In the past we have often visited the subjects of engagement letters, legal fees and the wisdom (or—oftentimes—lack of it) of suing when clients don’t, won’t or can’t pay what they owe. See, " Weighing the Risks of Suing for Fees," NYLJ, Sept. 7, 2010, and " Fixed Fees, Suing Clients, Tardiness Due to Technology," NYLJ, July 5, 2011. But every now and then along comes a case which proclaims that—sometimes—there is a path to recovery in the courtroom for lawyers who have been shortchanged by their clients. So, given our track record in this column of discouraging fee suits, it is only fair that we report on a case where the planets and stars lined up behind an aggrieved law firm. So it was in Pryor Cashman v. U.S. Coal, 651908/11, NYLJ 1202588022493, at *1 (Sup., N.Y., Decided Feb. 4, 2013).
Firm Sues Client
In July 2006, U.S. Coal hired Pryor Cashman to perform the legal work in connection with the acquisition of numerous coal companies. Pryor Cashman provided an engagement letter containing the terms of their agreement, including (1) the specific scope of the legal services; (2) a list of billing rates for Pryor’s attorneys, law clerks and paralegals; (3) expenses that may be incurred, to be reimbursed by U.S. Coal; (4) an explanation of the firm’s billing practices, such as sending a monthly invoice containing the fees and expenses incurred during the previous month, and the firm’s right to impose interest on balances outstanding for more than 30 days; (5) an explanation that U.S. Coal is free to terminate the attorney-client relationship at any time, and that Pryor would withdraw in compliance with applicable law; and (6) an agreement to waive certain conflicts of interest.
U.S. Coal verbally acknowledged and agreed to these terms. From July 2006 through June 2011, Pryor Cashman performed legal services in accordance with the terms of the engagement letter. It regularly sent U.S. Coal invoices, and, after receiving each invoice, U.S. Coal never raised an objection, nor requested a reduction of the billed amount. U.S. Coal periodically paid the invoices, though not in full.
From March 2008 through Dec. 31, 2009, U.S. Coal repeatedly assured Pryor Cashman that it would pay the outstanding balance on its invoices. According to its executives, U.S. Coal was in the process of obtaining financing for acquisitions of other coal companies, or refinancing its then-existing debt obligations. Afterwards, it would have enough money to pay the outstanding fees and expenses. Based on those representations, Pryor Cashman continued to perform legal services on U.S. Coal’s behalf. As of June 2011, Pryor Cashman was owed $2.5 million. U.S. Coal declined to pay, and Pryor Cashman sued. The complaint contained two causes of action—for breach of contract, and for an account stated.
U.S. Coal answered and counterclaimed, alleging that the firm had conflicts of interest relating to various business transactions between partners of the firm and U.S. Coal, none of which had been properly disclosed or waived, and had engaged in "questionable billing practices," such as billing for 14-hour-plus days and billing entries that were repeated word for word.
In granting the firm’s motion for summary judgment on its claims, and dismissing U.S. Coal’s counterclaims, the Supreme Court, New York County, found that at no time did U.S. Coal make any objection to the invoices that it had received over the course of the five years of representation. Further, the court held that "[b]ecause of the failure to object, the challenges to the reasonableness of the charges fail." Nevertheless, the court noted that "even if the court were to review the quality of the invoices, they appear to be adequate, at least in the context of U.S. Coal’s failure to contemporaneously object—they identify the attorneys to perform the services, the date of the service, a description of the work performed, the hours billed, and the fee assessed for each block of time charged."
Similarly, the court rejected the counterclaims on two grounds: first, that "U.S. Coal does not allege that it was damaged in any way by the alleged conflicts of interest, which is fatal to the claim (see Weil, Gotshal & Manges v. Fashion Boutique of Short Hills (10 AD3d 267 [1st Dept. 2004])"; and second, that "[a]s for the conflict of interest defense, the valid accounts stated bar U.S. Coal’s breach of contract counterclaim." In addition, the court held that the firm was entitled to judgement on its breach of contract claim, specifically finding that the failure to obtain the client’s countersignature to the engagement letter would not constitute a violation of New York’s requirement for a written engagement letter, and that even if that requirement had not been met "that, by itself would not preclude [the firm] from seeking recovery of legal fees under such theories as services rendered, quantum meruit and account stated." Finally, in dismissing the counterclaims, the court held that it was fatal to those claims that U.S. Coal neither alleged nor proved that it had been damaged in any way by the alleged conflicts of interest.
We do not wish to be thought of as going back on our previous counsel to lawyers to generally avoid suing for fees. Rather, this case is better seen as the exception that proves the rule. The case demonstrates the critical importance of using well-crafted engagement letters for all—even very sophisticated—clients. In addition, the case reinforces the importance of the account stated cause of action in states, like New York, whose substantive law permits it. In this case, the court noted the length of time, the number of bills and the partial payments in determining that the client had had an opportunity to object and had failed to do so.
An important lesson of this case is that law firms can assist in creating support for the "failure to object" element of account stated claims by accompanying each bill with a cover letter requesting that the client notify the firm promptly if it has any questions or concerns with respect to the bill. While we have no wish to dwell on the misfortune of others, it is also important to contrast this case with the recent highly publicized problems now faced by DLA Piper as a result of its suit against a client for fees ("churn that bill, baby"…).
That case demonstrates that there is an additional and equally critical step that firms need to take before commencing fee suits, namely thoroughly reviewing the file (including the email file) relating to the engagement, as well as all of the bills and the underlying time records. In particular, in any matter where the outcome of the engagement involved anything less than the complete attainment of the client’s objectives, it is essential, before commencing litigation to collect the fee, to review the file to determine the likelihood of success of any counterclaim for malpractice that may be asserted.
Turning to another topic we have addressed in the recent past, there are two notable recent developments in the continuing saga of claims by the representatives of collapsed law firms for the proceeds of "unfinished business" against the firms where lawyers from the now defunct firms have relocated. Earlier articles on this topic in this column were " Unfinished Business—Expanding Hurdle to Lateral Hiring," NYLJ, Aug. 1, 2012, and " More on Law Firms, Bankruptcy and ‘Unfinished Business,’" NYLJ, Nov. 2, 2012.
In the latest ruling in connection with the demise of the Heller Ehrman firm, the federal bankruptcy judge hearing the case recently granted summary judgment to the bankrupt law firm in lawsuits to recover fees the firm’s former members earned on cases they completed ("unfinished business") after fleeing to other firms during Heller’s impending demise (Heller Ehrman v. Jones Day (In re Heller Ehrman), Bankr. N.D. Cal., No. 10-3221 DM, March 11, 2013). Judge Dennis Montali, of the U.S. Bankruptcy Court for the Northern District of California, held that the four firms (out of approximately 40 originally sued) which had not settled this class of claim had failed to show they provided the Heller estate value in unfinished business former Heller lawyers brought to their new firms.
Under Jewel v. Boxer, 203 Cal. Rptr. 13 (Cal. Ct. App. 1984), former partners in a firm generally are entitled to their partnership share of income generated by the work of other former partners on cases that were active upon the firm’s dissolution. However, prior to the firm’s dissolution, the firm’s shareholders had approved a waiver so that lawyers could complete unfinished business free of any burden to account back to Heller for profits made on that business. This ruling in effect determines that because no value was provided in exchange for the waiver, the profits received by the firms to which the lawyers moved amount to a constructive fraudulent transfer for which they are accountable to the bankrupt firm. While the amount at stake is under seal, the total amount of fees for the unfinished business of the former Heller Ehrman partners received by each of the four firms is "in seven or more figures" according to the judge. The case is, of course, not over, and at least one of the firms is reported to have stated that it believes that it will eventually prevail in avoiding this liability.
In a parallel development, it was reported in the Am Law Daily on March 11 that unfinished business lawsuits had been filed in federal bankruptcy court in San Francisco by the trustee of the Howrey law firm against several of the law firms to whom former Howrey partners had moved as well as against seven former Howrey partners individually, based on the same theory as in the Heller Ehrman case. The trustee is reported to have stated that the six firms just sued are among 71 successor firms he is pursuing in hopes of recovering a total of approximately $200 million. The vast majority of those 71 firms are said to be in settlement talks with the estate.
As indicated in the earlier articles in this column referred to above, because the two cases pending in federal courts in New York (regarding the bankruptcies of the Coudert Brothers and the Thelen law firms) resulted in diametrically opposite conclusions on these same issues, it now seems almost certain that one or both will be appealed, and the New York law on these issues may well be referred by the U.S. Court of Appeals for the Second Circuit to the New York Court of Appeals for ultimate determination of the central legal issue. The critical issue for the appellate courts to address is whether New York’s public policy favoring the unfettered movement of lawyers, and, relatedly, the freedom of clients to select counsel of their choice, separately or taken together, trump the unfinished business rule in non-contingency fee cases.
Meanwhile, as all of these cases proceed, on both coasts, and unless and until the ruling in the Thelen case is very clearly upheld on appeal (and the decisions in both Coudert and Heller Ehrman are ultimately rejected), so that the unfinished business rule is abrogated as to hourly fee cases, hiring firms’ due diligence efforts—not to mention their hiring decisions—will continue to be significantly complicated.
Anthony E. Davis is a partner at Hinshaw & Culbertson and is a past president of the Association of Professional Responsibility Lawyers.