Opinion
No. 97 B 29997, Adversary Case No. 99 A 181.
Dated: March 31, 2000.
Decision After Trial
This adversary proceeding is before the court for findings of fact and conclusions of law after trial on the Second Amended Complaint to Determine Extent of Lien and for Turnover of Property of the Estate ("Complaint"). Plaintiff, American National Bank and Trust Company of Chicago ("ANB"), claims rights, as a secured lender, to receive fees awarded to the defendant law firms, Robert A. Holstein Associates, P.C. ("RAHA") and Stackler Holstein, a sole proprietorship, in conjunction with the settlements of four contingent fee cases resolved in the Circuit Court of Cook County. This matter has been referred to this court by Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois (eff. September 1, 1999). Further, this matter is a core proceeding under 28 U.S.C. § 157(b)(2)(A) and (K).
Facts
Some facts or evidence pertinent to a particular point of discussion will be examined as needed as part of the conclusions of law below.
Holstein, Mack Klein ("HMK") is a law partnership that ceased doing business in the fall of 1996. When HMK closed, Robert A. Holstein ("Holstein"), one of HMK's principals, organized the defendant law firm known herein as RAHA. At RAHA, Holstein continued to work the cases and files which he took with him from HMK.
While HMK was in business, ANB made a series of loans to the firm which remained outstanding and were in default when HMK disbanded. As part of the loan transactions, ANB received and holds a first priority security interest in HMK's property, including its accounts, contract rights, general intangibles and other receivables. For the most part, these receivables consist of HMK's right to be paid for services it rendered in personal injury and class action litigation that HMK was handling before it closed its doors, including the cases at issue in this proceeding, known as Hylaszek v. Aetna Life Insurance Co., Amin v. Brustin, Bernstein v. Browdy, and Howard v. Lutheran General Medical Group ("the Law Suits").
All of the Law Suits are cases in which HMK entered into a representation agreement with the respective plaintiffs before the firm closed. The evidence includes a written contingent fee agreement in the Bernstein and Howard cases. Amin entered into an oral contingent fee agreement with HMK. Hylasek was a civil rights case in which fees had not, as of the time of trial, been awarded by the federal district court.
After HMK defaulted on its obligations to ANB, ANB sued the firm in the Circuit Court of Cook County to enjoin dissipation of HMK's assets and to collect the debt. In an effort to obtain ANB's forbearance in the state court litigation and to obtain funds to satisfy RAHA's need for working capital, Holstein negotiated a written settlement agreement ("the Agreement") dated January 3, 1997, between ANB on one side and HMK, its principals, Robert A. Holstein, and RAHA, on the other. In the Agreement, ANB agreed to extend the period for HMK to pay its obligations to ANB, to dismiss the action against HMK, and to forbear from taking any action to enforce its security interest in HMK's property until a later date.
Robert A. Holstein testified that Robert A. Holstein, P.C., was a principal of HMK rather than himself individually.
In return, the Agreement established a scheme for allocating fees received by HMK or RAHA and provided that ANB's security interest in HMK's property would continue in effect without regard to the person or persons in possession or control of it. In addition, Holstein and RAHA granted ANB a first-priority security interest in RAHA's accounts, contract rights and general intangibles arising from professional services performed from the date of the Agreement until its expiration. Holstein and RAHA agreed to execute a UCC-1 Financing Statement to memorialize the security interest so that it could be perfected. On April 25, 1997, ANB filed a UCC-1 Financing Statement with the Secretary of State of Illinois regarding RAHA's collateral.
The parties specifically excluded from this new security interest any and all collateral resulting from professional services rendered after the Settlement Agreement expired. (Agrmt. ¶ 13).
ANB also filed UCC-1 Financing Statements related to the interests pledged by HMK (filed December 11, 1989) and Holstein (filed April 25, 1997).
Meanwhile, in a document dated July 15, 1997, Holstein transferred all of his personal assets to Barbara Stackler, an attorney practicing as a sole proprietorship known as Stackler Stackler, in lieu of foreclosure on a debt of an unspecified amount to Ms. Stackler owed by RAHA and Holstein. (The document recites that the parties had on March 15, 1997, entered into a Collateral Assignment Agreement, which had been amended on May 1, 1997, and that the debt arose from "a $100,000.00 line of credit, which was subsequently extended well beyond $100,000.00 to [Holstein and RAHA], all of which was used as working capital." The March and May documents are not in the record.)
Eventually, HMK defaulted under the Agreement and/or ANB's duty to forbear expired with respect to the outstanding indebtedness. Under Paragraph 38 of the Agreement, all of HMK's liabilities became immediately due and payable, and ANB became entitled to exercise all available rights and remedies available under the original loan documents, the Agreement itself or under the Illinois Commercial Code.
On October 12, 1999, the day on which ANB's representative testified at trial, HMK owed ANB $508,753.02 in principal and interest. The loan agreements further provide that HMK is responsible for any attorneys' fees and costs that ANB incurs in enforcing its rights under the loan agreements. However, ANB has not pursued its right to recover those fees and costs and is saving those issues for a later proceeding.
On September 30, 1997, Bruce Goodhart, a principal of HMK, filed a petition for involuntary bankruptcy relief on behalf of HMK. The court entered an order for relief on November 3, 1997. At that time, HMK's prepetition legal and equitable property interests became property of HMK's bankruptcy estate, including HMK's right to receive fees for services rendered.
By late 1997, Holstein decided to cease doing business as RAHA. On December 15, 1997, Holstein, RAHA, and Barbara Stackler, then entered into a written "Transfer and Assignment Agreement, pursuant to which RAHA's assets, including "all of the claims and legal matters . . . that RAHA is currently or anticipates handling that [HMK] was previously handling . . .," were assigned to Stackler. The document recited that the assignment constituted payment and release of debt owed by RAHA and Holstein totaling $250,000 greater than the value of all of Holstein's assets which had earlier been assigned to Stackler in partial satisfaction of this same debt. There are no written loan agreements, ledgers, books of account or other documents evidencing amounts represented to have been lent by Stackler to Holstein and RAHA, and no indication of the portions that went to RAHA and to Stackler, respectively.
On December 23, 1997, Holstein and Stackler further entered into an employment agreement whereby Holstein agreed to merge his practice into the Stackler firm, agreed to change the firm's name to Stackler Holstein and became a salaried employee of the firm.
In short, Holstein represented the plaintiffs in the Law Suits at HMK, took them with him to RAHA and then to Stackler Holstein. RAHA did not enter into new fee agreements with any of the plaintiffs. Neither did Holstein obtain new fee agreements from the plaintiffs at or about the time he joined Stackler Holstein.
As further described below, Elizabeth Howard entered into a fee agreement with Stackler Holstein in March 1999, just before the Howard case went to trial.
The Hylaszek Case
Holstein and Stackler Holstein presented a fee petition to the United States District Court in connection with the Hylaszek case on November 12, 1998. Although the fee had not been awarded as of the date the evidence closed, the parties agree that the fee should be allocated according to the hours and expenses the various lawyers contributed to the representation.
By contrast, the remainder of the Law Suits are contingent fee cases in which the parties strongly disagree about how the fee ultimately received should be allocated.
The Bernstein Case
On August 19, 1998, the Bernstein case was tried to a verdict of $591,784.00. Stackler Holstein received $168,913.28 from the proceeds of the Bernstein verdict on or about August 21, 1998. Of that amount, $156,279.33 represented attorneys' fee and $12,633.95 represented the reimbursement of costs.
Robert Bernstein became a client of HMK in April 1994. A written contingency fee agreement was entered into between HMK and Bernstein establishing that Robert A. Holstein was the principal attorney on the file. HMK's time records reflect that while HMK was in business, the firm devoted a total of 108.05 hours to Bernstein, at hourly rates ranging from $85 to $350. According to those time records, the total amount due HMK is $15,993.75.
The evidence, however, indicates that 108 hours understates the amount of work HMK devoted to the case. For example, although it is undisputed that HMK interviewed Mr. Bernstein concerning his case, drafted the complaint, interrogatories and requests for production of documents, HMK's time records do not reflect these activities. In addition, HMK responded to defendant's discovery requests, noticed and prepared for, took and reviewed the defendant's deposition, but HMK's time records do not reflect these activities. Court appearances were not recorded in the time sheets, nor was time devoted to written, telephonic and personal communications with the client and among co- and opposing counsel.
Jewel Klein, a former managing partner at HMK, testified that Holstein worked very hard and did not necessarily record all his time contemporaneously with each task. "[M]aybe at the end of the week he'd fill in his time as best he could remember." Transcript of October 6, 1999 at p. 34, lines 22-23.
In January 1997, Holstein began to represent Mr. Bernstein through RAHA. RAHA did not seek leave to substitute as counsel for Mr. Bernstein and Mr. Bernstein did not enter into a new contingency fee agreement with RAHA.
RAHA's time records reflect 6.75 hours devoted to the Bernstein case for work performed during 1997, at hourly rates ranging from $125 to $400. The total amount due as shown on RAHA's records for time related to the Bernstein case is $1,837.50.
Although RAHA drafted an amended complaint, responded to discovery requests (including requests for production of documents and interrogatories), prepared for, defended, and reviewed depositions, and made numerous court appearances, RAHA's time records do not reflect these activities. Defendant moved for summary judgment, but RAHA's time records do not reflect any time reviewing and discussing plaintiff's response to the motion, appearing in court on the motion or otherwise responding to it. In addition, plaintiff's time records do not reflect activities related to expert witnesses, although expert witnesses were engaged by the plaintiff.
Stackler Holstein began to represent Mr. Bernstein in January 1998. Mr. Bernstein did not indicate that he wished to terminate his relationship with RAHA and retain Stackler Holstein to represent him, nor did Stackler Holstein send any letter to RAHA indicating that it would be representing Mr. Bernstein in the future.
Stackler Holstein's time records reflect 591 hours devoted to the Bernstein case.
The Amin Case
On September 16, 1998, the Amin case settled for $325,000.00. Stackler Holstein received from the proceeds of the Amin settlement the entire portion of the award allocated for attorneys' fees and costs, in the amount of $110,929.69. Of that amount $108,333.33 represented the attorneys' fee and $1,596.36 represented the reimbursement of costs. Despite having received notice of ANB's interest in the attorneys' fee earned in the Amin case, RAHA and Stackler Holstein did not notify the Bank that the Amin case had been settled. Robert A. Holstein released the attorney's lien on the proceeds.
HMK began to represent Mohammed Amin in 1990. Mr. Amin entered into an oral contingency fee agreement with HMK. HMK's time records reflect a total of 271.65 hours devoted to the Amin case, at hourly rates ranging from $85 to $300. The total amount due as shown on HMK's records for services related to the Amin case is $38,018.75. The activities included developing a theory for the case, drafting pleadings, preparing and responding to discovery requests, taking depositions, appearing in court, and engaging in settlement discussions.
HMK's time records do not reflect the time it devoted to preparation of interrogatories or requests for production of documents, for taking a deposition of John Spikner on July 25, 1995, or for reviewing, responding, or attending court on a motion to dismiss (which HMK defeated after oral argument on the motion).
RAHA began representing Mr. Amin in January of 1997. Mr. Amin did not move to substitute RAHA for HMK, nor did he enter into a new written representation agreement with RAHA.
RAHA's time records reflect only 2.5 hours devoted to the Amin case in 1997, at an hourly rate of $400. The total amount due shown on RAHA's records for its time related to Amin is $1,000.
Although the following activities were performed by RAHA attorneys, none of the time devoted is reflected on RAHA's time sheets: drafting amended complaint, drafting and responding to interrogatories and requests for production of documents, preparing for and taking depositions, a court appearance on February 18, 1997 when a case management order was entered, amending pleadings, drafting correspondence, communications of any kind with the client, witnesses or opposing counsel for the entire year.
Stackler Holstein undertook the representation of Mr. Amin in January 1998. Mr. Amin did not indicate that he wished to terminate his relationship with RAHA, nor did Stackler Holstein move to substitute as counsel for Mr. Amin or obtain a new fee agreement with him.
Stackler Holstein's time records reflect a total of 127.25 hours devoted to the Amin case from March 4 through August 24, 1998.
The Howard Case
In August 1999, the Howard case was tried to verdict of $2,294,000 in favor of Elizabeth Howard and her son. The case was settled on appeal for $1.9 million. On August 11, 1999, the Circuit Court of Cook County approved attorneys' fees and costs for the plaintiffs' attorneys in the amount of $597,250.20. Of that amount $553,000.00 represented the attorneys' fee and $44,250.20 represented the reimbursement of costs. On September 15, 1999, the Circuit Court of Cook County entered an order directing the defendant to deposit the fees and costs portion of the award with the court pending disposition of this adversary proceeding or further order of court. On September 22, 1999, leave of this court authorized Stackler Holstein to withdraw $100,000 of the funds deposited with the clerk of the circuit court.
The Howard plaintiffs were originally represented by Patrick Salvi. At the end of May 1996, plaintiffs notified Mr. Salvi of their intention to discharge him and engage HMK. HMK obtained leave of court to substitute as counsel for the Howard plaintiffs on June 21, 1996.
HMK's time records reflect a total of 35.75 hours devoted to the Howard case, at hourly rates ranging from $35 to $350. The total amount due shown on HMK's time records is $10,358.75.
Although HMK performed the following legal services for plaintiffs, HMK's time records do not reflect these activities: drafting interrogatories and requests for production of documents, a portion of responding to discovery requests from the defendants, drafting a motion to sequester records, numerous conferences and other activities associated with expert witnesses, correspondence and other communications relating to, and preparation of, nine affidavits, and a variety of correspondence to opposing counsel.
HMK's time records reflect two meetings and two hours spent with an expert witness/consultant to Mrs. Howard named Dr. Bruce Livingston. Dr. Livingston's records of the time spent with HMK attorneys, however, indicate that 25 hours were spent in 7 meetings.
HMK pursued settlement of the case, although no time entry reflects such activity.
On January 1, 1997, RAHA began representing the Howard plaintiffs. The plaintiffs did not indicate their desire to terminate their agreement with HMK and retain new attorneys, and RAHA did not file a motion for leave to substitute as counsel for the plaintiffs.
RAHA's time records reflected a total of 21 hours devoted to the Howard case, at hourly rates ranging from $250 to $500. The total amount due shown on RAHA's original records for its time related to the case was $5,775.00. After this adversary proceeding was filed, RAHA amended its time records to reflect 27 additional hours devoted to the case. Even the amended records, however, fail to reflect time devoted to preparation for depositions, correspondence or communications between RAHA attorneys and plaintiff, opposing counsel or expert witnesses, preparing responses to interrogatories and requests for production of documents, court appearances, preparation of a motion to compel, and 5 hours of meetings with Dr. Livingston, although these activities occurred.
In January 1998, Stackler Holstein undertook the representation of plaintiffs in the Howard case. Ms. Howard did not indicate dissatisfaction with RAHA and did not indicate an intention to terminate her relationship with RAHA so as to retain new counsel. Stackler Holstein did not enter into a written representation agreement with the plaintiffs at that time and did not file a motion to substitute as counsel in the case.
Stackler Holstein's time records reflect a total of 1,026.5 hours devoted to the Howard case.
Stackler Holstein's time records indicate that most of the work on the case was performed by either Mr. Holstein or by relatively inexperienced associates of Stackler Holstein (Thomas A. Zimmerman had graduated from law school in 1996, and Todd M. Hanson in 1994, compared to Mr. Holstein who began to practice in the 1960s.)
In March 1999, shortly before trial, Elizabeth Howard entered into a written contingent fee agreement with Stackler Holstein containing the same terms as the written contingent fee agreement she had entered into with HMK.
The case went to trial in March, 1999, and plaintiffs obtained a jury verdict in the amount set out above. The fees awarded were in excess of the Illinois statutory limitations placed on fees awarded in medical malpractice cases.
Expert Testimony
Jewel N. Klein has been continually engaged in the practice of law for 31 years and is an experienced plaintiff's personal injury lawyer, also a former partner of Holstein, and a former managing partner of HMK. Her responsibilities as managing partner of HMK included reviewing the contingent fee agreements and the time records of the attorneys in her office. According to Ms. Klein, within the "personal injury bar" attorneys from time to time refer a case or cases to another attorney within the personal injury bar. When that is done, the ordinary and customary practice is for the referring attorney to receive a portion of the fee awarded in the referred case or cases. In Ms. Klein's experience and based on her association with other personal injury lawyers, Ms. Klein's opinion is that most referral fees range from one-third to one-half of the amount of the fees awarded. Ms. Klein's testimony is credible.
Bruce Goodhart has been continually engaged in the practice of law since 1963. Most of his practice has been in representing plaintiffs in personal injury litigation. He also was a partner of Holstein and a former managing partner of HMK. According to Mr. Goodhart, referral agreements whereby one plaintiff's attorney refers a case to another plaintiff's attorney are fairly common within the personal injury bar. According to Mr. Goodhart the typical referral agreement provides that the referring attorney will share from one-third to one-half of the fee awarded in the case. The amount could vary depending on the amount of work done by the referring attorney or whether the case settled before trial. In Mr. Goodhart's experience at HMK, cases referred to HMK by another attorney would likely result in 50 percent going to the referring firm. Mr. Goodhart's testimony is credible.
Conclusions of Law Analysis
ANB's six count complaint alleges several theories of recovery vis — vis the defendants. First, ANB alleges that it is entitled to receive all of the attorneys' fees awarded in the Law Suits because HMK's contingency contracts with its clients were never terminated; rather the contracts were assigned first to RAHA, then to Stackler Holstein subject to ANB's security interest. Count III asserts that Stackler Holstein is a successor firm to RAHA and HMK and, as a result, ANB again is entitled to all the fees awarded. Count IV alleges that Stackler Holstein, as a successor firm, is obligated to honor HMK's and RAHA's commitments under the January 3, 1997 Agreement, which entitle ANB to 75% of the fees recovered in Amin, Bernstein and Howard. Alternatively, ANB seeks recovery of HMK's right to receive quantum meruit payment for the services it rendered in the Law Suits. ANB finally contends that Stackler Holstein and RAHA knowingly converted ANB's collateral by taking possession of and retaining all of the fees paid in connection with the Law Suits.
Defendants respond, in the first instance, that ANB is not entitled to recover under any theory because ANB has failed to properly establish its claim against HMK. Additionally, they assert that there is no evidence that the contingency fee contracts with HMK were assigned to RAHA or Stackler Holstein; rather, they contend, the contracts ceased to exist at the time HMK closed its doors and declared bankruptcy. Defendants further maintain that Stackler Holstein is not the successor of RAHA and, therefore, cannot be held liable for HMK's or RAHA's obligations under the Agreement or elsewhere. With respect to ANB's claim for quantum meruit recovery, defendants argue that claims for quantum meruit recovery only lie against the former client, the recipient of the services rendered. Even if the defendants could be held liable under a quantum meruit theory, they further contend that ANB has not satisfied its burden of proving the value of the services HMK rendered. Finally, defendants assert that they cannot be held liable for conversion because ANB had no immediate right to possession of the funds; rather, it had nothing more than a security interest that might ripen into the right to receive a portion of the funds.
Proof of ANB's Claim
Defendants' argument that ANB has failed to properly prove its claim is without merit. ANB filed a proof of claim in HMK's related bankruptcy proceeding which serves as prima facie evidence of the validity of the claim. Fed.R.Bankr.P. 3001(f); In re Stoecker, 5 F.3d 1022, 1028 (7th Cir. 1993). Moreover, ANB proved its claim at trial by submitting the original loan documents, evidence that the bank's security interest was properly perfected and the bank's computerized records reflecting payments credited to the loan account and the current balance due. In addition to this documentary proof, Michael Hayes, an officer of ANB, testified regarding the balance due and the accuracy of ANB's computer records. Although defendants now object to the accuracy and reliability of the computer records, no objection to their admission into evidence was made at trial and the documents were so admitted. Even if timely objection had been made, the court notes that Mr. Hayes was sufficiently familiar with ANB's computer processing procedures to qualify the computer printouts for admission into evidence. Fed.R.Evid. 803(6). The court finds that ANB's records which were made, routinely kept and are relied upon in the ordinary course of ANB's business, are proper evidence of the amounts due to ANB. Defendants' further contention that ANB failed to credit $398,000, allegedly represented by two checks, as payments against the HMK loan account remains unsupported by the evidence. The alleged checks were not offered at trial and even if the checks exist, there is no evidence that anyone tendered the checks to ANB for the purpose of paying down the balance on the HMK loan account.
The Contract Assignment Claims
ANB asserts that HMK's contingency fee contracts constitute the firm's contract right to be paid for services rendered and, therefore, they are "accounts" within the meaning of § 9-106 of the Illinois Uniform Commercial Code ("Commercial Code"). 810 ILCS 5/9-106. It is undisputed that the collateral for ANB's loans to HMK included HMK's accounts. ANB further submits that under § 9-306(2) of the Commercial Code, 810 ILCS 5/9-306(2), a security interest continues in collateral, and proceeds of that collateral despite any sale, assignment or other disposition of the collateral, unless the secured party agrees otherwise. Finally, ANB urges, the evidence establishes that HMK's contingency fee contracts were never terminated; rather, they were assigned first to RAHA and later to Stackler Holstein, without ANB's consent. As a result, it contends Stackler Holstein received the fee awards subject to ANB's interest therein, thus entitling ANB to the entire fee award in each of the Law Suits.
The court agrees that HMK's contingency fee contracts were "accounts" to which ANB's security interest could and did attach. Commercial Code § 9-106 defines "account" to include "any right to payment for . . . services rendered . . . whether or not it has been earned by performance." A contingency fee contract precisely fits that definition. See PNC Bank, Delaware v. Berg, 1997 WL 527978, at *9 (Del.Super.Ct. 1997). It follows then that ANB's security interest, which expressly included HMK's accounts, attached to HMK's rights under its contingency fee contracts and would remain attached to that collateral or its proceeds even if the contracts were assigned or otherwise transferred to another firm. Id. at *10-11 (assuming bank had a valid security interest in contingency fee contracts, that interest would remain attached to identifiable proceeds of the contracts despite "sale" of the contracts to a new firm). Nevertheless, ANB's cause of action falters on an evidentiary basis. There is no evidence on this record to establish that HMK's contingency contracts were assigned to RAHA, rather, both the evidence and the law indicate that HMK's contractual right to receive a full contingency fee became inoperative in late 1996 when HMK closed its doors.
This is not to say that HMK no longer had any rights to be paid for the services it rendered in the Law Suits. Rather only its right to recover under the contracts ceased. As discussed further below, this would not preclude HMK's recovery under a quantum meruit theory.
As defendants point out, no one testified at trial that the fee contracts were assigned from HMK to RAHA. While ANB does not dispute that fact, it believes that there is documentary evidence of an assignment. Based on the January 1997 Agreement where ANB agreed to forbear from its collection activities, ANB urges that HMK and RAHA agreed that ANB's security interests in HMK's collateral would remain in effect regardless of who possessed or controlled the collateral. Further, ANB notes, the Agreement clearly contemplated a division of any fees received between ANB, on behalf of HMK, on one side and RAHA on the other. It also required RAHA to exercise it common law retaining lien in the client files.
ANB's reliance on the Agreement as proof of a written assignment of the contingency fee contracts is unpersuasive. The court has reviewed the Agreement on several occasions during the course of this litigation and has found nothing in it, either before or now, which constitutes an assignment of HMK's contingency fee contracts to RAHA. While the Agreement clearly contemplates that ANB's security interest will continue in HMK's collateral or the proceeds thereof, it does not create or define HMK's interest. In other words, the Agreement simply protects ANB's security interest. It does not alter the substance of the collateral, i.e., whether the collateral is HMK's contractual right to recover under its contingency fee contracts or HMK's quasi-contractual right to be paid on a quantum meruit basis.
ANB also makes much of the facts, established at trial, that normal procedures for substituting attorneys were not followed and new fee agreements were not executed when RAHA and Stackler Holstein took over the Law Suits. Further, the evidence shows that the clients consented first to RAHA and then to Stackler Holstein handling the Law Suits after HMK disbanded. Finally, the evidence established that the same attorney, Robert Holstein, remained responsible for the Law Suits from the time the clients hired him until each suit was resolved. These pieces of evidence, however, are insufficient to establish that an assignment of HMK's fee contracts took place. That a client agrees to a new firm's representation does not indicate that the client also agrees to an assignment of its fee contract with the original firm. Without the client's agreement, the assignment would be invalid. Under the Illinois Rules of Professional Responsibility, contingency fee agreements must be in writing. Further, a client must consent in writing if a lawyer is to divide a fee with a lawyer in another firm. See Illinois R. P.C. Rule 1.5(c) and (f). The clear import of these rules is that any change to a written contingency fee agreement which affects the recipient of the fee must receive the client's blessing, in writing. See Albert Brooks Friedman, Ltd. v. Malevitis, 304 Ill. App.3d 979, 710 N.E.2d 843, 847 (1999). As the Illinois courts have recently held, the client's interest in counsel of his or her choosing is paramount and the writing requirement of Rule 1.5 must be strictly construed to protect that interest. Id.; In re Spak, 188 Ill.2d 53, 719 N.E.2d 747, 754 (1999). It makes no difference that Holstein represented the clients throughout the litigation process. The fee contract was with HMK, not with Holstein, individually. Clearly HMK stopped representing those clients when it ceased doing business in late 1996. As a result, it relinquished its right to recover under the contracts.
While it is troubling that RAHA and Stackler Holstein failed to follow appropriate procedures to protect their own right to recover fees, their rights are not at issue in this proceeding. Even if their right to receive a fee may be questionable absent an assignment of HMK's written fee agreement, that would not expand HMK's rights to receive payment for the successor firms' work. Absent evidence of an assignment of the HMK fee contracts to RAHA and absent evidence of the clients' written consent thereto, the court must conclude that no such assignment took place. Recovery must be denied with respect to counts I and II of the Complaint.
Although there is evidence of a written assignment between RAHA and the firm now known as Stackler Holstein, absent the intervening assignment from HMK to RAHA, it cannot be said that the subsequent assignment to Stackler Holstein included HMK's contract rights.
The Successor Firm Claims
Count III and IV of the Complaint allege that Stackler Holstein is a successor of RAHA and HMK insofar as the cases formerly handled by HMK and RAHA. As a result of this status, ANB urges that Stackler Holstein succeeded to the original fee agreements which HMK negotiated, again entitling ANB to recover the entire fee awards (count III). Alternatively, ANB asserts that Stackler Holstein succeeded to HMK's and RAHA's obligation under the January 1997 Agreement to split fees with ANB. Because each of the Law Suits resulted in a recovery over $100,000, ANB seeks 75% of the fee awards pursuant to paragraph 16(a) of the Agreement (count IV).
ANB characterizes Stackler Holstein as a "thinly-veiled partnership of RAHA and Stackler Stackler, rather than a sole proprietorship. It offered evidence that Stackler Holstein still operates HMK's and RAHA's old phone lines, employs the associates of both RAHA and Stackler Stackler, operates out of new office space rather than Holstein moving into Stackler Stackler's existing office, and maintains the "fiction" that Holstein is an associate when in fact he has been held out as a principal of the firm. Despite these pieces of evidence, the court concludes that Stackler Holstein is not a successor of HMK and RAHA in the sense that it took on their contractual rights or obligations. The evidence also discloses that Stackler Stackler was a firm with long-standing roots in the Chicago legal community. Although Holstein transferred all of RAHA's assets to Stackler in December 1997, nothing in that Transfer and Assignment agreement suggests that Stackler intended to or did take on any obligations of RAHA. Significantly, the transfer of RAHA's assets was in satisfaction of a debt purportedly owed to Stackler. While Stackler Holstein continue to operate phone lines with HMK's and RAHA's old numbers, Mr. Holstein testified that this was necessary to allow his old clients to reach him in the event that they need items in their client files. Further, these old phone lines are not part of the main switchboard at Stackler Holstein. Moreover, the employment agreement between Holstein and Stackler Stackler spells out Holstein's role as an employee of Stackler Stackler. That he gave the firm authority to use his name in the firm name does not make him something other than employee. Clearly Ms. Stackler saw the benefit of using the name of a well-known personal injury lawyer in the name of her firm and negotiated for the use of that name, but there is no credible evidence that Mr. Holstein is her partner on a professional basis.
Because the evidence does not establish that Stackler Holstein is a successor partnership of RAHA and Stackler Stackler, ANB's claims under count III and IV must fail.
The Quantum Meruit Claim
The above discussion does not mean that ANB is entitled to no recovery herein. When HMK disbanded, its rights under its contingency fee contracts necessarily ended because the firm was no longer able to perform the contracts. Nevertheless, when a contingency fee contract ceases to be operable, the attorney retains a quasi-contractual right to be paid for services rendered on a quantum meruit basis. See Rhoades v. Norfolk and Western Railway Co., 78 Ill.2d 217, 230, 399 N.E.2d 909, 975 (1979) (establishing under Illinois law that attorneys discharged without cause are entitled to a reasonable fee for services rendered); Wegner v. Arnold, 305 Ill. App.3d 689, 713 N.E.2d 247, 250 (1999). ANB's security interest would attached to that claim because it represents HMK's right to payment for services rendered, i.e., an account, even though the amount of that account remained undetermined. 810 ILCS 5/9-106. See also In re Carlson, 211 B.R. 275, 279 (Bankr.N.D.Ill. 1997) (debtor attorney's quantum meruit claim for services completed prior to bankruptcy becomes property of the estate even though the amount of that claim is undetermined until recovery is had).
Defendants respond that an action for quantum meruit recovery only lies against the client, the recipient of the services rendered, not against subsequent counsel. Further, they assert that measuring quantum meruit as a percentage of the fee award is improper and that the evidence as a whole establishes that ANB should recover nothing, or at least, nothing more than a nominal award.
Defendants' assertion that they are not liable for quantum meruit claims was raised and rejected on defendants' motion for directed verdict. Defendants point to nothing further which would change the court's earlier ruling in that regard. While arguing that there is no basis or Illinois precedent to permit recovery against a successor firm, they have not offered any authority indicating that such recovery is impermissible. In addition to its prior ruling on defendants' motion for directed verdict, the court notes that it finds the reasoning of the court in Labrum Doak, L.L.C. v. Brown, 225 B.R. 93 (E.D.Pa. 1998), to be persuasive and particularly applicable to the circumstances of this case. In Labrum, four attorneys left the debtor law firm taking approximately 100 cases with them. After filing for relief under chapter 11 of the Bankruptcy Code, the debtor filed an adversary proceeding against those lawyers and their new firm seeking to recover fees for services previously invested in the transferred contingency fee cases. As the Labrum court noted, quantum meruit claims are based on quasi-contractual obligations. Such obligations, are imposed by law without regard to the assent of the party to be bound. Indeed, to avoid unjust enrichment of one party at another's expense, quasi-contractual duties might be imposed in spite of contrary intentions of the parties. Id. at 105. The court found no intuitive reason why a quantum meruit action could not lie against successor counsel under appropriate circumstances. In that case, the court permitted quantum meruit recovery against the defendant firm noting that the two firms were not unrelated. Further, the clients did not discharge the first firm out of dissatisfaction and seek other counsel, rather the first firm effectively handed over the clients to the successor firm. Id. at 106. The court determined that it would be unjust to allow the successor firm to accept the benefit of a substantial number of ready-made files, which were initially acquired through the good reputation of the debtor firm, without compensating the debtor firm. As a result, it concluded that quantum meruit recovery could be awarded against the successor firm.
Like Labrum, the firms at issue here are not unrelated. Further, the clients here did not discharge HMK, rather they permitted HMK to hand over their files to RAHA and Stackler Holstein when each of those earlier firms closed down. Holstein continued to represent them at each successive firm. Thus, Stackler Holstein received the benefit of receiving and keeping the Law Suits which were initially acquired through the good reputation of Holstein and his firm, HMK, and on which HMK performed substantial services leading to the successful resolution of the Law Suits. Under these limited circumstances, the court finds that there is no intuitive or legal reason that Stackler Holstein should not be required to ante up for the windfall it received. Indeed, it would seem unjust to hold otherwise. As the Supreme Court of Indiana has stated,
In a system of professional responsibility that stresses clients' rights, it is incumbent upon the lawyer who enters a contingent fee contract with knowledge of a previous lawyer's work to explain fully any obligation of the client to pay a previous lawyer and explicitly contract away liability for those fees. If this is not done the successor assumes the obligation to pay the first lawyer's fee out of his or her contingent fee.
Galanis v. Lyons Truitt, 715 N.E.2d 858, 863 (Ind. 1999). The evidence here is that neither RAHA nor Stackler Holstein had any discussions with the Law Suit clients regarding their potential liability to HMK for fees. Under Galanis, this evidence further supports a quantum meruit award against the defendants.
The remaining question then is the proper measure of quantum meruit recovery. Due to the inadequacy of HMK's time records and expert testimony establishing a usual and customary charge for transferring cases like the Law Suits to another firm, ANB urges that the customary percentage of fees awarded should control the measure of quantum meruit here. Accordingly, based on the expert testimony of Jewel Klein and Bruce Goodhart, ANB seeks recovery of 50% of the fee awards. Defendants contend that this "constructive referral" fee bears no relation to the value of HMK's services and that otherwise, ANB has proven no more than a nominal value with respect to HMK's services, e.g., recovery based on the hours HMK devoted to the Law Suits.
The term quantum meruit means "as much as he deserves" and, in this case, stands for the proposition that an attorney who performed services under a contingency fee contract that became inoperative prior to any recovery in the case remains entitled to recover the reasonable value of services rendered. See Rhoades, 78 Ill. 2d at 230, 399 N.E.2d at 975. In determining quantum meruit fees the courts consider various factors, including time and labor required, the attorney's skill and standing, the nature of the cause and the novelty and difficulty of the subject matter, the degree of responsibility in managing the cause, the usual and customary charge in the community and the benefits resulting to the client. In re Carlson, 211 B.R. at 280, citing, Muller v. Jones, 243 Ill. App.3d 711, 714, 613 N.E.2d 271, 273-74 (1993). It is clear then that, under Illinois law, time and labor required in a given case is but one factor to be considered in assessing a reasonable attorney fee under the doctrine of quantum meruit. Lee v. Ingalls Memorial Hospital, 232 Ill. App.3d 475, 478, 597 N.E.2d 747, 750 (1992). Indeed, in appropriate circumstances, the quantum meruit reward may equal the full contingent fee. See Rhoades, 78 Ill. 2d at 230, 399 N.E.2d at 975; Wegner, 305 Ill. App.3d 689, 713 N.E.2d at 252-53; Whalen v. Shear, 190 Ill. App.3d 84, 86-87, 546 N.E.2d 1, 2-3 (1989). The amount awarded is fact dependent and is to be determined according to the weight afforded the evidence by the trial court. Lee, 232 Ill. App.3d. at 479, 597 N.E.2d at 750.
The evidence here establishes that HMK's time records are substantially incomplete. As the detailed discussion in the facts above demonstrates, HMK performed many significant tasks for which its time went unrecorded. While the failure to keep complete time records is understandable when a case is accepted on a contingency basis, any award based only on such less than complete records would necessarily be inequitable. Further, with respect to other factors for measuring quantum meruit, the evidence shows that the same attorney handled the Law Suits at each of the three firms involved. As a result, some of the other factors result in a wash. For example, the attorney's skill and standing, as well as the degree of responsibility in managing the cause do not favor either HMK or the defendants. Likewise, the nature of the cause and the novelty and difficulty of the subject matter at issue would have been similar for both HMK and the defendants. At most, difficulty of the subject matter or the risk in accepting the case nominally favors HMK because it took on the Law Suits before any facts were developed, whereas the defendants had the benefit of Holstein's earlier work in evaluating the merit of the Law Suits.
Taking all of this into account, the court concludes that the usual and customary charge in the community should be given the most weight under the circumstances of this proceeding. Defendants' argument that reliance on this factor bears no relation to the reasonable value of HMK's services is unpersuasive. Both experts expressed the opinion that plaintiffs' attorneys within the "personal injury bar" from time to time find it necessary to transfer a case to another attorney after the first attorney has performed significant work on the case. In those situations, the "referral fee" paid to the first firm typically ranges from one third to one half of the amount of fees ultimately awarded. This range varies depending on the amount of work done by the referring attorney and whether the case is actually tried. This testimony exemplifies how the market values the work performed by the first firm. What the market will bear is certainly relevant to determining the reasonable value of such services. Defendants have offered no evidence to rebut the experts' opinions.
The court is cognizant, however, of Mr. Holstein's testimony that he typically "end loaded" his case preparation. In other words, he did as little as possible in the early stages of litigation, saving the bulk of the work until the end when recovery appeared to be more likely. This factor weighs against the value of HMK's services. In light of this factor, the court believes that higher end of the "range" of usual and customary charge is only appropriate with respect to Amin, to which HMK devoted approximately two thirds of the recorded hours on the case and which settled before trial, and that the lower end of the range should be applied to the two cases which went to trial, Bernstein and Howard. The court finds these percentages to be a reasonable measure of the value of HMK's services rendered with respect to the Law Suits. It is concluded, therefore, that ANB is entitled to recover one-half of the amount awarded in Amin that represents attorneys' fee, i.e., $108,333.33, and one-third of the amount awarded in Bernstein and Howard that represents attorneys' fees, i.e., $156,279.33 and $553,000, respectively.
Defendants have made much of the fact that they were awarded fees above Illinois statutory limits on fee awards in personal injury litigation. They assert that this fee enhancement is solely attributable to Stackler Holstein's work. The evidence, however, does not convince the court that Stackler Holstein deserve sole credit for this award. The evidence contains the order entered in the Howard case on behalf of the minor plaintiff. This order reflects court approval of a settlement of $950,000, and fees in the amount of $275,500, or 29 percent of the award. Under section 5/2-1114(c), fees would have been capped at $250,000 because the statute limits fees to 33-1/3% of the first $150,000 and 25% of the next $850,000 of the sum recovered. It is impossible to tell from the evidence before the court whether the additional $25,500 is entirely attributable to efforts during the trial. It becomes particularly uncertain here because the case eventually settled for considerably less than the jury verdict. Moreover, there is no evidence from which the court can determine the amount of any enhancement with respect to Elizabeth Howard's claim. Under all the circumstances presented, the court finds no basis to treat the portion of the fee attributable to the enhancement separately from the percentage allocation applied to the award as a whole.
Again, the fees in Hylaszek apparently are no longer in dispute. The parties agree that the fee should be allocated according to the hours and expenses that the various lawyers contributed to the case.
As a final note, ANB's conversion claim seeks nothing more than the money to which HMK is otherwise entitled. As a result, the court finds it unnecessary to determine whether ANB's proceeds were actually converted as it would add nothing to the outcome here.
Conclusion
For the foregoing reasons, the court finds against the plaintiff and in favor of the defendant with respect to counts I-V of the Complaint. The court further finds in favor of plaintiff and against defendant with respect to count VI of the Complaint. The parties are directed to submit, to the extent possible, a proposed agreed judgment order in accordance with the conclusions set forth herein. This matter is set for presentment of the proposed judgment order on April 10, 2000 at 10:00 a.m. without further notice.
The court takes judicial notice that the district court entered a fee award in Hylaszek on September 30, 1999. The amount of the award does not appear on the docket. To the extent that there is any dispute over distribution of that award, it should be raised as part of the proposed judgment order.