FEE-SPLITTING AGREEMENT OKD UNDER ILLINOIS ETHICS RULES

August 11, 2004

Steven P. Garmisa
Hoey & Farina Attorney
garmisa@hoeyfarina.com
1-888-425-1212

When a lawyer divorces his law firm, a separation agreement for handling contingency fees is a smart move.

Applying the Illinois Rules of Professional Conduct, the question for Chief U.S. District Judge Charles P. Kocoras was whether a separation agreement between a lawyer and his former firm was valid. Gimbel v. Wintroub, 2004 WL 1470259 (N.D. Ill., June 30).

Adam Gimbel, an attorney who used to work at Komessar & Wintroub, or K&W, has a cousin who practices law at a firm referred to as BRM that handles workers' compensation cases. Having arranged for referrals of common-law claims from his cousin's firm, Gimbel received a third of the contingency fees that K&W collected on these cases.

After Gimbel moved to Ohio, he filed a lawsuit in the U.S. District Court for the Northern District of Illinois alleging that K&W breached the terms of a separation agreement.

Denying a motion for summary judgment that attacked the validity of this contract, Kocoras concluded that Gimbel presented sufficient evidence that he complied with the requirements of Illinois law. Here are some highlights of the judge's opinion (with various omissions not noted in the quoted text):

"At the heart of the present dispute is an alleged separation agreement between Gimbel and K&W. While defendants deny that such an agreement existed, the record indicates that prior to Gimbel's departure to Cleveland, K&W agreed to pay Gimbel one-third of whatever fees that would be earned through K&W's outstanding cases that had been referred from BRM while Gimbel was at K&W.

"In exchange, Gimbel agreed to assist K&W in maintaining K&W's relationship with both the BRM-originated clients and BRM itself. The separation agreement did not contemplate Gimbel's receiving money for clients referred by BRM after Gimbel left K&W."

"Pursuant to the separation agreement, Gimbel contacted various K&W clients for whom he was primary counsel to inform them of his departure and to reassure them that K&W would competently represent them in his absence and that they should remain K&W clients.

"On a few occasions after he had left K&W, Gimbel spoke to K&W clients and advised them to stay with the firm. Gimbel also contacted [his cousin] Inbinder and Ruffolo [a partner at her firm] and told them that BRM should continue its referral relationship with K&W after Gimbel left for Cleveland.

"For its part, K&W made certain payments to Gimbel after he left the firm for fees received on BRM-referred cases, even though Gimbel claims these payments were less than the one-third percentage owed to him. According to Gimbel, K&W has yet to pay him over $141,000 in fees due under the separation agreement.

"On Dec. 5, 2002, Gimbel filed suit in this court against defendants, with jurisdiction based on diversity of citizenship. Gimbel's complaint alleges breach of contract and seeks an accounting for K&W's non-payment of fees owed under the separation agreement and requests a declaratory judgment holding that K&W is bound to compensate Gimbel under the separation agreement's terms. Defendants now move for summary judgment.

"Defendants first argue that summary judgment is warranted because the separation agreement is unenforceable under Rule 1.5 of the Illinois Rules of Professional Conduct. While Rule 1.5(f) outlines various conditions that govern fee-sharing arrangements between lawyers in different firms, Rule 1.5(j) provides that, 'Notwithstanding Rule 1.5(f), a payment may be made to a lawyer formerly in the firm, pursuant to a separation or retirement agreement.' Romanek v. Connelly, 753 N.E.2d 1062, 1067-68 (Ill. App. Ct. 2001). However, certain restrictions on Rule 1.5(j) exist, the first being that the fee-sharing agreement must not violate public policy. Romanek at 1071. Furthermore, the separation agreement cannot be based solely 'on a mere client referral.' Id. This occurs when the referring lawyer is rewarded for doing nothing more than 'simply being a link in the chain.' Id.

"In Romanek, the Illinois Appellate Court, 1st District, found that the paramount public policy concern governing referral agreements is that the firm retaining a client's case must have an incentive to provide the best representation to the referred client after the referring lawyer has left the firm.

"For this reason, an agreement would be contrary to public policy if the referring lawyer is entitled to a remittance of all the fees generated by the legal work of the client-retaining lawyer or firm. The Romanek court held that when a law firm retains some percentage of any fee recovery, 'it stands to gain from its services and, accordingly, possesses the incentive to use its best efforts' in handling the client's case.

"Because the Gimbel-K&W separation agreement allowed K&W to retain two-thirds of the fees it acquired from the BRM cases (which were treated as originating with Gimbel), K&W would be sufficiently motivated to zealously represent the clients in question. In fact, K&W earned handsome rewards for many of these cases. For this reason, we find that the separation agreement (as alleged by Gimbel) does not run afoul of the public policy concerns addressed in Romanek.

"The other chief restriction on referral-based separation agreements is that 'such arrangements cannot rest on the referral alone.' Romanek, 753 N.E.2d at 1070. This requirement comes from Rule 1.5(g)(2), which mandates that 'the referring lawyer agrees to assume the same legal responsibility for the performances of the services in question as would a partner of the receiving lawyer.'

"While the referring lawyer must do more than act as 'a link in the chain,' what constitutes the requisite quantum of additional obligations under the agreement is construed liberally. For instance, the Romanek court approved of an agreement where the departing/referring lawyer did nothing more than agree not to take a client with her when she left the firm.

"Based on the record before us, Gimbel's obligations under the separation agreement included assisting K&W in maintaining its relationship with the BRM-originated clients as well as preserving K&W's lucrative referral arrangement with BRM. Defendants argue that Gimbel had no real duties under the separation agreement because he did not have the power to take clients with him and because no clients had previously expressed interest in leaving K&W. However, Gimbel identifies numerous instances where he affirmatively acted in furtherance of the separation agreement.

"Gimbel claims to have spoken with each K&W client for whom he was the primary attorney to reassure them that K&W would continue to represent them well. After he left K&W, Gimbel spoke to at least two K&W clients who were questioning the quality of K&W's representation and assuaged their concerns by telling them that K&W would do a good job and that they should remain with the firm.

"Gimbel also spoke to Ruffolo and told him that the BRM-K&W relationship (which was initiated based on Gimbel's and BRM attorney Inbinder's being first cousins) should continue. Gimbel specifically told Ruffolo that a particular BRM-originated client, Tim Nolan, should stay with K&W, even though Nolan was beginning to get 'jumpy' over the quality of K&W's counsel. Ruffolo went on to reassure Nolan, who stayed with K&W.

"Via these examples of Gimbel's obligations under the separation agreement, and his subsequent conduct in furtherance of its terms, Gimbel has propounded sufficient evidence such that a genuine issue of fact exists concerning whether Gimbel had duties under the agreement beyond simply referring clients to K&W. As such, we cannot hold that as a matter of law the separation agreement violated Rule 1.5.

"Defendants also argue that the separation agreement is unenforceable because it lacked consideration due to Gimbel's end of the bargain consisting of nothing more than illusory promises.
"An illusory promise 'is a statement that is in the form of a promise, but it imposes no obligation upon the maker of the statement because it lacks specific terms that would be essential to an undertaking and enforceability. It is therefore not consideration for a return promise.' Preferred Eternal Systems Inc. v. Central Home, Inc., 660 N.E.2d 174, 178 (Ill. App. Ct. 1995).

"Defendants claim that because Gimbel did not plan on taking K&W clients with him after leaving the firm and that Gimbel's departure would not cause any clients to leave, he was not actually promising to do anything at all.

"Because of the equitable nature of Gimbel's declaratory judgment claim, Mimica v. Area Interstate Trucking Inc., 620 N.E.2d 1328, 1335 (Ill. App. Ct. 1993), we will only void the contract if the amount of consideration involved 'is not only so grossly inadequate as to shock the conscience of the court, but also accompanied by circumstances of unfairness.' Id. As for the Gimbel's breach of contract claim, a legal remedy, the requisite consideration could consist of as little as peppercorn, so long as it is perceptible. Wadsworth v. Thompson, for Use of Peet, 1846 WL 3870, *4 (Ill. 1846).

"Under his version of events, Gimbel's duties under the separation agreement included assuring clients to stay with K&W, and more importantly endeavoring to preserve the K&W-BRM relationship. The K&W-BRM referral arrangement, which has proven profitable to K&W, seemed to hinge on the familial relationship between Gimbel and Inbinder. Gimbel's efforts to sustain K&W's deal with BRM would have been of significant value to K&W -- making K&W's alleged promise to compensate Gimbel reasonable.

"The separation agreement was therefore meant to benefit both sides and regardless of whether the legal or equitable standard is employed, Gimbel has advanced enough facts, for the purposes of this motion, to counter defendants' claim that the agreement was not supported by consideration.

"Since genuine issues of material fact exist as to the separation agreement's validity and enforceability, summary judgment would be inappropriate."

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