In Re Hailey

FOR THE RESPONDENT FOR THE INDIANA SUPREME COURT

DISCIPLINARY COMMISSION

Ron Elberger, Judy L. Woods

Bose McKinney and Evans Donald R. Lundberg, Executive

Secretary

Indianapolis, Indiana 46204 115 West Washington Street

Indianapolis, Indiana 46204

IN THE

SUPREME COURT OF INDIANA

IN THE MATTER OF )

) CASE NO. 49S00-0009-DI-560

RICHIE DOUGLAS HAILEY )

DISCIPLINARY ACTION

August 8, 2003

Per Curiam

In collecting a contingent attorney fee from a client’s settlement,

attorney Richie Douglas Hailey retained a fee in excess of the amount

justified by the percentage provided in his written agreement with his

clients. We find today, therefore, that his fee was unreasonable. We also

find that the respondent failed timely to provide the client with a written

settlement disbursement summary, delayed payment to medical and other third-

party creditors, and shared a portion of his fee with another lawyer who

was not a member the respondent’s law firm in a manner not permitted by the

Rules of Professional Conduct. Because this is the first instance of

discipline for a violation of this type and because the respondent’s

services in achieving a settlement for his client were effective despite

his failure to be diligent in wrapping the matter up, we impose only a

public reprimand. Future violations of this nature may result in more

severe sanctions.

This matter comes before us upon the hearing officer’s tendered

report, generated after a full evidentiary hearing. The hearing officer

concluded that the respondent violated the Rules of Professional Conduct as

charged. The respondent has petitioned this Court for review of those

findings and conclusions, pursuant to Ind.Admission and Discipline Rule

23(15), urging us not to adopt the hearing officer’s findings of

misconduct. Where the hearing officer's report is challenged, we review

the record presented de novo. Final determination as to misconduct and

sanction rests with this Court. Matter of Lamb, 686 N.E.2d 113 (Ind.

1997); Matter of Gerde, 634 N.E.2d 494 (Ind. 1994).

I. The Facts

The respondent was admitted to the practice of law on October 9, 1974,

and practices law in Indianapolis. In 1992, a 13 year-old boy was

seriously injured in Indiana while riding as a passenger in an automobile.

He incurred several hundred thousand dollars in medical expenses and is

confined permanently to a wheelchair. Shortly after the accident, the

boy’s mother spoke with relatives, who suggested she contact the boy’s

uncle, who was a lawyer in Alabama, but did not handle personal injury

matters. The uncle obtained the respondent’s name from a friend and fellow

Alabama attorney, and gave it to the mother.

The boy’s father was generally aware that the uncle had consulted with

another Alabama attorney before the uncle recommended the respondent. The

mother and boy were not aware of the consultation. The Alabama attorney

and the parents each independently contacted the respondent, but had no

direct contact with each other. In January 1993, the respondent agreed to

represent the parents and the boy (collectively the “clients”) on a

contingent fee basis and the respondent drafted a written contingent fee

agreement which was executed by the clients on January 14, 1993. The

agreement provided, in relevant part, “[I]f the matter is settled or tried

after One Hundred Eighty (180) days after suit, the client will pay at a

rate of Forty percent (40%) of the gross amount recovered.” Expenses of

pursuing the claim were to be paid by the clients. The respondent did not

include in the contingent fee agreement any provision that specifically

addressed how his attorney fee would be calculated in the event of a

“structured settlement” that included future periodic payments. The

respondent's written fee agreement also did not disclose the division of

attorney fees with the Alabama lawyer specifically, nor did it address

generally the subject of division of fees with a lawyer not associated with

the respondent's law firm. The respondent did not provide the clients with

a copy of the agreement.

In November 1993, the respondent filed suit in an Indiana court on

behalf of the clients against the driver of the vehicle in which the boy

was riding at the time of the accident, the owner of the vehicle, the

automobile manufacturer, and others. Throughout the litigation, the

clients were in frequent contact with the respondent. The father also

spoke to the uncle about the case from time-to-time, and raised questions

about certain aspects of the case. The uncle in turn talked to the Alabama

attorney before responding, but the father never spoke to the Alabama

attorney about the case and the mother and boy remained unaware that the

Alabama attorney had any role in the matter.

In November 1997, the clients, the respondent, representatives of

various defense insurers, and counsel for the defendants in the case met in

two mediation sessions. At least by that time, the respondent was aware

that a structured settlement was a likely option. As the discussion focused

on a proposal to settle for a lump sum plus an annuity, the clients were

concerned whether the lump sum would be sufficient to pay the boy’s medical

expenses, attorney fees, and litigation expenses. They thought it would be

best to leave the annuity unencumbered for the boy’s future expenses. To

evaluate a structured settlement proposal they needed to know the dollar

amount required for both the boy’s medical providers and for attorney fees.

In particular, the clients did not know what several medical providers

would be willing to accept in satisfaction of their claims or how the

respondent's attorney fee was to be calculated in the event of a structured

settlement.

The defendants were accompanied at the second session by a broker

experienced in purchasing annuities to fund structured settlements. For

the first time the clients and the respondent discussed various methods by

which the respondent's attorney fee might be calculated under a structured

settlement. A copy of the written fee agreement was not available and the

respondent did not give the clients a definitive answer to the calculation

of his fee. Among the methods discussed during the second mediation

session was a proposal whereby the respondent would retain 40% of the lump

sum cash payment and 40% of the gross amount of future guaranteed payments

to be made to the boy, undiscounted to present value. The father concluded

that, under this method, the respondent's fee and the medical expense

payments would consume the lump sum payment and leave the boy owing

additional attorney fees. By this time medical expenses were estimated at

less than $400,000. [JACK] The respondent ultimately agreed in writing with

the clients prior to settlement that his maximum fee would be $1.6 million.

The clients and respondent both intended that $1.6 million was a maximum,

not the agreed amount of the fee.[1] With the respondent's attorney fee

capped at $1.6 million, and the knowledge that the total amount of medical

and related expenses was less than $400,000, the clients negotiated for an

annuity without concern that the cash portion of the settlement would be

inadequate to cover the medical and legal expenses.

The second mediation session resulted in a settlement. Its terms

called for an initial lump sum payment of $2 million cash, plus periodic

future payments of $80,000 per year compounding annually at 1.5%, beginning

December 29, 1998 and lasting for the longer of the balance of the boy’s

life or 40 years. Pursuant to the settlement agreement, on December 3,

1997, the defendants purchased an annuity for the boy’s benefit for a

single premium of $1,465,698. That price, which was $28,818 less than the

quote provided on November 29, 2003, was not reported to the respondent or

the clients and they made no inquiry.

Under the 40-year guarantee, the boy will receive a minimum gross

total payout of $4,341,431.29. The annuity was issued by a life insurance

company and backed by the irrevocable guaranty of a second life insurance

company. If the boy lives beyond the fortieth annual payment, he will

continue to receive payments as scheduled until he dies.

In mid January 1998, the respondent received the initial cash payment

of $2 million from the defendants and deposited it into his trust account.

Fairly early in the case the respondent and the Alabama attorney had agreed

that the Alabama attorney would receive one-third of the respondent’s fee.

On January 21, 1998, the respondent issued checks from his trust account in

the amount of $1,066,666.66 to his law firm and $533,333.33 to the Alabama

lawyer for a total of $1.6 million attorney fees. The respondent did not

notify the clients that he was paying the fees or that one-third of the fee

was being paid to the Alabama attorney. The father was aware before the

mediation sessions that a referral fee would likely be paid to the uncle,

but he had no indication as to the amount. Neither the mother nor the boy

knew that a referral fee would be paid. On November 3, 1995, the

respondent wrote a letter to the Alabama attorney in which, for the first

time, he placed in writing his understanding that he would share the fees

with the Alabama attorney.[2] The respondent did not provide a copy of

this letter to the clients.

In mid-February 1998, the respondent withdrew from his trust account

an additional $24,837.63 to reimburse his law office for various expenses

of the litigation. The respondent did not notify the clients of the

withdrawal and did not provide them with an accounting showing the items

that were being reimbursed. There is no claim that the amounts were

improper. The respondent retained the balance of the settlement funds in

his trust account to pay the medical creditors and health insurers who held

subrogation interests in the settlement.

At the mediation, the clients had directed the respondent to negotiate

with medical providers to attempt to reduce their claims. Between February

16 and October 28, 1998, the respondent made several partial distributions

to the clients, totaling $80,000. Throughout 1998, the mother became

increasingly concerned that her health insurers and various medical

providers had not been paid. In some instances, the creditors contacted

her directly. She made several unsuccessful efforts to contact the

respondent's office about payment of these bills.

On October 7, 1998, almost nine months after settlement was closed,

the mother sent a note to the respondent asking him to complete the

distribution of the settlement funds within the next two weeks because she

had been deferring a necessary surgical procedure until the distributions

were complete. The clients sent a similar letter on October 23, 1998. In

late October 1998, the clients finally hired an attorney to assist them in

getting the respondent's cooperation in distributing the settlement

proceeds. On November 4, 1998, the clients’ attorney wrote to the

respondent noting his representation of the clients and asking for a copy

of the written contingent fee agreement, an accounting of the settlement

funds, and a status report of any outstanding medical or subrogation

claims. The respondent did not reply, and on December 3, 1998, the clients’

attorney renewed his request. Following the second request, the respondent

began paying the medical claims. Between December 8, 1998 and January 23,

1999, the respondent paid a total of $282,189.87 from his trust account to

four medical creditors and subrogated insurers. The only medical bill the

respondent paid before December 1998 was a subrogation claim of one of the

mother’s insurers. This was paid on August 18, 1998 only after respondent

was threatened with legal action by an attorney representing the collection

agency for the insurer’s subrogation interest. Payment of the medical

claims was complicated by several factors. The applicable medical

insurance changed over time, and different insurers covered different items

and had different co-pays and deductibles. Bills submitted by medical

creditors included duplications, billing errors, and unauthorized charges.

Some were subject to Indiana's hospital lien statute (I.C. 32-8-26-4

(a)(6)); some were subject to the subrogation statute (I.C. 34-53-1-2), and

others were subject to neither. The respondent ultimately negotiated

discounts and reductions of approximately $115,793.01 from the original

medical expense claims. Despite those difficulties, the delay was for the

most part due to respondent’s failure to resolve those claims.

On December 11, 1998, approximately eleven months after he received

the settlement proceeds, the respondent first reported to the clients and

their attorney the distributions he had made from the settlement proceeds.

He did not report that he had distributed in excess of $1,624,000 for

expenses of litigation and attorney fees. The clients’ new attorney wrote

to the respondent on January 25, 1999. In addition to pointing out several

claims for medical services that appeared to remain unpaid, he renewed the

mother’s request for a copy of the contingent fee agreement and a full

accounting for the funds received in settlement. On April 30, 1999, the

clients’ attorney again asked for documentation that all of the medical

creditors had been paid and reminded the respondent of his earlier

unsatisfied request for a copy of the fee agreement and an accounting of

distributions. The clients’ attorney again renewed that request on June 3,

1999. On June 10, 1999, five months after he had paid the last medical

creditor, the respondent provided the client’s attorney with a settlement

statement disclosing the total settlement, listing the payments made from

the settlement proceeds (including distributions to medical creditors,

payment of litigation expenses, and distributions to the clients) and the

balance remaining in trust. For the first time, the statement disclosed

that the total amount of funds distributed from the settlement for attorney

fees was $1.6 million, but still did not disclose that $533,333.33 of that

was paid to the Alabama attorney. The respondent did not furnish a copy of

his fee agreement.

The Alabama attorney’s participation in the case was minimal. The

clients never hired him to be their attorney, and their contract with the

respondent did not mention a role for any other attorney not associated

with the respondent's law firm. As the case progressed, and unbeknownst to

the clients, the respondent and the Alabama attorney discussed the case by

telephone from time to time, but the Alabama attorney’s role was not

significant. He discussed some ideas about insurance coverage with the

respondent, but he was not involved with research, drafting of pleadings or

other papers, investigation, discovery, court appearances, negotiations, or

client communications. The clients first became aware of the payment to the

Alabama attorney in March 2001 when the clients were notified by the IRS

that the boy owed taxes on the interest earned by a certificate of deposit

held by the uncle for the benefit of the boy. As it turned out, the

Alabama attorney had in turn paid the uncle $177,600 of the $533,333.33 he

received from the respondent. That amount was placed in trust for the boy

by the uncle without the clients’ or the boy’s knowledge.

By June or July 1999, the respondent was ready to close the case and

distribute the $112,972 in settlement funds remaining in his trust account.

The respondent paid that amount to the clients on November 22, 1999. On

December 6, 1999, the client’s attorney once again asked the respondent for

a copy of the written contingent fee agreement and also asked for an

explanation of how the respondent's attorney fees were calculated. The

respondent never replied.

II. The Charged Violations

The hearing officer found that the respondent charged an

unreasonable fee in violation of Ind.Professional Conduct Rule 1.5(a)[3]

“because the contingent fee agreement did not clearly state the method by

which the fee was determined.” Findings of Fact at 34. He also concluded

that the respondent violated Prof.Cond.R. 1.5(c)[4] by failing timely to

provide a written settlement disbursement summary to his clients,

Prof.Cond.R. 1.3 and 1.15(b)[5] by delaying payment of the medical

creditors and lien holders, and Prof.Cond.R. 1.5(e) [6] by dividing his

attorney fees with the Alabama attorney without the client’s knowledge.

A. Unreasonable fee

The Disciplinary Commission alleged that the respondent charged an

unreasonable fee by “recovering a contingency fee on settlement funds that

were not to be received until the future without discounting the future

settlement payments to present value.” Verified Complaint at 4.

Respondent contends that there is no requirement that a structured

settlement be discounted to present value when calculating a contingent

attorney fee on the settlement.

We agree with the hearing officer’s conclusion that the respondent’s

fee agreement with the client failed to state clearly the method by which

the fee was determined. That in and of itself does not constitute a

violation of the prohibition in Prof.Cond.R. 1.5(a) against unreasonable

fees.[7] However, we find that the respondent’s fee was unreasonable

nonetheless, because the fee agreement, in calling for 40% of settlement,

must be based on the value to the client, unless some other method is

clearly spelled out. If an attorney wishes to calculate such a fee based

on anything else, the fee agreement must make those calculations clear to

the client. Here, by calling for 40% of the settlement, the agreement

limited respondent’s fee to 40% of the value and no more.

Use of the term “gross proceeds” does not salvage this agreement. A

lay person might well understand that to mean only that expenses will not

be deducted, and may have no understanding of what a structured settlement

is or that it is a possibility. Where a contingency fee on a structured

settlement will not be collected as settlement funds are actually received,

a lawyer cannot ignore the time value of money or let any material risk of

nonrecovery fall disproportionately on the client. In Matter of Myers, 663

N.E.2d 771 (Ind. 1996), a client hired attorney Myers to recover investment

funds. Myers and the client later entered into a written contingency fee

agreement, which provided that Myers would retain as his fee “10% of the

gross recovery of money and/or property prior to the filing of a claim.”

Myers thereafter negotiated a settlement on behalf of the client, which

terms provided for payments totaling $550,000: $50,000 due upon execution

of the settlement agreement, $50,000 due shortly thereafter, and $15,000

per month for 30 months. Myers deducted $35,000 for his fee from the first

payment and deducted $15,000 from the second payment. He then relinquished

any claim to the remaining $5,000 in fees and notified the defendant that

the remaining periodic payments of $15,000 should be made directly to the

clients. The defendant defaulted after paying a total of only $160,000 of

the $550,000 promised. We concluded that the lawyer’s retention of the

bulk (91%) of his anticipated $55,000 fee from the initial two payments of

the structured settlement was unreasonable because, although the fee

agreement called for a fee of ten percent, his fee in fact approached

thirty percent of the total actual recovery. Myers at 774.

Myers turned principally on the collection risk in deferred payments,

but the time value of money is subject to the same principle. Other

jurisdictions, in valuing structured settlements have expressly held that

contingency fees on structured settlements must account for the time value

of money and therefore be based upon either the settlement’s cost (i.e. the

price of annuity or its present value).[8] Deferred payments always

include a time value factor, and can also include risk of collection

factors. Shifting either without full disclosure and consent of the client

is simply a breach of the fee agreement. A lay person may not readily

grasp the economic significance of deferred payments. But we think it

should be obvious to any attorney who competently represents a party in

negotiating a transaction involving deferred payments.

Here the amount the respondent retained for himself was substantially

in excess of 40% of the value of the settlement at the time he took his

fee. This is true whether value is calculated on the cost of the annuity,

which is one reasonable approach, or by discounted cash flow. As such it

is unreasonable when the fee agreement simply called for a 40% fee.

The respondent contends that at the time he took the $1.6 million fee,

the figure functioned as a "cap" because he otherwise would have been

permitted to calculate his fee by taking 40% of the $2 million cash plus

40% of the gross amount of the clients’ guaranteed future payments

($4,341,431.29), without discounting to present value. The respondent's

fee, using this method, would have been $2,536,572.40. The annuity was

purchased for $1,465,698. Forty percent of the lump sum plus the purchase

price of the annuity (its “cost”) is $1,386,792. According to the

respondent’s expert, the present value[9] of the cash stream payable under

the annuity was slightly less ($1,368,509) than the cost of the

annuity.[10] Thus, whether valued using the cost of the annuity or the

discounted cash flow from the annuity, the fee the respondent actually

retained was over $200,000 in excess of 40% of the total present value of

the settlement. An attorney’s retention of a fee greater than that

specified in the fee agreement with the client, without the renegotiated

agreement of the client is strongly indicative of an unreasonable fee.

Matter of Lehman, 690 N.E.2d 696, 702 (Ind. 1997).

The respondent collected his entire fee, $1.6 million, from the

initial payment of $2 million. At the moment he collected his fee, it

amounted to 80% of the “gross amount recovered,” at that time. We have

held that taking an entire contingent fee from the first payments of a

structured settlement, absent explicit authorization in the fee agreement,

amounts to an unreasonable fee. Myers, infra (holding that “gross amounts

recovered” in contingent fee agreement meant “actual receipt” of funds);

Matter of Benjamin, 718 N.E.2d 1111 (Ind. 1999) (lawyer took entire

contingent fee from first settlement payments). Absent a contrary written

agreement, contingent fee recoveries should be taken only as the funds are

actually received. Restatement (Third) of the Law Governing Lawyers,

Section 35(2) (“Unless the contract construed in the circumstances

indicates otherwise, when a lawyer has contracted for a contingent fee, the

lawyer is entitled to receive the specified fee only when and to the extent

the client receives payment.”). The hearing officer found that the clients

expressed a desire to have the respondent’s fee deducted from the lump sum

payment so that the annuity payments would be preserved for the benefit of

the boy. This does not justify increasing the amount of the fee, which is

the effect of accelerating its payment ahead of the client’s recovery

without discounting for the time-value of money. If an attorney wishes to

calculate a fee based on this consideration, it needs to be spelled out for

the client in the written agreement, and the economic cost and risk of

noncollection to the client needs to be made clear. Here there appears to

be no risk of collection as there was in Myers, but that factor is also a

necessary disclosure if the attorney wishes to shift it to the client.

We recognize the value in the availability and use of structured

settlements. They often provide a severely injured plaintiff with a

regular, permanent income stream for future medical expenses and support

and may result in tax savings. If the parties agree to it, there is

nothing inherently wrong with a lawyer’s receiving the full amount of his

fee in current dollars and the client’s receiving payment in future dollars

so long as the relationship between the present value of the two is in

proportion to the percentage of the lawyer’s fee agreed to in the fee

agreement. But that condition was not met here.

We conclude that the respondent’s fee was unreasonable in violation

of Prof.Cond.R. 1.5(a), because it ignored the time-value of money and

thereby exceeded the fee agreed to in the initial written fee agreement

with the clients by over $200,000. The respondent’s proposed method of

calculating the present value of the structured settlement, by factoring in

the hypothetical tax savings inuring to the client, is not spelled out in

the fee agreement and is contrary to a lay person’s understanding of the

written agreement the respondent created. It appears to be a justification

after the fact, not a condition in setting the fee, and one not explained

to the client. The requirement of a written fee agreement includes

spelling out any unusual calculations and is designed to avoid exactly the

kind of dispute that arose here.

B. Fee sharing

Indiana Professional Conduct Rule 1.5(e) provides:

A division of fee between lawyers who are not in the same firm may be

made only if:

(1) the division is in proportion to the services performed by each

lawyer or, by written agreement with the client, each lawyer assumes

joint responsibility for the representation;

(2) the client is advised of and does not object to the participation

of all the lawyers involved; and

(3) the total fee is reasonable.

All three requirements are lacking in this case. The Alabama

attorney’s involvement in the case was minimal. It consisted of only a few

telephone conversations with the respondent about insurance coverage issues

relative to the case. Clearly, the division of fees between the respondent

and the Alabama attorney was not in proportion to the services provided by

the two. Nor were the clients aware of the Alabama attorney’s

participation. Absent proportionality, the fee division would nevertheless

have been permissible if: (1) the client was advised of, and had no

objection to, the fee sharing, (2) the respondent and the Alabama attorney,

by written agreement with the client, each assumed joint responsibility for

the representation, and (3) the total fee was reasonable. There is no

evidence of a joint responsibility agreement in this case (the respondent’s

letter to the Alabama attorney states that the respondent’s office takes

“primary responsibility” for the case). We conclude that the fee sharing

between the respondent and the Alabama attorney in this case violated

Prof.Cond.R. 1.5(e).

C. Delays in wrapping up the transaction

The respondent received the lump-sum settlement proceeds in mid-January

1998. At that time, several third parties had interests in the settlement

proceeds. Some of the creditors--the subrogated insurers--were statutorily

obligated to reduce their claims to share pro rata in the costs of the

recovery. The application of this statutory obligation is not complex and

there is no evidence in the record establishing any resistance by the

subrogated insurers to do so upon being informed of the requirements of the

statute. Furthermore, the respondent had collected information about the

boy’s special medical damages during the lawsuit. Upon settlement of the

suit, therefore, the respondent was well aware of the identity of the

subrogation and medical provider claimants. The respondent did have to

scrutinize the third-party medical bills to check for duplications, billing

errors, and unauthorized charges. His efforts in regard to these concerns

resulted in the respondent negotiating discounts and reductions of

approximately $115,793.01 from the original claims. However, the

respondent had paid only one of the medical bills by the end of 1998, some

10 months after he received the settlement proceeds, and he was aware of at

least most of the claimants’ interests before the lawsuit settled. He did

not pay the first medical creditor until eight months after receiving the

settlement proceeds, and then only after that creditor threatened the

respondent with a lawsuit. The respondent began paying the rest of the

third-party claims only after the client’s hired a new attorney. That the

respondent, following the client’s new attorney’s second contact, soon

thereafter paid some $282,189.87 in claims strongly indicates that there

was nothing slowing the claims payment process save the respondent’s

inattention. Professional Conduct Rule 1.3 requires lawyers to act with

reasonable diligence and promptness in representing clients. Professional

Conduct Rule 1.15(b) provides, in relevant part, that a lawyer shall

promptly deliver to third persons any funds the third person is entitled to

receive. The respondent’s delay in paying third party creditors following

his receipt of the settlement proceeds violated these rules and ultimately

required the clients to go to the expense of hiring another attorney to

prod the respondent to finish a project for which respondent had already

collected over $1 million in fees.

D. Written settlement statement

Professional Conduct Rule 1.5(c) requires that, upon conclusion of a

contingent fee matter, the lawyer is to provide the client with a written

statement stating the outcome of the matter, and, if there is a recovery,

showing the remittance to the client and the method of its determination.

At the time of settlement in late November 1997, the respondent did not

provide to the clients a written statement showing the total settlement,

the anticipated deductions, a specification of costs of litigation that

were advanced by the respondent, and the net recovery to the clients. The

respondent did not provide a written settlement statement to the clients in

advance of removing the attorney fees or expenses from trust. On December

11, 1998, the respondent reported to the clients the distributions he had

made from the settlement proceeds, 11 months after receiving the settlement

proceeds. At that time, he did not disclose the $24,000 he had withdrawn

to cover his expenses, the $1,066,666.66 he withdrew as his own attorney

fees, or the $533,333.33 he withdrew to provide to the Alabama attorney.

On June 10, 1999, after several unanswered requests from the clients’ new

attorney for a full accounting, the respondent provided to them a

settlement statement disclosing the total settlement, the distributions

made to medical creditors and others, and the balance remaining in trust.

That statement again omitted mention of the fee paid to the Alabama

attorney. In December 1999, while the final distributions were being made

from the settlement proceeds, the clients’ attorney asked the respondent

for an explanation of how his fee was calculated. The respondent never

replied.

We find that the respondent violated Prof.Cond.R. 1.5(c) by failing to

provide an adequate settlement statement upon conclusion of the

representation. Because the respondent failed to state the method of

calculating his fee, his statements did not adequately specify the method

of determining the remittance to the client. Additionally, the

respondent’s settlement statements failed to disclose the portion of the

fee paid to the Alabama attorney.

III. Sanction

Determination of an appropriate sanction for the respondent’s

misconduct requires consideration of several factors, including the

respondent’s state of mind, the duty violated, actual or potential injury

to the client, the duty of this Court to preserve the integrity of the

profession, the risk to the public in allowing the respondent to continue

in practice, and mitigating and aggravating circumstances. Matter of Cox,

662 N.E.2d 635 (Ind. 1996).

The hearing officer found that the respondent's delay in resolving

claims of third parties resulted in direct and significant harm to the

clients. For example, the respondent’s delay in paying one medical

provider resulted in that provider’s freezing its account with the clients,

and requiring the clients on one occasion to pay cash for necessary medical

supplies.

In mitigation, the hearing officer found that the clients agreed

that the respondent did an exemplary job prosecuting the case and obtained

an excellent result. We are strongly influenced by the testimony of the

clients wherein they expressed their deep gratitude to the respondent for

the settlement he obtained for them and his expertise in recovering on

their behalf. Their dissatisfaction arose only in relation to the amount

of attorney fees and his handling of pending medical claims. The hearing

officer also found that the respondent has no prior disciplinary actions

and has had an exemplary career, performing substantial service to the bar

and the justice system. Further, we note that the respondent placed

$215,000.00[11] in an interest bearing escrow account shortly after the

disciplinary proceeding was commenced. We direct the respondent to refund

to the clients $252,596.40,[12] plus interest computed at 8% annually and

to reimburse the clients for the attorney fees they incurred to prod him to

complete the project.

Absent substantial aggravating or concurrent misconduct, this Court

has generally imposed either public or private reprimands or at most short

suspensions on attorneys who exact unreasonable fees. See, e.g., Matter of

Myers, infra (public reprimand); Matter of Benjamin, 718 N.E.2d 1111 (Ind.

1999) (public reprimand for lawyer who kept fee in excess of that permitted

by statutes governing recoveries from Indiana Patient Compensation Fund,

and was taken from first installment of periodically-paid settlement,

contrary to client wishes); Matter of Lehman, 690 N.E.2d 696 (Ind. 1997)

(violation of rules governing contingent fee agreements, and

misrepresentation, by attorney who failed to disclose to personal injury

client that attorney would retain pro rata share of costs of recovery,

which insurers holding subrogation claims against client were required by

statute to pay, warranted reprimand). We view this case primarily as an

unreasonable fee case, although by that characterization we do not wish to

diminish the gravity of the respondent’s other transgressions.

The Clerk of this Court is directed to provide notice of this order in

accordance with Admis.Disc.R. 23(3)(d), to the hearing officer, and to the

clerk of the United States Court of Appeals for the Seventh Circuit, the

clerk of each of the United States District Courts in this state, and the

clerks of the United States Bankruptcy Courts in this state.

Costs of this proceeding are assessed against the respondent.

DICKSON, BOEHM, and RUCKER, JJ., concur.

SULLIVAN, J., concurs and dissents with separate opinion.

SHEPARD, C.J., not participating.

SULLIVAN, Justice, concurring and dissenting.

I concur in the Court's opinion except as to sanction. I agree that

respondent's career and contributions to the profession are weighty

mitigating circumstances. I nevertheless believe a period of suspension is

warranted. While I would find a public reprimand sufficient sanction for

any of the violations standing alone, I believe it is insufficient for the

combination of violations committed here. I do concur with the Court's

directing the respondent to refund the excess of the fee with interest and

to reimburse the clients for the attorneys fees they incurred to pride him

to complete the project.

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[1] The clients testified that they did not know the basis for the fee of

$1.6 million, but that they remembered the agreement with the respondent to

cap his fee at $1.6 million. The respondent testified that the $1.6 cap

was agreed to at a point during the settlement negotiations, but before the

final settlement amount was known.

[2] That letter stated in pertinent part:

"Please accept my apologies for not sending you a written confirmation as

to our fee arrangement prior to this date. . . . I took a look through all

correspondence, and did not find where I ever sent you a letter confirming

our agreement. However, I did find a note indicating what our agreement

was. Customarily, our office agrees to take primary responsibility for the

processing of the litigation against all named defendants, and settlement

and resolution of all subrogation claims. We also agree to be responsible

for 100% of all litigation expenses, subject only to reimbursement, in the

event the litigation is successful. Obviously, this litigation expense

reimbursement will come from the client's share. Further, we agree that any

attorneys' fees realized will be split on the basis of 2/3rds to our

office, and 1/3rd to yours. The 1/3rd that is paid to your office is

characterized as co-counsel fees to you."

[3] Professional Conduct Rule 1.5(a) provides:

A lawyer's fee shall be reasonable. The factors to be considered in

determining the reasonableness of a fee include the following:

(1) the time and labor required, the novelty and difficulty of the

questions involved, and the skill requisite to perform the legal service

properly;

(2) the likelihood, if apparent to the client, that the acceptance of the

particular employment will preclude other employment by the lawyer;

(3) the fee customarily charged in the locality for similar legal services;

(4) the amount involved and the results obtained;

(5) the time limitations imposed by the client or by the circumstances;

(6) the nature and length of the professional relationship with the client;

(7) the experience, reputation, and ability of the lawyer or lawyers

performing the services;

and (8) whether the fee is fixed or contingent.

[4] Professional Conduct Rule 1.5(c) provides:

A fee may be contingent on the outcome of the matter for which the service

is rendered, except in a matter in which a contingent fee is prohibited by

paragraph (d) or other law. A contingent fee agreement shall bed in writing

and shall state the method by which the fee is to be determined, including

the percentage or percentages that shall accrue to the lawyer in the event

of settlement, trial or appeal, litigation and other expenses to be

deducted from the recovery, and whether such expenses are to be deducted

before or after the contingent fee is calculated. Upon conclusion of a

contingent fee matter, the lawyer shall provide the client with a written

statement stating the outcome of the matter and, if there is a recovery,

showing the remittance to the client and the method of its determination.

[5] Professional Conduct Rule 1.3 provides:

A lawyer shall act with reasonable diligence and promptness in representing

a client.

Professional Conduct Rule 1.15(b) provides:

Upon receiving funds or other property in which the client or third person

has an interest, a lawyer shall promptly notify the client or third person.

Except as stated in this rule or otherwise permitted by law or by agreement

with the client, a lawyer shall promptly deliver to the client or third

person any funds or other property that the client or third person is

entitled to receive and, upon request by the client or third person, shall

promptly render a full accounting regarding such property.

[6] Professional Conduct Rule 1.5(e) provides:

A division of fee between lawyers who are not in the same firm may be made

only if:

(1) the division is in proportion to the services performed by each lawyer

or, by written agreement with the client, each lawyer assumes joint

responsibility for the representation;

(2) the client is advised of and does not object to the participation of

all the lawyers involved;

and

(3) the total fee is reasonable.

[7] If the agreement permitted the fee the respondent sought, it appears

to violate Prof.Cond.R. 1.5(c), which requires contingency fee agreements

to be in writing and to state the method by which the fee is to be

determined. However, the Commission charged a Prof.Cond.R. 1.5(c)

violation only with respect to the respondent's failure to provide the

clients with an adequate settlement statement.

[8] As pointed out by the parties in this case, many jurisdictions,

including courts in Florida, California, New Jersey, South Carolina,

Washington, Michigan, and New York, use “cost approach” method in valuing

annuity payments made pursuant to structured settlements. See e.g.,

Fla.Prof.Cond.R. 4-2.5(f); Schneider v. Kaiser Foundation Hospitals, 215

Cal.App. 3d 1311, 264 Cal.Rptr. 227, 231 (1989); Merendino v. FMC Corp.,

181 N.J. Super. 503, 438 A.2d 365, 368 (1981); Johnson v. Sears, Roebuck &

Co., 291 Pa.Super. 625, 436 A.2d 675 (1981); Matter of Williams, Jr., 336

S.C. 578, 521 S.E.2d 497 (1999); Wash.Prof.Cond.R. 1.5(c)(2); Re Estate of

Muccini, 118 Misc.2d 38, 460 NYS2d 680 (1983). Other states, including

Michigan, Alabama, have used the “present value” approach. See, e.g.,

Mich.Prof.Cond.R. 8.121 (2002); Ex parte St. Regis Corp., 535 So. 2d 160

(Ala. 1988). The Association of Trial Lawyers of America’s position on

the topic is set forth in a Board of Governor’s resolution stating,

“contingent fees on structured settlements should always be calculated on

the cost or present value of the annuity, whichever is lower, unless the

fee is paid in periodic payments.” Commission’s Exhibit A, ATLA Board of

Governors Resolution on Contingent Fees, July 18, 1986. Under either

approach, it is recognized that the true immediate value of the structured

settlement is that which takes into account the time-value of money.

[9] “Present value” may be defined as the total sum of future payments

based upon the plaintiff’s projected life expectancy discounted to reduce

the sum to its value in today’s dollars. See Nguyen v. Los Angeles County

Harbor/UCLA Medical Center, 40 Cal.App.4th 1453, 348 Cal.Rpt. at 309-310

(1995). The precise discount rate used by the expert is not clear from the

record.

[10] This calculated present value of the annuity is without regard to

income tax considerations. Under the annuity the client obtained in the

settlement, payments may receive more favorable tax treatment than if the

client received a lump sum and purchased an annuity. See Stipulated Ex.

217 at 36-38, Ex. A. The respondent’s expert testified that the client’s

hypothetical tax advantages should be considered when arriving at a present

value. However, as noted by the Commission, the client’s lump-sum

settlement, as compensatory damages, would not have been taxable. Interest

earned after the settlement was invested would have been taxable income. A

qualified structured settlement, like the one in this case, may result in

all future payments from the annuity being treated as non-taxable income.

The respondent’s expert testified that the present value of the client’s

future stream of income should be determined by asking what amount of money

the client would need to start out with in order to invest in such a way

that, after taxes on the earned interest, would pay the same stream of

income as the annuity. It is upon this rubric that the respondent’s expert

calculated what was, in his opinion, the true “present value” of the

settlement. We agree with the Commission that the client’s tax savings

inherent to the structure of the settlement and income tax law are not part

of the “gross amount recovered” for purposes of calculating contingent

attorneys fees. If an attorney wishes to have that considered that a part

of the fee, the written agreement must spell it out. Of course, the fee

must also be reasonable.

[11] Using the discount rate supplied by the respondent’s expert witness,

the present value of the annuity and contingent benefits was $1,368,509.

Accordingly, the total settlement value for purposes of calculating the

respondent’s contingent fee is $3,368,509 with the respondent’s agreed fee

being $1,347,403.60, or $252,596.40 less than he retained. Using the cost

approach, the total settlement value was $3,465,698, with the respondent’s

fee being $1,386,279.20, or $213,720.80 less than he retained. Because the

purchase of an annuity should preclude risk of collection issues that might

apply to long term structured settlements, this alternative is more costly

to the client. We consider it nevertheless a reasonable approach.

[12] This figure is calculated using the present value the respondent’s

expert attached to the annuity in the computation of the total value of the

settlement, as described in footnote 11, supra. Pursuant to ATLA’s

resolution, the contingent attorney fee is to be calculated on the cost or

present value of the annuity, whichever is lower. See footnote 8, supra.