                                                                                                                           Opinions of the United
1995 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


12-29-1995

Mitzel v. Westinghouse Elec. Corp.
Precedential or Non-Precedential:

Docket 94-5666




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     UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT


                         No. 94-5666


               KIRK MITZEL; JANET MITZEL, h/w

                              v.

              WESTINGHOUSE ELECTRIC CORPORATION;
            DRAVO CORPORATION; DICK CORPORATION;
    CORTEC INDUSTRIES, INC., t/a, d/b/a INLAND BUILDINGS;
       DAVY McKEE CORPORATION, t/a, d/b/a DAVY DRAVO;
              DRAVO ENGINEERING COMPANIES, INC.;
    CORTEC INDUSTRIES, INC., t/a, d/b/a SUMMIT BUILDINGS;
    S.B. ACQUISITION COMPANY, t/a, d/b/a SUMMIT BUILDINGS

             DICK CORPORATION; DRAVO CORPORATION
                               Third-Party Plaintiffs

                              v.

                    A.C. DELLOVADE, INC.;
        DAVY McKEE CORPORATION, t/a, d/b/a DAVY DRAVO
                               Third-Party Defendants

          Kirk Mitzel and Janet Mitzel, by and with
            their Attorneys, A Dragon Associates,
                               Appellants

      (Caption amended per the Clerk's 11/04/94 Order)



       On Appeal from the United States District Court
               for the District of New Jersey
                    (D.C. No. 91-cv-05689)



       Submitted Pursuant to Third Circuit LAR 34.1(a)
                        July 17, 1995

    Before: SLOVITER, Chief Judge, SCIRICA, Circuit Judge,
                                            1
                 and AMBROSE, District Judge


1
Hon. Donetta W. Ambrose, United States District Court for the
  Western District of Pennsylvania, sitting by designation.

                              1
                 (Opinion Filed December 29, l995 )

Arlin M. Adams
Schnader, Harrison, Segal & Lewis
Philadelphia, PA 19103

  Of Counsel:
          Kaethe B. Schumacher
          Schnader, Harrison, Segal & Lewis
          Philadelphia, PA 19103

          Albert Dragon
          Litvin, Blumber, Matusow & Young
          Philadelphia, PA 19107

                 Attorneys for Appellants



                         OPINION OF THE COURT



SLOVITER, Chief Judge.

          A Pennsylvania law firm, A Dragon Associates, and its

clients, Kirk and Janet Mitzel, challenge the district court's

application of the New Jersey State Court Contingency Fee Rule to

a two-million-dollar settlement received by the Mitzels in a case

Dragon filed for them in federal court in New Jersey.       They argue
that the district court erred in applying New Jersey rather than

Pennsylvania law, and, in the alternative, that even if the New

Jersey rule is applicable, Dragon is entitled to an increased fee

under the terms of the rule because of the extraordinary time and

effort it devoted to this case.       We have jurisdiction under 28

U.S.C. § 1291.    As none of the defendants have filed briefs, this

matter is before us on appellants' brief only.       Although the




                                  2
appeal was filed on behalf of both Dragon and the Mitzels, we

will treat only Dragon as the appellant.

                                  I.

          Kirk Mitzel was severely injured at a construction site

in New Jersey when a steel beam on which he was working collapsed

and fell 26 feet to the ground.       Mitzel and his wife, Janet, were

Pennsylvania residents at the time and retained Dragon to pursue

worker's compensation and personal injury claims on their behalf.

On July 26, 1990, the Mitzels signed a contingency fee agreement

with Dragon in which the law firm agreed to represent them in

return for 40% of any net recovery.      At some point after signing

this agreement, but before the complaint was filed, the Mitzels

moved to North Dakota.

          Dragon filed a complaint on December 30, 1991 in the

District Court of New Jersey based on diversity jurisdiction,

naming as defendants the primary and general contractors and the

companies that designed the equipment and materials involved in

the accident.   Two attorneys from the firm were admitted pro hac

vice to the District Court of New Jersey on May 18, 1992,

pursuant to the district court's Local Rule 4(c).

          Dragon asserts that during the following two-and-a-half

years it invested over 5100 attorney hours in discovery, taking

nineteen depositions, accumulating fifty-two expandable files of

documents that are over twenty-two feet thick, arguing nearly

twenty oral and written motions, reviewing hundreds of thousands

of records, and consulting more than ten experts.       It also claims




                                  3
to have incurred considerable costs in travelling to Pittsburgh

and Orlando to inspect documents.

          Ultimately, in mid-1994 the defendants offered the

Mitzels two million dollars, and Dragon volunteered to reduce its

contingency fee from 40% to one-third in order to facilitate a

settlement at this amount.   The Mitzels agreed and, on July 25,

1994, filed a motion with the district court asking it to confirm

the settlement and approve the one-third counsel fee in the

amount of $648,403.28.   The motion was referred to a magistrate

judge, who instead recommended application of New Jersey Court

Rule 1:21-7, and a counsel fee award of $435,181.47.   The

district court adopted the magistrate's recommendation and denied

plaintiffs' motion for reconsideration.   This appeal followed.

                               II.

                                A.

                          Choice of Law

          New Jersey Court Rule 1:21-7(c), which sets a schedule

of maximum limits on the contingency fees that New Jersey

attorneys can collect in tort litigation, provides:
          In any matter where a client's claim for
          damages is based upon the alleged tortious
          conduct of another, . . . an attorney shall
          not contract for, charge, or collect a
          contingent fee in excess of the following
          limits:
          (1) 33_% on the first $250,000 recovered;
          (2) 25% on the next $250,000 recovered;
          (3) 20% on the next $500,000 recovered; and
          (4) on all amounts recovered in excess of the
          above by application for reasonable fee in
          accordance with the provisions of paragraph
          (f) hereof . . . .




                                4
N.J. Court Rules, 1969, R. 1:21-7(c).   Paragraph (f), referred to

in subparagraph (4) above, provides that "[i]f at the conclusion

of a matter an attorney considers the fee permitted by paragraph

(c) to be inadequate, an application on written notice to the

client may be made to the Assignment Judge for the hearing and

determining of a reasonable fee in light of all the

circumstances."   R. 1:21-7(f).

          The New Jersey district court has incorporated New

Jersey's contingency fee rule into its local rules through Local

Rule 4(c), which provides that "[a] lawyer admitted pro hac vice

[to the federal court] is deemed to have agreed to take no fee in

any tort case in excess of the New Jersey State Court Contingency

Fee Rule (N.J. Court Rules, 1969, R. 1:21-7 as amended)."

          Dragon argues that the district court erred in holding

that New Jersey law rather than Pennsylvania law was applicable

to its decision as to the amount of the contingency fee.

Pennsylvania courts will uphold contingency fee agreements

voluntarily entered into by the parties as long as they are not

excessive and do not take "inequitable advantage of the payer."

Richette v. Solomon, 187 A.2d 910, 919 (Pa. 1963).    A one-third

contingency fee is not considered excessive, see id., and fees as

high as 40% have been enforced by Pennsylvania courts.   See,

e.g., Oliastro v. Borough of Ellwood City, 486 A.2d 966 (Pa.

Super. Ct. 1984).   We apply plenary review to the district

court's decision that New Jersey law is applicable here.      See




                                  5
Linan-Faye Constr. Co. v. Housing Auth. of Camden, 49 F.3d 915,

919 (3d Cir. 1995).

          Dragon presents the choice as one between Pennsylvania

and New Jersey law, but it has apparently failed to consider the

possibility that under the rules established by Erie R.R. Co. v.

Tompkins, 304 U.S. 64 (1938), and its progeny, an attorney's fee

issue affecting the allocation of funds between attorney and

client presented in a diversity case is a matter of procedure

governed by the law of the forum.

          Generally, the right of a party or an attorney to

recover attorney's fees from another party in a diversity action

is a matter of substantive state law.   See Alyeska Pipeline Serv.

Co. v. Wilderness Soc'y., 421 U.S. 240, 259 n.31 (1975); Abrams

v. Lightolier Inc., 50 F.3d 1204, 1224 (3d Cir. 1995); Montgomery

Ward & Co. v. Pacific Indem. Co., 557 F.2d 51, 55-58 (3d Cir.

1977); see also 1A James W. Moore et al., Moore's Federal

Practice ¶ O.309[1], at 3109-10 & n.46 (2d ed. 1995).    In

contrast, contingency fee agreements have been treated

differently.

          Contingency fee agreements apportion resources between

plaintiffs and their counsel rather than plaintiffs and

defendants, and therefore are collateral to the substantive

merits of lawsuits in a way that awards of attorney's fees

between parties are not.   Furthermore, because of the imbalance

of power that may exist between client and attorney, we have held

that "contingency fee agreements are of special concern to the

courts," Dunn v. H.K. Porter Co., 602 F.2d 1105, 1108 (3d Cir.


                                6
1979), and fall within a court's "supervisory power over the

members of its bar."    Schlesinger v. Teitelbaum, 475 F.2d 137,

141 (3d Cir.), cert. denied, 414 U.S. 1111 (1973); see Dunn, 602

F.2d at 1110 n.8.

            In Elder v. Metro. Freight Carriers, Inc., 543 F.2d 513

(3d Cir. 1976), this court was faced with an attorney's challenge

to a federal court's limitation of his contingency fee under

facts    strikingly similar to those before us.    Mrs. Elder, the

widow of a New York resident killed in an accident in New Jersey,

filed suit in New Jersey federal court seeking recovery under

state tort law.   Id. at 515.    Both Mrs. Elder and her lawyer were

residents of New York and they had signed a fee agreement there

promising the attorney a one-third contingency fee.       The lawyer

was admitted pro hac vice to the New Jersey district court, where

the suit proceeded.    After some discovery, the parties agreed to

a settlement.    Id.   The New York Surrogate Court approved

distribution of the proceeds to the widow and children, and set

the counsel fees pursuant to the one-third agreement, which would

have led to a fee substantially in excess of the amount allowable

under the New Jersey rule.    A proposed order for payment of the

one-third fee was then presented for approval to the district

court.    It declined to follow New York law and instead reduced

the contingency fee under the formula set forth in New Jersey

Court Rule 1:21-7, which was then, as now, incorporated into the

district court's local rules.     Id. at 515-16.
            Counsel appealed to this court, and we affirmed the

district court's decision.      Id. at 517-19.   We rejected an


                                   7
argument, proffered by Dragon here as well, that we should apply

the choice of law analysis of Klaxon Co. v. Stentor Elec. Mfg.

Co., 313 U.S. 487 (1941).    We reasoned as follows:    "Rules

regulating contingent fees pertain to conduct of members of the

bar, not to substantive law which determines the existence or

parameters of a cause of action.     Such rules are designed to

promote the efficient disposition of litigation and enhance the

public's confidence in the bar."     Id. at 519.   After noting that

federal courts have the power to prescribe requirements for

admissions before them and to discipline attorneys who have been

admitted to practice before them, we stated that "such rules are

of deep concern to the court which promulgated them," and

concluded "[w]hen local rules of a federal district court are

questioned, it is doubtful that the choice of law doctrines of

the forum state come into play."     Id.2

          Under this reasoning, contingency fee agreements in

diversity cases are to be treated as matters of procedure

governed by federal law.    We nonetheless proceed to analyze the

district court's choice of law decision, a step we also took in

Elder.   We hold that, even assuming arguendo that the issue were

a matter of state law under the Erie test, an application of New

Jersey choice of law principles would mandate application of New




2
 We are not persuaded by Dragon's attempt to distinguish Elder on
the ground that Elder involved a conflicting order from a New
York Surrogate court. That fact was not relevant to, and
certainly not dispositive of, this court's analysis of the
conflict of law issue regarding the amount of the counsel fee.


                                 8
Jersey law to the contingency fee agreement and thus lead to the

same result.   See Elder, 543 F.2d at 519.

          New Jersey law considers that matters relating to

attorney's fees fall within the sphere of the state's "paramount

concern with its courts," id. at 519.     The New Jersey view is

clear and express:
          It is a virtually axiomatic principle of
          conflicts of law that the procedural law of
          the forum applies even to causes of action
          governed by a different jurisdiction's
          substantive law. . . . Court rules
          regulating attorney fees are not only clearly
          procedural but have also expressly been so
          declared.

Du-Wel Prods., Inc. v. U.S. Fire Ins. Co., 565 A.2d 1113, 1120
(N.J. Super. Ct. App. Div. 1989) (citations omitted), cert.

denied, 583 A.2d 316 (N.J. 1990); see also State v. Otis Elevator

Co., 95 A.2d 715, 717 (N.J. 1953) ("From the outset in New

Jersey, following English precedents, the allowance of costs and

counsel fees had been uniformly considered by the courts of this

state to be a matter of procedure rather than of substantive

law.").

          Accordingly, we hold that the district court did not

err in applying New Jersey Court Rule 1:21-7 or its local federal

court counterpart to the Mitzels' contingent fee agreement.

                                B.

                Reasonableness of the Fee Awarded

          Dragon contends that even if the district court was

bound to follow the New Jersey contingency fee rule, it failed to

award "reasonable" compensation.     Dragon recognizes that we



                                9
review the district court's order in this respect only for an

abuse of discretion.

            Under Rule 1:21-7(f), a court may increase a

contingency fee above the maximum limits in the rule on

application by the attorney and written notice to the client. The

language of the rule makes the polestar "a reasonable fee in

light of all the circumstances."      The New Jersey caselaw

instructs that the attorney seeking an increased fee must

demonstrate that
          (1) the fee allowed under the rule is not
          reasonable compensation for the services
          actually rendered, and (2) the case presented
          problems which required exceptional skills
          beyond that normally encountered in such
          cases or the case was unusually time
          consuming.

Wurtzel v. Werres, 493 A.2d 611, 614 (N.J. Super. Ct. App. Div.),

cert. denied, 508 A.2d 223 (N.J. 1985); accord Anderson v.

Conley, 501 A.2d 1057, 1066 (N.J. Super. Ct. Law Div. 1985).

            In considering Dragon's application for a one-third

contingency fee, the magistrate judge distinguished earlier New

Jersey cases that granted fees above those established by Rule

1:21-17(c) on the ground that those adjustments were made at a

time when the Rule imposed a ten percent cap on judgments over

$250,000.   See, e.g., Bambi v. Dr. O, 482 A.2d 536, 538 (N.J.

Super. Ct. Law Div. 1984); Burd v. Hackensack Hosp. Ass'n, 477

A.2d 843, 844 (N.J. Super. Ct. Law Div. 1984); McNelis v. Cohen,

455 A.2d 1166, 1168 (N.J. Super. Ct. Law Div. 1982).       The

magistrate judge deemed those cases of little precedent,

particularly in light of the Rule's 1984 amendment increasing the


                                 10
percentages applicable and requiring counsel to make application

for fees for recoveries above $1 million, R.1:21-7(c)(4).

           Based on Dragon's application, the magistrate judge

recommended that Dragon be awarded twenty percent on the amount

recovered over and above $1 million, explaining "[a]lthough the

instant case did not present complex or novel legal issues,

counsel vigorously prosecuted [it] on behalf of his clients, and

dedicat[ed] a great deal of time to the matter, and secured a

very good result."   Magistrate's Report and Recommendation at 4.

Thus the fee recommended by the magistrate judge was calculated

as:   33_% of the first $250,000 recovered, equaling $83,250; 25%

of the next $250,000, equaling $62,500; 20% of the next $500,000,

equaling $100,000; and 20% of the remainder of $947,157.10,

equaling $189,431.42, leading to a total of $435,181.42.

           Dragon contends that this award was not sufficient to

render the total fee "reasonable" and that the fee should have

been increased to one-third of the entire net recovery.    It

argues that the fee awarded is not reasonable compensation

because it amounts to just $85 per attorney hour, out of which

the firm must still pay overhead and operating expenses.     Dragon

points to the magistrate judge's finding that counsel "vigorously

prosecuted [the] case," and to letters from defense counsel in

this case praising Dragon as "extremely competent," App. at 295,

and as having done an "excellent job in putting together a

difficult case."   App. at 172.   Dragon argues that the case was

"unusually time consuming" as the firm devoted over 5100 attorney

hours in extensive investigation and discovery.   Additionally, it


                                  11
points to the facts that the Mitzels agree to the increase and

that Rule 1:21-7, which has not been changed since 1984, fails to

account for inflation.   Substantially the same arguments were

considered and rejected by the magistrate judge and the district

court.

          Taking at face value Dragon's assertions regarding time

and effort expended on this case, we are not persuaded that the

case was so unusual or time-consuming that we should disturb the

district court's ruling.   The cases cited by Dragon in which one-

third fees were allowed under Rule 1:21-7(f) involved

considerably more extensive litigation than was involved here.

See Luchejko v. Membreno, 475 A.2d 696, 697 (N.J. Super. Ct. Law

Div. 1983) (medical malpractice action involving a "number of

difficult legal issues," as well as extensive discovery, pre-

trial motions, a six-day trial, and post-trial motions); Buckelew

v. Grossbard, 461 A.2d 590 (N.J. Super. Ct. Law Div.)(medical

malpractice action which was fully tried, appealed to appellate

division and then to Supreme Court, and remanded for new trial,

establishing new rule of law), aff'd, 469 A.2d 518 (N.J. Super.

Ct. App. Div. 1983).

          Dragon has not cited, nor has this court found, any New

Jersey case reversing a trial court's finding that an increase

above Rule 1:21-7's fee schedule was unwarranted.   Cf. Murphy v.
Mooresville, 333 A.2d 273, 275 (N.J. Super. Ct. App. Div.)

(reversing trial court's denial of fee increase where trial court

had concluded that increase warranted but had denied it on basis

of mistaken impression that rule precluded it), cert. denied, 343


                                12
A.2d 444 (N.J. 1975).   On the other hand, in Bolle v. Community

Memorial Hosp., 368 A.2d 935, 937-38 (N.J. Super. Ct. App. Div.

1976), cert. denied, 377 A.2d 679 (N.J. 1977), the Appellate

Division reversed a trial court's allowance of a fee above the

schedule limits for the prosecution of a medical malpractice

action despite the fact that it admittedly required "time,

efforts and expertise" and involved not only discovery but a

five-day trial and an appeal.   See also Wurtzel, 493 A.2d at 613-

16 (reversing trial court's allowance of increased fee for

prosecution of medical malpractice action involving extensive

discovery and trial preparation, including consultation and

preparation of multiple expert witnesses).

          Dragon cites the opinion in Iskander v. Columbia Cement

Co., 484 A.2d 353 (N.J. Super. Ct. App. Div. 1984), as precedent

for the argument that the magistrate judge and the district judge

should have considered the New Jersey rule's failure to keep pace

with inflation and the reduced value of the dollar.     While

Iskander cited inflation as one of several factors supporting a

fee increase, the court explicitly cautioned against extending

that holding beyond circumstances in which "an especially long

period of time has elapsed between retainer and outcome, such as

the eight years involved here."    Id. at 355.   Here, in contrast,

the time between retainer by counsel and settlement was four

years.   As the court stated in Iskander, the rule's failure to

keep pace with inflation "can be solved only by the [New Jersey]

Supreme Court in its rule-making capacity." Id.




                                  13
             Thus, in the absence of other factors indicating that

an increased fee is warranted, we cannot hold that the district

court exceeded the considerable bounds of its discretion.

                                  C.

             Throughout its brief, Dragon has called to our

attention the Mitzels' agreement to Dragon's receipt of the

larger fee.     Indeed, the Mitzels filed the notice of appeal along

with Dragon, challenging the district court's fee award, even

though a reversal would mean that the Mitzels' recovery would be

substantially reduced.     As the magistrate judge noted, if Dragon

were awarded the fee it requested, it would receive $648,403.28,

instead of the $435,181.47 awarded by the district court.

             In this posture of the case, we are acutely

uncomfortable with the lack of an opposing party on the appeal.

Undoubtedly, the defendants have no interest in how the

settlement fund is divided between plaintiffs and their

attorneys.     The only ones who stand to lose if Dragon gets the

increased fee it is seeking are the Mitzels themselves, and the

difference to them is $213,221.81, a considerable sum in any

financial circumstances.     Any time the attorney's fee and the

client's recovery come from a fixed fund of money, a "significant

conflict of interest" arises between attorney and client.     See

Report of the Third Circuit Task Force, Court Awarded Attorney's

Fees at 36 (Oct. 8, 1985), reprinted in 108 F.R.D. 237 (1985);

see also In re General Motors Corp. Pick-Up Truck Fuel Tank
Prods. Liab. Litig., 55 F.3d 768, 820 (3d Cir.) (discussing

similar conflict in class action context), cert. denied, 116 S.


                                  14
Ct. 88 (1995).   But in this case, by actually petitioning the

court for an increase in its fee, Dragon has brought that

conflict into stark relief.

          The premise behind Rule 1:21-7 is that attorneys and

their clients do not have equal bargaining power, and that

clients consequently need protection from the courts with respect

to contingent fee agreements.    See Kingman v. Finnerty, 486 A.2d

342, 344 (N.J. Super. Ct. App. Div. 1985); American Trial Lawyers

Ass'n v. New Jersey Supreme Court, 316 A.2d 19, 24-25 (N.J.

Super. Ct. App. Div. 1974), aff'd 330 A.2d 350 (N.J. Sup. Ct.

1974).   Numerous provisions of the Rule are included to protect

clients' interests.   Illustrative are those requiring the

attorney to advise the client of the option to retain the

attorney under an arrangement for compensation on the basis of

the reasonable value of the services, 1:21-7(b), and mandating

that any application for an increase be made on "written notice

to the client," 1:21-7(f).

           We have no reason to assume that there has been any

overreaching by Dragon or that the Mitzels have not been fully

advised of their rights.     We assume that the Mitzels joined in

bringing this appeal out of a sense of gratitude to Dragon and a

commitment to their earlier contractual fee arrangement.

Nonetheless, it is because there is an inherent conflict of

interest in this situation, but see New Jersey Rules of
Professional Conduct (RPC) 1.8(j)(2) (contingency fee contracts

excepted from general prohibition on conflicts of interest




                                  15
between lawyer and client), that we have treated this appeal as

if filed by Dragon alone.3

                               III.

          For the reasons set forth above, we will affirm the

order of the district court.




3
 We have no desire to enter into the debate about contingency
fees currently underway in legal circles and particularly in New
Jersey, where regulation of contingency fees is apparently the
strictest in the country. It has been reported that a New Jersey
state senate committee has discussed proposals for abolition of
contingency fees, whereas the 1994 report of the New Jersey
Supreme Court Committee on Civil Practice, since tabled,
recommended amending Rule 1:21-7 to increase the contingency fees
allowed. See generally Robert J. Kerekes, The Crisis of
Congested Courts, 18 Seton Hall Legis. J. 489, 498 n.39 (1994);
Martin L. Haines, Contingent Fee System in Need of Shakeup, N.J.
L.J., Oct. 17, 1994, at 18; Martin L. Haines, Time to Rethink
Contingent Fee Caps, N.J. L.J., Sept. 19, 1994, at 17; Tess
Brennan, Proposed Contingency-Fee Revision Tabled, N.J. L.J.,
Apr. 11, 1994, at 8.


                               16
17
