A ‘Trick’ on County, a ‘Treat’ for Lawyers

Trick or treat? Halloween arrived early this year for the county when, in August, the law firm of Hennigan, Mercer & Bennett shocked legal representatives by demanding a “treat” of $48.7 million. Surprised that the firm would seek a bonus nearly twice as large as the $26.3 million in legal fees already collected, county officials questioned how this bonus could be anything other than an illegal gift of public funds.

The firm revealed the “trick”--a vague, open-ended clause that appears to grant it latitude to draft a final fee statement, charging unspecified amounts above and beyond “benchmark billing rates.” The bankruptcy litigation representative, Thomas W. Hayes, denied the claim, declaring further payments “unnecessary.” The firm sued its former clients in federal court for $48.7 million. A decision rests with U.S. District Judge Gary L. Taylor, who fielded arguments from both sides on Oct. 7.

This is the law firm that on behalf of the county (and pool investors) had banged on doors up and down Wall Street, suing and successfully “scaring” several financial firms into settlements, ultimately bagging $865 million. While an impressive sum, it is important to note that $865 million is just over half the amount of investment losses suffered by the Orange County investment pool in 1994, which led to the county’s bankruptcy. If Taylor awards the $48.7 million or any additional money to the lawyers, the award will reduce recovery payments to local governments. Such a decision would enrich Hennigan, Mercer & Bennett for naming and claiming their bonus at public expense. An award in this case could set a dangerous precedent.

J. Michael Hennigan, a partner, called the bonus reasonable, saying that most contingency arrangements provide much more than the $75 million, or less than 10% of recovered amounts, that his firm would receive. “It is a huge number, but well-deserved, I think,” Hennigan concluded.

But what of the original intent of the parties to this agreement? In particular, the county, seeking to avoid a contingency arrangement, agreed to pay the firm’s listed rates for legal services and earlier had set aside a $50-million “war chest” to fund the legal effort: There was no risk that the law firm would not be paid in a timely way. One might consider the $385 to $450 hourly rate, billed by partners at HMB, sometimes for hundreds of hours per month, to be adequate compensation.

Should we be bound by the “trick” and provide the “treat”? Are fully compensated law firms entitled to a retroactive contingency in such cases? An expansive interpretation of the terms of an agreement, particularly by the party that drafted it, often meets with judicial skepticism. That would be particularly appropriate and welcome in this case.