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April 14, 1982

Michael DONAGHY and Esther Donaghy, Plaintiffs,
John J. NAPOLEON, D. O., et al., Defendants

The opinion of the court was delivered by: BROTMAN

This medical malpractice case, wherein jurisdiction is founded on diversity of citizenship, 28 U.S.C. ยง 1332, is now before the court on application for approval of attorneys' fees, and for an order permitting the disbursement of a fund created in behalf of the plaintiffs by their counsel. In cases such as this, the court is bound by Rule 1:21-7 of the Rules Governing the Courts of the State of New Jersey (Gann 1982). The settlement which has been reached among the parties was set forth on the record on March 30, 1982. A copy of the document embodying the settlement has been appended to the instant application for approval of attorneys' fees as Exhibit B.

The settlement calls for an initial payment of $ 325,000.00 in cash for the benefit of plaintiffs, along with periodic and lump sum payments in later years which are expected to amount to $ 1,325,000. (Application; Exhibit A, Affidavit of Albert S. Fein, Esquire). The court is informed that Albert S. Fein, Esquire (of the Pennsylvania Bar), attorney for plaintiffs, incurred costs of $ 24,430.72 in the prosecution, and that Edward J. Brady, Esquire (of the New Jersey Bar), local counsel for plaintiffs, incurred costs of $ 248.00. It has also been determined that plaintiffs will be required to pay $ 10,000.00 to the Commonwealth of Pennsylvania as reimbursement for benefits received under the Commonwealth's Medical Assistance Program. (Exhibit D, Affidavit of Albert S. Fein, Esquire).

 Mr. Fein has informed the court that he entered into a contingent fee arrangement in the Commonwealth of Pennsylvania, where plaintiffs reside and where their counsel maintains his office, calling for a payment of one-third (331/3%) of any recovery. (Exhibit C, Affidavit of Albert S. Fein, Esquire). This court, however, is required to disregard that contingent fee agreement, and may only permit the disbursement of a fee which is within the limits established by N.J. Court Rule 1:21-7. Elder v. Metropolitan Freight Carriers, Inc., 543 F.2d 513 (3rd Cir. 1976). The Rule permits an attorney's fees to be calculated as a percentage of the recovery gained by the plaintiffs. That amount is fixed by paragraph (c) of the Rule, as will be explained below, and may be adjusted in accordance with paragraph (f) of the Rule if "at the conclusion of a matter an attorney considers the fee permitted by paragraph (c) to be inadequate...." Rule 1:21-7(f).

 In determining the amount of the recovery on which the fee is to be based, the court must calculate the fair market value-or the present cost-of the settlement fund. Of course, when a settlement calls for a single cash payment, there is no difficulty in determining the recovery amount. When the parties establish a "structured settlement," as in this case, then the recovery amount cannot be determined solely by reference to the aggregate amount of expected cash payments to be made in the future. Rather, the court is required to establish the present value of the settlement fund out of which future payments are to be made. The reasons for this approach are explained in Merendino v. FMC Corporation, 181 N.J.Super. 503, 509-10, 438 A.2d 365 (Law Div. 1981).

 At no time during the course and conclusion of settlement discussions were plaintiffs and their counsel advised of the actual present cost of the annuity and balloon payments. Once the case settled, the court obtained from defense counsel the annuity cost figure, which was $ 212,400.00.

 It is to be noted that all the periodic payments are fixed and guaranteed with appropriate survivorship provisions in the event Michael Donaghy dies before receiving all the monthly or balloon payments. Under these circumstances, it is believed that all of the payments will be received free of federal income taxes. See Merendino v. FMC Corporation, supra, 181 N.J.Super. 507 n.1, 438 A.2d 365.

 The total cash payments will be $ 1,650,000.00, but the present cost of the package was $ 537,400.00, comprised of $ 325,000.00 cash "up front" and the $ 212,400.00 cost of the annuity funding the monthly and balloon payments. As stated by Judge Arthur J. Simpson, Jr., in Tobias v. Autore, 182 N.J.Super. 328, 330, 440 A.2d 1171 (Law Div. 1982), "in a "structured settlement' the total actual cost is the proper basis upon which to calculate attorneys' contingent fees." The "up front" cash of $ 325,000.00, plus the cost of the annuity and balloon payments of $ 212,400.00, or $ 537,400.00, constitute the total actual cost. Counsel have requested a flat fee of $ 161,000.00 ($ 155,000.00 to Albert S. Fein, Esquire and $ 6,000.00 to Edward J. Brady, Esquire) plus disbursements of $ 24,678.72 ($ 24,430.72 to Albert S. Fein, Esquire and $ 248.00 to Edward J. Brady, Esquire). For purposes of computing the contingency fee, the disbursements plus the $ 10,000.00 medical reimbursement to the Commonwealth of Pennsylvania must be subtracted, leaving a net recovery amount of $ 502,721.28 from which the court may calculate the permissible amount. Pacillo v. Harris Manufacturing Co., 182 N.J.Super. 322, 440 A.2d 1168 (Law Div. 1981). The fee as requested by plaintiff's counsel would constitute 29.96% of the total recovery, or 31.22% of the net sum recovered calculated in accordance with R. 1:21-7(d), and being $ 161,000.00/$ 537,400.00-$ 34,678.72. The maximum fee permitted by R. 1:21-7(c) is $ 84,738.80 or 16.856% of the net sum recovered ($ 502,721.28) and is calculated as follows: R. 1:21-7(c) % on (1) First $ 1,000.00 50 $ 1,000.00 $ 500.00 (2) Next 2,000.00 40 2,000.00 800.00 (3) Next 47,000.00 33 1/3 47,000.00 15,666.67 (4) Next 50,000.00 25 50,000.00 12,500.00 (5) Next 150,000.00 20 150,000.00 30,000.00 (6) Over 250,000.00 10 252,721.28 25,272.13 $ 502,721.28 $ 84,738.80


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