1-1     By:  Fraser, Ratliff                                   S.B. No. 113
 1-2           (In the Senate - Filed December 22, 1998; January 28, 1999,
 1-3     read first time and referred to Committee on Finance;
 1-4     April 19, 1999, reported adversely, with favorable Committee
 1-5     Substitute by the following vote:  Yeas 7, Nays 1; April 19, 1999,
 1-6     sent to printer.)
 1-7     COMMITTEE SUBSTITUTE FOR S.B. No. 113                   By:  Fraser
 1-8                            A BILL TO BE ENTITLED
 1-9                                   AN ACT
1-10     relating to contingent fee contracts for legal services entered
1-11     into by a state governmental entity and to the deposit of certain
1-12     delinquent or disputed funds recovered by a state governmental
1-13     entity.
1-14           BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
1-15           SECTION 1.  (a)  The legislature finds that:
1-16                 (1)  a payment to a private attorney or law firm under
1-17     a contingent fee contract for legal services entered into by a
1-18     state governmental entity constitutes compensation paid to a public
1-19     contractor for which the legislature must provide by law under
1-20     Section 44, Article III, Texas Constitution;
1-21                 (2)  funds recovered by a state governmental entity in
1-22     litigation or in settlement of a matter that could have resulted in
1-23     litigation are state funds that must be deposited in the state
1-24     treasury and made subject to the appropriations process; and
1-25                 (3)  contingent fee contracts for legal services may be
1-26     appropriate under certain circumstances, but those contracts risk
1-27     abuses and economic losses to state governmental entities in the
1-28     form of the payment of excessive fees and unreasonable expenses
1-29     that reduce the state's net recoveries from opposing parties,
1-30     making it necessary for the legislature to state when, how, and on
1-31     what terms state governmental entities may enter into and pay fees
1-32     and expenses under those contracts to ensure that contracting
1-33     private attorneys and law firms are paid no more than a reasonable
1-34     fee and are reimbursed for no more than actual and reasonably
1-35     incurred expenses under the contract.
1-36           (b)  It is the policy of this state that all funds recovered
1-37     by a state governmental entity from an opposing party in litigation
1-38     or in settlement of a matter that could have resulted in
1-39     litigation, including funds designated as damages, amounts adjudged
1-40     or awarded, attorney's fees, costs, interest, settlement proceeds,
1-41     or expenses, are the property of the state governmental entity that
1-42     must be deposited in the manner that public funds of the entity
1-43     must be deposited. Legal fees and expenses may be paid from the
1-44     recovered funds under a contingent fee contract for legal services
1-45     only after the funds have been appropriately deposited and only in
1-46     accordance with applicable law.
1-47           SECTION 2.  Subchapter F, Chapter 404, Government Code, is
1-48     amended by adding Section 404.097 to read as follows:
1-49           Sec. 404.097.  DEPOSIT OF FUNDS RECOVERED BY LITIGATION OR
1-50     SETTLEMENT.  (a)  Notwithstanding Section 404.093, this section
1-51     applies by its terms to each state governmental entity.
1-52           (b)  In this section, "contingent fee contract" and "state
1-53     governmental entity" have the meanings assigned by Section
1-54     2254.101.
1-55           (c)  All funds recovered by a state governmental entity in
1-56     litigation or in settlement of a matter that could have resulted in
1-57     litigation, including funds designated as damages, amounts adjudged
1-58     or awarded, attorney's fees, costs, interest, settlement proceeds,
1-59     or expenses, are public funds of the state or the state
1-60     governmental entity and shall be deposited in the state treasury to
1-61     the credit of the appropriate fund or account.
1-62           (d)  Legal fees and expenses may be paid from the recovered
1-63     funds under a contingent fee contract for legal services only:
1-64                 (1)  after the funds are deposited in accordance with
 2-1     this section; and
 2-2                 (2)  in accordance with Subchapter C, Chapter 2254.
 2-3           SECTION 3.  Chapter 2254, Government Code, is amended by
 2-4     adding Subchapter C to read as follows:
 2-5          SUBCHAPTER C.  CONTINGENT FEE CONTRACT FOR LEGAL SERVICES
 2-6           Sec. 2254.101.  DEFINITIONS.  In this subchapter:
 2-7                 (1)  "Contingent fee" means that part of a fee for
 2-8     legal services, under a contingent fee contract, the amount or
 2-9     payment of which is contingent on the outcome of the matter for
2-10     which the services were obtained.
2-11                 (2)  "Contingent fee contract" means a contract for
2-12     legal services under which the amount or the payment of the fee for
2-13     the services is contingent in whole or in part on the outcome of
2-14     the matter for which the services were obtained.
2-15                 (3)  "State governmental entity":
2-16                       (A)  means the state or a board, commission,
2-17     department, office, or other agency in the executive branch of
2-18     state government created under the constitution or a statute of the
2-19     state, including an institution of higher education as defined by
2-20     Section 61.003, Education Code;
2-21                       (B)  includes the state when a state officer is
2-22     bringing a parens patriae proceeding in the name of the state; and
2-23                       (C)  does not include a state agency or state
2-24     officer acting as a receiver, special deputy receiver, liquidator,
2-25     or liquidating agent in connection with the administration of the
2-26     assets of an insolvent entity under Article 21.28, Insurance Code,
2-27     or Chapter 36, 66, 96, or 126, Finance Code.
2-28           Sec. 2254.102.  APPLICABILITY.  (a)  This subchapter applies
2-29     only to a contingent fee contract for legal services entered into
2-30     by a state governmental entity.
2-31           (b)  The legislature by this subchapter is providing, in
2-32     accordance with Section 44, Article III, Texas Constitution, for
2-33     the manner in which and the situations under which a state
2-34     governmental entity may compensate a public contractor under a
2-35     contingent fee contract for legal services.
2-36           Sec. 2254.103.  CONTRACT APPROVAL; SIGNATURE.  (a)  A state
2-37     governmental entity that has authority to enter into a contract for
2-38     legal services in its own name may enter into a contingent fee
2-39     contract for legal services only if:
2-40                 (1)  the governing body of the state governmental
2-41     entity approves the contract and the approved contract is signed by
2-42     the presiding officer of the governing body; or
2-43                 (2)  for an entity that is not governed by a
2-44     multimember governing body, the elected or appointed officer who
2-45     governs the entity approves and signs the contract.
2-46           (b)  The attorney general may enter into a contingent fee
2-47     contract for legal services in the name of the state in relation to
2-48     a matter that has been referred to the attorney general under law
2-49     by another state governmental entity only if the other state
2-50     governmental entity approves and signs the contract in accordance
2-51     with Subsection (a).
2-52           (c)  A state governmental entity, including the state, may
2-53     enter into a contingent fee contract for legal services that is not
2-54     described by Subsection (a) or (b) only if the governor approves
2-55     and signs the contract.
2-56           (d)  Before approving the contract, the governing body,
2-57     elected or appointed officer, or governor, as appropriate, must
2-58     find that:
2-59                 (1)  there is a substantial need for the legal
2-60     services;
2-61                 (2)  the legal services cannot be adequately performed
2-62     by the attorneys and supporting personnel of the state governmental
2-63     entity or by the attorneys and supporting personnel of another
2-64     state governmental entity; and
2-65                 (3)  the legal services cannot reasonably be obtained
2-66     from attorneys in private practice under a contract providing only
2-67     for the payment of hourly fees, without regard to the outcome of
2-68     the matter, because of the nature of the matter for which the
2-69     services will be obtained or because the state governmental entity
 3-1     does not have appropriated funds available to pay the estimated
 3-2     amounts required under a contract providing only for the payment of
 3-3     hourly fees.
 3-4           (e)  Before entering into a contingent fee contract for legal
 3-5     services in which the estimated amount that may be recovered
 3-6     exceeds $100,000, a state governmental entity that proposes to
 3-7     enter into the contract in its own name or in the name of the state
 3-8     must also notify the governor, lieutenant governor, and Legislative
 3-9     Budget Board that the entity proposes to enter into the contract,
3-10     send them copies of the proposed contract, and send them
3-11     information demonstrating that the conditions listed in Subsection
3-12     (d) exist.  The state governmental entity may not enter into the
3-13     proposed contract in its own name or in the name of the state
3-14     unless the governor and the lieutenant governor, after consulting
3-15     the Legislative Budget Board, find that:
3-16                 (1)  the proposed contract complies with all
3-17     requirements of this subchapter; and
3-18                 (2)  entering into the proposed contract is preferable
3-19     to attempting to pay only hourly fees for the legal services,
3-20     without regard to the outcome of the matter, by transferring other
3-21     appropriated funds to pay for the services under Subchapter A,
3-22     Chapter 317, or under another law.
3-23           (f)  A contingent fee contract for legal services that is
3-24     subject to Subsection (e) is void unless the governor and the
3-25     lieutenant governor have made the findings required by Subsection
3-26     (e).
3-27           Sec. 2254.104.  TIME AND EXPENSE RECORDS REQUIRED; FINAL
3-28     STATEMENT.  (a)  The contract must require that the contracting
3-29     attorney or law firm keep current and complete written time and
3-30     expense records that describe in detail the time and money spent
3-31     each day in performing the contract.
3-32           (b)  The contracting attorney or law firm shall permit the
3-33     governing body or governing officer of the state governmental
3-34     entity, the attorney general, and the state auditor each to inspect
3-35     or obtain copies of the time and expense records at any time on
3-36     request.
3-37           (c)  On conclusion of the matter for which legal services
3-38     were obtained, the contracting attorney or law firm shall provide
3-39     the contracting state governmental entity with a complete written
3-40     statement that describes the outcome of the matter, states the
3-41     amount of any recovery, shows the contracting attorney's or law
3-42     firm's computation of the amount of the contingent fee, and
3-43     contains the final complete time and expense records required by
3-44     Subsection (a).  The complete written statement required by this
3-45     subsection is public information under Chapter 552 and may not be
3-46     withheld from a requestor under that chapter under Section 552.103
3-47     or any other exception from required disclosure.
3-48           (d)  This subsection does not apply to the complete written
3-49     statement required by Subsection (c).  All time and expense records
3-50     required under this section are public information subject to
3-51     required public disclosure under Chapter 552.  Information in the
3-52     records may be withheld from a member of the public under Section
3-53     552.103 only if, in addition to meeting the requirements of Section
3-54     552.103, the chief legal officer or employee of the state
3-55     governmental entity determines that withholding the information is
3-56     necessary to protect the entity's strategy or position in pending
3-57     or reasonably anticipated litigation.  Information withheld from
3-58     public disclosure under this subsection shall be segregated from
3-59     information that is subject to required public disclosure.
3-60           Sec. 2254.105.  CERTAIN GENERAL CONTRACT REQUIREMENTS.  The
3-61     contract must:
3-62                 (1)  provide for the method by which the contingent fee
3-63     is computed;
3-64                 (2)  state the differences, if any, in the method by
3-65     which the contingent fee is computed if the matter is settled,
3-66     tried, or tried and appealed;
3-67                 (3)  state how litigation and other expenses will be
3-68     paid and, if reimbursement of any expense is contingent on the
3-69     outcome of the matter or reimbursable from the amount recovered in
 4-1     the matter, state whether the amount recovered for purposes of the
 4-2     contingent fee computation is considered to be the amount obtained
 4-3     before or after expenses are deducted;
 4-4                 (4)  state that any subcontracted legal or support
 4-5     services performed by a person who is not a contracting attorney or
 4-6     a partner, shareholder, or employee of a contracting attorney or
 4-7     law firm is an expense subject to reimbursement only in accordance
 4-8     with this subchapter; and
 4-9                 (5)  state that the amount of the contingent fee and
4-10     reimbursement of expenses under the contract will be paid and
4-11     limited in accordance with this subchapter.
4-12           Sec. 2254.106.  CONTRACT REQUIREMENTS: COMPUTATION OF
4-13     CONTINGENT FEE; REIMBURSEMENT OF EXPENSES.  (a)  The contract must
4-14     establish the reasonable hourly rate for work performed by an
4-15     attorney, law clerk, or paralegal who will perform legal or support
4-16     services under the contract based on the reasonable and customary
4-17     rate in the relevant locality for the type of work performed and on
4-18     the relevant experience, demonstrated ability, and standard hourly
4-19     billing rate, if any, of the person performing the work.  The
4-20     contract may establish the reasonable hourly rate for one or more
4-21     persons by name and may establish a rate schedule for work
4-22     performed by unnamed persons.  The highest hourly rate for a named
4-23     person or under a rate schedule may not exceed $1,000 an hour.
4-24     This subsection applies to subcontracted work performed by an
4-25     attorney, law clerk, or paralegal who is not a contracting attorney
4-26     or a partner, shareholder, or employee of a contracting attorney or
4-27     law firm as well as to work performed by a contracting attorney or
4-28     by a partner, shareholder, or employee of a contracting attorney or
4-29     law firm.
4-30           (b)  The contract must establish a base fee to be computed as
4-31     follows.  For each attorney, law clerk, or paralegal who is a
4-32     contracting attorney or a partner, shareholder, or employee of a
4-33     contracting attorney or law firm, multiply the number of hours the
4-34     attorney, law clerk, or paralegal works in providing legal or
4-35     support services under the contract times the reasonable hourly
4-36     rate for the work performed by that attorney, law clerk, or
4-37     paralegal.  Add the resulting amounts to obtain the base fee.  The
4-38     computation of the base fee may not include hours or costs
4-39     attributable to work performed by a person who is not a contracting
4-40     attorney or a partner, shareholder, or employee of a contracting
4-41     attorney or law firm.
4-42           (c)  Subject to Subsection (d), the contingent fee is
4-43     computed by multiplying the base fee by a multiplier.  The contract
4-44     must establish a reasonable multiplier based on any expected
4-45     difficulties in performing the contract, the amount of expenses
4-46     expected to be risked by the contractor, the expected risk of no
4-47     recovery, and any expected long delay in recovery.  The multiplier
4-48     may not exceed four without prior approval by the legislature.
4-49           (d)  In addition to establishing the method of computing the
4-50     fee under Subsections (a), (b), and (c), the contract must limit
4-51     the amount of the contingent fee to a stated percentage of the
4-52     amount recovered.  The contract may state different percentage
4-53     limitations for different ranges of possible recoveries and
4-54     different percentage limitations in the event the matter is
4-55     settled, tried, or tried and appealed.  The percentage limitation
4-56     may not exceed 35 percent without prior approval by the
4-57     legislature.  The contract must state that the amount of the
4-58     contingent fee will not exceed the lesser of the stated percentage
4-59     of the amount recovered or the amount  computed under Subsections
4-60     (a), (b), and (c).
4-61           (e)  The contract also may:
4-62                 (1)  limit the amount of expenses that may be
4-63     reimbursed; and
4-64                 (2)  provide that the amount or payment of only part of
4-65     the fee is contingent on the outcome of the matter for which the
4-66     services were obtained, with the amount and payment of the
4-67     remainder of the fee payable on a regular hourly rate basis without
4-68     regard to the outcome of the matter.
4-69           (f)  Except as provided by Section 2254.107, this section
 5-1     does not apply to a contingent fee contract for legal services:
 5-2                 (1)  in which the expected amount to be recovered and
 5-3     the actual amount recovered do not exceed $100,000; or
 5-4                 (2)  under which a series of recoveries is contemplated
 5-5     and the amount of each individual recovery is not expected to and
 5-6     does not exceed $100,000.
 5-7           (g)  This section applies to a contract described by
 5-8     Subsection (f) for each individual recovery under the contract that
 5-9     actually exceeds $100,000, and the contract must provide for
5-10     computing the fee in accordance with this section for each
5-11     individual recovery that actually exceeds $100,000.
5-12           Sec. 2254.107.  MIXED HOURLY AND CONTINGENT FEE CONTRACTS;
5-13     REIMBURSEMENT FOR SUBCONTRACTED WORK. (a)  This section applies
5-14     only to a contingent fee contract:
5-15                 (1)  under which the amount or payment of only part of
5-16     the fee is contingent on the outcome of the matter for which the
5-17     services were obtained, with the amount and payment of the
5-18     remainder of the fee payable on a regular hourly rate basis without
5-19     regard to the outcome of the matter; or
5-20                 (2)  under which reimbursable expenses are incurred for
5-21     subcontracted legal or support services performed by a person who
5-22     is not a contracting attorney or a partner, shareholder, or
5-23     employee of a contracting attorney or law firm.
5-24           (b)  Sections 2254.106(a) and (e) apply to the contract
5-25     without regard to the expected or actual amount of recovery under
5-26     the contract.
5-27           (c)  The limitations prescribed by Section 2254.106 on the
5-28     amount of the contingent fee apply to the entire amount of the fee
5-29     under the contingent fee contract, including the part of the fee
5-30     the amount and payment of which is not contingent on the outcome of
5-31     the matter.
5-32           (d)  The limitations prescribed by Section 2254.108 on
5-33     payment of the fee apply only to payment of the contingent portion
5-34     of the fee.
5-35           Sec. 2254.108.  FEE PAYMENT AND EXPENSE REIMBURSEMENT.
5-36     (a)  Except as provided by Subsection (b), a contingent fee and a
5-37     reimbursement of an expense under a contract with a state
5-38     governmental entity is payable only from funds the legislature
5-39     specifically appropriates to pay the fee or reimburse the expense.
5-40     An appropriation to pay the fee or reimburse the expense must
5-41     specifically describe the individual contract, or the class of
5-42     contracts classified by subject matter, on account of which the fee
5-43     is payable or expense is reimbursable.  A general reference to
5-44     contingent fee contracts for legal services or to contracts subject
5-45     to this subchapter or a similar general description is not a
5-46     sufficient description for purposes of this subsection.
5-47           (b)  If the legislature has not specifically appropriated
5-48     funds for paying the fee or reimbursing the expense, a state
5-49     governmental entity may pay the fee or reimburse the expense from
5-50     other available funds only if:
5-51                 (1)  the legislature is not in session; and
5-52                 (2)  the Legislative Budget Board gives its prior
5-53     approval for that payment or reimbursement under Section 69,
5-54     Article XVI, Texas Constitution, after examining the statement
5-55     required under Section 2254.104(c) and determining that the
5-56     requested payment and the contract under which payment is requested
5-57     meet all the requirements of this subchapter.
5-58           (c)  A payment or reimbursement under the contract may not be
5-59     made until:
5-60                 (1)  final and unappealable arrangements have been made
5-61     for depositing all recovered funds to the credit of the appropriate
5-62     fund or account in the state treasury; and
5-63                 (2)  the state governmental entity and the state
5-64     auditor have received from the contracting attorney or law firm the
5-65     statement required under Section 2254.104(c).
5-66           (d)  Litigation and other expenses payable under the
5-67     contract, including expenses attributable to attorney, paralegal,
5-68     accountant, expert, or other professional work performed by a
5-69     person who is not a contracting attorney or a partner, shareholder,
 6-1     or employee of a contracting attorney or law firm, may be
 6-2     reimbursed only if the state governmental entity and the state
 6-3     auditor determine that the expenses were reasonable, proper,
 6-4     necessary, actually incurred on behalf of the state governmental
 6-5     entity, and paid for by the contracting attorney or law firm.  The
 6-6     contingent fee may not be paid until the state auditor has reviewed
 6-7     the relevant time and expense records and verified that the hours
 6-8     of work on which the fee computation is based were actually worked
 6-9     in performing reasonable and necessary services for the state
6-10     governmental entity under the contract.
6-11           Sec. 2254.109.  EFFECT ON OTHER LAW.  (a)  This subchapter
6-12     does not limit the right of a state governmental entity to recover
6-13     fees and expenses from opposing parties under other law.
6-14           (b)  Compliance with this subchapter does not relieve a
6-15     contracting attorney or law firm of an obligation or responsibility
6-16     under other law, including under the Texas Disciplinary Rules of
6-17     Professional Conduct.
6-18           (c)  A state officer, employee, or governing body, including
6-19     the attorney general, may not waive the requirements of this
6-20     subchapter or prejudice the interests of the state under this
6-21     subchapter.  This subchapter does not waive the state's sovereign
6-22     immunity from suit or its immunity from suit in federal court under
6-23     the Eleventh Amendment to the federal constitution.
6-24           SECTION 4.  This Act takes effect September 1, 1999, and the
6-25     changes in law made by this Act apply only to a contract entered
6-26     into on or after that date.
6-27           SECTION 5.  The importance of this legislation and the
6-28     crowded condition of the calendars in both houses create an
6-29     emergency and an imperative public necessity that the
6-30     constitutional rule requiring bills to be read on three several
6-31     days in each house be suspended, and this rule is hereby suspended.
6-32                                  * * * * *