Court adopts rule banning 'value-added' fees in divorces

By Lee Dryden
BridgeTower Media Newswires
DETROIT — More than 18 months after a public hearing on a potential game-changer for family law practitioners, the Michigan Supreme Court has finally ruled.

In an April 5 order, the high court clarified that, effective May 1, lawyers cannot charge “value-added” or “results-obtained” fees in divorce cases.

The legal community weighed in on completing proposals during a public comment period in 2015 and a public hearing on Sept. 16, 2015.

Ultimately, the Supreme Court sided with the Attorney Grievance Commission and the State Bar of Michigan’s Standing Committee on
Professional Ethics in prohibiting such contingent fees in a domestic relations matter.

The State Bar’s Family Law Section submitted a proposal that would “explicitly allow such a fee to be charged, with the understanding that the fee must still meet the ‘reasonable’ standard for all fees described in MRPC 1.5(a) and with the agreement of the client.”

Justice Richard H. Bernstein broke from the rest of the court on the issue as the recent order stated he would “adopt the alternative published proposal that would allow an attorney and client to agree in writing to an enhanced fee.”

Most lawyers who addressed the court at the 2015 hearing asserted that reasonable value-added fees should be permitted, especially because clients do not pay the enhanced fee if they don’t agree with it.

Those opposed to such billing claimed it is a contingency fee that puts vulnerable divorce clients in a precarious position.

During the hearing, Justice Brian K. Zahra asked whether value-added fees are essentially a divorce lawyer’s “tip jar.”

MRPC 1.5(d) will state that “a lawyer shall not enter into an arrangement for, charge, or collect: (1) any fee in a domestic relations matter, the payment or amount of which is contingent upon the securing of a divorce or upon the amount of alimony or support, or property settlement in lieu thereof, the lawyer’s success, results obtained, value added, or any factor to be applied that leaves the client unable to discern the basis or rate of the fee or the method by which the fee is to be determined, or (2) a contingent fee for representing a defendant in a criminal case.”

A paragraph to be added in the Comment following Rule 1.5 includes: “The amount of alimony, support or property awarded to a client shall not be used by a lawyer as a basis for enhancing the fee. This provision does not preclude a contract for a contingent fee for legal representation in connection with the recovery of postjudgment balances due under support, alimony or other financial orders because such contracts do not implicate the same policy concerns.”

Richard S. Victor, who is of counsel to Hertz Schram PC in Bloomfield Hills, said his concern with the high court’s order is “whenever you try to fix something that is not broken, you often exacerbate problems or create new ones in their place.”

He described the new guidelines as “extremely ambiguous.”

“In domestic relations matters, unless a ‘flat fee’ is charged — which in matters other than appellate cases, is usually not a fair way to handle cases for either the client or the attorney — an attorney can never know how much time, work, effort or the amount and difficulty of issues, and needs of the client, will be involved in a case when a client first comes in to hire their attorney. Therefore, it would be impossible to tell a client ‘up-front’ how much a divorce/domestic matter will cost them at the time a client hires the attorney.

“What can be told to the client and what lawyers should now put into all written contracts, based on this new rule, is that the basis for the determination for the fee that will be charged to the client will be based on what will incur during the legal representation and in the future of their case.

“The language of this new rule is confusing. How does it bar value-added or enhanced fees, if the contract clearly sets forth that it is one of the basis and/or methods by which the fee will be determined and the client agrees to it?”

Mathew Kobliska of DeBrincat Padgett Kobliska & Zick in Farmington Hills called the Supreme Court’s decision “unfortunate,” adding that “results-oriented fees are neither new nor unique to Michigan.”

“Consumers are looking for different ways in which to retain legal counsel for representation in their domestic relations cases, and the court just removed one way for them to do that,” he said. “In the vast majority of situations, results-oriented fees enable the financially disadvantaged party to secure legal counsel of similar qualifications and expertise to that obtained by the opposing party.

“The results-oriented fee only applied if, at the conclusion of the matter, the client was fully informed and agreed that the attorney brought significant value to the case, and that the additional fee was in fact earned.

“Compare the alternative: the client and the attorney agree to a reduced hourly rate, with a flat amount due at the conclusion of the representation, regardless of the client’s satisfaction with the outcome. This arrangement would be permissible under MRPC 1.5. How does this benefit the legal consumer? With a results-oriented fee, the client has the final say, and can simply decline to pay the additional amount.”

Another perspective

When contacted for comment on the high court’s decision, Attorney Grievance Commission Grievance Administrator Alan M. Gershel referred to the commission’s position submitted to the court during the comment period.

That letter stated the alternative ultimately favored by the Supreme Court is “consistent with Michigan’s longstanding public policy disfavoring fee agreements between attorneys and their clients that are entered into during a representation.”

“The contingent nature of an enhanced fee is inarguable, and cannot be finessed, as claimed by proponents for enhanced fees in divorce cases, simply on the strength of the ‘results obtained’ language of Rule 1.5(a)(4),” the letter stated. “If this were so, then the same reasoning would permit the use of enhanced fees in criminal cases. The claim that the ‘results obtained’ language of paragraph (a)(4) provides a safe harbor for enhanced fees in divorce cases fundamentally misconstrues Rule 1.5.

“Critics of Alternative A also argue that it would interfere with the contractual freedom of clients and their lawyers. However, it is the proponents of enhanced fees in divorce cases who seek to change established principles of contract law.”

The alternative rejected by the high court stated: “An attorney and client may consent in writing to an ‘enhanced fee’ in a case, which may take into consideration the results obtained for a client, provided that such a fee is ‘reasonable’ considering all the factors set forth in MRPC 1.5(a) and is agreed to by attorney and client.”

The AGC added, “There may be a place for enhanced fees as to other legal matters, but that type of fee agreement does not belong in divorce cases. The prohibition against contingent fees in divorce cases should apply with equal force to enhanced fees.”

Kenneth M. Mogill, of Mogill Posner & Cohen in Lake Orion and chair of the State Bar Standing Committee on Professional Ethics, said the amendment adopted by the high court “which writes into Rule 1.5(d) the gist of RI-346, a 2009 Ethics Committee opinion, will result in greater transparency and clarity in fee agreements and will protect vulnerable divorce clients without impacting the ability of practitioners to charge a reasonable fee.”

Mogill commented in his personal capacity, not on the ethics committee’s behalf.