The Texas Supreme Court has blocked a pair of litigators from owning a piece of their former client’s business as part of their recovery under a contingent fee contract.
The background to the high court’s mandamus decision in In Re David Davenportis as follows, according to the majority decision.
In 1999, Dean Davenport formed Water Exploration Co. (WECO) to produce commercial drinking water as an equal limited partnership with James Allen and Mark Wynne. Eventually, a partnership dispute arose over the business.
Davenport filed suit against his two partners and won a declaratory judgment that he owned a third of the business. He later hired lawyers Tom Hall and Blake Dietzmann to pursue other parts of the partnership dispute after the attorneys promised they could net a big monetary verdict.
Davenport signed a contingent fee contract with Hall and Dietzmann that promised the attorneys 40 percent of the gross amount recovered in the case. The contract also stipulated that the lawyers would not take a fee out of the ownership of the portions of the business owned by 5D Water Resources and Dillon Water Services, a company owned by Davenport. It also stated that the lawyers would pay for all necessary expenses for prosecuting the case, and that those sums would be repaid with recovered money.
Hall and Dietzmann later won a $70 million judgment for Davenport for conversion of his partnership interest, but the lawyer harbored serious doubts about the strength of the verdict on appeal and advised Davenport to settle. Davenport settled his claim with Allen for $200,000 and promptly paid the attorneys their share. Allen also transferred his third interest in WECO to Davenport.
The lawyers claimed they exchanged documents with Davenport to transfer his 66 percent interest in the company to them, but the transfer never occurred.
Davenport later settled with Wynne, bought out his share of WECO and paid the lawyers an additional $297,813.30 in attorney fees as their share of sums recovered in the litigation.
But the lawyers later filed a lawsuit against Davenport in a Bexar County District Court alleging they were entitled to an ownership interest in WECO and that Davenport failed to pay $226,795.01 in expenses in the underlying litigation.
The trial court determined the lawyers’ contingent fee agreement was ambiguous after a summary judgment hearing and allowed a jury to consider the case.
The jury found the attorneys were not entitled to ownership in WECO because Davenport had not agreed to that. The jury also found the lawyers waived any rights they had to an ownership interest but did find that Davenport owed the attorneys $226,795.01 in unpaid expenses.
The trial court signed a final judgment and awarded the lawyers $1.3 million in attorney fees. The lawyers then moved for a new trial, arguing the jury’s conclusion that the contract was unambiguous must be disregarded because the evidence did not support the verdict. The trial court granted the motion for a new trial—a decision that was appealed to San Antonio’s Fourth Court of Appeals.
The Fourth Court then sent the case back the trial court, ordering it to state its reasons for granting a new trial. And on remand, the trial court changed its mind and decided that the contract was unambiguous after all and that the evidence was sufficient to support the jury’s verdict.
Davenport appealed the mandamus decision to the Texas Supreme Court, arguing that the trial court abused its discretion by improperly nullifying a jury verdict in ordering a new trial. At the high court, the lawyers argued that they were due an ownership interest in WECO. By force of negative implication, the lawyers argued that their contract with Davenport allows a fee to be paid out of any interest in WECO owned by anyone other than 5D or Dillon.
The high court concluded that the trial court wrongly ruled the contingent fee agreement unambiguously entitled the lawyers to an ownership interest in WECO. If the attorneys wanted noncash benefits from their client as part of their fee, they should have specifically provided for that in the contract, the court wrote.
“It would have been simple for the lawyers to include language in the agreement that would have explicitly allowed for the lawyers to receive a percentage of partnership of other non-cash interests derived from their representation,” wrote Justice Don Willett in the June 16 majority opinion. “Because they neglected to do so, and for the reasons set forth above, we find the agreement only permits recovery from monetary awards.”
The decision directs the trial court to vacate its new trial order and render a decision consistent with the opinion.
Justice Jeff Boyd wrote a concurring decision agreeing with the majority’s conclusion that the trial court should vacate its new trial order in the case. “But I would order the trial court to enter judgment based on the jury’s verdict, not because the agreement unambiguously favors the client as a matter of law,” Boyd wrote.
Deborah Hankinson, a Dallas appellate attorney and former Texas Supreme Court justice who represents Davenport, is pleased with the high court’s decision.
“There’s case law in Texas that says if you’re going to have a contingency fee on something that is not cash, you have to say it in the contract,” Hankinson said. “We thought the law was clear on contingency fee contracts. But the court reaffirmed its requirements for contingency fee contracts.”
Brendan McBride, a San Antonio appellate attorney who represents Hall and Dietzmann, said his clients have not yet decided whether to ask the high court to rehear the case. The decision is bad news for lawyers who want to collect nonmonetary fees from their clients, he said.
“I think it sets a dangerous precedent to allow clients to make deals—potentially even with the defendants who owe the judgment—to eliminate their attorney’s ability to collect their fee.”