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A v. D

Decided: July 3, 1984.


Simpson, A.j.s.c.


This is a contested application under R. 1:21-7(f) -- prior to amendments to R. 1:21-7 effective as to contingent-fee arrangements agreed to after January 15, 1984 -- for an increased attorney's fee in excess of the amount allowable pursuant to R. 1:21-7(c). Letters are used to designate the parties because the trial judge approved a settlement including an agreement that the terms be confidential and the file sealed.

A was born in 1971 with no feet and most of his left hand missing. He and his father (B) and mother (C) sued three obstetricians (D, E & F) alleging medical malpractice, and a drug manufacturer (G) charging strict liability in tort, breach of express warranty, and negligence. The gist of the suit was that a progestational agent administered to C in the first trimester of pregnancy, to treat threatened abortion, resulted in the boy's deformities. Despite the physical handicaps there is no apparent emotional loss in the child. He is now 12 1/2 years old, works with computers, looks forward to college, and as far as is known -- has a normal life expectancy.

The case originated in another county and plaintiffs' personal counsel (H) referred his clients to trial counsel (I). A standard R. 1:21-7 contingent fee retainer was signed February 27, 1978 and included an obligation by B and C to pay disbursements in the event of no recovery. H became a judge thereafter, so that his active involvement in the case ended -- but he continues to have a financial interest in a portion of the fee. Since I is a certified civil trial attorney under R. 1:39, H may receive a referral fee pursuant to DR 2-107(A)(3), but the total fee must not exceed reasonable compensation for the legal services rendered in connection with the case. H and I should file a report with the Administrative Director of the Courts as to the fee division arrangement in accordance with DR 2-107(B)(1).

Trial of the case had actually begun in the county where H sits -- by way of pretrial motions -- when G moved to change venue, which was granted by the assignment judge. The

Appellate Division denied a motion for leave to appeal, and the case was transferred to Bergen County. D, E, and F had already settled for $50,000.00 and ultimately G settled for $485,000. Disbursements were $57,492.25, so that the R. 1:21-7(d) net aggregate recovery was $477,507.75. The trial judge approved an allocation of $202,507.25 for the parents' claims (including counsel fees) and $275,000.00 to be structured for the child. When the increased counsel fee application was contested, this court appointed a guardian ad litem (J) to represent the interests of the child. The guardian ad litem also made recommendations as to the terms of the structure for his ward, which were accepted by all parties and counsel, and approved by this court. Of the child's share, $50,000.00 was deposited in the Surrogate's Common Investment Fund and the remaining $225,000.00 used to fund an annuity providing monthly and lump-sum payments set forth on exhibits I, II, and III attached hereto. The underwriter is the Manufacturers Life Insurance Company, which is rated A (the highest rating) by A.M. Best Company.

If A lives his normal life expectancy of 57.02 years the total annuity payout will be $3,012,233.64; and if he does not, the guaranteed payments for 30 years will total $1,330,528.91. The increasing monthly payments provide a hedge against inflation and the lump-sum payments in the future will also cover unforeseeable contingencies. The internal rate of return is approximately 11 1/2% to 12% and this "interest" portion of the payments will escape federal and New Jersey income taxes. I.R.C. ยง 104(a)(2) and N.J.S.A. 54A:6-6(b). Although the actual future tax savings will depend upon A's annual top tax brackets, it is clear that hundreds of thousands of tax dollars will have been avoided, and the high internal rate of return locked-in for the boy's lifetime. If a lump-sum had been accepted and invested in other than tax-exempt securities, the income thereon would have been subject to such taxes. Rev.Rul. 65-29. In short, a superb job has been done by I and J in obtaining, improving, and perfecting this structured settlement.

There would have been no settlement -- structured or otherwise -- of course, unless the case had been prepared for trial and the defendants convinced that the possibility of a higher verdict warranted a settlement. In general, the settlement value of a case reflects a meeting of the minds on the estimated amount of a jury verdict multiplied by the probability of a verdict in favor of the plaintiff. This is never an easy determination and in a case like this is a most difficult matter. Liability was bitterly contested over a six-year period of investigation, pleadings, motions, discovery, and trial preparation. There was a very real possibility of verdicts of no cause-of-action against any of the defendants. I's affidavit detailed an estimated 1603 hours of legal effort, plus another 1031.5 hours by two associate attorneys. The guardian ad litem summed it up in his report that "the case involved a new area for drug product liability and a difficult factual situation within that new area of liability." It is unfortunate that no actual time records were kept, Burd v. Hackensack Hospital Association, 195 N.J. Super. 35 (Law Div.1984), but the claim of inadequacy of the counsel fee permitted under the old R. 1:21-7(c) is "thoroughly substantial and documented."*fn1

Pursuant to the retainer agreement and R. 1:21-7(c), prior to the amendment effective January 16, 1984, the allowable counsel fee calculation would be as follows:

R. 1:21-7(c) % On Totals

(1) 50 $1,000.00 $500.00

(2) 40 2,000.00 800.00

(3) 33 1/3 47,000.00 15,666.67

(4) 25 50,000.00 12,500.00

(5) 20 150,000.00 30,000.00

(6) 10 227,507.75 22,750.78

------------ -----------

Totals $477,507.75 $82,217.45

The request by I is for a flat one-third of the aggregate net recovery or $159,169.25.*fn2 An initial objection by B and C, to even the $82,217.45 calculation, is that the fee on the first $50,000 of recovery should be limited to 25% in view of R. 1:21-7(c)(7) (or on all recovery under R. 1:21-7(c)(5) effective January 16, 1984). Such a limit is provided for when the recovery is for the benefit of an infant, as here, and "the matter is settled without trial." This court held, in Iskander v. Columbia Cement Co., 192 N.J. Super. 114 (Law Div.1983) that the reduced percentage was applicable "where no substantial portion of the trial has occurred." In the present case, motions in limine as to the admissibility of evidence, had been heard for 2 1/2 weeks by the original trial judge before the venue was changed because H was by then a judge in that county. While the determination of an overall reasonable fee does not turn on this point, the unique factual situation here involved suggests that the 25% limitation should not apply. If it did, the total fee on the first $50,000 of net recovery would be $12,500 instead of $16,966.67.*fn3

The guardian ad litem, J, suggested that the new R. 1:21-7(c) schedule be used to calculate a reasonable fee under the circumstances of this case. This new schedule permits a maximum of 33 1/3% on the first $250,000 recovered and 25% on the next $250,000. The fee on the net aggregate recovery of $477,507.75, on this basis, would be $140,210.27.*fn4 There are a number of factors suggesting that J's recommendation should be accepted. B and C are incorrect in asserting that an increase above the amount allowable under the old rule results in a windfall because most of the work was done prior to the new rule being effective. As summarized in Iskander, counsel

fees have not increased proportionately to the increased values of settlements and verdicts. Id. 192 N.J. Super. at 126-127. The DR2-106(A) factors applicable to contingent fees pursuant to R. 1:21-7(e) also support an R. 1:21-7(f) increase (e.g., time, difficulty, skill, results, and ability of counsel). Assuming a ballpark accuracy of the estimated 2634.5 hours of legal effort expended, a counsel fee of $140,210.27 would only result in an hourly rate of $53.23. This may be compared with the $145.56 per hour estimated hourly rate in Burd, 195 N.J. Super. at 37. On the other hand, a flat one-third fee is inappropriate in view of the very high amount of disbursements and the fact that B and C assumed the full risk of paying the $57,492.25 in the event of no recovery. They had signed notes for the disbursements advanced by I and until the obstetricians settled they were committed to obtaining a second mortgage on their home in order to finance the trial costs. The doctrines of maintenance and champerty do not prevail in New Jersey, Schomp v. Schenck, 40 N.J.L. 195 (Sup.Ct.1878), and it is common knowledge that many plaintiffs' attorneys do not collect disbursements they have advanced where there is no recovery. In sum, a counsel fee of $140,210.27 is reasonable in light of all the circumstances and to maximize the aggregate marginal benefits of attorney and client. Merendino v. FMC Corp., 181 N.J. Super. 503 (Law Div.1981).

The guardian ad litem has requested an $1800 counsel fee; no one objects; and it is allowed. The submitted order has been completed to reflect the approved counsel fee for I (including whatever is properly allocated to H), and I should file copies of papers on this application with ...

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