Mr. Underwood hired the personal injury law firm Hughes & Coleman to represent him in his motor vehicle personal injury matter. Their agreement provided for Hughes & Coleman to be paid on a contingency fee basis and included, among other terms, that the firm would “assist the client in submitting medical bills for payment to any responsible insurance carrier or agency.”

Two days after Mr. Underwood retained its services, Hughes & Coleman mailed Progressive a letter advising the insurer of Underwood's PIP claim and requesting that it reserve all no-fault benefits to “pay bills or lost wages only as directed by Hughes & Coleman.”

Through further communications with Progressive, the firm learned that Mr. Underwood had a total of $20,000 in PIP coverage: $10,000 in basic reparation benefits (“BRB”) plus $10,000 in added reparation benefits (“ARB”). The firm also learned that Mr. Underwood had not provided to Progressive any physician statements or wage-verification documents required to verify his entitlement to further lost wage payments. Despite repeated requests from Hughes & Coleman, Mr. Underwood never provided these documents.

Hughes & Coleman subsequently mailed Progressive another letter, this time asking it to release Mr. Underwood's remaining no-fault benefits of $18,809.94 by check payable to Mr. Underwood and the firm. To support the request and show that Mr. Underwood's covered losses easily would exceed that amount, Hughes & Coleman attached a bill totaling $71,812.40 from Mr. Underwood's stay at the University of Louisville Hospital.

The firm received the check and mailed Mr. Underwood a power of attorney document, which he signed a couple of days later. This limited power of attorney authorized Hughes & Coleman “to endorse [Mr. Underwood's] name to a settlement draft for the purpose of depositing [the outstanding PIP] funds in [the firm's] escrow account pending final distribution.”

Although Mr. Underwood had not provided any verifying documentation, Hughes & Coleman issued him a check for $973 from the escrowed funds for lost wages. This was calculated by applying the $200-per-week statutory rate to the four weeks and three days that he had not worked or been already compensated for. Later, Hughes & Coleman cut another check from the escrowed funds for $3,492.88 – a negotiated full-satisfaction of the University of Louisville Hospital bill.

This left $14,344.06 remaining in the escrow account.

After Hughes & Coleman decided that the claim needed to enter litigation, Mr. Underwood authorized a suit to be filed on his behalf. The firm then began negotiating a settlement with the tortfeasor's insurer, which culminated in the insurer offering $145,000, which Mr. Underwood rejected.

Hughes & Coleman had valued the case at $200,000 or more and recommended against settling for less than that amount.

Mr. Underwood's (and his mother's) relationship with his counsel deteriorated, and he fired the firm. In her email discharging the firm and requesting the case file and remaining escrow balance, Mr. Underwood's mother explained:

One of the reasons that we are letting you go is, the escrow money could have been given to Travis when he needed the money but we were not told that, we were told that you all had to take it and put it in escrow. We have found out that this was not required like we were made to think it was.

Hughes & Coleman sent Mr. Underwood the remaining escrow balance of $14,344.06.

Mr. Underwood then hired new counsel, James Chambers, to represent him. Shortly thereafter, negotiations with the tortfeasor's insurer concluded with the parties' agreeing to a final settlement of $200,000, resulting in a contingency legal fee of $66,660.

Hughes & Coleman asserted an attorneys' lien on that fee under KRS 376.460, claiming that it was entitled to a quantum meruit share of the fee as compensation for its services rendered to Mr. Underwood before being terminated.

Mr. Chambers challenged the firm's entitlement to any portion of the fee, insisting that its firing was “for cause” and so barred its quantum meruit claim. The firing's justifiable cause, Mr. Chambers argued, was Hughes & Coleman's supposed mishandling of Mr. Underwood's no-fault benefits, which he maintained was both unethical and legally unauthorized.

Despite Hughes & Coleman's willingness to do so, Mr. Chambers declined to participate in the Kentucky Bar Association's fee arbitration process.

The trial court held an evidentiary hearing where it heard testimony from a Hughes & Coleman attorney and staff who worked on Mr. Underwood's case. The firm also submitted deposition testimony from an attorney who testified as an expert in motor vehicle personal injury litigation. He explained that it was common practice to handle clients' no-fault benefits as Hughes & Coleman had handled Mr. Underwood's. He also opined that the firm had provided diligent service, that Mr. Underwood's case appeared to have been progressing well, and that there was nothing about the representation that he considered good cause for discharging the firm.

In addition, Hughes & Coleman submitted its entire 503-page, contemporaneously generated file for Mr. Underwood's case from its case-management system, which the trial court found to be “extremely detailed and meticulous.”

Mr. Chambers' evidence included only notarized statements from Mr. Underwood and his mother; he did not call any witnesses or personally testify at the hearing.

The trial court concluded that Hughes & Coleman's representation of Mr. Underwood had not been deficient and that the firing had been without cause. The trial court rejected Mr. Chambers' contention that the firm's communications with Mr. Underwood had been inadequate, finding “substantial evidence showing that [Hughes & Coleman] maintained excellent communication with [Mr. Underwood] and returned … telephone calls promptly.” The trial court also rejected Mr. Chambers' argument that Hughes & Coleman had improperly withheld or otherwise mishandled Underwood's no-fault benefits.

Having concluded that Hughes & Coleman had been discharged without cause, the trial court apportioned 75 percent of the legal fee to the firm and 25 percent to Mr. Chambers. In the trial court's view, that was “the allocation that most fairly recognize[d] both Hughes & Coleman's labor and [Mr.] Chambers' ability to settle.”

The court of appeals reversed, holding that, in its handling of Mr. Underwood's no-fault benefits, Hughes & Coleman had “maintained a position unsupported by law and adverse to its client” that “constituted valid cause” for Mr. Underwood's terminating its services.

The dispute reached the Kentucky Supreme Court.

The Kentucky Supreme Court's Decision

The court reversed.

In its decision, the court explained that, under Kentucky law, when an attorney employed under a contingency fee contract was discharged without cause before completion of the contract, the attorney was entitled to fee recovery on a quantum meruit basis only, and not on the terms of the contract.

Quantum meruit, the court continued, was an equitable remedy entitling a person who had rendered services to recover payment for the reasonable value of those services. In the legal fee setting, quantum meruit recovery sought to compensate the discharged attorney for the value of the services rendered before being fired.

The court then pointed out that the quantum meruit fee recovery rule applied only when an attorney had been discharged “without cause” – and, therefore, that an attorney forfeited any claim to a fee when validly discharged “for cause.”

The court said that, to justify fee forfeiture, “cause” for a discharge “must involve some sort of wrongful conduct by the attorney, resulting in an irreconcilable breakdown in the attorney-client relationship.” In particular, the court held that an attorney's discharge should be deemed “for cause” so as to bar the fired attorney from recovering a fee in quantum meruit “only” where the reason for the discharge was “some sort of culpable conduct by the attorney.”

Applying that rule in this case, the court found “no cause justifying forfeiture of Hughes & Coleman's quantum meruit fee.” It said that although Mr. Underwood might have felt that he had good reason to be dissatisfied with his lawyers, “the trial court was correct to rule that this dissatisfaction was not a sufficient cause to bar those lawyers from being paid for the work that they performed.”

Among other things, the court declared that the Underwoods' asserted basis for terminating Hughes & Coleman “misunderstands the law” because Mr. Underwood was not, as he and his mother had apparently come to believe, entitled to receive all of the remaining PIP funds “when he needed the money.” Indeed, the court pointed out, those funds' use was statutorily restricted to compensate him only “for loss from injury” from the car crash.

The court also found that “Hughes & Coleman's spearheading [Mr.] Underwood's benefits disbursement was completely aboveboard.” Indeed, the court said, that practice seemed “almost integral to fully servicing a motor-vehicle personal-injury client's needs – it should be commended and encouraged, not punished.”

Accordingly, the court concluded that Hughes & Coleman was entitled to quantum meruit apportionment of the contingency fee, as the trial court had ordered.

The case is Hughes & Coleman, PLLC v. Chambers, No. 2015-SC-000435-DG (Ky. Aug. 24, 2017). Attorneys involved include: FOR APPELLANT: Peter Lucas Ostermiller. FOR APPELLEE: Charles E. Theiler II, Ashby Angell.