Overlawyered: Chronicling The High Cost Of Our Legal System

Posts Tagged ‘contingent fee’

Unclaimed property: headed eventually for the Supreme Court?

I’ve got a new post at Cato at Liberty noting that Justices Samuel Alito and Clarence Thomas, in a concurrence this spring, appear to be inviting a constitutional challenge to states’ administration of escheat (unclaimed property) law on due process grounds. [More on Taylor et al. v. Yee from Daniel Fisher at Forbes] While the immediate questions posed would likely be whether states are doing too little to notify owners and using too short a period of idleness (three years is becoming common), the fact patterns might conceivably implicate some of the other problems noted by businesses on the receiving end of these laws, which we discussed back in 2013 (more): creative redefinitions of unclaimed property and outside “auditors” incentivized by contingency fees to overreach in assessments.

The Associated Press took a look at the issue last fall; more background at Maria Koklanaris, Tax Analysts and Odds and Means.

Reflecting widespread business discontent, the U.S. Chamber has addressed the issue in a series of papers and its publications have covered problems in states like Illinois, as well as in California as well as profiling the firms that specialize in these collections, which in some cases have filed qui tam (bounty-hunting) suits for a share of the proceeds.

On Delaware in particular see the Wall Street Journal (more), Forbes, and Delaware State News. And the Wilmington News-Journal has published an extensive investigation of the escheat contractors’ ties to the Delaware political class.

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Contingency fees + IRS = sound policy?

Yet again — we covered this issue last year — lawmakers on Capitol Hill are considering sending private debt collectors on contingency fee after those who owe money to the Internal Revenue Service. Here’s an issue where I can agree with Washington Post columnist Catherine Rampell: contingency fees and tax collection don’t make for a good mix. Will we ever learn our lesson on law enforcement for profit?

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“Congress moves to turn back taxes over to debt collectors”

Law enforcement for profit to take another big leap forward? [Washington Post]:

The Internal Revenue Service would be required to turn over millions of unpaid tax bills to private debt collectors under a measure before the Senate, reviving a program that has previously led to complaints of harassment and has not saved taxpayers money.

The provision was tucked into a larger bill, aimed at renewing an array of expired tax breaks, at the request of Sen. Charles E. Schumer (D-N.Y.), whose state is home to two of the four private collection agencies that stand to benefit from the proposal.

It requires all “inactive tax receivables” to be assigned to private debt collectors if the IRS cannot locate the person who owes the money or if IRS agents are unable to make contact within a year.

The idea has been tried twice before, but was discontinued both times after poor results including net losses on the program. Nina Olson, who holds the position of Taxpayer Advocate in the U.S. government (and is no relation), strongly opposes the program, noting that some of the money would be recouped by the Treasury anyway through means such as future withheld refunds without the need for paying 25 percent contingency fees to the middlemen. Bounty-hunting freelancers are more likely to resort to tactics such as day-and-night harassing calls, and have less flexibility to work out payment plans for those getting back on their feet after reverses or, in the case of estate taxes, heirs who may have not yet received the inheritances from which they need to pay the tax due.

Compare many state governments’ practice of putting out plaintiff’s-side litigation opportunities to private lawyers at contingency fee, which has created a durable lobby for hardball extractive lawsuits of dubious social benefit as well as showering large sums on law firms that already are or soon become influential political players in their states.

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EU considers harmonizing class action rules

The various member countries have very different traditions as to “collective redress” of legal claims, and while some have liberalized the procedures recently, none is anywhere near as liberal as the United States in permitting lawyers to assert class actions. That’s not going to change, according to Monique Goyens, director general of the European consumer organisation BEUC, which has pushed for new collective redress rules: “The key safeguards against exorbitant awards are in place. So we are not importing US class actions.” [Euractiv] More specifically:

The safeguards include swiftly ending unfounded cases and avoiding national systems where lawyers’ fees are calculated as a percentage of the compensation awarded, like current systems in the US and, to a lesser extent, in some European countries. The Commission also advises countries to avoid punitive measures, inflicted on top of actual damage and compensation for victims.

Maybe one of these days we could get some of those safeguards over here.

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What’s scarier than asset forfeiture operations?

Asset forfeiture operations with private helpers working on contingency fee:

After seizing more than $1 million in cash in drug stops this year, a district attorney has suspended further roadside busts by his task force because of growing criticism over a private company’s participation.

District Attorney Jason Hicks, whose territory includes four Oklahoma counties, hired Guthrie-based Desert Snow LLC with a deal to pay it between 10 and 25 percent of seizure proceeds, depending on whether its “trainers” were present or only department officers. “Sometimes, no drugs were found and no one was arrested, but task force officers took money found in the vehicles anyway after a drug-sniffing dog got excited.” Now criminal charges arising from the stops are being ended, an investigation has been launched into allegedly missing funds, and “some” money is being returned to motorists. A judge said he was “shocked”

after learning the private company’s owner pulled over a pregnant driver along Interstate 40 and questioned her even though he is not a state-certified law enforcement officer….

Forfeited funds are split among the law enforcement agencies of the task force after Desert Snow is paid.

It bears repeating again and again: contingency fees and law enforcement authority don’t mix. Not ethically, anyway. (via Ed Brayton; more from Eapen Thampy, Americans for Forfeiture Reform).

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Delaware: your escheating heart

All 50 states have escheat laws awarding to state governments ownership of unclaimed property in business hands, which can range from bank, insurance, and stock holdings whose proper owners cannot be found to retail gift cards never cashed in. The revenue looms peculiarly large for the state of Delaware, because it is the state of incorporation for so many businesses. In recent years friction has been growing between the state and its corporate citizens as the state government has taken an increasingly aggressive stance in auditing corporations for unreported escheatable property. [WSJ] So far, perhaps, so routine (except for the parties to the dispute), but some accounts omit one of the most salient angles, summed up by one critic [Douglas Lindholm, IBD via Volokh] as follows:

Last year alone, Delaware seized $319.5 million from liquidated property while returning only $18.9 million of unclaimed property to its rightful owners.

Delaware does this through an unfair, onerous and expensive audit system that “looks back” to 1981, and contrives unclaimed property if the company doesn’t have records for all those years. This process often costs companies millions of dollars, mires them in years of audits, and forces them to deal with third-party auditors who are motivated by contingent fees to invent unclaimed property where none exists.

Kelmar, which conducts most of the audits for the Delaware Department of Finance and works on a contingent fee, was paid more than $30 million in the second half of 2012 alone.

Again and again — whether in forfeiture laws entitling law enforcers to a share of the booty seized, or percentage awards for informants under whistleblower laws, or traffic camera systems in which the operators of the cameras get a share of ticket revenue, contingency fees for participants in law enforcement prove deeply problematic. In my chapter on contingency fees in The Litigation Explosion, I summed things up this way:

Contingency fees tend to be disfavored in professions to whom the interests of others are helplessly entrusted, where misconduct is hard to monitor…. Giving traffic cops contingency fees by hinging their bonuses on whether they make a ticket quota arouses widespread anger because it so obviously tempts the officer running under quota to be unfair to the motorist. The same is true of giving tax collectors contingency fees by hinging their bonuses on how many deductions they disallow or how many assets they seize. (“Tax farming,” the old system where private parties were deputized to collect taxes and keep some of the haul for themselves, was abolished long ago in well-run countries, not because it was the least bit inefficient — it was a favorite way for Roman emperors to extract revenue from conquered provinces — but because it encouraged brutality and trampling of due process in tax collection.)

Delaware seems to have gotten its image in trouble through a variant on tax farming. Let’s hope a lesson is being learned.

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Torts roundup

  • State attorneys general and contingent-fee lawyers: West Virginia high court says OK [WV Record] Similar Nevada challenge [Daniel Fisher]
  • Driver of bus that fatally crushed pedestrian fails to convince court on can’t-bear-to-look-at-evidence theory [David Applegate, Heartland Lawsuit Abuse Fortnightly]
  • UK uncovers biggest car crash scam ring, detectives say County Durham motorists were paying up to £100 extra on insurance [BBC, Guardian, Telegraph]
  • “A Litigator Reviews John Grisham’s The Litigators” [Max Kennerly]
  • Quin Hillyer, who’s written extensively on litigation abuse, is putting journalism on hold and running for Congress from Mobile, Ala. [American Spectator]
  • Not clear how man and 5-year-old son drowned in pool — he’d been hired for landscaping — but homeowner being sued [Florence, Ala.; WAFF]
  • “U.S. Legal System Ranked as Most Costly” [Shannon Green, Corp Counsel] “International comparisons of litigation costs: Europe, U.S. and Canada” [US Chamber]

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Echo-mill diagnostic skills, on contingency

A Florida cardiologist has been sentenced to six years in federal prison and ordered to pay $4.5 million in restitution after serving to review the echocardiograms of more than 1,100 prospective claimants on a fen-phen settlement trust fund; many of the claimants he diagnosed were not in fact ill. “The physician was also to be compensated $1,500 for each claimant who qualified for benefits when that person’s claim was paid, according to the U.S. Attorney’s Office for the Eastern District of Pennsylvania, which prosecuted the case.” At trial, he testified “that his medical reports had been forged by the mass tort lawyer who had hired him on a contingency fee basis, the record states.” As I observed in The Litigation Explosion, medicine, like law, is a profession in which the prohibition of contingency or success fees developed early, in large part because it was expected that such fees would work to the benefit of dishonest practice. [Penn Record]

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Baltimore judge: county’s traffic-cam contract pays unlawful bounties

“A Circuit Court judge has ruled that Baltimore County’s contract with its speed camera vendor is illegal, because it pays the company a cut of each citation issued…. Maryland law says that ‘if a contractor operates a speed camera system on behalf of a local jurisdiction, the contractor’s fee may not be contingent on the number of citations issued or paid.’ But several jurisdictions, including Baltimore County and Baltimore City, pay their vendors a cut of each ticket, arguing that the jurisdiction, not the company, operates the cameras.” Judge Susan Souder ruled that Xerox State and Local Solutions, which currently “receives about $19 from every $40 ticket,” is indeed involved in the operation of the cameras. Del. Michael Smigiel, an Eastern Shore Republican, has introduced a bill to repeal the camera program: “We specifically said we’re not going to allow this to happen, and it happened,” he said. [Baltimore Sun, auto-plays video]

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