Can a lawyer take a contingent fee paid as a share of the real estate that is the subject of the lawsuit?

Plain-English summary

A client retained a lawyer to defend his title in real estate litigation. They first signed a 'Retainer Agreement' under which the client would convey the disputed real estate to a corporation in which the lawyer held one-third of the stock, and ten months later signed a Rule 8 contingent fee agreement (capping the fee at one-third 'of lands involved in said litigation') that recited it ratified the earlier retainer agreement. The Grievance Commission asked whether the arrangement violated the Bar Rules.

The Commission held the original retainer agreement, standing alone, gave the lawyer a proprietary interest in the subject of the litigation, which Rule 3.7(c) forbids; holding stock in a corporation formed to take title is such an interest even if indirect, and using a corporate shield to evade the rule would itself violate Rule 3.2(f)(1). Neither of Rule 3.7(c)'s exceptions saved it: it was not a 'lien granted by law' (that term does not cover an interest created by agreement), and it lacked the substantial terms Rule 8 requires of a contingent fee contract.

Reading the two agreements together, however, the Commission found they created only a contingent interest in the real estate, with the lawyer obliged to surrender his stock if he failed or was discharged. It then addressed whether Rule 8 permits a contingent fee payable as an interest in real property. Tracing the rule to former M.R.C.P. Rule 88 and the 1965 amendment decriminalizing contingent fees, and noting that the rule reaches the defense of real actions where no money fund is recovered, the Commission concluded that the word 'amount' in Rule 8 is a word of convenience and does not require payment in cash. Accordingly, a contingent fee for defending the client's title, paid as a share of the real estate involved, may comply with Rule 8 and will not offend Rule 3.7(c).

Currency note

This opinion was issued in 1986, before Maine's replacement of the former Maine Bar Rules with the Maine Rules of Professional Conduct (effective August 1, 2009). Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Can a lawyer take an ownership interest in the property being litigated?

A: The opinion concluded no, not as outright ownership. Acquiring a proprietary interest in the subject of litigation the lawyer is conducting violates Rule 3.7(c), and holding stock in a corporation formed to hold the title is such an interest even though indirect.

Q: Can a contingent fee be paid in real estate rather than cash?

A: The opinion concluded yes. Reading Rule 8 as a whole, the word 'amount' does not require cash, so a contingent fee may be paid in kind, including as a share of the real estate involved.

Q: Why did the first 'retainer agreement' fail?

A: The opinion concluded it granted absolute ownership in the litigated property rather than a 'lien granted by law,' and it lacked the substantial terms Rule 8 requires of a contingent fee contract, so neither exception to Rule 3.7(c) applied.

Q: What made the overall arrangement permissible?

A: The opinion concluded that, read together, the two agreements created only a contingent interest, with the lawyer required to give back his stock if he failed or was discharged; a properly drawn Rule 8 contingent fee paid as a share of the defended real estate complies with the rules.

Background and rules framework

The opinion interprets former Maine Bar Rule 3.7(c) (a lawyer may not acquire a proprietary interest in the subject of litigation, except a lien granted by law or a Rule 8 contingent fee), Rule 3.2(f)(1) (no circumventing the rules), and Bar Rule 8 (contingent fee agreements), with Rule 3.3 supplying the factors for excessiveness. These correspond to ABA Model Rule 1.8(i) (acquiring a proprietary interest in a cause of action, with exceptions for liens and contingent fees) and Model Rule 1.5 (fees, including contingent fees).

Citations and references

Rules of Professional Conduct:

• Model Rule 1.8(i) (proprietary interest in a cause of action); Model Rule 1.5 (fees; contingent fees)
• Maine Bar Rules 3.7(c), 3.8(c), 3.2(f)(1), 3.3; Bar Rule 8 (contingent fee agreements)

Statutes:

• Maine champerty statute, as amended in 1965 (contingent fee agreements to bring, prosecute, or defend a civil action not champertous)

Other authority:

• Former M.R.C.P. Rule 88 (adopted January 1, 1966); 2 Maine Civil Practice section 88.1

See also

• Maine Ethics Op. 81: Contingent Fees in Fee-Shift Cases
• Maine Ethics Op. 75: Contingent Fees in Divorce Cases

Source

• Landing page: https://mebaroverseers.org/attorney_services/opinion.html?id=91095

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

Issued by the Professional Ethics Commission

Date Issued: January 7, 1986

Facts

The Grievance Commission has asked for an opinion based on the following facts. In 1982 client X retained attorney A to defend an action brought to establish the plaintiff's title to certain real estate. X was the defendant. X and A executed a document entitled 'Retainer Agreement' providing that X would convey the real estate involved in the litigation to a corporation in which A would hold one-third of the capital stock and X would hold the remaining two-thirds.

Ten months later X and attorney A executed a contingent fee agreement using the form provided in Rule 8 of the Maine Bar Rules. The controversy was identified as defense of the title litigation. The contingency was identified as resolution of the litigation in favor of the defendant X and presumably his successor in title, the corporation. The agreement provided that the client would not be liable to pay compensation other than from amounts collected by the attorney except for disbursements and travel expenses and at the same time provided that the fee would not exceed one-third 'of lands involved in said litigation.' The agreement further stated that it was intended to confirm and ratify the previous retainer agreement.

Question

Does this arrangement violate any of the Bar Rules?

Opinion

It is not clear just what the parties intended, nor is it clear which parts of these overlapping and inconsistent agreements were performed. We will assume, however, that the corporation was formed, its stock was issued, and the real estate was conveyed to it. We will further assume that the attorney intended these agreements to be construed as complying with the Bar Rules to the extent possible. Whether or not that was his intention, we believe any Court adjudicating a claim arising from the attorney-client relationship would so construe them for the client's protection.

Standing alone, the retainer agreement provided that the attorney would receive a proprietary interest in the subject matter of the litigation in violation of Bar Rule 3.7(c). Rule 3.7(c) provides:

(c) Interest in Litigation. A lawyer shall not acquire a proprietary interest in the cause of action or subject matter of litigation he is conducting for a client, except that he may:

(1) Assert a lien granted by law against the proceeds of such action or litigation to secure his fee or expenses . . .(2) Contract with a client for a reasonable contingent fee as provided in Rule 8.

Ownership of stock in a corporation formed to hold title to the real estate in litigation is such a proprietary interest although indirect. Even if it were not, Rule 3.2(f)(1) would be violated by using a corporate shield to circumvent Rule 3.7(c).

Rule 3.7(c) permits two exceptions to its prohibition, assertion of 'a lien granted by law,' and a contingent fee agreement as provided in Bar Rule 8. The retainer agreement was not a lien granted by law in proceeds of litigation. It was an agreement to grant absolute ownership in the property being litigated. The term 'lien granted by law' does not, in our view, include an interest created by agreement.

Nor was the initial retainer agreement saved by the contingent fee exception. It may be inferred that the corporation would own nothing unless the attorney succeeded, and to that extent the likely effect of the retainer agreement may have resembled a contingent fee agreement. Rule 3.8(c) requires, however, a contract as provided in Rule 8. The retainer agreement lacked substantial terms that Rule 8 requires in a contingent fee contract and thus did not qualify.

Sometime later the parties executed a second agreement, attempting to follow the form of a Rule 8 contingent fee contract. The second agreement recited that it was intended as an amendment to the retainer agreement. Accordingly we will construe the two together and in light of applicable requirements of the Bar Rules. Thus construed, the agreements created only a contingent interest in the real estate. If the attorney failed to defend title to the real estate or was discharged he could have been required to surrender his stock, subject to any right he might have to some part of the real estate if a successor attorney managed to defend the title. Failure to do so voluntarily could be treated as a violation of Rules 3.2(f)(1) and 3.7(c).

Does Rule 8 allow attorneys to make a contingent fee agreement providing for payment in the form of an interest in real property? Although certain terms used in the Rule suggest that the drafters had in mind primarily fees payable in money, on considering the rule as a whole, we conclude that it was intended to have a broader scope.

Rule 8 was taken, without significant alteration, from M.R.C.P. Rule 88, adopted January 1, 1966. Originally the impetus for the rule was a 1965 amendment to Maine's criminal champerty statute providing that 'agreement . . . to bring, prosecute or defend any civil action on a contingent fee basis' would not henceforth be champertous, as they had previously been. Maine was the last state to allow contingent fee agreements.

It is evident that Rule 8 cannot be limited to cases in which successful litigation will produce a monetary recovery. Excluded as cases in which contingent fee agreements are permissible are criminal actions, and certain domestic relations cases. The former produce no recovery; the latter frequently produce none. Paragraph (e) of the rule requires a statement 'whether and to what extent the client is to be liable to pay compensation otherwise than from amounts collected for him.' And the statute prompting adoption of the rule provided that contingent fee agreements to 'prosecute or defend a civil action' would not be champertous. Clearly this would allow defense of a real action on a contingent fee basis, even though there would be no fund recovered from which to pay a fee. The rule was intended to protect the public by regulating the fee arrangements recently made lawful by the Legislature and therefore must have been intended to apply to all those arrangements, including agreements for the defense of litigation.

The authors of Maine Civil Practice maintain that former Rule 88 was intended to be even broader.

'Rule 88 . . . is not restricted in scope to civil cases before that [Superior] court or even to litigated matters. It is a rule regulating the conduct of members of the bar generally. . . . The rule regulates contingent fee agreements for proceedings in the District Court and the Probate Court and before administrative agencies such as the State Liquor Commission. . . .' (2 Maine Civil Practice section 88.1, p. 361)

Obviously no such rule could restrict the attorney to a fee derived from monetary amounts recovered by him for the client, since the parties may not expect to recover anything. That being the case, is there any reason why a contingent fee may not be paid in any manner allowable for payment of a non-contingent fee?

Rule 8 aside, nothing in the Bar Rules suggests that fees for legal services must be paid in cash. Payment in kind was at one time probably quite common. All the factors outlined in Rule 3.3 as determinative of whether a fee is excessive may be applied to fees paid in kind, although a disciplinary authority would presumably have to take on the added task of evaluating the property.

Rule 8 uses the word 'amount' in referring to the contingent fee in sub-paragraphs (a) and (e) and in the suggested form of agreement. But original Rule 88 was intended to cover all the ground covered by the exclusion from the champerty statute that prompted the Court to adopt it. That exclusion made all agreements 'on a contingent fee basis' non-champertous. Among the agreements thus made lawful would surely have been agreements in which the contingent fee was payable in kind. One result of the amendment was that attorneys and clients could henceforth bring or defend a civil action 'on shares,' including a share in any real estate involved.

We therefore conclude that the word 'amount' as used in Rule 8 is a word of convenience and was not intended to require payment of contingent compensation in cash.

Accordingly, a contingent fee agreement in which the service is defense of the client's title to real estate, and the fee is to be a share of the real estate involved may comply with Rule 8 and if so will not offend Rule 3.7(c).