Subject: IN THE SUPREME COURT OF TEXAS
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Date: Sat, 29 Sep 2007 11:39:15 -0500

IN THE SUPREME COURT OF TEXAS

════════════

No. 04-1004

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Hoover Slovacek
LLP,

formerly Hoover, Bax &
Slovacek, L.L.P., Petitioner,

v.

John B. Walton, Jr.,
Respondent

════════════════════════════════════════════════════

On Petition for Review from the

Court of Appeals for the Eighth District of
Texas

════════════════════════════════════════════════════

Argued December 1,
2005

Justice Hecht, joined by Justice Medina and Justice Willett, dissenting.

I withdraw my
dissenting opinion dated June 30, 2006 and substitute this one in its stead.

No rational
plaintiff changes lawyers midway through a case in order to recover less, and
John B. Walton, Jr. was not irrational. So when he retained what is now the law
firm of Hoover Slovacek LLP to collect royalties for oil and gas produced on his
32,500-acre ranch for a contingent fee of 28.66% of any recovery, he must have
reasoned that if he had to discharge the firm it would be to maximize recovery,
in which event the firm should not receive a percentage of the final recovery
and thereby benefit from services rendered by the new lawyers but should be paid
only what the fee was worth at the time of discharge. Without an agreement on
the subject, if Hoover Slovacek were discharged for good cause, it might have
the right to be paid the value of its services rendered,[1] but if it were discharged without good
cause, it would be entitled to its full contingent fee from the final
recovery.[2] Walton and Hoover Slovacek agreed
instead that if he terminated the representation, with or without cause, he
would “immediately pay the Firm the then present value of the Contingent Fee”.
Hoover Slovacek would not receive a percentage of the final recovery if
discharged without cause, and Walton would pay the value of the fee, which could
take into account more than the time spent and thus might be more or less than
the value of the services rendered by the firm based on an hourly rate.

What appears
to have been a good-faith effort by lawyer and client to reach a fair
arrangement for handling the difficult possibility of estrangement was,
according to the Court, unconscionable, meaning that “a competent lawyer
could not form a reasonable belief that the fee is reasonable.”[3] This, of course, does not reflect very
well on Hoover Slovacek or its distinguished counsel in this case, who have
advocated the reasonableness of the fee, and the Court’s condemnation of what
might appear to be a rather innocuous fee agreement may also come as a surprise
to a large number of other lawyers who have up until now considered themselves
competent. Worse still, the Court says, the agreement violated public policy,
which means, not that it was bad, but that it “contravene[d] some positive
statute or some well‑established rule of law”.[4] The Court does not actually identify a
statute or rule of law that has been contravened, and truthfully, none has been.
In fact, the agreement has done no devilry at all. To be sure, Walton and Hoover
Slovacek have fought hard over how much is owed, the firm claiming at least $1.7
million (28.66% of $6 million, which Walton once may have thought his claims
were worth), maybe more, while the client admits to owing no more than $257,940
(28.66% of the $900,000 his claims actually settled for), and maybe nothing at
all. But fighting over an agreement does not make the agreement unconscionable
and against public policy, or the number of valid agreements would be much
smaller.

What does
make an agreement unconscionable and against public policy, according to the
Court, is not its terms, which seem fair enough in this case, or any consequence
to the parties, as yet unrealized here, but what might happen if the
agreement were made between other parties or in other circumstances. If a court
can imagine circumstances in which an agreement could be unconscionable —
and here, the Court has tried to list every conceivable way that could happen,
and then some — it is unconscionable. Here are the seven reasons the
Court gives for holding this termination fee agreement unconscionable and
against public policy:

$
The agreement does not distinguish between discharges with and without
cause. True, but surely a lawyer and client can agree to a termination fee
that avoids wrangling over whether discharge was with or without cause, given
the intrinsic uncertainties in that issue. Walton and Hoover Slovacek settled on
a termination fee that Walton, at least, surely thought would be less than a
percentage of the ultimate recovery, and the firm, perhaps, thought might be
more than the value of services rendered at an hourly fee. Mere compromise is
not unconscionable, but if it were, no matter here. Walton undertook to prove
that he discharged Hoover Slovacek with cause but failed to convince the jury,
so even if the agreement had drawn the distinction, he could not take advantage
of it. At this point, the distinction is irrelevant.

$
If the contingent fee were worth more at the time of discharge than at the
end of the case, it would be a bad deal for the client. So it would, but a
fee agreement is not unconscionable and against public policy merely because it
could be a bad deal for the client. As noted at the outset, a rational
plaintiff does not change lawyers to recover less, and if that is what Walton
did, he has himself to blame. The Court criticizes this agreement because it
would benefit the client only when the claim is improved by changing lawyers,
but since the client is in control, benefit to the client should always be
intended and, absent misjudgment, achieved. Moreover, there is no evidence in
this case that Hoover Slovacek’s contingent fee was ever worth more than
it would have been at the end of the case. If the fee was worth as much at
discharge as it would have been at the end, the agreement gave the firm only
what Texas law would if there had been no termination clause, since it has not
been established that discharge was for cause. Walton could have made a
bad deal, but there is no evidence he did.

$
Ascertaining the value of a contingent fee mid-case is hard. There is
some tension between this argument and the previous one, which assumes that a
contingent fee can be valued before the end of the case to the client’s
detriment. Actually, the value of a contingent fee mid-case may well be
impossible to prove with sufficient certainty for recovery, even in a case like
this one involving only economic damages. Walton’s lawyer first demanded $58.5
million to settle, the defendants countered with $6 million and conditions,
Walton demanded $6 million without conditions, the defendants offered $300,000,
and the case finally settled for $900,000, due largely to new and unforeseen
developments. Walton discharged Hoover Slovacek 22 months into a 42-month-long
case. What was Hoover Slovacek’s contingent fee worth at discharge? That
question has been fully tried but has still not been answered — there is no
evidence what a willing buyer would have paid a willing seller for a claim like
Walton’s the day he discharged Hoover Slovacek — and it may not be answerable.
Even if the audit of royalty payments Walton commissioned had been completed,
uncertainties remained in determining whether he had been underpaid. But the
Court seems not to notice that Hoover Slovacek bears the burden of proving the
value of its fee, and any difficulty in carrying that burden does not prejudice
Walton, it benefits him.

$
A lawyer who knows that the value of a claim is declining has an incentive to
misbehave, provoke discharge, collect more than he would in the end, and turn to
more lucrative business. This argument rejects what the previous one
asserts, that the value of a contingent fee is hard to predict. But more
importantly, the Court appears to assume a jurisdiction in which lawyers do not
owe clients a fiduciary duty, the intentional breach of which is a tort remedied
by actual and exemplary damages. A lawyer as wicked as the Court’s imagination
may be more deterred by the threat of punitive damages than the threat of a
voided contract. In any event, no evidence in this case hints at anything even
approaching this pollo poco nightmare.

$
The agreement required Walton to pay up at discharge. But if there had
been no agreement, Walton would undisputedly have been required to pay Hoover
Slovacek at discharge the value of its services rendered. The impoverished
client the Court hypothesizes — certainly not Walton — who could afford
representation only on a contingent fee, would be required to pay for the value
of the discharged lawyer’s services at termination. To agree to what the law
would otherwise provide can hardly be unconscionable. Even so, it would in
fact have been no burden on Walton. He could have paid Hoover Slovacek, just
as he paid his new lawyers $283,000 at an hourly rate. And in any event, in over
nine years, Walton has not yet paid Hoover Slovacek one cent for prosecuting his
claims against the Bass defendants.

$
The agreement violated professional rule 1.08(h) by allowing Hoover Slovacek
to acquire an interest in Walton’s claim other than by a contingent fee
authorized by rule 1.04. Here the circularity is dizzying. To restate the
argument: if the agreement was unconscionable in violation of rule 1.04 of the
Texas Disciplinary Rules of Professional Conduct, it gave Hoover Slovacek an
interest in Walton’s claim prohibited by rule 1.08(h), which excepts only
interests created by an agreement valid under rule 1.04, which this agreement
was not, if indeed it wasn’t. If the termination fee was not unconscionable,
rule 1.08(h) is inapplicable, and if the termination fee was unconscionable,
rule 1.08(h) is inconsequential. Either way, rule 1.08(h) is irrelevant.

$
A client should not reasonably expect a contingent fee to equal or exceed the
recovery. Certainly not, but even if that could ever occur with a
termination fee like the one in this case, and it is not at all clear that it
ever could, it has not happened in this case. Walton settled for
$900,000, and there is no evidence that he owes Hoover Slovacek more than 28.66%
of that amount. The Court notes that its concerns do not extend to hourly fee
agreements, but it is not clear why only contingent fees are subject to abuse.[5]

In sum, the
Court “believe[s] Hoover’s termination fee provision is unreasonably susceptible
to overreaching, exploiting the attorney’s superior information, and damaging
the trust that is vital to the attorney-client relationship.”[6] Although I think the Court’s arguments
are strained at best, even if they had more substance, a fee agreement should
not be voided as unconscionable and against public policy based merely on what
could happen but was not intended and has not in fact occurred. It
could have happened that Hoover Slovacek provoked its own discharge for
nefarious reasons, or that Walton discharged Hoover Slovacek for cause, or that
when he did, the termination fee exceeded the contingent fee, or that he was
somehow prejudiced by the difficulty in evaluating the termination fee, or that
he had to pay before any recovery was realized, or that the fee exceeded his
recovery. Any of these things could have happened, but none did.
Walton and Hoover Slovacek anticipated exactly what occurred and tried to make
suitable provision for it. Whether their agreement was unconscionable, and
therefore abhorrent to public policy and void, should be determined by their
initial expectations and the actual consequences, not on hyperbolic
hypothesizing in hindsight. As the comment to rule 1.04 states:

[F]ee arrangements normally are made at the outset of
representation, a time when many uncertainties and contingencies exist, while
claims of unconscionability are made in hindsight when the contingencies have
been resolved. . . . Except in very unusual situations, therefore, the
circumstances at the time a fee arrangement is made should control in
determining a question of unconscionability.[7]

Agreements are
unconscionable when they are not or cannot be proper, not when it is merely
possible for them to be improper.

Again, it
matters not whether the parties have behaved admirably throughout. Walton does
seem to have had an inflated view of the value of his claims (about 900%),
though perhaps no more than many clients, and he may not have had good cause to
discharge Hoover Slovacek — at least he could not convince a jury he did. And
Hoover Slovacek may have been overly aggressive, at first in pursuing the
defendants (demanding $58.5 million to settle a $900,000 claim) and then in
pursuing Walton (demanding millions for a legal fee worth $257,940). But Hoover
Slovacek’s lawyers are not here on disciplinary charges, and Walton is not
applying for Client of the Year. An agreement is not unconscionable because a
party acts unconscionably — and there is certainly no evidence that Walton or
Hoover Slovacek did.

If the Court
is serious about today’s analysis, many more fee agreements and other contracts
will be unconscionable. The Court says that “[h]ourly fee agreements
. . . do not implicate the [same] concerns” it has about the agreement
in this case,[8] but they do. Fees based on hourly
rates seemingly reasonable at the outset could end up being excessive in
easily imaginable circumstances, but that mere potential does not invalidate an
agreement.

But the Court
may not be serious. It may be that today’s decision will be limited to this one
particular fee agreement in this one isolated situation, portending nothing for
fee agreements in general.[9] If so, then the rules governing fee
agreements will merely have a minor exception, and only the Court’s authority to
articulate general rules will suffer. Of course, the careful lawyer on a
contingent fee can simply charge what the law allows for termination of
representation without good cause: the full fee. The client will be penalized
for changing lawyers and will pay for services not rendered, but it will not be
unconscionable.

We have taken
as given that the only fee a Texas lawyer is prohibited from charging is one
that is illegal or unconscionable because that is what rule 1.04(a) of the Texas
Disciplinary Rules of Professional Conduct provides.[10] In most states, lawyers cannot charge
unreasonable fees;[11] not so in Texas. In Texas, a lawyer
is prohibited only from charging a fee that a competent lawyer could not
reasonably believe to be reasonable.[12] Of course, Texas law does not
award lawyers unreasonable fees, so one could argue that notwithstanding
rule 1.04(a), a lawyer suing to collect a fee must prove that it is reasonable,
not merely that it is not unconscionable. In matters other than lawyer
discipline, the Disciplinary Rules of Professional Conduct have been held to
“provide guidelines and suggest the relevant considerations” without supplying
the rule of decision,[13] and one could argue that the role of
rule 1.04(a) in enforcing fee agreements is similarly limited.[14] But none of the parties here
does.

The Court
remands the case to the court of appeals to review the sufficiency of the
evidence regarding the jury’s failure to find that Walton discharged Hoover
Slovacek for good cause. In the end, Hoover Slovacek may recover as much or more
without the termination fee provision. This is certainly an odd way of applying
unconscionability. I would enforce the termination fee agreement. Accordingly, I
respectfully dissent.

Nathan L. Hecht

Justice

Opinion
delivered: November 3, 2006

[1] Compare Royden v. Ardoin, 331 S.W.2d 208,
209 (Tex. 1960) (holding that an attorney suspended from practice before
completion of representation was not entitled to recover on the contract or for
quantum meruit, but stating: “If an attorney, without just cause, abandons his
client before the proceeding for which he was retained has been conducted to its
termination, or if such attorney commits a material breach of his contract of
employment, he thereby forfeits all right to compensation.” (internal quotation
marks omitted)), and Kelly v. Murphy, 630 S.W.2d 759, 761‑762
(Tex. App.—Houston [1st Dist.] 1982, writ ref’d n.r.e.) (holding that an
attorney who dismissed his client’s lawsuit without authorization was not
entitled to recover for quantum meruit), with Rocha v. Ahmad, 676
S.W.2d 149, 156 (Tex. App.—San Antonio 1984, writ dism’d) (holding that attorney
discharged for good cause was nevertheless entitled to recover for quantum
meruit, and stating: “If the former client pleads and proves good cause for
discharge, . . . then the attorney is not entitled to recover under
the contract of employment. In such a case, the attorney may attempt to recover
a fee for services rendered up to the time of discharge under quantum
meruit.”).

[2] Mandell & Wright v. Thomas 441 S.W.2d 841,
847 (Tex. 1969) (“In Texas, when the client, without good cause, discharges an
attorney before he has completed his work, the attorney may recover on the
contract for the amount of his compensation.” (citing Myers v. Crockett,
14 Tex. 257 (1855); White v. Burch, 19 S.W.2d 404 (Tex. Civ. App.—Fort
Worth 1929, writ ref’d); White v. Burch, 33 S.W.2d 512 (Tex. Civ.
App.—Fort Worth 1930, writ ref’d); Cottle County v. McClintock &
Robertson, 150 S.W.2d 134 (Tex. Civ. App.—Amarillo 1941, writ dism’d
judgment cor.))). One might well think that the most the client would owe in
such circumstances would be the contractual fee prorated for the services the
lawyer actually performed. See Restatement (Third) of the Law Governing
Lawyers § 40 cmt. c (2000) (“Allowing a discharged or withdrawing
lawyer to recover compensation under a fee contract with the client is sometimes
more appropriate . . . where the client discharges a contingent-fee
lawyer without cause just before the contingency occurs, perhaps in order to
avoid paying the contractual percentage fee. . . . [T]he contractual
fee is prorated for the services actually performed . . . .”). But that is not
Texas law, and the parties in this case have not suggested it should
be.

[3] Tex.
Disciplinary R. Prof’l Conduct 1.04(a) (“A fee is unconscionable if a
competent lawyer could not form a reasonable belief that the fee is
reasonable.”).

[4] Lawrence v. CDB Servs., Inc., 44 S.W.3d 544, 553
(Tex. 2001) (“‘Public policy, some courts have said, is a term of vague and
uncertain meaning, which it pertains to the law‑making power to define, and
courts are apt to encroach upon the domain of that branch of the government if
they characterize a transaction as invalid because it is contrary to public
policy, unless the transaction contravenes some positive statute or some
well‑established rule of law.’“); Town of Flower Mound v. Stafford Estates
Ltd. Partnership, 135 S.W.3d 620, 628 (Tex. 2004); Texas Commerce Bank,
N.A. v. Grizzle, 96 S.W.3d 240, 250 (Tex. 2002);.Churchill Forge, Inc. v.
Brown, 61 S.W.3d 368, 373 (Tex. 2001).

[5] See Restatement (Third) of the Law Governing
Lawyers § 34 cmt. c (2000) (“Accordingly, the reasonableness of a
fee due under an hourly rate contract, for example, depends on whether the
number of hours the lawyer worked was reasonable in light of the matter and
client. It is also relevant whether the lawyer provided poor service, such as
might make unreasonable a fee that would be appropriate for better services, or
services that were better or more successful than normally would have been
expected . . . .”).

[6] Ante at ___.

[7] Tex.
Disciplinary R. Prof’l Conduct 1.04 cmt. 7; see also Restatement (Third) of the Law Governing
Lawyers § 34 cmt. c (“Although reasonableness is usually assessed as
of the time the contract was entered into, later events might be relevant.
. . . [E]vents not known or contemplated when the contract was made
can render the contract unreasonably favorable to the lawyer or, occasionally,
to the client. . . . To determine what events client and lawyer
contemplated, their contract must be construed in light of its goals and
circumstances and in light of the possibilities discussed with the client
. . . .”).

[8] Ante at ___.

[9] See County of Cameron v. Brown, 80 S.W.3d
549, 565-566 (Tex. 2002) (Hecht, J., dissenting) (“It may be, however — one
cannot always tell for sure — that the Court does not really mean what it says.
. . . [I]t may be that this case is just another ‘restricted railroad
ticket, good for this day and train only.’“ (citing Smith v. Allwright,
321 U.S. 649, 669 (1944) (Roberts, J., dissenting))).

[10] Tex.
Disciplinary R. Prof’l Conduct 1.04(a) (“A lawyer shall not enter into an
arrangement for, charge, or collect an illegal fee or unconscionable
fee.”).

[11] Alaska R.
Prof’l Conduct Rule 1.5(a); Ariz.
R. Prof’l Conduct ER 1.5(a); Ariz. R. Prof’l Conduct, ER 1.5(a);
Ark. R. Prof’l Conduct, Rule
1.5(a), (e)(3); Colo. R. Prof’l
Conduct Rule 1.5(a), (f); Colo.
R. Civ. P. Ch. 23.3 (contingent fees), Rules 3, 7; Conn. R. Prof’l Conduct, Rule 1.5(a);
Del. R. Prof’l Conduct , Rule
1.5(a); D.C. R. Prof’l Conduct
Rule 1.5(a); Ga. R. Prof’l
Conduct Rule 4-102, Rule 1.5(a); Haw. R. Prof’l Conduct Rule 1.5(a);
Idaho R. Prof’l Conduct Rule
1.5(a); Ill. R. Prof’l Conduct
Rule 1.5(a); Ind. R. Prof’l
Conduct Rule 1.5(a); Kan. R.
Prof’l Conduct Rule 1.5(a), (e) (court review); Ky. R. Prof’l Conduct SCR
3.130(1.5(a)); La. R. Prof’l
Conduct Rule 1.5(a), (f)(5) (unearned fee/expense deposit/retainer
provision); Md. R. Prof’l Conduct
Rule 1.5(a); Minn. R. Prof’l
Conduct Rule 1.5(a); Miss. R.
Prof’l Conduct Rule 1.5(a); Mo.
R. Prof’l Conduct Rule 4-1.5(a); Mont. R. Prof’l Conduct Rule 1.5(a);
Nev. R. Prof’l Conduct Rule
155.1; N.J. Rules Prof’l Conduct
RPC 1.5(a); N.M. R. Prof’l
Conduct RULE 16‑105(A); N.D. R.
Prof’l Conduct Rule 1.5(a); Okla.
R. Prof’l Conduct Rule 1.5(a); R.I. R. Prof’l Conduct Rule 1.5(a);
S.C. R. Prof’l Conduct Rule
1.5(a); S.D. R. Prof’l Conduct
Rule 1.5(a); Tenn. R. Prof’l
Conduct Rule 1.5(a); Vt. R.
Prof’l Conduct Rule 1.5(a); Va.
R. Prof’l Conduct Rule 1.5(a); Wash. R. Prof’l Conduct Rule 1.5(a);
W. Va. R. Prof’l Conduct Rule
1.5(a); Wis. R. Prof’l Conduct
SCR 20:1.5(a); and Wyo. R. Prof’l
Conduct Rule 1.5(a). See also ABA Model Rules of Professional Conduct
Rule 1.5(a) (no “unreasonable” fees or expenses) (1983); ABA Ethics 2000 Revised Model Rules of
Professional Conduct Rule 1.5(a), (e)(3) (2003); and Restatement of the Law Governing
Lawyers §§ 34-35 (contingent fees, incorporating
§34)(2000).

[12] See supra note 2.

[13] In re Users System Services, Inc., 22 S.W.3d
331, 334 (Tex. 1999); In re EPIC Holdings, Inc., 985 S.W.2d 41, 48 (Tex.
1998); National Medical Enterprises, Inc. v. Godbey, 924 S.W.2d 123, 132
(Tex. 1996); Henderson v. Floyd, 891 S.W.2d 252, 254 (Tex. 1995) (per
curiam); Spears v. Fourth Court of Appeals, 797 S.W.2d 654, 656 (Tex.
1990); Ayres v. Canales, 790 S.W.2d 554, 556 n.2 (Tex.
1990).

[14] Cf. Johnson v. Brewer & Pritchard,
P.C., 73 S.W.3d 193, 205 (Tex. 2002) (referring to Rule 1.04 to determine a
permissible referral fee); Bocquet v. Herring, 972 S.W.2d 19, 21 (Tex.
1998) (referring to Rule 1.04 for factors indicating reasonableness of attorney
fee); Arthur Andersen & Co. v. Perry Equip. Corp., 945 S.W.2d 812,
818 (Tex. 1997) (same).