If a lawyer commits malpractice in a contingency fee case, are the client’s damages reduced by the amount of the unearned contingent fee?

Until recently, this had been an open question in the Evergreen State. Not any more, however, as the Washington Supreme Court, in an en banc opinion cogently written by Justice Debra Stephens in Shoemake v. Ferrer, __ Wn. 2d ___ (2010), ruled six weeks ago that the client’s damages should include the negligent attorney’s hypothetical fee.

Incredibly, Shoemake v. Ferrer dates all the way back to 1992, which is when Andrea Shoemake was badly hurt in a head-on collision with a drunk driver. Andrea and her husband, Keith Shoemake, later hired Douglas Ferrer to pursue their claims against the drunk driver and their underinsured motorist carrier, State Farm, which had issued a policy with a $100,000 UIM limit. Under the terms of the agreement, the Shoemakes agreed to pay a 40 percent contingency fee.

To quote Justice Stephens, “Ferrer mishandled the case.” Certainly no argument there, as the attorney’s conduct included the following:

• Although State Farm offered to pay the $100,000 UIM limit in 1995, Ferrer inexplicably never communicated the settlement offer to his clients.

• After filing the complaint only two days before the statute of limitations ran in April 1995, Ferrer failed to file the mandatory confirmation of joinder, resulting in dismissal of the case almost 11 months later. (It’s unclear whether State Farm offered the UIM limit before or after Ferrer filed suit.)

• After convincing a judge to allow the case to proceed to trial, Ferrer failed to notify the Shoemakes, who lived out-of-state, of the trial date. The lawsuit was dismissed a second time when Ferrer himself failed to appear on the first day of trial.

• Instead of letting his clients know their case had been dismissed, for several years Ferrer falsely told them the delay was due to court congestion.

• Andrea confronted Ferrer after finally calling the court in 2005 and discovering his deceit. Although Ferrer assured her that he would try to get the case reinstated, he never did so.

The Shoemakes then hired another attorney to pursue the injury claim and sue Ferrer for malpractice. After learning about the prior settlement offer, the attorney – 10 years later – somehow recovered the UIM limit from State Farm and then filed suit against Ferrer. The legal malpractice claim sought damages in the form of interest on the Shoemakes’ decade-long wait for the $100,000 payment. The breach of fiduciary duty claim, on the other hand, sought an award of attorney fees for Ferrer’s “flagrant breach” of his duties.

Predictably, Ferrer admitted liability and only contested the amount of damages.

Not so predictably, the trial court agreed with Ferrer that his 40 percent contingency fee should be deducted from the $100,000 before interest was calculated. As a consequence, the net award was around $30,500. To arrive at this amount, the trial court added the net settlement ($60,000) and the prejudgment interest on the net settlement (about $70,500), and then subtracted the State Farm payment ($100,000). On top of this, the trial court awarded reasonable attorney fees of almost $15,000 as a sanction for Ferrer’s fiduciary breach.

Both sides appealed. And in a published opinion, the Court of Appeals (Division One) ultimately reversed both rulings by the trial court. See Shoemake v. Ferrer, 143 Wn. App. 819 (2008).

In Ferrer’s favor, Division One overturned the attorney fees award, concluding that an attorney’s breach of a fiduciary duty isn’t a “recognized equitable basis” for an award of attorney fees in a legal malpractice action.

The Shoemakes by far were the biggest winners, however, because the Court of Appeals refused to deduct the 40 percent contingency fee from their UIM recovery. As a result, their net award increased from $30,500 to $117,500 – i.e., an $87,000 gain. To arrive at this amount, Division One added the gross settlement ($100,000) and the prejudgment interest on the gross settlement (about $117,500), and then subtracted the State Farm payment ($100,000).

Noting that the case presented an “issue of first impression involving a determination of damages for legal malpractice,” the Washington Supreme Court granted Ferrer’s petition for review.

The high court began its analysis by stating the basic rules on damages in tort cases:

• “The guiding principle of tort law is to make the injured party as whole as possible through pecuniary compensation.”

• The plaintiff is entitled to an award of money that will place him in as good a position as he would have been had the wrong not occurred.

• The plaintiff should be made whole without conferring a windfall.

• When prejudgment interest is sought, the award should compensate the plaintiff for the “use value” of his damage amount from the time of loss to the date of judgment.

Both sides pleaded their case by invoking these same principles.

According to Ferrer, the Shoemakes at most would’ve received only $60,000 (i.e., 60 percent of the UIM limit) if he hadn’t acted negligently. Since damages are supposed to put the plaintiff in as good a position as she would’ve been had the tort not occurred, he said the contingency fee had to be subtracted from the award. Since the Shoemakes never would’ve received this 40 percent portion of the settlement, he said prejudgment interest on that amount was “inappropriate” because they weren’t “deprived of its use.” And if interest was allowed on the entire $100,000 settlement, he said a windfall would be conferred on the Shoemakes while “effectively impos[ing] punitive damages against him.”

But the Shoemakes strongly disagreed. Since they had to hire a second lawyer to complete the job Ferrer didn’t do, the clients said they couldn’t possibly be made whole unless the 40 percent contingency fee was credited to their award. They also argued that “fee forfeiture” serves a “remedial purpose” by giving injured clients an incentive to sue the wrongdoer.

So how did the high court pick between these “two competing ways” to resolve the case? By first examining the “sharply divided authorities” from other jurisdictions and academic sources.

The minority view, the justices noted, advocates that the plaintiff’s award should be reduced by the amount the negligent attorney would’ve recovered if he had “fully performed.” This is the proper measure of damages, the minority reasons, because the client would’ve had to pay the contingency fee to receive full performance. This also comports with the so-called “American rule,” which says attorney fees generally aren’t recoverable by the prevailing party.

The majority view, on the other hand, refuses to deduct the negligent lawyer’s fee in calculating damage to the plaintiff. As stated in Restatement (Third) of The Law Governing Lawyers (2000):

[I]f the net amount were all the plaintiff could recover in the malpractice action, the defendant lawyer would in effect be credited with a fee that the lawyer never earned, and the plaintiff would have to pay two lawyers (the defendant lawyer and the plaintiff’s lawyer in the malpractice action) to recover one judgment.

To cut to the chase, the high court affirmed the Court of Appeals and likewise applied the majority rule. Its reasoning included the following:

• Since the Shoemakes had to expend fees on a second lawyer to “finish the job” not done by Ferrer, the majority approach properly makes them whole without conferring a windfall.

• Given the fees they incurred by hiring a second attorney, the majority approach properly compensates the Shoemakes for losses actually incurred due to Ferrer’s negligence.

• Since the award under the majority approach is “compensatory and remedial,” it doesn’t impose punitive damages on the negligent attorney or impermissibly award “transactional costs” as claimed by Ferrer.

Last but not least, the justices noted that while compensatory damages are intended to make the plaintiff whole, they do “frequently include a deterrence component that should not be confused with a punitive damage award.” As the high court further elaborated:

Our legal system has a particular interest in deterring lawyers from breaching their ethical duties to their clients. Thus, a legal malpractice plaintiff’s damages may appropriately include forfeiture of the attorney’s hypothetical contingency fee.

For hopefully every reader, this article on Shoemake v. Ferrer will be purely informational. But if future similar cases do ever occur, the point to be made is that a legal malpractice claimant’s damages won’t be reduced by the amount of the negligent attorney’s hypothetical contingency fee.