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Ethics Question of the Month - May 2019

Lawyer A represents 33 homeowners in a suit against Company X, which does seismic testing for oil and gas.  The company uses underground dynamite blasts to generate seismic waves.  The homeowners have claimed structural damage to their foundations, walls, driveways, and sidewalks resulting from the seismic waves generated by Company X.  The damage experienced by individual homeowners varies according to the value of their property, the extent of the damage, and the cost of repairs.   

Lawyer A sent individual settlement demands to Company X for all 33 clients.  After initial negotiations, 11 of the clients agreed to accept Company X’s settlement offers.  The remaining 22 clients refused to accept Company X’s original individual offers.   Lawyer A and Company X’s lawyers go to mediation to resolve the remaining 22 claims.  At the end of the mediation, Company X offers a single gross settlement amount to resolve the remaining 22 claims and tells Lawyer A that, in return, it requires 22 releases or the overall offer will be withdrawn.  

Lawyer A decides to apportion the gross amount among her clients, but holds back 10% of the gross amount in case any clients don’t agree to their individual offers.  Two clients refuse their individual settlement offers.  Lawyer A uses most of the 10% that she held back to increase the offers to the two holdout clients, and they agree to the increased offer.  Lawyer A then redistributes what is left of the 10% to the remaining 20 clients involved in the mediation on a pro rata basis so that all of the gross settlement amount offered by Company X is now distributed to the 22 clients involved in the mediation.

Which of these statements is most accurate? 

A.    Lawyer A has done an admirable job of settling all of her clients’ claims in a complicated case and a difficult situation.  Although imperfect in some ways, the settlement method complies with the Texas disciplinary rules.

B.    We don’t know enough detail about the settlement method to judge whether Lawyer A has fully complied with applicable disciplinary rules.

C.    Lawyer A’s solution is permissible, except for holding back 10% of the gross settlement amount to disproportionately reward uncooperative clients.

D.    Lawyer A should not have reached a settlement on behalf of the first 11 clients until the claims of the remaining 22 were also resolved.  Therefore, none of the settlements are permissible under the Texas disciplinary rules.  

ANSWER:  B

DISCUSSION

Rule 1.08 addresses a variety of potential conflicts.  Subsection (f) is applicable here:

(f) A lawyer who represents two or more clients shall not participate in making an aggregate settlement of the claims of or against the clients, or in a criminal case an aggregated agreement to guilty or nolo contendere pleas, unless each client has consented after consultation, including disclosure of the existence and nature of all the claims or pleas involved and of the nature and extent of the participation of each person in the settlement.

This provision is the “aggregate settlement rule” and it applies when there is a global settlement to be apportioned among jointly-represented clients.  Though our Rules do not define “aggregate settlement”, we understand it to mean a single settlement amount intended to settle multiple client claims.  

Defendants might make an “aggregate settlement” offer in a large multi-plaintiff case where there are hundreds or thousands of claimants; however, Rule 1.08(f) applies any time there is more than one client represented by a lawyer facing a single settlement offer to all individual claims.  The defendant may take the position that it doesn’t care how the global settlement amount is apportioned among the clients as long as every claimant—or almost every claimant—signs a release (this is often referred to as a “cram-down” settlement).

An aggregate settlement offer can put a lawyer in a difficult position.  On one hand, the lawyer may have little difficulty dividing the money among clients who have identical claims and damages; however, where the damages are more subjective and varied, clients may have sharply different opinions about the apportionment of settlement funds to different clients. Moreover, the lawyer may be tempted to recommend the global settlement—even though it is objectively inadequate compared to the lawyer’s own damages model—because the lawyer’s resulting contingent fee is substantial and it eliminates the risk of not recovering  anything at trial.  And while there can be conflicts between the lawyer’s own interest versus the clients’ interest in settlements under Rule 1.06(b), here we are interested primarily in Rule 1.08(f).

So, what does Lawyer A need to do under Rule 1.08(f)?

•    First, disclose to every client the proposed settlement amount for that client and for each of the jointly-represented clients.

•    Second, explain how each client’s proposed settlement amount was calculated—which requires an explanation of the individual claims of every client and what variables were used to calculate the proposed settlements.

•    Third, after providing these disclosures, ask for each individual client’s consent to his or her proposed individual settlement.

In some instances, the mechanics of apportioning a global settlement is not easy.  To the extent that objective, relevant factors can be used, they should be; however, there also may be relevant factors that are inherently subjective.  In our property damage scenario, damage estimates may be a mix of objective and subjective factors.  Using competent appraisers and/or damage estimators who strive to apply the same criteria for every property is important, even if there is still a degree of subjectivity.  The lawyer’s approach doesn’t have to be perfect – and it won’t be – but it should strive to apply the same standards to every client’s claims so that the clients can understand the lawyer’s methodology.  Further, making financial exceptions for “holdout” clients is suspect because that significantly deviates from using the same methodology for every client and opens the lawyer up to charges of favoritism.  

The primary purpose behind Rule 1.08(f) is full disclosure to every jointly-represented client of how that client is being treated compared to other similarly-situated clients.  Of course, Rule 1.08(f) can make aggregate settlements more difficult to accomplish because, with disclosure, some clients may contest the methodology or the results that it produced.  And the mechanics of disclosure can vary because there is always the risk that specific client settlement amounts may be leaked by clients to third parties that have no right to know this otherwise confidential information.  

Because the question did not describe how the lawyer apportioned the global settlement to individual clients, and did not reveal whether the required disclosures were made, B is the best answer.  If Lawyer A did not make the disclosures required by Rule 1.08(f), then she is in violation of that rule.    
 

Posted: 4/28/2019 12:00:00 AM by TCLE Editor | with 0 comments

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About Ethics Question of the Month

Ethics Question of the Month is a regular feature of the Texas Bar Journal created and sponsored by the Texas Center for Legal Ethics.

DISCLAIMER: The information contained in Ethics Question of the Month is intended to illustrate an ethics issue of general interest in the Texas legal community; it is not intended to provide ethics advice that applies regardless of particular facts.  For specific legal ethics advice, readers are urged to consult the Texas Disciplinary Rules of Professional Conduct (including their official comments) and other authorities and/or a qualified legal ethics advisor.

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