How should a lawyer compute a contingent fee when the case resolves through a structured settlement that pays the client over time?

Plain-English summary

The Committee was asked the proper way to compute a contingent fee in a structured settlement, where the client receives payments over time. It explained that the Rules do not set a single method; the governing standard is Rule 1.5(a)'s reasonableness, applied in light of the listed factors, and the method of computation should be agreed in advance and expressed in the fee contract to avoid misunderstanding.

The opinion stated that the contract should specify whether the lawyer takes the fee in a lump sum or periodically, for example as the client receives annual increments. If the fee is taken in a lump sum, it should be based on a percentage of the discounted present value of the future periodic payments, not on a percentage of "total benefits." Because the inquiry also raised questions of law, the Committee referred counsel to the case law, noting that absent a contrary agreement a lawyer may have to take the fee periodically (Cardenas v. Ramsey County; In re Chow), and that courts apply the percentage to discounted present value (majority rule) or to the cost of the funding annuity (minority rule), citing Pettiford v. Eskwitt and the disciplinary case Florida Bar v. Gentry.

Currency note

This opinion was issued in 1990, before the substantial 2009 revisions to Kentucky's Rules of Professional Conduct (SCR 3.130); the bar notes the rules are amended periodically. Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against the current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Does the fee contract have to state how a structured-settlement fee is computed?

A: Yes. The opinion said the method of computation should be agreed in advance and expressed in the fee contract to avoid misunderstanding, under Rule 1.5.

Q: For a lump-sum fee, is the percentage applied to the total payout?

A: No. The opinion stated a lump-sum fee should be based on a percentage of the discounted present value of the future periodic payments, not on "total benefits."

Q: Can the lawyer be required to wait and collect the fee over time?

A: The opinion noted that, absent an agreement to the contrary, courts have held the lawyer may have to receive the fee periodically as the client receives annual increments, citing Cardenas and In re Chow.

Background and rules framework

The opinion interprets Rule 1.5 (fees; Model Rule 1.5), specifically the reasonableness standard of 1.5(a) and the writing requirement for contingent fees, together with the rule (cited in the opinion as Rule 1.8(c)) on stating the computation method in the fee contract. It leaves the precise calculation to the developing case law on structured-settlement fees.

Citations and references

Rules of Professional Conduct:

• MR 1.5 / KRPC 1.5 (fees; reasonableness and contingent-fee writing)
• MR 1.8 / KRPC 1.8 (cited in the opinion for stating the computation method)

Cases:

• Cardenas v. Ramsey County, 322 N.W.2d 191 (Minn. 1982), periodic receipt of fee
• In re Chow, 656 P.2d 105 (Haw. 1982), periodic receipt of fee
• Pettiford v. Eskwitt, 460 A.2d 716 (N.J. Super. 1983), present-value computation
• Florida Bar v. Gentry, 475 So. 2d 678 (Fla. 1985), excessive fee for ignoring present value

See also

• KBA Ethics Op. E-333: Civil Rights Contingent Fees
• KBA Ethics Op. E-342: Advancing Case Expenses
• AL Ethics Op. 1991-05: Contingent Fee for Child Support

Source

• Landing page: https://kybar.org/For-Members/Rules-Ethics-Information/Ethics-Opinions
• Original PDF: https://kybar.org/Portals/0/Admin/Ethics%20Opinions/KBA_E-339.pdf

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

KENTUCKY BAR ASSOCIATION
Ethics Opinion KBA E-339
Issued: June 1990

The Rules of Professional Conduct are amended periodically. Lawyers should consult the current version of the rules and comments, SCR 3.130 (available at http://www.kybar.org), before relying on this opinion.

Question:

What is the proper way to compute the amount of a contingent fee in the context of a structured settlement?

Answer:

The contingent fee must be reasonable and the method of computation should be set forth in the fee contract. Rules 1.5(a) and (c). The agreement should specify if the lawyer is to receive the fee in a lump sum or periodically, e.g., as the client receives his or her annual increments. If the lawyer is to receive his fee in a lump sum, then it should be based on a percentage of the discounted present value of future (periodic) payments rather than on a percentage of "total benefits". OPINION

The Rules do not attempt to set forth a single method for calculating fees in this context. The standard of "reasonableness" set forth in Rule 1.5(a) (in light of the various factors set forth) obtains. The method of computation should be agreed upon in advance, and expressed in the fee contract to avoid misunderstanding. Rule 1.8(c). Beyond expressing these generalities, we must refer counsel to the caselaw, since the inquiry involves questions of law as well as ethics. It has been held that in the absence of an agreement to the contrary the lawyer may have to wait and receive his or her fee periodically, as the client receives annual increments. See Cardenas v. Ramsey County, 322 N.W.2d 191 (Minn. 1982); In re Chow, 656 P.2d 105 (Haw. 1982). In addition, the courts have announced a rule that the contingent fee percentage should be applied to the discounted present value of future (periodic) payments (majority rule), or in some instances the cost of the annuity funding the payments (minority rule). See, e.g., Pettiford v. Eskwitt, 460 A.2d 716 (N.J.Super. 1983); Florida Bar v. Gentry, 475 So.2d 678 (Fla. 1985) (disciplinary case in which the court opined that the lawyer did not follow the community standard of charging a percentage of the present value of the settlement and therefore charged an excessive fee).
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Note to Reader
This ethics opinion has been formally adopted by the Board of Governors of the Kentucky Bar Association under the provisions of Kentucky Supreme Court Rule 3.530 (or its predecessor rule). The Rule provides that formal opinions are advisory only.