Aggregate Systems Inc v Federated States of Micronesia Development Bank [2002] FMSC 1; 10 FSM Intrm. 493 (Chk. 2002) (6 February 2002)

FEDERATED STATES OF MICRONESIA
SUPREME COURT TRIAL DIVISION

Cite as Aggregate Sys., Inc. v. FSM Dev. Bank,
[2002] FMSC 1; 10 FSM Intrm. 493 (Chk. 2002)

[2002] FMSC 1; [10 FSM Intrm. 493]

AGGREGATE SYSTEMS, INC., MANUEL
D. CRISOSTOMO and CESAR A.
CRISOSTOMO,
Plaintiffs,

vs.

FEDERATED STATES OF MICRONESIA
DEVELOPMENT BANK and
ESTATE OF SASUO HARUO,
Defendants.
__________________________________________________

FEDERATED STATES OF MICRONESIA
DEVELOPMENT BANK,
Plaintiff,

vs.

LOUIS FAMILY, INC.,
Defendant.

CIVIL ACTION NO. 1994-1002
CIVIL ACTION NO. 1994-1008

ORDER

Richard H. Benson
Specially Assigned Justice

Decided: February 6, 2002

APPEARANCES:

For the Movant:
R. Barrie Michelsen, Esq., pro se
P.O. Box 248
Koror, Palau PW 96940

For the Defendant (FSM Dev. Bank):
James P. Woodruff, Esq.
P.O. Box M
Kolonia, Pohnpei FM 96941

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HEADNOTES

Attorney, Trial Counselor and Client - Fees
The first step in resolving a fee dispute between an attorney and a former client is to consult the

[10 FSM Intrm. 494]

written fee agreement between the parties, if there is one. Aggregate Sys., Inc. v. FSM Dev. Bank, [2002] FMSC 1; 10 FSM Intrm. 493, 496 (Chk. 2002).

Attorney, Trial Counselor and Client - Fees
A contingent fee agreement must be in writing and must state the method by which the fee is to be determined. Aggregate Sys., Inc. v. FSM Dev. Bank, [2002] FMSC 1; 10 FSM Intrm. 493, 496 (Chk. 2002).

Attorney, Trial Counselor and Client - Fees; Contracts - Interpretation
Construction of a contract for an attorney's compensation is governed by the same rules that apply to contracts generally and interpretation of contract terms are matters of law to be determined by the court. Aggregate Sys., Inc. v. FSM Dev. Bank, [2002] FMSC 1; 10 FSM Intrm. 493, 496 (Chk. 2002).

Attorney, Trial Counselor and Client - Fees
Contingent fee contracts, with some exceptions, are acceptable in the FSM. A contingent fee agreement is the freely negotiated expression both of a client's willingness to pay more than a particular hourly rate to secure effective representation, and of an attorney's willingness to take the case despite the risk of nonpayment. Aggregate Sys., Inc. v. FSM Dev. Bank, [2002] FMSC 1; 10 FSM Intrm. 493, 496 (Chk. 2002).

Attorney, Trial Counselor and Client - Fees
Courts should be reluctant to disturb contingent fee arrangements freely entered into by knowledgeable and competent parties. Nevertheless, an attorney's fee must still be reasonable or the court may reduce it. Aggregate Sys., Inc. v. FSM Dev. Bank, [2002] FMSC 1; 10 FSM Intrm. 493, 496 (Chk. 2002).

Attorney, Trial Counselor and Client - Fees
When a written fee agreement, freely negotiated between competent and knowledgeable parties, does not require the attorney to preform any work after judgment is entered, and expressly states that the attorney's fee is "20% of the gross amount henceforth collected by the client," not 20% of the gross amount collected by the attorney, and when the attorney has performed all of the acts that his contract required of him, the attorney is entitled to compensation according to the contract's terms. Aggregate Sys., Inc. v. FSM Dev. Bank, [2002] FMSC 1; 10 FSM Intrm. 493, 496-97 (Chk. 2002).

Attorney, Trial Counselor and Client - Fees; Contracts
When the attorney-client contract is at an end without liability for breach on either side, the attorney remains entitled to compensation according to the contract terms for the services performed to date. Aggregate Sys., Inc. v. FSM Dev. Bank, [2002] FMSC 1; 10 FSM Intrm. 493, 497 (Chk. 2002).

Attorney, Trial Counselor and Client - Fees
An attorney fee contract term for "20% of the gross amount henceforth collected by the client" was reasonable when every attorney who takes cases on a contingency basis runs the risk that he will be paid little or nothing for his work, when the 20% fee is lower than many contingent fees, but the attorney's contractual obligations (pursue to judgment) were also less than usual, when the delinquent loans had been charged off because the bank had done all that it could to collect the loans, and when the cases were not promising. Aggregate Sys., Inc. v. FSM Dev. Bank, [2002] FMSC 1; 10 FSM Intrm. 493, 497 (Chk. 2002).

Attorney, Trial Counselor and Client - Fees
When an attorney is recovering his fees under the contract's terms and not under quantum meruit, he may enforce a common law charging lien in the original case instead of having to seek his fees in a separate lawsuit. Generally, an attorney is entitled to a common law lien for his fees upon his client's cause of action and the funds it recovers. Aggregate Sys., Inc. v. FSM Dev. Bank, [2002] FMSC 1; 10 FSM Intrm. 493, 497 (Chk. 2002).

[10 FSM Intrm. 495]

Attorney, Trial Counselor and Client - Fees
An attorney's charging lien is not created by statute, but has its origin in the common law, and is governed by equitable principles and is based on the equitable doctrine that an attorney should be paid out of the proceeds of the judgment secured by that attorney. Aggregate Sys., Inc. v. FSM Dev. Bank, [2002] FMSC 1; 10 FSM Intrm. 493, 497 (Chk. 2002).

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COURT'S OPINION

RICHARD H. BENSON, Specially Assigned Justice:

On July 10, 2001, R. Barrie Michelsen, former counsel of the FSM Development Bank in these matters, filed his Motion with Memorandum of Law in Support of Assessment of Charging Lien or Equitable Lien for Attorney's Fees. The motion sought, in order to enforce the fee agreement between Michelsen and the Development Bank, a lien on 20% of any future payments on the FSM Development Bank's judgment against Louis Family, Inc. No opposition was filed before the motion was granted by court order on July 24, 2001.

On August 6, 2001, the Development Bank filed its opposition to Michelsen's motion and a motion of its own to set aside the July 24th order concerning the lien for attorney's fees. The motion also asked the court to vacate the attorney fee payments that earlier, on November 15, 2000, the court had ordered paid to Michelsen for the judgments in both Aggregate Systems, Inc. v. FSM Development Bank, Civ. No. 1994-1002 and FSM Development Bank v. Louis Family, Inc. See Aggregate Sys., Inc. v. FSM Dev. Bank, [2000] FMSC 22; 9 FSM Intrm. 569, 570 (Chk. 2000). Michelsen's opposition to the motion to set aside was filed on September 21, 2001. The Bank's reply was filed the same day. On October 12, 2001, Michelsen filed a motion seeking to modify the July 24th order so that the lien would also include 20% ($23,344.02) of the $116,720.12, which he had not realized until recently had already paid to the Bank on the Louis Family judgment. The Bank filed its opposition to this motion on October 15, 2001 and filed a supplemental opposition the next day.

At the telephonic hearing on October 25, 2001, the July 24th order was vacated so that the court could consider the Bank's opposition to Michelsen's July 10th motion. Also during that hearing, the Bank withdrew its request to vacate the November 15, 2000 court order.

I. Nature of Dispute

The Bank contends that Michelsen is not entitled to a lien for his attorney's fees because he is not entitled to any fees at all, and that if he were entitled to any fees then those would be determined on a quantum meruit basis, not on the basis of the 20% in the fee agreement. The Bank asserts that Michelsen should be entitled to only 20% of what he personally collected for the Bank's benefit, and notes that Michelsen collected nothing. The Bank also contends that, since he collected nothing, Michelsen is limited to recovery under quantum meruit for the value of the services he did perform and that quantum meruit recovery can only be sought in a separate lawsuit, not in a proceeding in the original case. The Bank further asserts that Michelsen abandoned it and left it on its own to find successor counsel and that it was successor counsel who collected, and will collect, the funds that Michelsen now wants 20% of, and that, because he voluntarily withdrew from representing the Bank before any funds were collected, he should not even be entitled to quantum meruit recovery. At oral argument, the Bank emphasized that all attorney fees must be reasonable. It claimed that the fees Michelsen seeks are not because he was no longer the Bank's attorney when payments were first made.

[10 FSM Intrm. 496]

Michelsen contends that he is entitled to 20% of everything that the Bank receives pursuant to its judgment against the Louis Family, Inc. because that is what the fee agreement says he gets if he fulfills his obligations to the Bank under the agreement and he contends that he did fulfill them all. Michelsen denies that the Bank was abandoned and notes that his successor firm was available and that it did continue to assist the Bank on other cases in which Michelsen had represented the Bank under the same fee arrangement, and he provided copies of some of his successor firm's monthly statements showing that firm's continuing collection work on similar cases.

II. Analysis of Dispute

The first step in resolving a fee dispute between an attorney and a former client is to consult the written fee agreement between the parties, if there is one. In this case there was a written fee agreement, as is required by law since it was a contingent fee agreement. A contingent fee agreement must be in writing and must "state the method by which the fee is to be determined." FSM MRPC R. 1.5(c). "[C]onstruction of a contract for compensation of an attorney is governed by the same rules that apply to contracts generally." 7 AM. JUR. 2D Attorneys at Law § 247 (rev. ed. 1980). Interpretation of contract terms are matters of law to be determined by the court. Nanpei v. Kihara, [1995] FMSC 49; 7 FSM Intrm. 319, 323 (App. 1995).

The contract between Michelsen and the Bank makpress provisions concerningrning each party's performance. It lists Michelsen's contractual obligations to "1. Enter an appearance, file a complaint, and file such other and further motions as are appropriate in the matter. 2. Pursue such complaint to an ultimate conclusion, either by settlement of the parties or judgment of the court." The client's obligations are "1. To pay the Counsel for the performance of such legal services . . .&#16. To rate rate fully wlly with the Counsel and to provide all information known by or available to the Client which may aid Counsel in representing the Client." The agreement also states the m by wthe fee is to be o be deterdetermined: "[t]he attorney's fee in this case shall be 20% of the gross amount henceforth collected by the client," and that none of counsel's travel expenses in Chuuk or Pohnpei would be reimbursed. Michelsen contends that he fulfilled the contract when he filed the complaint against Louis Family Inc. and pursued it to its ultimate conclusion - a court-issued judgment.

Contingent fee contracts, with some exceptions not applicable in this case, are acceptable in the Federated States of Micronesia. FSM MRPC R. 1.5(c) ("[a] fee may be contingent on the outcome of the matter for which the service is rendered"). A contingent fee agreement is "the freely negotiated expression both of a [client's] willingness to pay more than a particular hourly rate to secure effective representation, and of an attorney's willingness to take the case despite the risk of nonpayment." Wells v. Sullivan, [1990] USCA2 658; 907 F.2d 367, 371 (2d Cir. 1990). And "courts should be reluctant to disturb contingent fee arrangements freely entered into by knowledgeable and competent parties." McKenzie Constr., Inc. Maynard[1985] USCA3 380; , 758 F.2d 97, 101 (3d Cir. 1983). Nevertheless, an attorney's fee must still be reasonable, FSM MRPC R. 1.5(a), or the court may reduce it, see, e.g., Bank of Hawaii v. Jack, [1990] FMSC 7; 4 FSM Intrm. 216, 221-22 (Pon. 1990) (fee request reduced to 15% of the outstanding judgment debt because under circumstances a fee award of over that was not reasonable).

The fee agreement between Michelsen and the Bank was in writing and did state the method by which the fee is to be determined. But it is an unusual contract in that it does not require the attorney to preform any work after judgment is entered. (Michelsen provided a copy of an earlier contract that had contained a clause requiring such post-judgment efforts, but which, at the Bank's request, was superseded by the contract at issue here.)

Michelsen emphasizes that the fee agreement was freely negotiated between competent and knowledgeable parties and it expressly states that his fee is "20% of the gross amount henceforth

[10 FSM Intrm. 497]

collected by the client," not 20% of the gross amount collected by the attorney. When the Bank commented that it did not think that Michelsen or his successors expected to work on collection efforts for free, Michelsen responded that they would have done so and did do so in the expectation that such work would increase the likelihood that the judgment debtor would make payments from which they would get their 20%. Michelsen noted that he did setup the post-judgment receivership and when the first receiver did not work out he found another.

It is not disputed that the fee agreement was freely negotiated between competent and knowledgeable parties. The court accordingly finds that Attorney Michelsen did perform all of the acts that his contract with the Bank required of him in its action against the Louis Family, Inc. Michelsen therefore did not voluntarily withdraw from the contract as argued by the Bank, and the Bank's contentions based on Michelsen's asserted withdrawal before fulfilling the contract are inapplicable. When "[t]he [attorney-client] contract is at an end without liability for breach on either side . .&#160he attorney] remains ains entitled to compensation according to the terms of the contract for the services performed to date." Maksym v. Loesch, [1991] USCA7 781; 937 F.2d 1237, 1245 (7th Cir. 1991). The contract term here for services performed to date was "20% of the gross amount henceforth collected by the client." Furthermore, the court concludes that the fee is reasonable.

Every attorney who takes cases on a contingency basis runs the risk that he will be paid little or nothing for his work. The 20% fee here is lower than many contingent fees, but the attorney's contractual obligations (pursue to judgment) were also less than usual. Pursuant to the contract, Michelsen took all 47 delinquent loans in an entire group in which the Bank had, at the urging of the Public Auditor's Office, taken the final step of collection and charged them off. Thus the contract involved legal action where the Bank had done all that it could to collect the loans. This indicates that the cases were not promising. Michelsen ran the real and substantial risk that he would never be paid anything on the loan collection proceeding.

Since Michelsen fulfilled his contractual obligations to the Bank he may recover under the contract's terms and not under quantum meruit. Since Michelsen is recovering under the contract he may enforce a common law charging lien in the original case instead of having to seek his fees in a separate lawsuit. See, e.g., Frazee v. Frazee, 660 P.2d 928, 929 (Idaho 1983). Generally, an attorney is entitled to a common law lien for his fees upon his client's cause of action and the funds it recovers. See, e.g., Itar-Tass Russian News Agency v. Russian Kurier, Inc., 140 F.3d 442, 449 (2d Cir. 1998); Valley Disposal, Inc. v. Central Vt. Solid Waste Mgmt. Dist., [1997] USCA2 341; 113 F.3d 357, 362 (2d Cir. 1997). An attorney's charging lien "is not created by statute, but has its origin in the common law, and is governed by equitable principles." Northern Pueblos Enterprises v. Montgomery, 644 P.2d 1036, 1038 (N.M. 1982) (citing Prichard v. Fulmer, 159 P. 39, 40 (N.M. 1916)). It "is based on the equitable doctrine that an attorney should be paid out of the proceeds of the judgment secured by that attorney." Edwards v. Andrews, Davis, Legg, Bixler, Milsten & Murrah, Inc., 650 P.2d 857, 862 (Okla. 1982). The court therefore concludes that Michelsen is entitled to 20% of the gross amount the Bank has collected, and will collect, toward satisfaction of its judgment against the Louis Family, Inc. An attorney's lien is therefore imposed to effect that result.

During oral argument, Michelsen conceded that the $1,601 in attorney's fees the Receiver had already paid him in Louis Family case pursuant to the November 15, 2000 court order should be credited against what the Bank owes him. That $2,274.47 payment (the $1,601 plus $673.47 interest) will therefore be deducted from the $23,344.02 sought as fees for the $116,720.12 already paid on the Louis Family judgment.

[2002] FMSC 2; [10 FSM Intrm. 498]

III. Conclusion

Accordingly, R. Barrie Michelsen is entitled to a lien on 20% of the sums collected to satisfy the FSM Development Bank's judgment against Louis Family, Inc. and for a further lien to recover the 20% he should have already received if the Bank had honored its contract. Therefore any future payments to the Bank to satisfy the Louis Family, Inc. judgment shall be disbursed as follows: 20% of each payment shall be remitted to R. Barrie Michelsen as payment for his 20% attorney's fee; the remaining 80% shall also be remitted to R. Barrie Michelsen until the 80% payments total $21,069.55; and thereafter that 80% shall be remitted to the FSM Development Bank.

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