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September 2010
Suing for Unpaid Fees? Think Again!
By Thomas Browne, Esq., Hinshaw & Culbertson LLP © 2010 by Hinshaw & Culbertson LLP Article Used with Permission
Lawyers enjoy getting paid. It makes them smile. Lawyers resent not getting paid. It makes them sue. I count on that to keep my book of legal malpractice defense business full.
The decision of whether to pursue a client for legal fees should never be an emotional one. Too much is at stake. It should start with an objective response to a simple question:
“Why are the fees unpaid?” The fact is, behind every problem account-receivable is a substantial problem. Setting aside lost mail, procrastination, and simple forgetfulness, there are three reasons why invoice for legal services are not paid:
● The client cannot pay the invoice;
● The client has an unresolved complaint about his legal representation; and
● The client believes integrity is for the other guy.
In short, clients do not pay fees because they can’t, shouldn’t, or won’t. Inherent in each of these reasons for nonpayment are problems for the lawyer. If the client has no money, a judgment for fees may be uncollectible. If the client is dissatisfied, a counterclaim for legal malpractice is almost guaranteed, as is correspondence to the ARDC. And if the client does not feel bound by legal obligations or the truth, the lawyer is in for a very rough ride.
The cause of nonpayment alone often presents reason enough to forego collection proceedings; but if it does not, one should then evaluate the entire matter objectively from a legal and financial perspective before deciding to sue a client for fees.
On the legal side, one should consider, for example, how the case will sit with the finder of fact. Was the result obtained favorable for the client? Are fees proportionate to the size of the problem? Does the file reflect personal attention or indifference to the needs of clients? Are billing invoices accurate? Are there any aggravating circumstances, such as possible claims of professional impropriety?
In short, what are the chances of success on the claim for fees as well as any counterclaim that may be brought? A suit for less is not an automatic winner, as some lawyers would like to believe. Clients swing back.
As for financial considerations, lawyers often grossly underestimate the true cost of a suit for fees. Because such an action brings into issue the lawyer’s competence and ethics, it must be taken seriously. That means time – and lots of it. It means expert witnesses’ fees, court reporters, transcripts, and photocopy expenses.
Moreover, there are likely to be substantial hidden costs. For example, a counterclaim for malpractice may be covered by insurance, but what is its impact on future insurance premiums and future insurability? And, of course, what price should one put on peace of mind? ARDC proceedings and claims of tortious misconduct can be quite unsettling. Obviously, there are times when lawyers should pursue unpaid fees. But the decision to do so should be a calculated one.
Be prepared to compromise, as it is usually cost effective. Consider less drastic and costly alternatives to litigation, such as arbitration or mediation.
The best time to address a fee problem is not at the end of the attorney-client relationship or after the problem has become acute. Fee problems almost always get worse with time. If you are interested in being paid, pay attention to fees from the outset.
Make certain the terms of retention are clear, understood and agreed to by the client. Do not take on clients who express reluctance to accept the terms offered – i.e., clients who say they will talk about fees later.
Address fee problems early. If you do not receive an adequate explanation for why an invoice is unpaid, you have no rational basis upon which to expect payment for subsequent invoices.
The moral of the story is obvious. Because there may be no good solution to a fee problem, avoid the problem. If you cannot avoid the problem, do not allow it to get larger. Simple, huh?
Now if you will excuse me, I have some sizeable accounts receivable to deal with.
Disclaimer: Perspectives is published as a service to lawyers. While the information contained herein is believed to be reliable, readers are advised to consult their own legal and insurance counsel for assistance in applying it to their unique situations.
Fee Collection Checklist
By Thomas Browne, Esq., Hinshaw & Culbertson LLP © 2010 by Hinshaw & Culbertson LLP Article Used with Permission
Before suing a client for legal fees, a law firm should always conduct a review of the client matter, and the client’s attitude and history.
Many insurers and lawyers who frequently litigate legal malpractice claims believe that fee disputes underlie as many as 40% of the claims, and no less than 25% of the claims. This means that suing a client has at least of one-in-four chance of drawing a legal malpractice claim in response.
The following Analysis Checklist provides a minimal review before suing for fees.
Fee Agreement
¬ Was the client informed of the basis or rate of the fee before or within a reasonable time after the commencement of the representation as required by Rule 1.5(b)?
¬ Will there be a dispute over the terms of the fee agreement?
¬ Is the fee agreement in writing?
¬ Has the fee agreement been modified to benefit the firm during the attorney-client relationship?
¬ Are there any ethical or legal limitations on our ability to enforce the fee agreement?
¬ Have we abided by our agreements?
¬ Will our billing statements make good evidentiary exhibits?
¬ Have we requested payment of the outstanding fees in writing?
¬ Have we requested payment of the outstanding fees over the telephone or in person?
¬ Is an installment agreement feasible?
Matter
¬ What is the status of the matter?
¬ Has there been any action adverse to our client?
¬ Have we caused any adverse action to have been taken against our client?
¬ What services did we provide?
¬ What results did we obtain?
¬ How did the client benefit from our services?
¬ Is there any basis for a claim against us for legal malpractice or breach of fiduciary duty?
¬ Is there any basis for a claim that we engaged in a conflict of interest?
Client
¬ Is this a long-standing or regular client that gives us substantial business?
¬ Is this a client that we want to keep in hopes of receiving future business?
¬ Do we represent this client (or its parent corporation or subsidiaries) in other pending matters?
¬ Is this the only matter in which the client has not paid the fees owed?
¬ Why is the client not paying the fees owed?
¬ Dissatisfied with the outcome?
¬ Dissatisfied with us?
¬ Fees are more than client expected?
¬ Unable to pay?
¬ What are the chances that we will be able to collect any judgment obtained against the client?
¬ Is the client likely to file a counterclaim or sue for malpractice?
¬ Has the client sued lawyers or other professionals?
¬ Is the client generally litigious?
¬ Is there a risk of adverse publicity if we sue this client for fees?
Cost/Benefit Analysis
¬ What is the outstanding balance?
¬ What is the likelihood of prevailing in a suit for fees?
¬ What will be the cost in legal fees and expenses?
¬ Are the fees and expenses recoverable from the client?
¬ What is the recoverable amount after payment of income tax?
¬ If there is a counterclaim (even frivolous), what is the insurance deductible?
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