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4th Circuit: Judge erred in slashing contingency fee

RICHMOND  — A trial judge should not have cut the contingency fee in a personal injury case from $6 million to $600,000, the 4th U.S. Circuit Court of Appeals held this week.

The plaintiff, who was struck by an alleged drunken driver, was brain-damaged and incompetent, requiring court approval of the settlement. But the judge gave insufficient consideration to the nature of contingency fees in general and to the specific risks involved in the case, Judge J. Harvie Wilkinson III wrote for the 4th Circuit panel.

The reduction in attorneys’ fees “was much too steep a decrease,” Wilkinson wrote, remanding the case to the federal court in Raleigh, N.C.

“Successful outcomes often make risks seem less risky in hindsight than they were at the time, and the court should not have ignored those risks merely because at some later point in litigation the defendant found it in its interest to settle,” the opinion said.

Settlement after default

At the time of his injury on New Year’s Eve 2005, Mark Pellegrin worked as a crew leader for communications tower inspections for KCI Technologies.

Kelly McKiernan, one of Pellegrin’s crew members, drove to Pellegrin’s home in the company’s truck to check equipment for an upcoming inspection. After working for a while, the men began drinking to celebrate the holiday.

McKiernan decided to leave, and Pellegrin tried to stop him, fearing McKiernan was too intoxicated to drive. McKiernan ran into Pellegrin with the vehicle.

Pellegrin suffered permanent and severe brain damage that left him unable to walk, talk or even roll over. He is partially conscious and can communicate through facial expressions.

His father, who lived in Louisiana, retained the law firm of St. Martin, Williams and Bourque, which associated the North Carolina firm of Abrams & Abrams PA under an agreement to split a one-third contingency fee.

KCI’s insurance policy with National Union Fire Insurance Co. provided $21 million in coverage, but the insurer argued it was not obligated to defend or indemnify a claim because McKiernan violated the company’s internal rules by driving drunk.

McKiernan could not afford counsel to defend the suit filed against him in state court, and the trial judge entered a $75 million judgment against him.

Pellegrin’s attorneys then sought a declaration that National Union was liable for the full $75 million judgment because of its failure to defend McKiernan. The attorneys relied on North Carolina law that estops an insurer from denying coverage and makes it liable for any reasonable settlement or award if it improperly refused to defend a claim.

National Union removed the suit to federal court, and settled after a one-day mediation.

The settlement was divided into thirds: $6 million for the contingency fee, $6 million for a special-needs trust to supplement Pellegrin’s care, and $6 million to purchase an annuity guaranteed to pay $12.1 million and as much as $29.9 million if Pellegrin survives to his healthy life expectancy of 78.

Considerable risks

Because Pellegrin was incompetent, the settlement required court approval.

At the hearing, U.S. District Judge Terrence Boyle asked the attorneys how much time they had spent on the case. A principal in the North Carolina firm responded that the firm did not keep hourly records because it took only contingency cases.

Pressed by Boyle, the attorney said that each firm had at least a thousand hours in the case.

Pellegrin’s father spoke in favor of the settlement. He said the attorneys have shown “me and my son more compassion and help and I do not begrudge them anything. I think they earned everything. I was proud of them and we’re all tired and ready for this to be over.”

Nevertheless, Boyle concluded that $300 per hour was “a high hourly rate for a similarly-situated lawyer in North Carolina” and awarded the plaintiff’s attorneys $600,000.

They appealed and Wilkinson wrote that Boyle had properly looked to the 12-factor analysis the 4th Circuit had set in its leading fee award cases, Barber v. Kimbrell’s Inc. and Allen v. U.S.

But, Wilkinson said, “Fixing a lodestar fee in this contingency fee case was error and threatens to nullify the considerable advantages of contingency arrangements.”

Those advantages include vigorous representation of a plaintiff who “sometimes has little to offer a lawyer other than his personal plight,” he wrote.

Attorneys will be unwilling to assume the risk of no payment whatsoever if their reward for accepting a contingency case is the same as risk-free hourly work, he said.

And the risks in this case were considerable, Wilkinson said.

Potential problems included “the National Union reservation of rights letter, the reality that McKiernan was judgment-proof, the fact that any contributory negligence on Pellegrin’s part would operate as a bar to recovery in North Carolina, and the need to obtain payment from a company insurance plan that provided coverage only for company-authorized acts without triggering worker’s compensation under North Carolina’s co-employee immunity doctrine,” Wilkinson wrote.

Alan Cooper writes for Virginia Lawyers Weekly, the Richmond-based sister publication of The Daily Record.