Contracts: Contingency Fee Must Be Facially Reasonable to Support Court Award of Fees

Geller v. Lesk, 644 Ariz. Adv. Rep. 4 (App. Div. I, September 25, 2012) (J. Kessler)


Plaintiffs sued for breach of contract on a promissory note and won summary judgment. The trial court awarded $380,000 in principal, $320,394.92 in late charges, penalties, interest and $175,098.73 in attorneys' fees under Ariz. Rev. Stat. sec. 12-341.01 and the note which provided the prevailing party in a dispute should recover attorneys' fees. The fee application was supported by plaintiffs' counsels' 25% contingency fee contract or in the alternative a request for $300 an hour. Plaintiffs' counsel stated he did not keep time records on the case but approximated that he had spent over 100 hours prosecuting the matter. Defendant's objected stating the statute only allowed a recovery of reasonable fees and that plaintiffs having agreed to a contingency fee did not make the contingency fee reasonable. Defendants argued that their lawyer had spent only 50.2 hours on the case and even if plaintiffs' counsel had spent 100 hours that would compute to only $30,000 in fees; plaintiffs' counsel would have to work 583 hours to "earn" the amount of the contingency fee. The trial court awarded the full amount of The contingency fee. Defendants appealed and the Arizona Court of Appeals vacated the attorneys' fee award, awarded defendant attorneys' fees and costs on appeal and remanded the case for a determination of a "reasonable" fee.

The court of appeals first noted that where the contract at issue provides the prevailing party shall recover attorneys' fees it is that provision and not Ariz. Rev. Stat. sec. 12-341.01 which controls. However, even when enforcing a contractual provision for fees, the court is required to award only a "reasonable" fee even if the contract does not specify the fees be reasonable and even where the contract specifically defines the amount of fees to be paid, how to calculate them or that "all fees incurred" be paid. To establish reasonableness it is incumbent upon the party seeking fees to to make a prima facie showing of reasonableness. Upon such a showing the burden shifts to the party challenging the fees to show the fees requested were excessive. Importantly, the court held that "When dealing with a contingency agreement, the prevailing way to show reasonableness is through contemporaneous logs and not an offhand approximation of hours worked."

Here there was no prima facie showing of reasonableness of the fee. There were no time records submitted or support for the argument that even $300 an hour was reasonable. Even assuming it was, a reasonable fee could be no more than $30,000 at this rate and not the contingency fee amount awarded. The court noted that in the case of a contingency fee, a prima facie showing must include at a minimum, factual support of the factors articulated in E.R. 1.5 (a) to support it (e.g., time and labor expended, novelty and difficulty of issue, skill required etc). The court rejected the argument that the contingency fee was proper because it assumed the risk of no or limited recovery stating hourly rates contemplate the same risk. Enhancement of the fee is reserved for exceptional cases and in such cases the Lodestar approach should be followed in calculating the fees. (Under the lodestar method, the number of hours expended is multiplied by a reasonable rate of compensation.) Finally plaintiffs' argument that it will unfairly be stuck paying fees over and above what the court awards if they receive an award of anything less than the full amount of the contingency fee was rejected. That argument, the court noted, "ignores that even when an attorney and client have agreed to a contingency fee, the attorney has a duty to review the fee at the conclusion of the representation to ensure that it would still be reasonable."

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