Splitting the spoils: Lawyers sue lawyers

  • Article by: DAVID PHELPS , Star Tribune
  • Updated: May 18, 2008 - 10:32 PM

In contingency cases, law firms may go a long time between payments for victory. Who gets paid first, and how much, can be a delicate matter.

The world of contingency-fee lawsuits is one of high risk, high reward and high emotions.

Lose the case, and a law firm could get nothing. Win the case and the payouts might be huge. But distribution of the winnings can take a toll.

Plaintiff's lawyers who practice in the contingency domain say arguments over money don't happen all the time but when they do, it's like a bad divorce.

Recently unsealed documents in a fee-dispute lawsuit against the Minneapolis law firm Heins Mills & Olson reveals the raw downside of internal bickering over money.

After negotiating a $2.65 billion settlement in 2005 over false and misleading financial statements by AOL Time Warner, the Heins law firm received a $103 million fee for its work as lead counsel in a nationwide class-action lawsuit.

When some of the partners of the firm thought that Sam Heins and others at the top of the letterhead were keeping too much of the winnings for themselves, outrage replaced decorum.

"It's my goddamn law firm," Heins said at one point to a small group of attorneys when asked for justification of the split.

The group included Alan Gilbert, who left the firm shortly after the encounter and returned to a position in the Minnesota Attorney General's office, and Brian Williams, who left the firm and later sued to get a larger cut of the fee. A trial based on Williams' lawsuit is scheduled in Hennepin County District Court for next month.

Paying the bank first

Heins' comments are contained in a deposition last fall in which he was questioned for the Williams case. Portions of his deposition and other documents were unsealed earlier this month at the request of the Star Tribune.

Heins had more to say in his deposition about the 2006 meeting. "He [Gilbert] said, 'I -- you know, we can work it out. We can work it out.' And I said, 'No, we can't. I'm not going to work it out. We've made an extraordinary generous offer. I'm not going to be negotiated with about it. Either you take it or you don't.'"

Williams and Gilbert each eventually received $4 million from the AOL Time Warner proceeds, according to the unsealed records; Heins got $48 million and his wife, Stacey Mills, an equity partner in the firm, got $32 million.

Heins and Mills argued with their colleagues that the fee didn't go directly to their bottom line but had to be used to cover taxes and pay down a line of credit with the firm's banker that they had used to keep operations going between victories in court.

"That's our first obligation," Mills said about the credit line in a deposition.

Firms that work on contingency have different business models than more traditional firms that rely on billable hours and clients who pay their statements every 30 days. Contingency firms get nothing if they lose a case, and their out-of-pocket expense can be considerable.

Thus, the banking relationship is critical for a law firm working on contingency with a case that can go months or longer before it produces any income for the firm.

William O'Brien of the Minneapolis firm Miller-O'Brien-Cummins, said many firms have established relationships with financial institutions for lines of credit to finance their work.

"You need resources to do that and stay in the game," O'Brien said. "Lawyers have to be good businesspeople too. Those that get in over their head get in trouble."

Tobacco winnings

Taking cases on contingency can be a roller-coaster ride even if exhaustive research has convinced a firm that it has a winning case.

Robert (Randy) Hopper of Zimmerman Reed, a plaintiffs' firm in Minneapolis, recalled a case 10 years ago against the private mortgage insurance industry that was tossed out of court before the lawsuit's ink was barely dry. A judge's interpretation of consumer law differed from Zimmerman Reed's theory.

"That was a year and a half worth of work by two or three lawyers [with no return]," Hopper said.

But several years later, Zimmerman Reed's work on tobacco litigation, led by Charles (Bucky) Zimmerman, allowed the firm to collect an undisclosed portion of a $1.25 billion settlement with the tobacco industry that was divided among 53 law firms.

"The risk is exceedingly high. You have to vet each case on the front end on both the law and the facts," Hopper said. "Everyone hates contingency until the check comes in."

The Minnesota State Board of Investment retained Heins in 2002 to pursue claims against AOL Time Warner for investment losses. The case settled in 2005.

Ron Rosenbaum, a St. Paul attorney who handled medical malpractice cases and has been a talk-radio host, said law firms that rely on contingency cases need to build a record of settlements to provide financing for the next lawsuit down the road.

"The key to this is getting a pipeline," Rosenbaum said. "If you have a pipeline, you can go pretty far without going underwater."

Heins Mills had four settlements that resulted in payments to its lawyers in 2005 and 2006, according to an affidavit of the firm's administrator.

A bitter divorce

Herbert Kritzer, a professor at William Mitchell College of Law, has written a book on contingency-fee cases called "Risks, Reputations and Rewards."

Kritzer, who is not a lawyer but researches the business of law, said contingency lawyers are like portfolio managers for investors who choose cases with the best chances for financial returns. Some take more routine cases such as automobile accidents, which are more likely to pay out, while others go for higher-risk cases in hopes of a larger return.

In terms of distributing settlements to the firm's members, the payout is "limited only by creativity," Kritzer said. But when the firm's members challenge each other, it can get ugly.

"A split in a law firm is like a divorce," he said. "It's a business divorce and it's often pretty bitter."

David Phelps • 612-673-7269

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