetent client is still only a lawyer, not a full legal representative; therefore, unless a guardian, conservator or some other representative is appointed, certain acts simply cannot be performed. (See MRPC 1.14, Comment, observing that disposing of a client's property ordinarily requires an appointment of a legal representative.)

In Michigan, the client is the guardianship or the conservatorship as an "entity," not the fiduciary or the ward. Steinway v. Bolden, 185 Mich App 234, 237-238; 460 NW2d 306 (1990); such an "entity" is similar to an "organization" under MRPC 1.13, and the fiduciary and the ward or beneficiary would be similar to the "constituents" of the "organization." See ABA Formal Opinion 94-380. Unlike Michigan, a majority of other jurisdictions identify the fiduciary as the lawyer's only client, and further stating that the lawyer owes the client's ward or beneficiaries only those obligations that the lawyer has to other "third-parties," such as under MRPC 4.1 et seq. At least one commentator has attempted to resolve the ambiguities differently, treating the fiduciary and the beneficiary as joint clients of the lawyer, thus including the fiduciary's ward or beneficiary within the scope of the lawyer's duties of professional loyalty and care. See Hazard, Triangular Lawyer Relationships: An Exploratory Analysis, 1 Georgetown Journal of Legal Ethics 15 (1987).

The Committee opines that the Michigan analysis identifying the "entity" -- guardianship, conservatorship, estate or trust -- as the client is preferable, both because it best reflects what most frequently is the reality of the situation, and because it better serves to protect confidential communications with both the fiduciary and the ward.

Because one of the "constituents" of the client is "under a disability," the lawyer must be mindful of the requirements of MRPC 1.14, CLIENT UNDER A DISABILITY, which states:

    "(a) When a client's ability to make adequately considered decisions in connection with the representation is impaired, whether because of minority or mental disability or for some other reason, the lawyer shall, as far as reasonably possible, maintain a normal client-lawyer relationship with the client.

    "(b) A lawyer may seek the appointment of a guardian or take other protective action with respect to a client only when the lawyer reasonably believes that the client cannot adequately act in the client's own interest."

As to the ward, the lawyer shall, as far as reasonably possible, maintain a normal client-lawyer relationship including keeping the ward reasonably informed, pursuant to MRPC 1.4, either directly, or through the fiduciary. If a fiduciary is appointed by a court, the lawyer must generally abide by the fiduciary's decisions and directions. For instance, under Michigan law, a conservator clearly has the power, without court authorization or confirmation, to employ a lawyer, pay or contest a claim, and prosecute or defend actions or proceedings regarding a claim such as that raised in this inquiry. See MCL 700.484; MSA 27.5481. Nevertheless, if the lawyer believes that the fiduciary may be acting contrary to the ward's best interests, or if a good faith question exists as to the propriety of the conduct directed by the fiduciary, then the lawyer may be under a duty to seek the appointment of a guardian ad litem or take other "protective action" if the ward or beneficiary cannot adequately act in his, her, or their own interest. See MRPC 1.14(b) and RI-140. Such "protective action" could include assisting the fiduciary in seeking instruction from the supervising court under MCL 700.476, MSA 27.5476.

2. The Contingent Fee Agreement.

The proposed contingent fee agreement is permissible under MRPC 1.5 FEES, which states:

    "(a) A lawyer shall not enter into an agreement for, charge, or collect an illegal or clearly excessive fee. A fee is clearly excessive when, after a review of the facts, a lawyer of ordinary prudence would be left with a definite and firm conviction that the fee is in excess of a reasonable fee. The factors to be considered in determining the reasonableness of a fee include the following:

      "(1) the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly;

      "(2) the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;

      "(3) the fee customarily charged in the locality for similar legal services;

      "(4) the amount involved and the results obtained;

      "(5) the time limitations imposed by the client or by the circumstances;

      "(6) the nature and length of the professional relationship with the client;

      "(7) the experience, reputation, and ability of the lawyer or lawyers performing the services; and

      "(8) whether the fee is fixed or contingent.

      ". . .

    "(c) A fee may be contingent on the outcome of the matter for which the service is rendered, except in a matter in which a contingent fee is prohibited by paragraph (d) or by other law. A contingent-fee agreement shall be in writing and shall state the method by which the fee is to be determined. Upon conclusion of a contingent-fee matter, the lawyer shall provide the client with a written statement of the outcome of the matter and, if there is a recovery, show the remittance to the client and the method of its determination. See MCR 8.121. [1]

The contingent fee agreement must be in writing and must state the method by which the fee is to be determined. Since a determination of whether a fee is "clearly excessive" may be reached only "after a review of the facts," such a determination is beyond the scope of, and is not part of, this opinion. If there is doubt as to the reasonableness of the percentage amount of other terms of the contingent fee arrangement, the fiduciary could seek instruction from the court supervising the guardianship/conservatorship. Upon conclusion of the matter, the required accounting should be rendered to the fiduciary and ward.

3. The Facility Should NOT be a Client.

Under the facts described, the Facility should not be a client of the lawyer in this engagement, because to do so would present too high a likelihood that the simultaneous representation could adversely affect the lawyer's relationship with the other client, and thus present a conflict of interest[2] under MRPC 1.7, CONFLICT OF INTEREST: GENERAL RULE, which states:

    "(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."

      . . .

The opportunities for direct conflicts are several. The Facility is and will continue to be a creditor with a continuing claim against the conservatorship and the ward for the services provided. Since the services are highly personal in nature, there is also the possibility that the fiduciary and the ward could be in disputes with, or deem it advisable to terminate the services by, the Facility at sometime in the future. Resolution of the claim against the insurer could take several forms, including: compromise for an amount less than that necessary to pay for even the present, lower level of services on a long-term basis; or, payment of only the amount already expended, without provision for future services; or, payment only for future services, without payment for past sums expended; or, a variety of other alternatives, yielding different results as to past sums expended than as to future expenses to be incurred. If the lawyer were to represent both the Facility and the conservatorship simultaneously, settlement could also be made more complicated by the lawyer's special duties of disclosure when making such aggregate settlements of claims. See MRPC 1.8(g). Any of these circumstances could place the conservatorship in a directly adverse relationship to the Facility.

When a disinterested lawyer would conclude that the representation would be adversely affected under the circumstances, the lawyer involved cannot properly ask for such agreement or provide representation based on the client's consent. In such an instance, the client's consent should not even be requested. See MRPC 1.7, Comment.

In the opinion of the Committee, and under the circumstances and facts presented, multiple representation of the Facility simultaneously with representation of the conservatorship entity, would adversely affect the relationship of the lawyer with the conservatorship, and should not be undertaken. Therefore, consent of the fiduciary on behalf of the conservatorship should not be requested.

4. Contracting for a Contingent Fee Based, in Part, Upon Receipt of a Portion of the Monies to be Paid to the Facility, Does NOT Constitute an Impermissible Conflict of Interest, Provided that the Client Consents after Consultation.

The conflict of interest analysis does not end by avoiding any direct conflict with other clients prohibited by MRPC 1.7(a); in addition, lawyers must also avoid indirect conflicts with other clients, third-parties (even though not a client and not directly adverse as an opposite party) or the lawyer's own interests, under MRPC 1.7(b), which states:

    "(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."

The described contingent fee arrangement, in and of itself, will not necessarily materially limit the lawyer's responsibilities to the conservatorship, or to the Facility as a "third person." The "lawyer's own interests" are unlikely to be affected, because the percentage of the contingent fee is identical both as to the portion which may be recovered by the conservatorship, as well as the portion which might be recovered by the Facility. Provided that the lawyer reasonably believes[3] that the representation will not be adversely affected, and the client consents after consultation[4], MRPC 1.7(b) does not prohibit the fee arrangement.

The fiduciary may give consent, on behalf of the ward, incident to the power to employ legal counsel. If there is doubt as to the fiduciary's authority, instruction should be sought from a court of proper jurisdiction.

In addition, MRPC 1.8(f), CONFLICT OF INTEREST: PROHIBITED TRANSACTIONS, states:

    "(f) A lawyer shall not accept compensation for representing a client from one other than the client unless:

      "(1) the client consents after consultation;

      "(2) there is no interference with the lawyer's independence of professional judgment or with the client-lawyer relationship; and

      "(3) information relating to representation of a client is protected as required by Rule 1.6."

In effect, the lawyer is accepting compensation from the Facility, which is an entity "other than the client;" therefore, for this additional reason, the lawyer must obtain the consent of the client after consultation. The lawyer must also determine that there is no interference with the lawyer's independence of professional judgment or with the client-lawyer relationship (for instance, by assuring that direction for the conduct of the litigation originates from the fiduciary and ward, not the Facility). Finally, the lawyer must assure that information relating to representation of the fiduciary and ward is protected as required by MRPC 1.6, maintaining its confidentiality.

Although not required, it would be advisable to reduce to writing the terms of the arrangement between the fiduciary (on behalf of the conservatorship) and the Facility; such a written agreement might include definition of any obligation on the part of the Facility to bear a portion of the out-of-pocket expenses or disbursements of the claim proceeding, a clarification of the role of the lawyer as the legal representative only of the conservatorship, and a recitation of the Facility's opportunity to obtain independent legal counsel. (See MRPC 4.1 and 4.3).

5. Waiver of a Future Conflict is Sometimes Permissible, but is not Necessary Here.

Subject to certain important restrictions, a client may waive conflicts of interest which might arise in the future. See ABA Formal Opinion 93-372 (April 16, 1993). This issue usually arises where the client is interested in hiring the lawyer for some present service, the lawyer is unwilling to undertake the assignment unless the client today agrees to waiver conflicts of interest that may arise at some future time in engagements undertaken by the lawyer for others with interests adverse to the client, and the client is agreeable to giving such waiver. In this case, since the Facility is not, and shall not be, a client, there is no need to request a waiver of future conflicts.

6. Summary.

In summary, a lawyer is permitted to enter into a contingent fee agreement with a fiduciary for a legally incapacitated person, based upon a recovery which includes, in part, a portion of the insurance benefits to be paid to a health care provider or facility. Such an agreement must be in writing, and must state the method by which the fee is to be determined. The client is the conservatorship as an entity, not the health care provider or the facility, since, in most circumstances, simultaneous representation of the health care provider or facility would present an impermissible conflict of interest.

While waivers of future conflicts are sometimes permissible, no waiver is required in this case.


[1] Since MCR 8.121 applies only "[i]n any claim or action for personal injury or wrongful death based upon the alleged conduct of another . . .," it would appear to have no application in this insurance contract dispute.

[2] Under the former Code of Professional Responsibility, Canon 9 applied an "appearance of impropriety" standard; in adopting the Model Rules of Professional Conduct, the ABA specifically rejected the "appearance of impropriety" standard in favor of fact-based tests (in MRPC 1.7 and 1.9) applied to determine whether the lawyer's duties of loyalty and confidentiality to the present or former client will likely be compromised by the contemplated representation.

[3] "Reasonably believes" in MRPC denotes that the lawyer believes the matter in question and that the circumstances are such that the belief is reasonable. See MRPC 1.0, Comment.

[4] Under MRPC, "consultation" denotes communication of information reasonably sufficient to permit the client to appreciate the significance of the matter in question. When the representation of multiple clients in a single matter is undertaken, the consultation shall including explanation of the implications of the common representation and the advantages and risks involved. See MRPC 1.0, Comment, and MRPC 1.7(b)(2). Although not required by MRPC, it may be wise to obtain consent in writing.

 
     

 

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