In a fifty-percent contingent-fee case, must litigation costs be deducted before the fee is split, and can a lawyer take fifty percent of the gross recovery while the client pays all costs?

Plain-English summary

A lawyer asked two questions about a fifty-fifty contingent-fee contract. First, when a recovery is obtained by compromise or suit, may the attorney take all of his advanced expenses and costs out of the client's portion, or must those costs be deducted from the total recovery before the residue is divided? Second, may an attorney contract for fifty percent of the gross recovery with the client agreeing to pay all expenses and costs?

The Board of Governors began by cautioning that advisory opinions should not reach justiciable matters that are for the courts, and that because the questions involved construing Section 4101, C.O.S. 1921 (5 Okl. St. Ann. § 7), its views should be treated "more as a suggestion of ideas than as an opinion." The statute allows an attorney to contract for up to fifty percent of the "net amount" of the judgment or compromise. Reading "net amount" as the recovery less the costs of obtaining it, the Board suggested that costs should be deducted from the gross recovery first and the residue divided equally. It pointed to Rule 44, which provides that a lawyer may not agree to bear the expenses of litigation but may in good faith advance them subject to reimbursement. Working through a numerical example, the Board concluded that dividing the gross first and then reimbursing the attorney would give the attorney more than the statutory maximum, so the second question, whether the attorney may take fifty percent of the gross while the client pays all costs, was answered in the negative.

Currency note

This opinion was issued in 1932, decades before Oklahoma replaced its original Rules of Professional Conduct (patterned on the ABA Canons of Professional Ethics) with the Oklahoma Rules of Professional Conduct (adopted 1988) and the later Ethics 2000 revisions. The rule cited here, Rule 44, and the statute construed, Section 4101 of C.O.S. 1921, belong to that era and may since have been renumbered, amended, or superseded; current Oklahoma law governs the permissible terms of contingent-fee contracts. Treat this page as historical context, not current guidance. Verify against current rules and statutes before relying on any specific provision mentioned here.

Common questions

Q: In a 50% contingent-fee case, are costs deducted before or after the fee is split?

A: The Board suggested costs should be deducted from the gross recovery first and the residue divided equally, reading the statute's fifty-percent cap to operate on the net amount of the judgment.

Q: Can a lawyer contract for 50% of the gross recovery while the client pays all costs?

A: The Board answered no. It concluded that arrangement would give the attorney more than fifty percent of the net amount and so would contravene the statute.

Q: Could the lawyer agree to bear the litigation expenses himself?

A: No. The Board cited Rule 44, under which a lawyer may not properly agree to pay or bear the expenses of litigation but may advance them in good faith subject to reimbursement.

Background and rules framework

The opinion construed Section 4101 of C.O.S. 1921 (5 Okl. St. Ann. § 7), which allowed an attorney to contract for a percentage of the proceeds of a client's cause of action not to exceed fifty percent of the net amount recovered. The Board read "net amount" as the gross recovery less the costs incurred in obtaining it. It applied Rule 44 of the then-current Oklahoma Rules of Professional Conduct, which barred a lawyer from agreeing to bear litigation expenses but allowed advancing them subject to reimbursement. The Board expressly framed its analysis as a suggestion rather than a binding opinion because it involved statutory construction reserved to the courts.

Citations and references

Rules of Professional Conduct:

• Rule 44 (1929 Oklahoma Rules of Professional Conduct): a lawyer may not agree to bear the expenses of litigation but may advance them in good faith subject to reimbursement.

Statutes:

• Section 4101, C.O.S. 1921 (5 Okl. St. Ann. § 7): an attorney may contract for up to fifty percent of the net amount of a judgment or compromise.

See also

• Okla. Bar Ethics Op. 10: Sharing a Collection Fee With a Lay Forwarder
• ABA Formal Op. 94-389: Contingent Fees
• ABA Formal Op. 93-373: Reverse Contingent Fees

Source

• Landing page: https://www.okbar.org/ethics/ethics-opinion-no-26/

Original opinion text

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

Adopted April 29, 1932

The Board of Governors is in receipt of the following request for an Advisory Opinion:

"When an attorney enters into a contingent fee contract on a fifty-fifty basis, and the cause is disposed of by recovery, either by compromise or suit, can the attorney take from the client's portion of such recovery all his expenses and costs advanced, or shall he deduct these costs, expenses, etc., from the total recovery and divide the residue;

The second question is, can an attorney enter into a contract by which he requires his client to agree that the attorney shall have fifty per cent of the gross recovery, the client to pay all expenses, costs, etc."

Preliminary to the response to the questions, it must be said that in the rendering of Advisory Opinions it is not the province of the Board of Governors to render opinions upon justiciable matters–that is to say, matters which are properly to be decided by the courts. Advisory Opinions of the Board of Governors should be restricted to questions involving the professional ethics and professional conduct of members of the bar as prescribed by the rules of professional conduct and the causes for disbarment; and while the questions propounded do involve the professional conduct of the members of the bar they also involve the construction of Section 4101, C.O.S.1921, 5 Okl. St. Ann. § 7, which is as follows:

"It shall be lawful for an attorney to contract for a percentage or portion of the proceeds of a client's cause of action or claim not to exceed fifty per centum of the net amount of such judgment as may be recovered or such compromise as may be made."

In the absence of a construction by the courts of this statute as to the matters involved, the Board of Governors is reluctant to appear as invading the province of the courts. Accordingly, whatever views are expressed in connection with the subject-matter should be considered more as a suggestion of ideas than as an opinion.

The statute seems to be plain. An attorney is given a lien upon the client's "cause of action" not to exceed fifty per centum of the "net" amount of the judgment or compromise. The right to recover costs does not of itself constitute a "cause of action" but is merely incidental thereto. Again, it would seem that the amount of a judgment is one thing while the "net" amount of a judgment would seem to suggest another. In our opinion the legislature intended by the use of the phrase "net amount" of the judgment to limit the amount upon which the maximum of fifty per cent would operate to an amount less than the gross amount. The word "net" has been defined as "clear of all proper deductions and charges and implies a gross sum from which allowances are to be taken." (See Words and Phrases.)

Upon these considerations it seems that the proper construction of the statute would be that the fifty per cent maximum should operate upon the amount of the actual net recovery by the client, to-wit, the amount of the judgment less the costs incurred or expended in obtaining it.

In this connection, see Rule 44 of the Rules of Professional Conduct which provides:

"A lawyer may not properly agree with a client that the lawyer shall pay or bear the expenses of the litigation; he may in good faith advance expenses as a matter of convenience but subject to reimbursement."

In view of the foregoing, the questions propounded may be disposed of by stating that the attorney should deduct the amount of the costs, etc., from the gross recovery, the residue to be equally divided.

To amplify:

(a) If the client had expended fifty dollars as costs, and the attorney had advanced an additional sum of $75.00 as costs and the total sum collected on the judgment is $5,100.00, there should first be deducted from the gross amount collected the sum of $125.00, out of which the attorney should be reimbursed to the extent of $75.00, the client reimbursing himself in the sum of $50.00. The remainder of the gross sum collected, to-wit, $4,975, the "net amount" of the judgment, should be divided equally, to-wit, the sum of $2,487.50 to each. This is within the statute referred to.

(b) Using the same figures, if the gross amount of the judgment is first divided, to-wit, $2,550.00 to each and the client reimburses the attorney out of his one-half to the extent of $75.00, the attorney would, of course, net $2,550.00 or $62.50 more than the maximum of fifty per cent of the "net amount" of the judgment, which would be in contravention of the statute.

It follows that the second question "can an attorney enter into a contract by which he requires his client to agree that the attorney shall have fifty per cent of the gross amount, the client to pay all expenses, costs, etc.," is answered in the negative.