Gillis v. Wells Fargo Bank, N.A.

Filing 74

OPINION and ORDER ADOPTING re 58 Sealed Order, 49 DENYING SEALED MOTION Approve Attorney Fee Agreement by Ernst Law Firm, PLC. Signed by District Judge Patrick J. Duggan. (MOre)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION

MAUREEN GILLIS,
Plaintiff,

Civil Action No.
12-CV-10734

vs.
Honorable Patrick J. Duggan
WELLS FARGO BANK, N.A.,
Defendant.
_____________________________/
OPINION (1) ADOPTING THE MAGISTRATE JUDGE’S REPORT AND
RECOMMENDATION INSOFAR AS CONSISTENT WITH THIS
OPINION AND ORDER, (2) DENYING ERNST LAW FIRM, PLC’S
MOTION REGARDING DIVISION OF ATTORNEY FEES, and (3)
UNSEALING THESE ANCILLARY PROCEEDINGS
I. INTRODUCTION
This is a conversion, fraud, and breach of contract dispute between Plaintiff
Maureen Gillis and Defendant Wells Fargo Bank, N.A. (Wells Fargo). After the
Court granted summary judgment in favor of Gillis on her breach of contract and
conversion claims against Wells Fargo, see Gillis v. Wells Fargo Bank, N.A., No.
12-CV-10734, 2013 WL 2250215 (E.D. Mich. May 22, 2013), the parties settled
their dispute. But a new dispute arose – one between Gillis and her former
attorney, Kevin S. Ernst of Ernst Law Firm, PLC – over the proper amount of
attorney fees due Ernst for work performed in this lawsuit. The Court has ancillary

jurisdiction to resolve this disagreement. See Exact Software N. Am., Inc. v.
DeMoisey, 718 F.3d 535, 542 (6th Cir. 2013) (“For years, indeed since the early
years of the republic, federal courts have resolved fee disputes between lawyers
and their clients when those disputes arise out of the underlying case.”); Jenkins v.
Weinshienk, 670 F.2d 915, 918 (10th Cir. 1982) (“Determining the legal fees a
party to a lawsuit properly before the court owes its attorney, with respect to the
work done in the suit being litigated, easily fits the concept of ancillary
jurisdiction.”).
The Court referred the matter to Magistrate Judge Michael Hluchaniuk, who
held an evidentiary hearing on January 29, 2014 and issued a Report and
Recommendation (R&R) on June 30, 2014 recommending that Ernst’s motion for
division of attorney fees be denied. Ernst filed objections to the R&R and Gillis,
through her new attorney, filed a response. The Court has reviewed this matter de
novo and, for the reasons that follow, agrees with the Magistrate Judge that Ernst’s
motion for division of attorney fees should be denied.1

1

Before proceeding further, the Court notes that these ancillary proceedings – the
motion papers, the transcript of the evidentiary hearing, the parties’ proposed
findings of fact and conclusions of law, the Magistrate Judge’s R&R, and the
objections thereto – have been filed under seal. However, this Court’s Local Rules
require parties to obtain a court order permitting sealing before filing any item
under seal, unless “a statute or rule authorizes filing a document or other item
under seal.” E.D. Mich. LR 5.3. No statute or rule of which this Court is aware
authorizes the sealing of these proceedings, and no request to file a document
under seal has been made by any party in this case. Thus, the Court will order the
2

II. BACKGROUND2
Before this lawsuit was filed, Gillis and Ernst entered into a written
contingent fee agreement under which Ernst would receive as compensation for his
work on the case one-third of “all sums recovered by settlement or judgment” after
first deducting costs from the amount recovered. Contingent Fee Agreement ¶ 2
(ECF No. 49-2 Page ID 906).

The agreement, which was drafted by Ernst,

explicitly forbids subsequent oral modifications: “The provisions of this agreement
Clerk of Court to unseal the following documents that have been filed under seal
without proper authorization: ECF Nos. 49-51, 54-55, 57-58, 61, 68, 72, and 73.
The Court acknowledges that the content of a confidential settlement agreement
between Gillis and Wells Fargo is discussed in these proceedings and that the
agreement itself is contained in the record. However, while “[t]he parties are
privileged to negotiate in secret, . . . they must litigate in public,” and [s]ealing
court records . . . is deemed a drastic step, which must be justified by ‘the most
compelling reasons.’” Encana Oil & Gas (USA), Inc. v. Zaremba Family Farms,
Inc., No. 12-369, 2012 WL 1377598, at **1-2 (W.D. Mich. Apr. 19, 2012)
(quoting In re Knoxville News-Sentinel Co., 723 F.2d 470, 476 (6th Cir. 1983)).
Here, no party has attempted to make any showing, compelling or otherwise,
justifying the sealing of these proceedings. The issue of sealing was discussed
briefly during the evidentiary hearing over which Magistrate Judge Hluchaniuk
presided. Ernst stated that he filed the motion under seal because matters
contained in the parties’ confidential settlement agreement are referenced.
Magistrate Judge Hluchaniuk ordered that the transcript of the evidentiary hearing
be sealed “unless ordered unsealed by a Court following today’s proceeding.”
1/29/14 Hr’g Tr. 61-62 (ECF No. 61 Page ID 1096-97). Notably, the pertinent
Local Rule and case law authority was not cited or discussed during the evidentiary
hearing. For the reasons discussed above, the Court now unseals these
proceedings.
2

The following background facts are gleaned from the evidentiary hearing held by
Magistrate Judge Hluchaniuk on January 29, 2014 and from the evidence attached
to the parties’ motion papers.
3

may not be modified or waived except in a writing signed and executed by all
parties.” Id. ¶ 13 (ECF No. 49-2 Page ID 909).
After Gillis signed the contingent fee agreement, Ernst did some additional
legal research and consulted Dean Elliott, another attorney. The two determined
that a potential statutory conversion claim existed against Wells Fargo and that, if
successful, Gillis may be entitled to an award of attorney fees from Wells Fargo
pursuant to the fee-shifting provision of Michigan’s conversion statute. See Mich.
Comp. Laws § 600.2919a (“A person damaged as a result of [a conversion] may
recover 3 times the amount of actual damages sustained, plus costs and reasonable
attorney fees.”).
After discovering the potential conversion claim, Ernst spoke to Gillis and
the two orally agreed that, if successful on the conversion claim, Ernst and Elliott
would receive the full amount of any attorney fee award in addition to one-third of
the other sums recovered in the lawsuit.3 Gillis admits that she orally agreed to this
arrangement and gave Ernst an affirmative response indicating her approval,
although Gillis testified that she “didn’t understand [the arrangement] at the time.”
Moreover, Gillis admitted that she did not ask Ernst any questions about the
arrangement, did not otherwise seek clarification, and did not ask Ernst to put the

3

Elliott was not a party to the written contingent fee agreement because his
involvement in this matter postdated the written agreement.
4

oral agreement in writing. Gillis conceded that, based on her statements to Ernst,
he would have reasonably believed that she agreed to the oral arrangement.
1/29/14 Hr’g Tr. 41-44 (ECF No. 61 Page ID 1076-79).
Ernst and Elliott, on behalf of Gillis, eventually sought and obtained
summary judgment on the conversion claim; however, the Court did not rule on
damages at that time, instead reserving the ruling for a later date. See Gillis, 2013
WL 2250215, at *13 (“The Court reserves ruling on the amount of damages
[Gillis] is entitled to under her conversion claim.”).
However, that later date never came, as Gillis and Wells Fargo settled their
dispute for $312,000 following a settlement conference over which this Court
presided.

During Ernst’s settlement discussions with Wells Fargo, Ernst

emphasized the fact that Wells Fargo could be responsible for Gillis’ attorney fees,
which at that time had reached approximately $130,000. In others words, Ernst
“leveraged” Wells Fargo’s potential attorney fee exposure to boost the settlement
value of the case. The parties entered into a written settlement agreement under
which “Wells Fargo agree[d] to pay Gillis . . . $312,000” as a “Settlement
Payment” in exchange for relinquishing her claims.

Confidential Settlement

Agreement & Release ¶ III.C (ECF No. 50-3 Page ID 956).
Pursuant to the written contingent fee agreement, Ernst should have received
approximately $104,000 (one-third of $312,000) and Gillis should have received
5

approximately $208,000 (two-thirds of $312,00).4 Instead, however, Ernst gave
Gillis a check for only $156,000, which is one-half of the settlement amount.
According to Ernst, the written contingent fee agreement was orally modified a
second time – this time during the settlement conference.

The following

circumstances led to the second purported oral modification.
During the settlement conference – after Wells Fargo offered to settle the
case for $312,000 but before Gillis accepted the settlement offer – Ernst called
Gillis, who was participating telephonically in the settlement conference, and
explained that a settlement offer of $312,000 was on the table, and that based on
the first oral modification to the contingent fee agreement, discussed above, Ernst
would be entitled to his attorney fees so far (which at that time totaled
approximately $130,000) plus approximately $104,000, which is one-third of the
settlement amount, for a total of $234,000. However, Ernst explained to Gillis that
because $234,000 constitutes more than half of the settlement offer and “it’s [not]
fair [for the attorney] to take more than half,” Ernst orally proposed that he and
Gillis each take half of the settlement amount, with Ernst paying costs (totaling
approximately $2,500) from his share. Ernst told Gillis over the phone that she
would “walk away with one hundred and fifty-six [thousand].” 1/29/14 Hr’g Tr.
11, 47-49 (ECF No. 61 Page ID 1046, 1082-84).
4

In computing these numbers, the Court disregards the issue of costs, which would
alter the numbers slightly.
6

Gillis admits that she orally agreed to this arrangement by giving Ernst an
affirmative verbal response, but states that she nonetheless always understood that
she was entitled to two-thirds of her recovery pursuant to the written contingent fee
agreement, which she did not think could be changed absent a written, signed
agreement.

The following colloquy ensued at the evidentiary hearing before

Magistrate Judge Hluchaniuk:
Q [by Ernst]: How is it that you could understand that you were going
to get two-thirds when I just told you [over the phone, during the
settlement conference] you were going to get half?
A [by Gillis]: I assumed there was something I was missing that
possibly that $70,000 check had some value in there which would
have made it kind of a two-thirds, one-third. I didn’t. . . . That I was
just trusting that the only thing I had signed said two-third, one-third.
And however – whatever numbers you were quoting, that when I saw
something in writing it would be explained and that it would come out
to two-thirds, one-third.
Once again, Gillis admits that she did not ask Ernst for clarification regarding the
new arrangement, did not ask Ernst to reduce it to writing, and, based on her
statements to Ernst, he would have reasonably believed that she agreed to the oral
modification. Id. at 49-50 (ECF No. 61 Page ID 1084-85).
After Gillis orally agreed to evenly split the settlement offer, Ernst, on
behalf of Gillis, accepted the offer. Gillis was eventually given a check marked
“final settlement payment” in the amount of $156,000.

However, a dispute

subsequently arose, leading to these ancillary proceedings. Gillis’ position is that
7

both purported oral modifications are invalid and that, pursuant to the written
contingent fee agreement, she is entitled to approximately $208,000, which is twothirds of the settlement amount. Because Gillis already received $156,000, the
amount currently at issue is approximately $52,000.
III. ANALYSIS
In his R&R, Magistrate Judge Hluchaniuk summarized the arguments made
by the parties in their motion papers. The Court does not restate those arguments
here and instead proceeds directly to its legal analysis.
“A contingent fee contract has been defined as a fee agreement under which
the attorney will not be paid unless the client is successful.

Under such a

definition, if payment to the attorney is certain, the contract is not a contingent fee
agreement even if the amount of the fee might vary depending on the result in the
matter.” 1 Robert L. Rossi, Attorneys’ Fees § 2:1 (3d ed. 2014). See also 23
Williston on Contracts § 62:4 (2002) (“A contingent fee for attorney services is
one that depends upon the success or failure in an effort to enforce a supposed
right. Thus, under a contingency fee contract, the attorney is not entitled to receive
payment for services rendered, unless the client succeeds in recovering money
damages.” (footnote omitted)). In Michigan, contingent fee agreements must be in
writing; oral contingent fee agreements are unenforceable. See Mich. R. Prof’l
Conduct 1.5(c) (“A contingent-fee agreement shall be in writing.”); 7A C.J.S.
8

Attorney & Client § 392 (2004) (“An oral contingent fee agreement is not
enforceable and the attorney cannot recover the fee amount specified in the oral
agreement.” (footnote omitted)); Ronald D. Rotunda & John S. Dzienkowski,
Legal Ethics - The Lawyer’s Deskbook on Professional Responsibility § 1.5-3
(2013-2014 ed.) (“[A]ll contingent fee arrangements must be in writing.”).
The written contingent fee agreement between Gillis and Ernst allocates to
Ernst one-third of “all sums recovered by settlement or judgment.” Given that
there is no provision in the written agreement separately addressing attorney fee
awards and the phrase “all sums” is broad enough to encompass an award of
attorney fees, Ernst would not be entitled to the full amount of any attorney fee
award under the terms of the parties’ written agreement.5 Rather, under the written
contingent fee agreement, an attorney fee award is treated like any other aspect of
the recovery and subject to a one-third/two-thirds split.6

5

In the absence of an agreement otherwise or a court order, an attorney fee award
belongs to the client and not the client’s attorney. See Restatement (Third) of The
Law Governing Lawyers § 38(3) (2000) (“Unless a contract construed in the
circumstances indicates otherwise . . . payments that the law requires an opposing
party or that party’s lawyer to pay as attorney-fee awards . . . are credited to the
client, not the client’s lawyer, absent a contrary statute or court order.”).
6

Ernst argues that the written agreement is “silent” as to the division of attorney
fee awards. While it is true that the agreement does not specifically mention
attorney fee awards, the agreement does provide that “all sums recovered” are
subject to a one-third/two-thirds split. The recovery of attorney fees would clearly
fit within the category of “all sums.” If it was Ernst’s intention to treat attorney fee
awards differently, it was his responsibility to so indicate in the written agreement.
9

After Gillis signed the written contingent fee agreement, Ernst sought to
modify its terms by changing the way in which an attorney fee award would be
treated. Instead of a one-third/two-thirds split of “all sums recovered,” which
would include the recovery of an attorney fee award, Ernst sought to differentiate
an attorney fee award from other sums recovered. This purported modification
amounts to a new contingent fee agreement under which Ernst would be entitled to
100% of any attorney fees recovered and one-third of all other sums recovered if
successful in prosecuting Gillis’ claims.7 Because all contingent fee agreements in
Michigan must be in writing and this one was oral, it is not enforceable.
Alternatively, even if the oral modification were enforceable, the Court
would still conclude that Ernst is not entitled to more than one-third of the
settlement amount pursuant to the purported oral modification.

The oral

agreement, according to Ernst, was that Ernst would get “any attorney’s fees

See Gorton v. Hostak, Henzl & Bichler, S.C., 217 Wis.2d 493, 508, 577 N.W.2d
617, 623 (1998) (“[T]he burden is on the attorney who possesses legal knowledge
and who drafts the agreement to state clearly the terms of the fee agreement and to
address specifically the allocation of court-awarded attorney fees.”).
7

The purported oral agreement allocating the full amount of any attorney fee
award and one-third of other sums to Ernst fits within the definition of a contingent
fee agreement because Ernst would be entitled to the full amount of any attorney
fee award and one-third of other sums recovered only if he obtained a successful
outcome for Gillis. See Rossi § 2:1 (defining a contingent fee agreement “as a fee
agreement under which the attorney will not be paid unless the client is
successful.”). At the time of the purported oral modification, Ernst had not yet
achieved a successful outcome for Gillis.
10

payable by Wells Fargo . . . in addition to the one-third of any potential damages.”
1/29/14 Hr’g Tr. 7-8 (ECF No. 61 Page ID 1042-43). However, no attorney fees
were ever awarded in this case. During the summary judgment proceedings, the
Court explicitly declined to rule on the issue of damages relating to Gillis’
conversion claim: “The Court reserves ruling on the amount of damages she is
entitled to under her conversion claim.”

Gillis, 2013 WL 2250215, at *13.

Likewise, the settlement agreement between Gillis and Wells Fargo does not
earmark any sum of money as an attorney fee award; it merely provides that
“Wells Fargo agrees to pay Gillis . . . $312,000” as a “Settlement Payment” in
exchange for relinquishing her claims.

Confidential Settlement Agreement &

Release ¶ III.C (ECF No. 50-3 Page ID 956). While Wells Fargo’s potential
exposure to Gillis’ attorney fees may have played a significant role in the
settlement negotiations, there is no basis on this record to conclude that any
specific portion of that amount constituted an attorney fee award.
For these reasons, Ernst is not entitled to more than one-third of the
settlement amount. The first purported oral modification to the written contingent
fee agreement is not enforceable.
The second purported oral modification, however, presents a more difficult
question.

Under this purported modification to the written contingent fee

agreement, Ernst and Gillis orally agreed, during the settlement conference, that
11

they would evenly split the $312,000 settlement amount that had been offered,
with Ernst paying costs from his share in the amount of approximately $2,500.
This new agreement, unlike the first purported oral modification, is not a
contingent fee agreement; at the time Ernest and Gillis agreed to evenly split the
offered amount of $312,000, an offer to settle the case in that amount was on the
table and, at that moment, Ernst had achieved a successful outcome for Gillis by
eliciting the settlement offer from Wells Fargo.

Because there is no rule

prohibiting oral non-contingent fee agreements between attorney and client, the
second purported oral modification, unlike the first one, is not unenforceable on
the ground that it was not reduced to writing pursuant to Michigan Rule of
Professional Conduct 1.5(c).
However, under Michigan law, special rules govern an attorney’s ability to
modify a contract with a client once the attorney-client relationship has begun:
The relationship between client and attorney is a fiduciary one, not
measured by the rule of dealing at arm’s length. They can agree upon
fees, but if the agreement is made after the relationship is begun, it is
subject to scrutiny by the court in case of dispute. . . . On the other
hand, a client is not necessarily an incompetent before the law and if
he acquiesces in a charge as a free contracting person, with knowledge
of the facts, and especially if he acquiesces in it for a reasonable time,
there is no reason for the court to put him under guardianship by
revaluing the services or scrutinizing them critically or to the unfair
disadvantage of the attorney. His account stated will be binding
although he may have some criticism of the fees.

12

Rippey v. Wilson, 280 Mich. 233, 243-44, 273 N.W. 552, 555 (1937). Similarly,
under the Restatement (Third) of the Law Governing Lawyers (2000)
(“Restatement”), which is “consistent with Michigan’s Rules of Professional
Conduct in all respects,” CenTra, Inc. v. Estrin, 538 F.3d 402, 409-10 (6th Cir.
2008), “[c]lient-lawyer fee contracts entered into after the matter in question is
under way are subject to special scrutiny” and are binding if “fair and equitable in
view of circumstances unanticipated when [the] contract was made.” Restatement
§ 18 cmt. e.
It is Ernst’s burden to show that the oral modification to the written
contingent fee agreement was fair and equitable. See id. (“If the client and lawyer
made an initial contract and the postinception contract in question is a modification
of that contract, the client may avoid the contract unless the lawyer [shows that the
modification was fair and reasonable to the client].”). For the following reasons,
the Court concludes that Ernst has not met his burden of showing that the
modification was reasonable and fair and that, accordingly, the oral modification
may be voided by Gillis.
The written contingent fee agreement that Ernst himself drafted contains a
clause that very clearly forbids, without exception, subsequent oral modifications
to the written agreement: “The provisions of this agreement may not be modified
or waived except in a writing signed and executed by all parties.” Contingent Fee
13

Agreement ¶ 13 (ECF No. 49-2 Page ID 909). While the Court acknowledges the
authority on which Ernest relies demonstrating that parties may, as a matter of
general contract law under certain circumstances, orally modify a contract
containing a clause prohibiting oral modifications, see, e.g., Quality Products &
Concepts Co. v. Nagel Precision, Inc., 469 Mich. 362, 372, 666 N.W.2d 251, 257
(2003) (“[C]ontracts with written modification or anti-waiver clauses can be
modified or waived notwithstanding their restrictive amendment clauses.”), the
usual rules of contract construction do not apply to the present dispute. Rather, the
Court is obligated to construe the provisions of the written contingent fee
agreement from the perspective of a reasonable client. See Restatement § 18 cmt.
h (“[C]ontracts between clients and lawyers are to be construed from the
standpoint of a reasonable person in the client’s circumstances.”). As a result,
“[t]he lawyer . . . bears the burden of ensuring that the contract states any terms
diverging from a reasonable client’s expectations.” Id. For example, this rule
would “require[] . . . that a lawyer’s contract to represent a client in ‘your suit’ be
construed to include representation in appropriate appeals if the lawyer had not
stated that appeals were excluded.” Id.
In the same way, the Court easily concludes that a reasonable client under
the circumstances would construe the no-oral-modifications provision contained in
the written contingent fee agreement to mean exactly what it says. Although Ernst
14

may have known of law in Michigan allowing oral modifications to contracts that
explicitly forbid oral modifications, it would be patently unreasonable to expect a
client with no legal training to know of such authority. Indeed, the record here
reflects that Gillis was not aware of such authority, as she testified that it was her
belief, based on the no-oral-modifications clause, that the written contingent fee
agreement could not be orally modified. 1/29/14 Hr’g Tr. 91-92 (ECF No. 61 Page
ID 1126-27).
Ernst’s reliance on Biedul v. Siefman, No. 263736, 2006 WL 3375317
(Mich. Ct. App. Nov. 21, 2006) is misplaced. In that case, the Michigan Court of
Appeals refused to disturb a jury verdict enforcing an oral modification to a fee
agreement between an attorney and his client where the client’s breach of the
initial fee agreement prompted the attorney to seek a modified fee arrangement.
However, the initial fee agreement in Biedul did not contain a clause prohibiting
subsequent oral modifications. For this reason, Biedul is not relevant here.
Alternatively, even if the written contingent fee agreement had not contained
a clause prohibiting subsequent oral modifications, the Court would still conclude
that the second oral modification is unenforceable. In eliciting Gillis’ agreement to
evenly split the $312,000 settlement offer, Ernst told Gillis that he (Ernst) would
be entitled to approximately $234,000 of the $312,000 settlement amount pursuant
to the first purported oral modification, and that a second oral modification was
15

therefore necessary so that Ernst would not receive more than half of the recovery.
However, for the reasons explained above, Ernst was not, in fact, entitled to
$234,000 under the first purported oral modification because that modification
constituted an unenforceable oral contingent fee agreement. Thus, Ernst has not
adequately demonstrated that Gillis had an accurate understanding of the
circumstances prompting the need for a modification. See Restatement § 18 cmt. e
(to enforce mid-litigation modification to contract between lawyer and client,
“the lawyer must show that the client was adequately aware of the effects and any
material disadvantages of the proposed contract, including, if applicable,
circumstances concerning the need for modification.”).
For these reasons, the Court concludes that the second purported oral
modification to the written contingent fee agreement is not fair and reasonable to
Gillis. Therefore, the Court does not enforce that modification.
IV. CONCLUSION
For the reasons stated above, the Magistrate Judge’s R&R is ADOPTED
insofar as consistent with this Opinion and Order, and Ernst’s motion for division
of attorney fees is DENIED. The Court enforces the written contingent agreement
between Ernst and Gillis as written and does not enforce either of the two
subsequent purported oral modifications to that agreement. Accordingly, Ernst is
entitled to one-third of the amount recovered after first deducting costs; Gillis is
16

entitled to the remainder. Assuming costs were $2,500, Ernst is entitled to onethird of $309,500, which is $103,166.67, and Gillis is entitled to the remainder,
which is $208,833.33. Given that Ernst already provided Gillis a check in the
amount of $156,000, Gillis is owed $52,833.33.
The Clerk of Court shall UNSEAL these proceedings, including ECF Nos.
49-51, 54-55, 57-58, 61, 68, 72, and 73.
SO ORDERED.

Dated: September 30, 2014

s/PATRICK J. DUGGAN
UNITED STATES DISTRICT JUDGE

Copies to:
Dean D. Elliott, Esq.
Kevin S. Ernst, Esq.
Timothy J. Jordan, Esq.
Michael J. Blalock, Esq.

17