After suing a client for $1.2 million in unpaid legal fees, Squire Sanders & Dempsey has been slapped with a legal malpractice lawsuit and is running up its own bills by hiring an outside law firm to defend itself.
The case exemplifies why some law firms refuse to file lawsuits against clients for nonpayment of fees, an escalating trend in this economy. Some law firm leaders say the dispute also points out why firms must keep a close eye on outstanding invoices and raises questions about just how Squire Sanders allowed a client to run up a seven-figure bill.
The case involves Armor Screen, a West Palm Beach-based window screen manufacturer. Armor hired Cleveland-based Squire Sanders in 2006 to pursue a patent case against a competitor that Armor claimed was violating its patents for a hurricane-resistant screen.
Squire Sanders attorneys Scott Coffey in West Palm Beach and Robert Vaughan in Miami -- who is now with WardKim -- represented Armor, filing lawsuits against the competitor. The litigation triggered the competitor, Fort Myers-based Storm Catcher, to ask the U.S. Patent and Trademark Office to re-examine Armor's patents, which were ultimately deemed invalid.
The patent ruling destroyed Armor's business, valued at more than $2 million, said Warren Trazenfeld, a Miami solo attorney who is representing Armor in the malpractice case.
"The patents were the most valuable part of the company," he said. "Now the business's valuation has been substantially affected."
Trazenfeld claims the Squire Sanders lawyers should have requested a re-examination of the patents and could have fixed them in Armor's favor. Instead, the firm deliberately headed into litigation to run up high legal bills, he alleges.
"It absolutely could have been an easy fix," Trazenfeld said.
While Armor later found out that Storm Catcher's attorney fees were paid by its insurance company, the company claimed Squire never informed Armor that was an option. Additionally, the suit alleges Squire attorneys never informed Armor of the risk that the patents could be invalidated as a result of litigation.
Vaughan did not return a call for comment before deadline.
Squire Sanders referred calls to the firm's outside counsel, Gregory Coleman of Burman Critton Luttier & Coleman in West Palm Beach, who did not return calls for comment by deadline.
But in a response filed Tuesday to the counterclaim, Squire maintains a promissory note and conditional forbearance agreement with Armor are enforceable and were not obtained by coercion, duress or extortionate threats."
Armor's lawsuit against Storm Catcher was stayed pending the patent decision.
"It is languishing until Armor can find new counsel and decide what to do," Trazenfeld said. "It's basically in the twilight zone."
$2 MILLION IN FEES
Armor paid Squire $2 million in fees and owed another $1.2 million when Squire asked Armor to sign the forbearance agreement and note for the outstanding payments to continue as counsel on July 15, 2009, he said.
On March 24, Squire Sanders filed suit against Armor in Palm Beach Circuit Court, seeking more than $1 million in legal fees plus attorney fees for the new suit.
"The president of Armor Screen cetified on behalf of the company that Armor Screen received each of the outstanding invoices for fees and costs and that Armor Screen had no question, concern or objection relating to the invoices, including the amounts of the invoices, the description of the work performed or the quality, value or efficiency of the services provided to, for or on behalf of Armor Screen," Squire's suit said.
WASTED NO TIME
Armor wasted no time firing back, hiring Trazenfeld to file the countersuit April 15 for legal malpractice. He claims the forbearance agreement signed last July 15 is unenforceable because it was obtained by "coercion, duress and extortionate threats by the plaintiff."
Squire handed Armor an ultimatum saying it would "abandon" Armor at a critical stage in the litigation and not file a timely response in the patent proceeding unless Armor signed the agreement, Armor claims.
The company "paid millions of dollars in fees to SSD and received in return the loss of its valuable patents, the destruction of its business value in excess of $2 million, adverse rulings on every piece of litigation handled by SSD and strengthening the resolve of its business competitors," states the countersuit. "SSD, a firm hit hard by the economic downturn, seeks to be rewarded for the debacle it caused by seeking to claw another $1,208,026 from Armor based upon documents it charged Armor many thousands of dollars to draft and then required Armor to sign under threats of withdrawal."
South Florida law firm leaders called the case a nightmare scenario for any law firm.
Several said they would never allow a client to get so far behind on its bills and keep a tight rein on accounts receivables. Others said they would never sue a client for nonpayment of fees in any case.
"I have an employee who chases people who owe us money," said a managing partner who did not want to be identified. "Whenever an account falls 30 days past due, I get an e-mail. Then I will send an e-mail to the client, and if he doesn't pay we pull the plug. I also try to screen clients effectively."
In one case, the managing partner said when a client was late and could not afford to pay the bill, the lawyer responded, "Why don't you pay me what you think is a reasonable fee?" The client did.
When a bill climbs to a range of $30,000 to $50,000, "alarm bells go off," said the partner, who called $1.2 million "a very big number."
"Every time you sue a client for legal fees, you can expect to be hit with a malpractice suit," said Franklin Zemel, a partner at Arnstein Lehr's Fort Lauderdale office. "We rarely do it."
STATUTE OF LIMITATIONS
Years ago, law firms waited two years before suing clients since the statute of limitations on legal malpractice was two years while the statute of limitations on breach of contract was five. But a ruling by the Florida Supreme Court changed that.
Some law firms sell their receivables to third-party companies, which sue laggard client suits to avoid negative publicity. But that does not immunize the firms from malpractice suits.
"There's really no way to duck a malpractice suit," Zemel noted. He got lucky recently after suing a client for $220,000 in unpaid legal fees. The client wound up settling and did not countersue for malpractice.
Steve Zelkowitz, managing partner of GrayRobinson's Miami office, said the trend of clients suing law firms, which are considered deep pockets, is growing, particularly when a firm loses a case.
"Once clients lose, they will do anything to try not to pay," he said. Clients also sue when their attorney leaves the firm and goes to a new law firm, leaving the client behind.
Vaughan left Squire Sanders last month to join WardKim, a small Fort Lauderdale litigation firm, as an equity partner.
Zelkowitz also said litigation can lead to payment issues because fees can skyrocket quickly as opposed to transactional work, where fees are spelled out and there are no surprises.
Disputes over unpaid bills are "definitely becoming more prevalent, and law firms need to be more vigilant," Zelkowitz said. "No one should get more than 90 days behind with clients."
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Sued Over Unpaid Legal Fees, Client Hits Squire Sanders With Malpractice Suit
Daily Business Review
May 10, 2010
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Storm Stupid
Everyone who knows Armor Screen, knows they don't have deep pockets, but it's cheaper to sue your attorney than pay a $1.2 million dollar bill.
This company does not have $1.2 million.
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SomeGuy
Even through Squires Sanders is not an elite New York firm, I hardly think a trifling amount like $50,000 will cause its executive partner too much heartburn.
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