Jorge Ochoa v. Employers National Insurance Co., Intervenors-Appellees, Waterman Steamship Corp.

REAYLEY, Circuit Judge:

Our question is how to allocate money, recovered from a negligent shipowner, as among the injured longshoreman, his attorney, and the stevedore’s insurance carrier. We must apply Bloomer v. Liberty Mutual Insurance Co., 445 U.S. 74, 100 S.Ct. 925, 63 L.Ed.2d 215 (1980), to a case in which the recovery is insufficient to cover both the attorney’s fee and the compensation carrier’s lien. The district court awarded full reimbursement to the compensation carrier at the expense of the attorney.¹ We reverse.

1. The Case Below

The Longshoremen’s and Harbor Workers’ Compensation Act, 33 U.S.C. §§ 901-950 (1976) (“the Act”), authorizes an injured longshoreman to bring suit against the responsible party—usually the owner of the vessel on which the injury occurred—within six months after receiving a compensation award. 33 U.S.C. § 933(a), (b). Longshoreman Jorge Ochoa brought suit and recovered $62,058 from Waterman Steamship Corporation for injuries sustained while unloading Waterman’s vessel. The stevedore’s compensation carrier, Employers’ National Insurance Company (“ENI”), intervened in the suit to recover medical expenses and compensation benefits,² which totalled $42,024 paid to Ochoa by the time of the judgment. The expenses of the litigation aside from the attorney’s fee were $6,263.³ The $55,795 remaining would produce an attorney’s fee, at 40% of recovery, of $22,318. If that fee were allowed, the compensation carrier would then recover only $33,477, considerably less than the $42,024 required for full reimbursement. On the other hand, if we allowed the compensation carrier the full $42,024, the remaining $13,771 would be considerably less than the $22,318 expected fee. Furthermore, if the attorney takes the $13,771, the longshoreman receives nothing from the recovery against the shipowner.

The original jury verdict was upheld on appeal. Due to additional benefits extended during the time of appeal, the verdict was inadequate to pay fully ENI’s compensation lien and Ochoa’s attorney’s fee. ENI moved in the district court to amend the judgment to reflect ENI’s entitlement to be reimbursed for the additional benefits. Ochoa’s attorney opposed the motion, since granting it would leave insufficient funds to pay his fee. The district court granted the motion, and Ochoa appeals.

We conclude that a reasonable fee is an expense of the suit that must be deducted before the compensation carrier or stevedore can be reimbursed. If there is nothing left after that computation of expenses and after the compensation carrier’s recovery, the trial court should then consider the reasonableness of the recovery as between the longshoreman and his attorney under all of the circumstances and adjust that allocation in favor of the longshoreman if equity so requires.

2. The Stipulation

During the course of the trial the longshoreman through his attorney stipulated with the intervening carrier the amount of the compensation benefits and medical expenses paid to Ochoa or for his benefit. That stipulation stated that this sum would “take precedence over all other claims of plaintiff” if any damages were recovered by plaintiff. The trial court considered that this agreement gave priority to the carrier over the payment of attorney’s fees. We do not construe it to have that effect. The objective of the agreement was to resolve any question about the sum of the carrier’s payments.⁴ Under the law, that repayment does precede payments to the plaintiff longshoreman. We would not construe the agreement to change the legal rules for the payment of the expenses of the suit, in which both intervenors and plaintiff are interested, without language clearly to that effect. See Lamar v. Admiral Shipping Corp., 476 F.2d 300, 303 (5th Cir.1973) (longshoremen stipulated that compensation benefits would be repaid to stevedore’s carrier free of any claim for attorneys’ fees).

3. Prior to Bloomer

We now return to a question we have faced previously, although against a different background. In Strachan Shipping Co. v. Melvin, 327 F.2d 83 (5th Cir. 1964), we framed the question for decision: “which of the two liens [a reasonable attorney’s fee and the stevedore’s subrogation lien] take priority when the recovery is insufficient to pay both liens in full.” Id. at 84. We then affirmed the district court’s holding that the longshoreman’s attorney’s fees were included in the expense of litigation, which was a first charge against the fund recovered from the third party tort-feasor.

Subsequent cases construing the Act and the 1972 amendments to the Act have significantly altered the setting in which Melvin was decided. In the present setting, however, we return to the rule that Ochoa’s attorney’s fees constitute an expense of suit, which must be satisfied before the stevedore’s compensation lien attaches to the net recovery.

An injured longshoreman’s cause of action is automatically assigned to the stevedore if the longshoreman does not institute suit within six months after receiving a compensation award. 33 U.S.C. § 933(b). The Act explicitly provides for the distribution of the stevedore’s recovery on the longshoreman’s cause of action. See 33 U.S.C. § 933(e). When the longshoreman sues, however, the Act is silent as to a method of distribution. “[FJilling this statutory lacuna” has been left to the courts. See Mitchell v. Scheepvaart Maatschappij Trans-Ocean, 579 F.2d 1274, 1280 (5th Cir.1978). Due to the lack of statutory specificity, the circuits have disagreed in their interpretations of how the Act applies to claims involving the longshoreman-stevedore-shipowner relationship. One principal dispute, now settled, was whether the stevedore could be charged with a portion of the longshoreman’s attorney’s fees. The circuits had split three ways on this question. See Bloomer v. Liberty Mutual Insurance Co., 445 U.S. 74, 77 n. 3, 100 S.Ct. 925, 927 n. 3, 63 L.Ed.2d 215 (1980).

Mitchell v. Scheepvaart Maatshappij Trans-Ocean, 579 F.2d 1274 (5th Cir.1978), represented this circuit’s equitable approach to the problem of distributing the longshoreman’s tort recovery from a negligent shipowner among the longshoreman, his stevedore, and his attorney. The Mitchell court refused to apply a priority rule that would rank claims to the fund on a measured, arithmetic basis. Id. at 1279. That approach would be unfair to the injured longshoreman in some circumstances. Instead, the court suggested “application of the equitable rule that he who reaps a harvest for another is entitled to share in the yield.” Id. at 1278. Thus, trial courts were directed to inquire into the particular circumstances of a case to determine whether the stevedore should be required to contribute to a reasonable fee for the longshoreman’s counsel.

4. Bloomer’s Resolution

The Supreme Court resolved the different approaches among the circuit courts in Bloomer v. Liberty Mutual Insurance Co., 445 U.S. 74, 100 S.Ct. 925, 63 L.Ed.2d 215 (1980). The Court rejected the “equitable apportionment” theory of Mitchell and held that the stevedore’s compensation lien cannot be taxed to pay part of the longshoreman’s attorney’s fees. The apportionment or contribution had been justified with the “common-fund” theory: because the longshoreman’s attorney helped produce a fund out of which the stevedore was reimbursed for compensation payments, it was fair to charge the stevedore with part of the fee. To resolve the question the Court inquired into the legislative history and Congressional intent behind the Act. Under the Act’s “comprehensive scheme,” the stevedore is reimbursed after litigation costs, but before any recovery by the longshoreman, when it sues a shipowner pursuant to an assignment from the longshoreman. The stevedore, therefore, bears no part of its legal expense if the recovery covers those expenses and its compensation reimbursement. “There is no reason to believe that Congress intended a different distribution of the expenses of suit merely because the longshoreman has brought the action.” Id. at 78, 79, 100 S.Ct. at 928.

5. After Bloomer

Despite Bloomer’s clarification, another question has arisen: when the recovery is insufficient to satisfy both the attorneys contingent fee (if properly calculated on the gross) and the compensation lien, which is entitled to be satisfied first? The Second Circuit and the Seventh Circuit, the only post-Bloomer courts to confront the question until now,⁵ have reached opposite results. Compare Incorvaia v. Hellenic Lines, Ltd., “Grigorios-C-IV”, 668 F.2d 650 (2d Cir. 1982), cert. denied, 459 U.S. 967, 103 S.Ct. 293, 74 L.Ed.2d 277 (1982) (reasonable attorney’s fee has priority; compensation lien applies to net proceeds) with Johnson v. Sioux City & New Orleans Barge Lines, Inc., 629 F.2d 1244 (7th Cir.1980) (per curiam), cert. denied, 449 U.S. 987, 101 S.Ct. 408, 66 L.Ed.2d 251 (1980) (attorney’s contingent fee should be calculated on net recovery after satisfaction of compensation lien). Both Incorvaia and Johnson purport to be consistent with the intent of the Act, as interpreted in Bloomer.

It is important to note that the recovery in Bloomer was ample to pay substantial amounts to the stevedore, the longshoreman, and the longshoreman’s attorney. Under the distribution approved by the Court, Bloomer received a net of over $22,-700. Under the rejected approach Bloomer would have received over $28,400. Moreover, the Court stated clearly that it did not address the question of priority where a jury award was insufficient to satisfy both the compensation lien and the attorney’s fees. Bloomer, 445 U.S. at 86 n. 13, 100 S.Ct. at 932 n. 13. “[N]othing in our decision suggests that the stevedore’s lien has priority over the longshoreman’s expenses.” Id.

The conflicting results reached by the Second and Seventh Circuits are best explained by their focus on different aspects of Bloomer, applied in the context of an inadequate recovery. For example, the Seventh Circuit in Johnson focused on one of the purposes of the 1972 amendments to the Act—to reduce litigation. Johnson, 629 F.2d at 1249. The Johnson court refused to figure the longshoreman’s attorney’s contingent fee on the gross recovery. That “approach, which gives the attorney a fee based on the benefit to the stevedore, encourages litigation brought nominally on behalf of the longshoreman in cases where the stevedore’s interest is relatively greater than the longshoreman’s.” Id. By contrast, the Second Circuit in Incorvaia stressed the Bloomer Court’s analysis of the Act’s legislative history, which 'indicates that the compensation lien attaches only to the longshoreman’s net recovery. Incorvaia, 668 F.2d at 652.

6. Attorney’s Fee An Expense of Suit

We cannot avoid the conclusion that Congress intended the compensation lien to come out of the net recovery, after the costs of litigation, including reasonable attorney’s fees, are subtracted. We are thus aligned with the Second Circuit in Incorvaia. Accord Valentino v. Rickners Rhederei, G.M. B.H., SS Etha, 552 F.2d 466 (2d Cir.1977).

In 1959, Congress amended the Act to eliminate the requirement that an injured longshoreman elect between collecting compensation benefits and suing a third party in tort. “The bill, as amended, provides that an employer must be reimbursed for any compensation paid to the employee out of the net proceeds of the recovery.” S.Rep. No. 428, 86th Cong., 1st Sess. 2, reprinted in 1959 U.S.Code Cong. & Ad. News 2134, 2135 (emphasis added). The Bloomer Court noted:

The House version of the amendment would have provided: “[T]he carrier liable for the payment of ... compensation shall have a lien on the proceeds of any recovery from [a] third person, whether by judgment, settlement, or otherwise, after the deduction of the reasonable and necessary expenditures, including attorney’s fees, incurred in effecting such recovery, to the extent of the total amount of compensation awarded under, or provided, or estimated, by this Act.... ” H.R.Rep. No. 229, 86 Cong., 1st Sess., 6 (1959). The House passed this version of the amendment, 105 Cong.Rec. 5561-5562 (1959), but later concurred in the Senate version on the evidence [sic] assumption that the Senate version also adopted existing judicial practice. See id., at 15343.

Bloomer, 445 U.S. at 81 n. 6, 100 S.Ct. at 929 n. 6.

There is no indication that the 1972 amendments expressed any intent that the compensation lien be satisfied before reasonable attorney’s fees are deducted from the third-party recovery.⁶ The 1972 amendments eliminated the unseaworthiness remedy for longshoremen as well as the shipowner’s third-party cause of action against the stevedore. These two changes were intended to reduce litigation and to conserve the resources of stevedores so that they would have sufficient funds to pay increased compensation benefits. See H.Rep. No. 1441, 92d Cong., 2d Sess. 5, reprinted in 1972 U.S.Code Cong. & Ad. News 4698-4705; Bloomer, 445 U.S. at 83-85, 100 S.Ct. at 930-31.

The changes effected by the 1972 amendments — increased compensation benefits, abolition of the unseaworthiness remedy, and elimination of the shipowner’s cause of action against the stevedore — no doubt helped accomplish the purpose of achieving a reduction in litigation. We decline, however, to read into those amendments an intent to reduce litigation initiated by longshoremen against negligent shipowners. By assuring the vitality of the longshoremen’s third-party cause of action we not only promote the longshoreman’s interest, but also assist in conserving stevedore resources, one of the purposes behind the 1972 amendments. Because stevedores are assured of having their compensation liens satisfied from net recoveries, longshoremen’s third-party suits inure to the benefit of stevedores. If we were to accept the approach proposed by ENI we would unduly impede the ability of longshoremen to avail themselves of the remedy provided by Congress. “[Pjermitting the compensation lien to come ahead of the attorney’s lien would deter counsel from pressing longshoremen’s claims on a contingent fee basis except ‘where a recovery substantially in excess of the amount of the stevedore’s lien is a virtual certainty.’ ” Incorvaia v. Hellenic Lines, Ltd., “Grigorios-C-IV”, 668 F.2d 650, 653 (2d Cir.1982) (quoting Valentino v. Rickners Rhederei, G.M.B.H., SS Etha, 552 F.2d 466, 469 (2d Cir.1977)).

We think that our holding coincides with the Act’s “comprehensive scheme,” as interpreted in Bloomer. The same rationale that persuaded the Court to hold that the longshoreman should bear fully his own legal expenses, Bloomer, 445 U.S. at 85, 100 S.Ct. at 931, persuades us to maintain the symmetry of the Act.⁷ It would be incongruous to favor the compensation lien over the longshoreman’s attorney’s fee in distributing a longshoreman’s tort recovery when the Act specifically provides that, when the stevedore sues on the longshoreman’s claim, expenses, including a reasonable attorney’s fee, shall be reimbursed before the compensation lien is paid. 33 U.S.C. § 933(e). When using the term “legal expenses” in Bloomer, it is clear that the Court contemplated attorney’s fees as being included in those expenses. See Bloomer, 445 U.S. at 76 n. 2, 77 n. 3, 84 n. 9, 100 S.Ct. at 927 nn. 2 & 3, 931 n. 9. In footnote six of Bloomer the Court cited legislative history stating that the longshoreman was entitled to deduct his expenses from the third-party recovery. Id. at 81 n. 6, 100 S.Ct. at 929 n. 6. Footnote six then directs the reader to footnote 13, which discusses Fontana v. Pennsylvania Railroad Co., 106 F.Supp. 461 (S.D. N.Y.1952), aff’d sub nom. Fontana v. Grace Line, Inc., 205 F.2d 151 (2d Cir.1953) (per curiam), cert. denied, 346 U.S. 886, 74 S.Ct. 137, 98 L.Ed. 390 (1953). Under Fontana, “the expenses of suit, including attorney’s fees, represent the first charge on the recovery against the third party.” Bloomer, 445 U.S. at 86 n. 13, 100 S.Ct. at 932 n. 13. See Chouest v. A & P Boat Rentals, Inc., 472 F.2d 1026, 1034 n. 13 (5th Cir.1973), cert. denied, 412 U.S. 949, 93 S.Ct. 3012, 37 L.Ed.2d 1002 (1973).

7.Reasonableness of the Fee

By holding that attorney’s fees are part of the longshoreman’s expenses that are recovered prior to satisfaction of the compensation lien, we stress that only reasonable attorney’s fees are allowed. In every case involving distribution of a longshoreman’s tort recovery, district courts should assess the reasonableness of the longshoreman’s attorney’s fee. See Cappel v. Adams, 434 F.2d 1278 (5th Cir.1970) (reasonableness of attorney’s contingent fee contract within court’s discretion.); see also Johnson v. Sioux City & New Orleans Barge Lines, Inc., 629 F.2d 1244, 1248 n. 6 (7th Cir.1980) (per curiam), cert. denied, 449 U.S. 987, 101 S.Ct. 408, 66 L.Ed.2d 251 (1980). We continue to “reject any formula under which the plaintiff’s contract with counsel would automatically govern” the amount or percentage of the longshoreman’s attorney’s fee. Mitchell v. Scheepvaart Maatschappij Trans-Ocean, 579 F.2d at 1282. Our cases have approved of percentage contingent fees not because plaintiff’s contract governed, but because the court determined that such fees were reasonable. See id. at n. 11 (citing Chouest v. A & P Boat Rentals, Inc., 472 F.2d 1026 (5th Cir. 1973), cert. denied, 412 U.S. 949, 93 S.Ct. 3012, 37 L.Ed.2d 1002 (1973), and Strachan Shipping Co. v. Melvin, 327 F.2d 83 (5th Cir.1964)); see also Incorvaia v. Hellenic Lines, Ltd., “Grigorios-C-IV”, 668 F.2d 650, 653 n. 4 (2d Cir.1982), cert. denied, 459 U.S. 967, 103 S.Ct. 293, 74 L.Ed.2d 277 (1982) (“reasonableness of the attorney’s fee may be challenged, lest it encroach unduly on the net proceeds”).

8. Allocation of the Recovery

Subject to a contrary agreement between the affected parties, the allocation of the money recovered from a negligent third party is made in the following manner. First, the out of pocket expenses are deducted. Then the attorney’s fee, if the court approves it as reasonable, is deducted. The carrier's repayment then takes priority. In the present case, after deducting expenses of $6,263 there is $55,795 for allocation. If the attorney is entitled to a reasonable fee of 40% of that amount, the sum of $22,318 is deducted for that purpose. The balance, and no more, of $33,477 goes to the compensation carrier.

9. Equitable Adjustment

We acknowledge that in some circumstances, our holding has the potential for producing inequitable results. This is the case where the longshoreman’s attorney receives a substantial fee by applying the percentage to the gross recovery, but the longshoreman receives little or nothing because the stevedore’s compensation lien consumed the net. See Strachan Shipping Co. v. Melvin, 327 F.2d 83, 86-94 (5th Cir.1964) (Brown, J., dissenting) (Melvin rule without adjustment subordinates interest of injured worker to that of lawyer on contingent fee); see also Incorvaia, 668 F.2d at 653 n. 4 (contrasting coneededly reasonable fee of one-third of modest verdict in Incorvaia with “undesirable consequences” produced by a 40% attorney’s fee applied to substantial recoveries, illustrated by Judge Brown’s dissent in Melvin). The fairness of the final allocation between the longshoreman and his attorney is a different matter from the reasonableness of the attorney’s fee for services rendered in obtaining the total recovery from the negligent tortfeasor. Others have perceived unfairness in a situation where payment of a substantial attorney’s contingent fee and the compensation lien leaves a small amount or nothing for the injured longshoreman. For example, the Mitchell court noted that plaintiff’s counsel declined to charge a one-third contingent fee based on the gross recovery. Describing such a fee as “grossly unjust,” plaintiff’s counsel instead charged the client one-third of the net recovery. Mitchell, 579 F.2d at 1278 n. 6.

In Scozzari v. Jade Co., 350 F.Supp. 801 (E.D.N.Y.1972), the court construed the Act and concluded that the compensation lien attaches to “proceeds net of plaintiff’s attorney’s fee and other expenses necessary to secure the fund.” Id. at 804. The Scozzari court then considered the case where the fund is insufficient to cover both the attorney’s fee and the compensation lien and noted that “it would be inequitable to permit ... an injured worker to receive nothing while his counsel receives a substantial fee.” Id. at 806. The court held, as a matter of equity, that plaintiff’s counsel “should share his recovery equally with plaintiff.” Id. Contra Valentino v. Rickners Rhederei, G.M.B.H., SS Etha, 552 F.2d 466, 470 n. 5 (2d Cir.1977) (longshoreman’s attorney cannot share fee with longshoreman).

We think that the Scozzari approach is commendable, although we decline to set any certain division between attorney and client in insufficient recovery cases. District courts, however, have discretion to adjust an attorney’s fee so that the injured longshoreman can share in the recovery. In reviewing the matter, the court should consider whether it is reasonable and equitable for the attorney to recover, for example, $22,318, while the injured longshoreman receives nothing. If the attorney has earlier obtained a fee for securing compensation benefits for the longshoreman, a double recovery should be avoided.⁸ District courts should take care not to impair the incentive of counsel. A fair return for the attorney should be allowed, determined under all the circumstances.⁹ With that consideration in mind, however, the trial court in the exercise of discretion may require an adjustment to assure equity for both the longshoreman and his attorney.

We do not think that Bloomer prevents this equitable adjustment. Bloomer clearly does not allow an adjustment of the stevedore’s recovery to contribute toward the longshoreman’s attorney’s fees. By contrast, our adjustment operates only as between the longshoreman and his attorney. The compensation lien on the net recovery remains inviolable, consistent with Bloomer. Allowing an equitable adjustment between longshoreman and attorney, however, mitigates the effect of that rule in insufficient recovery cases.

The District Court’s judgment of September 20, 1982, amended September 24, 1982, is reversed. The case is remanded for reconsideration and reallocation of the original recovery consistent with this opinion.

REVERSED and REMANDED.

1 . On this appeal all have assumed that the agreement between Ochoa and his attorney set the fee at 40% of the total recovery against the shipowner. At oral argument we were given a retainer agreement, signed by Ochoa, which assigns 50% of “any claim or suit I have or may have in this matter” to the attorney. The compensation carrier denies that Ochoa’s agreement with his attorney is to commit a fee computed on the total recovery rather than on what Ochoa receives after the compensation repayment is deducted. If the carrier were correct, there would be no problem, and the carrier would enjoy the priority given it by the trial court’s judgment.

2 . When a longshoreman recovers from a negligent shipowner, the stevedore has a lien against the recovery in the amount of the stevedore’s compensation payments. See The Etna, 138 F.2d 37 (3d Cir.1943). The stevedore’s compensation insurance carrier often occupies the place of the stevedore. For purposes of this opinion, there is no difference between the entitlement of “stevedore,” “compensation carrier,” or “carrier.”

3 . There will be an issue upon remand over the correct amount of expenses, as there may be on other figures used herein. If so, that will be for the trial court to resolve.

4 . In Chouest v. A & P Boat Rentals, Inc., 472 F.2d 1026 (5th Cir.1973), cert. denied, 412 U.S. 949, 93 S.Ct. 3012, 37 L.Ed.2d 1002 (1973), the stevedore’s insurance carrier thought that a pretrial stipulation guaranteed the carrier full recoupment of its compensation payments. The Chouest court refused to give the stipulation the effect urged by the carrier. Instead, the court construed the stipulation to reflect an agreement only as to the amount of the medical and compensation payments. Id. at 1029, 1031.

5 . Since Bloomer, we have decided two cases involving apportionment under the Act. See Pluyer v. Mitsui O.S.K. Lines, Ltd., 664 F.2d 1243 (5th Cir. 1982); LeBlanc v. Petco, Inc., 647 F.2d 617 (5th Cir.1981), cert. denied, 454 U.S. 1085, 102 S.Ct. 644, 70 L.Ed.2d 621 (1981). In LeBlanc, the court applied Bloomer and reversed the district court, which had reduced the compensation lien by one-third. In Pluyer, after longshoreman Pluyer’s total damages were reduced by the amount of his negligence, the recovery amounted to $35,536. After the stevedore’s compensation lien of $25,640 was satisfied, a net of $9,896 was paid to Pluyer. Neither case contains any reference to attorney’s fees. Moreover, there is no indication that in Pluyer or LeBlanc the recovery was insufficient to pay all claims.

6 . “[T]o the extent that the 1972 amendments offer guidance, they strongly suggest that the rule for payment of attorney’s fees, was not intended to be altered.” Bloomer, 445 U.S. at 85, 100 S.Ct. at 931.

7 . See Davis v. United States Lines Co., 253 F.2d 262, 265 (3d Cir.1958) (to “renounce the rule of Fontana [v. Pennsylvania R.R. Co., 106 F.Supp. 461 (S.D.N.Y.1952), aff’d sub nom. Fontana v. Grace Line, Inc., 205 F.2d 151 (2d Cir.1953) (per curiam), cert. denied, 346 U.S. 886, 74 S.Ct. 137, 98 L.Ed. 390 (1953) (compensation lien attaches only after attorney’s fees are deducted) ] would be to rob the statute of symmetry and logic”).

8 . See Johnson, 629 F.2d 1244, 1248-49 (to prevent double recovery, Act does not allow attorney, who was awarded fee for securing compensation award, later to receive a fee calculated on gross tort recovery that includes compensation lien).

9 . We maintain “our concern with fair reimbursement for lawyers who represent employees in third party actions.” See Chouest, 472 F.2d at 1034 n. 13.