By Craddick H.B. No. 604
76R3316 JRD-D
A BILL TO BE ENTITLED
1-1 AN ACT
1-2 relating to contingent fee contracts for legal services entered
1-3 into by a state or local governmental entity and to the deposit of
1-4 certain delinquent or disputed funds recovered by a state or local
1-5 governmental entity.
1-6 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
1-7 SECTION 1. LEGISLATIVE FINDINGS AND POLICY. (a) The
1-8 legislature finds that:
1-9 (1) a payment to a private attorney or law firm under
1-10 a contingent fee contract for legal services entered into by a
1-11 governmental entity constitutes compensation paid to a public
1-12 contractor for which the legislature must provide by law under
1-13 Section 44, Article III, Texas Constitution;
1-14 (2) funds recovered by a state governmental entity in
1-15 litigation or in settlement of a matter that could have resulted in
1-16 litigation are state funds that must be deposited in the state
1-17 treasury and made subject to the appropriations process;
1-18 (3) funds recovered by a local governmental entity in
1-19 litigation or in settlement of a matter that could have resulted in
1-20 litigation are local government funds that must be deposited in a
1-21 depository of the local governmental entity under state law and
1-22 expended in the manner that funds of the local governmental entity
1-23 must be expended under state law; and
1-24 (4) contingent fee contracts for legal services may be
2-1 appropriate under certain circumstances, but those contracts risk
2-2 abuses and economic losses to governmental entities in the form of
2-3 the payment of excessive fees and unreasonable expenses that reduce
2-4 the state's net recoveries from opposing parties, making it
2-5 necessary for the legislature to state when, how, and on what terms
2-6 governmental entities may enter into and pay fees and expenses
2-7 under those contracts to ensure that contracting private attorneys
2-8 and law firms are paid no more than a reasonable fee and are
2-9 reimbursed for no more than actual and reasonably incurred expenses
2-10 under the contract.
2-11 (b) It is the policy of this state that all funds recovered
2-12 by a state or local governmental entity from an opposing party in
2-13 litigation or in settlement of a matter that could have resulted in
2-14 litigation, including funds designated as damages, amounts adjudged
2-15 or awarded, attorney's fees, costs, interest, settlement proceeds,
2-16 or expenses, are the property of the state or local governmental
2-17 entity that must be deposited in the manner that public funds of
2-18 the entity must be deposited. Legal fees and expenses may be paid
2-19 from the recovered funds under a contingent fee contract for legal
2-20 services only after the funds have been appropriately deposited and
2-21 only in accordance with applicable law.
2-22 SECTION 2. Chapter 140, Local Government Code, is amended by
2-23 adding Section 140.008 to read as follows:
2-24 Sec. 140.008. DEPOSIT OF FUNDS RECOVERED BY LITIGATION OR
2-25 SETTLEMENT. (a) In this section, "contingent fee contract" and
2-26 "local governmental entity" have the meanings assigned by Section
2-27 2254.101, Government Code.
3-1 (b) All funds recovered by or for a local governmental
3-2 entity in litigation or in settlement of a matter that could have
3-3 resulted in litigation, including funds designated as damages,
3-4 amounts adjudged or awarded, attorney's fees, costs, interest,
3-5 settlement proceeds, or expenses, are public funds of the local
3-6 governmental entity and shall be deposited in a depository of the
3-7 local governmental entity under state law.
3-8 (c) Legal fees and expenses may be paid from the recovered
3-9 funds under a contingent fee contract for legal services only:
3-10 (1) after the funds are deposited in accordance with
3-11 this section; and
3-12 (2) in accordance with Subchapter C, Chapter 2254,
3-13 Government Code.
3-14 SECTION 3. Subchapter F, Chapter 404, Government Code, is
3-15 amended by adding Section 404.097 to read as follows:
3-16 Sec. 404.097. DEPOSIT OF FUNDS RECOVERED BY LITIGATION OR
3-17 SETTLEMENT. (a) Notwithstanding Section 404.093, this section
3-18 applies by its terms to each state governmental entity.
3-19 (b) In this section, "contingent fee contract" and "state
3-20 governmental entity" have the meanings assigned by Section
3-21 2254.101.
3-22 (c) All funds recovered by a state governmental entity in
3-23 litigation or in settlement of a matter that could have resulted in
3-24 litigation, including funds designated as damages, amounts adjudged
3-25 or awarded, attorney's fees, costs, interest, settlement proceeds,
3-26 or expenses, are public funds of the state or the state
3-27 governmental entity and shall be deposited in the state treasury
4-1 to the credit of the appropriate fund or account.
4-2 (d) Legal fees and expenses may be paid from the recovered
4-3 funds under a contingent fee contract for legal services only:
4-4 (1) after the funds are deposited in accordance with
4-5 this section; and
4-6 (2) in accordance with Subchapter C, Chapter 2254.
4-7 SECTION 4. Chapter 2254, Government Code, is amended by
4-8 adding Subchapter C to read as follows:
4-9 SUBCHAPTER C. CONTINGENT FEE CONTRACT FOR LEGAL SERVICES
4-10 Sec. 2254.101. DEFINITIONS. In this subchapter:
4-11 (1) "Contingent fee" means that part of a fee for
4-12 legal services, under a contingent fee contract, the amount or
4-13 payment of which is contingent on the outcome of the matter for
4-14 which the services were obtained.
4-15 (2) "Contingent fee contract" means a contract for
4-16 legal services under which the amount or the payment of the fee for
4-17 the services is contingent in whole or in part on the outcome of
4-18 the matter for which the services were obtained.
4-19 (3) "Local governmental entity" means a political
4-20 subdivision of the state, including a:
4-21 (A) county;
4-22 (B) municipality;
4-23 (C) public school district; or
4-24 (D) special-purpose district or authority.
4-25 (4) "State governmental entity":
4-26 (A) means the state or a board, commission,
4-27 department, office, or other agency in the executive branch of
5-1 state government created under the constitution or a statute of the
5-2 state, including an institution of higher education as defined by
5-3 Section 61.003, Education Code;
5-4 (B) includes the state when a state officer is
5-5 bringing a parens patriae proceeding in the name of the state; and
5-6 (C) does not include a state agency or state
5-7 officer acting as a receiver, special deputy receiver, liquidator,
5-8 or liquidating agent in connection with the administration of the
5-9 assets of an insolvent entity under Article 21.28, Insurance Code,
5-10 or Chapter 36, 66, 96, or 126, Finance Code.
5-11 Sec. 2254.102. APPLICABILITY. (a) This subchapter applies
5-12 only to a contingent fee contract for legal services entered into
5-13 by a state or local governmental entity.
5-14 (b) The legislature by this subchapter is providing, in
5-15 accordance with Section 44, Article III, Texas Constitution, for
5-16 the manner in which and the situations under which a state or local
5-17 governmental entity may compensate a public contractor under a
5-18 contingency fee contract for legal services.
5-19 Sec. 2254.103. CONTRACT APPROVAL; SIGNATURE. (a) A local
5-20 governmental entity that has authority to enter into a contract for
5-21 legal services may enter into a contingent fee contract for legal
5-22 services only if the governing body of the local governmental
5-23 entity approves the contract and the approved contract is signed by
5-24 the presiding officer of the governing body.
5-25 (b) A state governmental entity that has authority to enter
5-26 into a contract for legal services in its own name may enter into a
5-27 contingent fee contract for legal services only if:
6-1 (1) the governing body of the state governmental
6-2 entity approves the contract and the approved contract is signed by
6-3 the presiding officer of the governing body; or
6-4 (2) for an entity that is not governed by a
6-5 multimember governing body, the elected or appointed officer who
6-6 governs the entity approves and signs the contract.
6-7 (c) The attorney general may enter into a contingent fee
6-8 contract for legal services in the name of the state in relation to
6-9 a matter that has been referred to the attorney general under law
6-10 by another state governmental entity only if the other state
6-11 governmental entity approves and signs the contract in accordance
6-12 with Subsection (b).
6-13 (d) A state governmental entity, including the state, may
6-14 enter into a contingent fee contract for legal services that is not
6-15 described by Subsection (b) or (c) only if the governor approves
6-16 and signs the contract.
6-17 (e) Before approving the contract, the governing body,
6-18 elected or appointed officer, or governor, as appropriate, must
6-19 find that:
6-20 (1) there is a substantial need for the legal
6-21 services;
6-22 (2) the legal services cannot be adequately performed
6-23 by the attorneys and supporting personnel of the governmental
6-24 entity or by the attorneys and supporting personnel of another
6-25 governmental entity; and
6-26 (3) the legal services cannot reasonably be obtained
6-27 from attorneys in private practice under a contract providing only
7-1 for the payment of hourly fees, without regard to the outcome of
7-2 the matter, because of the nature of the matter for which the
7-3 services will be obtained or, for a state governmental entity,
7-4 because the entity does not have appropriated funds available to
7-5 pay the estimated amounts required under a contract providing only
7-6 for the payment of hourly fees.
7-7 (f) Before entering into a contingent fee contract for legal
7-8 services in which the estimated amount that may be recovered
7-9 exceeds $100,000, a state governmental entity that proposes to
7-10 enter into the contract in its own name or in the name of the state
7-11 must also notify the governor, lieutenant governor, and Legislative
7-12 Budget Board that the entity proposes to enter into the contract,
7-13 send them copies of the proposed contract, and send them
7-14 information demonstrating that the conditions listed in Subsection
7-15 (e) exist. The state governmental entity may not enter into the
7-16 proposed contract in its own name or in the name of the state
7-17 unless the governor and the lieutenant governor, after consulting
7-18 the Legislative Budget Board, find that:
7-19 (1) the proposed contract complies with all
7-20 requirements of this subchapter; and
7-21 (2) entering into the proposed contract is preferable
7-22 to attempting to pay only hourly fees for the legal services,
7-23 without regard to the outcome of the matter, by transferring other
7-24 appropriated funds to pay for the services under Subchapter A,
7-25 Chapter 317, or under another law.
7-26 (g) A contingent fee contract for legal services that is
7-27 subject to Subsection (f) is void unless the governor and the
8-1 lieutenant governor have made the findings required by Subsection
8-2 (f).
8-3 Sec. 2254.104. TIME AND EXPENSE RECORDS REQUIRED; FINAL
8-4 STATEMENT. (a) The contract must require that the contracting
8-5 attorney or law firm keep current and complete written time and
8-6 expense records that describe in detail the time and money spent
8-7 each day in performing the contract.
8-8 (b) Under a contract with a state governmental entity, the
8-9 contracting attorney or law firm shall permit the governing body or
8-10 governing officer of the governmental entity, the attorney general,
8-11 and the state auditor each to inspect or obtain copies of the time
8-12 and expense records at any time on request. Under a contract with
8-13 a local governmental entity, the contracting attorney or law firm
8-14 shall permit the governing body of the governmental entity, the
8-15 chief legal officer or employee of the governmental entity, and the
8-16 chief financial officer or employee of the governmental entity each
8-17 to inspect or obtain copies of the time and expense records at any
8-18 time on request.
8-19 (c) On conclusion of the matter for which legal services
8-20 were obtained, the contracting attorney or law firm shall provide
8-21 the contracting governmental entity with a complete written
8-22 statement that describes the outcome of the matter, states the
8-23 amount of any recovery, shows the contracting attorney's or law
8-24 firm's computation of the amount of the contingent fee, and
8-25 contains the final complete time and expense records required by
8-26 Subsection (a).
8-27 (d) All time and expense records required under this section
9-1 are public information subject to required public disclosure under
9-2 Chapter 552. Information in the records may be withheld from a
9-3 member of the public under Section 552.103 only if, in addition to
9-4 meeting the requirements of Section 552.103, the chief legal
9-5 officer or employee of the state or local governmental entity
9-6 determines that withholding the information is necessary to protect
9-7 the entity's strategy or position in pending or reasonably
9-8 anticipated litigation.
9-9 Sec. 2254.105. CERTAIN GENERAL CONTRACT REQUIREMENTS. The
9-10 contract must:
9-11 (1) provide for the method by which the contingent fee
9-12 is computed;
9-13 (2) state the differences, if any, in the method by
9-14 which the contingent fee is computed if the matter is settled,
9-15 tried, or tried and appealed;
9-16 (3) state how litigation and other expenses will be
9-17 paid and, if reimbursement of any expense is contingent on the
9-18 outcome of the matter or reimbursable from the amount recovered in
9-19 the matter, state whether the amount recovered for purposes of the
9-20 contingent fee computation is considered to be the amount obtained
9-21 before or after expenses are deducted;
9-22 (4) state that any subcontracted legal or support
9-23 services performed by a person who is not a contracting attorney or
9-24 a partner, shareholder, or employee of a contracting attorney or
9-25 law firm is an expense subject to reimbursement only in accordance
9-26 with this subchapter; and
9-27 (5) state that the amount of the contingent fee and
10-1 reimbursement of expenses under the contract will be paid and
10-2 limited in accordance with this subchapter.
10-3 Sec. 2254.106. CONTRACT REQUIREMENTS: COMPUTATION OF
10-4 CONTINGENT FEE; REIMBURSEMENT OF EXPENSES. (a) The contract must
10-5 establish the reasonable hourly rate for work performed by an
10-6 attorney, law clerk, or paralegal who will perform legal or support
10-7 services under the contract based on the reasonable and customary
10-8 rate in the relevant locality for the type of work performed and on
10-9 the relevant experience, demonstrated ability, and standard hourly
10-10 billing rate, if any, of the person performing the work. The
10-11 contract may establish the reasonable hourly rate for one or more
10-12 persons by name and may establish a rate schedule for work
10-13 performed by unnamed persons. The highest hourly rate for a named
10-14 person or under a rate schedule may not exceed $1,000 an hour. This
10-15 subsection applies to subcontracted work performed by an attorney,
10-16 law clerk, or paralegal who is not a contracting attorney or a
10-17 partner, shareholder, or employee of a contracting attorney or law
10-18 firm as well as to work performed by a contracting attorney or by a
10-19 partner, shareholder, or employee of a contracting attorney or law
10-20 firm.
10-21 (b) The contract must establish a base fee to be computed as
10-22 follows. For each attorney, law clerk, or paralegal who is a
10-23 contracting attorney or a partner, shareholder, or employee of a
10-24 contracting attorney or law firm, multiply the number of hours the
10-25 attorney, law clerk, or paralegal works in providing legal or
10-26 support services under the contract times the reasonable hourly
10-27 rate for the work performed by that attorney, law clerk, or
11-1 paralegal. Add the resulting amounts to obtain the base fee. The
11-2 computation of the base fee may not include hours or costs
11-3 attributable to work performed by a person who is not a contracting
11-4 attorney or a partner, shareholder, or employee of a contracting
11-5 attorney or law firm.
11-6 (c) Subject to Subsection (d), the contingent fee is
11-7 computed by multiplying the base fee by a multiplier. The contract
11-8 must establish a reasonable multiplier based on any expected
11-9 difficulties in performing the contract, the amount of expenses
11-10 expected to be risked by the contractor, the expected risk of no
11-11 recovery, and any expected long delay in recovery. The multiplier
11-12 may not exceed four without prior approval by the legislature.
11-13 (d) In addition to establishing the method of computing the
11-14 fee under Subsections (a), (b), and (c), the contract must limit
11-15 the amount of the contingent fee to a stated percentage of the
11-16 amount recovered. The contract may state different percentage
11-17 limitations for different ranges of possible recoveries and
11-18 different percentage limitations in the event the matter is
11-19 settled, tried, or tried and appealed. The percentage limitation
11-20 may not exceed 35 percent without prior approval by the
11-21 legislature. The contract must state that the amount of the
11-22 contingent fee will not exceed the lesser of the stated percentage
11-23 of the amount recovered or the amount computed under Subsections
11-24 (a), (b), and (c).
11-25 (e) The contract also may:
11-26 (1) limit the amount of expenses that may be
11-27 reimbursed; and
12-1 (2) provide that the amount or payment of only part of
12-2 the fee is contingent on the outcome of the matter for which the
12-3 services were obtained, with the amount and payment of the
12-4 remainder of the fee payable on a regular hourly rate basis without
12-5 regard to the outcome of the matter.
12-6 (f) Except as provided by Section 2254.107, this section
12-7 does not apply to a contingent fee contract for legal services:
12-8 (1) in which the expected amount to be recovered and
12-9 the actual amount recovered do not exceed $100,000; or
12-10 (2) under which a series of recoveries is
12-11 contemplated, and the amount of each individual recovery is not
12-12 expected to and does not exceed $100,000.
12-13 (g) This section applies to a contract described by
12-14 Subsection (f) for each individual recovery under the contract
12-15 that actually exceeds $100,000, and the contract must provide for
12-16 computing the fee in accordance with this section for each
12-17 individual recovery that actually exceeds $100,000.
12-18 (h) Except as provided by Section 2254.107, this section
12-19 does not apply to a contingent fee contract for legal services
12-20 authorized under Section 6.30, Tax Code, for the recovery of
12-21 delinquent taxes owed by persons to a local governmental entity.
12-22 Sec. 2254.107. MIXED HOURLY AND CONTINGENT FEE CONTRACTS;
12-23 REIMBURSEMENT FOR SUBCONTRACTED WORK. (a) This section applies
12-24 only to a contingent fee contract:
12-25 (1) under which the amount or payment of only part of
12-26 the fee is contingent on the outcome of the matter for which the
12-27 services were obtained, with the amount and payment of the
13-1 remainder of the fee payable on a regular hourly rate basis without
13-2 regard to the outcome of the matter; or
13-3 (2) under which reimbursable expenses are incurred for
13-4 subcontracted legal or support services performed by a person who
13-5 is not a contracting attorney or a partner, shareholder, or
13-6 employee of a contracting attorney or law firm.
13-7 (b) Sections 2254.106(a) and 2254.106(e) apply to the
13-8 contract without regard to whether the contract is authorized under
13-9 Section 6.30, Tax Code, and without regard to the expected or
13-10 actual amount of recovery under the contract. In the event of a
13-11 conflict between Section 2254.106(a) or 2254.106(e) and Section
13-12 6.30, Tax Code, the Tax Code prevails.
13-13 (c) The limitations prescribed by Section 2254.106 on the
13-14 amount of the contingent fee apply to the entire amount of the fee
13-15 under the contingent fee contract, including the part of the fee
13-16 the amount and payment of which is not contingent on the outcome of
13-17 the matter.
13-18 (d) The limitations prescribed by Sections 2254.108 and
13-19 2254.109 on payment of the fee apply only to payment of the
13-20 contingent portion of the fee.
13-21 Sec. 2254.108. FEE PAYMENT AND EXPENSE REIMBURSEMENT UNDER
13-22 CONTRACT WITH LOCAL GOVERNMENTAL ENTITY. (a) The governing body
13-23 of a local governmental entity must specifically approve a payment
13-24 of a contingent fee and a reimbursement of expenses under the
13-25 contract.
13-26 (b) The governing body may not approve a fee payment or
13-27 expense reimbursement under the contract until:
14-1 (1) final and unappealable arrangements have been made
14-2 for depositing all recovered funds to the credit of the local
14-3 governmental entity in its depository under state law; and
14-4 (2) the local governmental entity has received from
14-5 the contracting attorney or law firm the statement required under
14-6 Section 2254.104(c).
14-7 (c) Litigation and other expenses payable under the
14-8 contract, including expenses attributable to attorney, paralegal,
14-9 accountant, expert, or other professional work performed by a
14-10 person who is not a contracting attorney or a partner, shareholder,
14-11 or employee of a contracting attorney or law firm, may be
14-12 reimbursed only if the governing body determines that the expenses
14-13 were reasonable, proper, necessary, actually incurred on behalf of
14-14 the local governmental entity, and paid for by the contracting
14-15 attorney or law firm.
14-16 Sec. 2254.109. FEE PAYMENT AND EXPENSE REIMBURSEMENT UNDER
14-17 CONTRACT WITH STATE GOVERNMENTAL ENTITY. (a) Except as provided
14-18 by Subsection (b), a contingent fee and a reimbursement of an
14-19 expense under a contract with a state governmental entity is
14-20 payable only from funds the legislature specifically appropriates
14-21 to pay the fee or reimburse the expense. An appropriation to pay
14-22 the fee or reimburse the expense must specifically describe the
14-23 individual contract, or the class of contracts classified by
14-24 subject matter, on account of which the fee is payable or expense
14-25 is reimbursable. A general reference to contingent fee contracts
14-26 for legal services or to contracts subject to this subchapter or a
14-27 similar general description is not a sufficient description for
15-1 purposes of this subsection.
15-2 (b) If the legislature has not specifically appropriated
15-3 funds for paying the fee or reimbursing the expense, a state
15-4 governmental entity may pay the fee or reimburse the expense from
15-5 other available funds only if:
15-6 (1) the legislature is not in session; and
15-7 (2) the Legislative Budget Board gives its prior
15-8 approval for that payment or reimbursement under Section 69,
15-9 Article XVI, Texas Constitution, after examining the statement
15-10 required under Section 2254.104(c) and determining that the
15-11 requested payment and the contract under which payment is requested
15-12 meet all the requirements of this subchapter.
15-13 (c) A payment or reimbursement under the contract may not be
15-14 made until:
15-15 (1) final and unappealable arrangements have been made
15-16 for depositing all recovered funds to the credit of the appropriate
15-17 fund or account in the state treasury; and
15-18 (2) the state governmental entity and the state
15-19 auditor have received from the contracting attorney or law firm the
15-20 statement required under Section 2254.104(c).
15-21 (d) Litigation and other expenses payable under the
15-22 contract, including expenses attributable to attorney, paralegal,
15-23 accountant, expert, or other professional work performed by a
15-24 person who is not a contracting attorney or a partner, shareholder,
15-25 or employee of a contracting attorney or law firm, may be
15-26 reimbursed only if the state governmental entity and the state
15-27 auditor determine that the expenses were reasonable, proper,
16-1 necessary, actually incurred on behalf of the state governmental
16-2 entity, and paid for by the contracting attorney or law firm. The
16-3 contingent fee may not be paid until the state auditor has reviewed
16-4 the relevant time and expense records and verified that the hours
16-5 of work on which the fee computation is based were actually worked
16-6 in performing reasonable and necessary services for the state
16-7 governmental entity under the contract.
16-8 Sec. 2254.110. EFFECT ON OTHER LAW. (a) This subchapter
16-9 does not limit the right of a governmental entity to recover fees
16-10 and expenses from opposing parties under other law.
16-11 (b) Compliance with this subchapter does not relieve a
16-12 contracting attorney or law firm of an obligation or responsibility
16-13 under other law, including under the Texas Disciplinary Rules of
16-14 Professional Conduct.
16-15 (c) A state or local officer, employee, or governing body,
16-16 including the attorney general, may not waive the requirements of
16-17 this subchapter or prejudice the interests of the state under this
16-18 subchapter. This subchapter does not waive the state's sovereign
16-19 immunity from suit or its immunity from suit in federal court under
16-20 the Eleventh Amendment to the federal constitution.
16-21 SECTION 5. This Act takes effect September 1, 1999, and the
16-22 changes in law made by this Act apply only to a contract entered
16-23 into on or after that date.
16-24 SECTION 6. The importance of this legislation and the
16-25 crowded condition of the calendars in both houses create an
16-26 emergency and an imperative public necessity that the
16-27 constitutional rule requiring bills to be read on three several
17-1 days in each house be suspended, and this rule is hereby suspended.