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Clients Sued by Firms for Fees Retaliate With Malpractice Suits
Daily Business Review
September 30, 2009
image: Artville Illustration
Fort Lauderdale, Fla., law firm Rothstein Rosenfeldt Adler says it "dedicated numerous hours in the pursuit" of justice for an education services company in a series of multimillion-dollar lawsuits filed around the country that alleged fraud, racketeering, defamation and legal malpractice.
The client was Whitney Information Network, which invested in a Panamanian company that owns and operates a Costa Rican hotel resort. Whitney alleges fellow shareholders, lawyers and contractors worked to wrench away its ownership stake. It filed suits in New York and Florida federal courts and was sued in Maryland.
Nearly three years after the litigation started, Whitney and a subsidiary are facing another lawsuit -- over unpaid attorney fees.
Rothstein Rosenfeldt Adler asserts the Whitney companies failed to pay legal bills totaling more than $400,000.
The lawsuit is one of a growing number of cases filed by law firms against clients for unpaid bills. But these cases don't start and end with a claim for contract indebtedness.
Many clients are fighting back.
Miami attorney Warren Trazenfeld, who represents Whitney in the unpaid legal bills case, contends lawyers suing clients is "one of the top 10 stupidest things a lawyer can do."
He said almost every claim for unpaid legal fees is met with a counterclaim of legal malpractice. He said one will be coming against Rothstein.
"Most clients think the best defense is a good offense, and there's no better offense than a counterclaim for legal malpractice," Trazenfeld said.
Rothstein managing shareholder and CEO Scott Rothstein and shareholder Shawn Birken, who filed the contract indebtedness lawsuit, did not return calls for comment by deadline.
In a tanking economy, lawyers and their clients are increasingly finding themselves on opposing sides instead of sharing the same table in court. Across the board, businesses have slowed the payment of their bills, including legal fees. On the flip side, law firms dealing with shrinking demand and a smaller financial cushion feel pressure to turn to the courts for the money they claim they are owed by filing contract indebtedness suits.
"It's the absolute last resort," said Charles Rosenberg, managing shareholder of Carlton Fields' Miami office. "It's the ultimate tragedy when a lawyer has to sue the client for legal fees."
He said attorneys do not want to become adversaries against their clients, but lawsuits are sometimes necessary to collect fees.
"Law firms need to run a business just like any other businesses," Rosenberg said.
He understands some clients are unable to pay attorneys. In other instances, clients who view lawyers as advisers or consultants could move legal bills to the bottom of the pile. In those instances, a lawsuit gets a client's attention.
But overall, Rosenberg said suing clients is a lose-lose scenario.
Berger Singerman chairman Mitchell Berger said his Fort Lauderdale-based firm tries to work with tardy clients but will use the courts if necessary.
"We will seek to be paid if we think we are justified in being paid," Berger said.
Both Rosenberg and Berger said their firms exercise caution when deciding which clients to take -- even more so after the economy turned. Suing a client most likely means the end of the business relationship.
Berger said client selection and communication are paramount for a firm's success.
"The most important thing to do is when you have engagement is to ensure that the terms are discussed and the clients understand what is going to be undertaken and communication on the front end of what is going to be expected," Berger said.
He said his firm is more diligent about collecting bills than it would be in better times and following up with clients more often. He said he and his attorneys explain to clients what the next steps are, how much the representation will cost, and how and when the firm expects payment.
Rosenberg said his firm also ensures clients who are less experienced in dealing with lawyers understand the time required to represent them and the cost of that work.
Hildebrandt International legal consultant Joe Altonji said he advises firms to use caution when selecting clients to avoid a fallout later on.
Firms should make sure clients understand the costs of representation, spell out their fee agreements up front and get appropriate retainers from the start.
He said he doesn't have any data to indicate an uptick in lawsuits over unpaid legal bills but said it wouldn't surprise him.
"I suspect most of the situations are more about the client's economic conditions than about the service, but sometimes clients don't pay if they're mad," Altonji said.
Trazenfeld echoed those comments: "It's never a happy client who gets sued by lawyers over legal fees."
Law firms acknowledge fee disputes could result in legal malpractice claims. Clients could opt for a pre-emptive strike or file a counterclaim. Some estranged clients contend they didn't pay their legal bills because they received inadequate service.
Ruden McClosky president and managing director Carl Schuster said malpractice claims are "really the only defense" clients have.
"They obviously haven't paid the bill so that's not a defense, so they have to think up a defense," he said.
He acknowledged some malpractice claims have merit, but they're often used as a settlement tool. Schuster said his firm takes a number of steps before suing a client. Lawyers send "friendly reminders" about unpaid bills or contact their corporate accounting departments.
"We usually nudge gently with gentle reminders until we believe we're being ignored. Then we do a demand letter," Schuster said. He said his firm is willing to allow clients to set up a payment plan if necessary.
A Ruden committee meets monthly to review receivables, and the committee decides if unpaid bills should be pursued through litigation, Schuster said.
Last week, the firm filed suit against the father of retired pro quarterback Bernie Kosar, seeking nearly $40,000 in unpaid bills. Schuster declined to comment on the case against Bernard Kosar Sr. and Raul Puig.
The firm represented them in a 2006 Broward Circuit Court case claiming fraud until it withdrew in March, citing irreconcilable differences.
Schuster said his firm doesn't enjoy filing these suits.
"We tend not to file suits against clients unless we absolutely have to because they have not just breached the contract but promised us and promised us and promised us -- and yet haven't done anything about it."
