During tough economic times, the pressure to collect fees is intense. Clients who are already “slow pay” clients increasingly become “no pay” clients, creating even more pressure on attorneys and law practices that are already stretched thin.
Now, as attorneys and law firms move into the third quarter of 2014, their options for getting paid are becoming more and more limited. Collection efforts have moved from gentle reminders to written requests to formal demands for payment.
When such efforts are unsuccessful, attorneys and law firms are faced with the tough question of whether to bring a lawsuit to recover unpaid attorneys’ fees and unreimbursed out-of-pocket expenses. Some attorneys and law firms have adopted a simple rule regarding suits for fees: never sue a client.
While risk-free in theory, such rules ignore the economic realities of the modern day law practice. Of course, the biggest risk of such a policy is that the attorney or law firm never gets paid, notwithstanding the expenses advanced and the time invested. Unfortunately, word of the use of a “never have to pay/never get sued” approach travels fast, especially among financially strapped clients eager to take advantage as they face increasingly difficult times themselves.
For attorneys and law firms that have planned ahead, there are ways to mitigate these risks with cash retainers, frequent billings and early terminations of the attorney-client relationship when unpaid fees and expenses accumulate. But sometimes, even the best practices are unsuccessful, leaving attorneys and law firms with only one choice if they want to get paid: the filing of collection legal proceedings for unpaid fees and expenses.
Suits for fees do involve real risks. It is reported that out of every five suits for fees, at least two will result in a counterclaim for legal malpractice. While significant in terms of frequency, the risk of a counterclaim for legal malpractice should not be overstated. Although not legally significant, courts are generally cognizant that such counterclaims are a common response to a suit for unpaid fees and unreimbursed expenses.
Nonetheless, a counterclaim for legal malpractice is still a claim for legal malpractice. This means it must be reported to the legal malpractice insurer and noted on all future applications for legal malpractice insurance that ask lawyers whether a claim has ever been made against them.
Indeed, some overly cautious law firms report their own filing of a suit for fees to their legal malpractice insurer as a “circumstance that might give rise to a claim.” If a counterclaim for legal malpractice is made, most legal malpractice insurers readily provide a defense. But when that happens, the center of gravity for decision-making regarding resolution of the claim often shifts dramatically.
Rarely do the interests of an attorney seeking to recover fees and those of a legal malpractice insurer defending a counterclaim for legal malpractice completely align. As a result, the decision to withdraw from the representation and to bring a suit for fees should never be made lightly. Basically, the decision involves the balancing of the interests of getting paid against the costs and risks of attempting to do so.
Here are some of the questions that attorneys and law practices should consider in making that decision.
• Is the amount significant?
The first question is whether the amount of money at issue is really worth the risk. While seemingly obvious, this is a question sometimes missed by attorneys and law practices desperate for revenue and the reimbursement of incurred expenses. The fact is, it makes little financial sense to file a lawsuit to recover relatively small amounts while risking a counterclaim for legal malpractice. By the time an attorney adds the out-of-pocket expenses associated with filing a lawsuit to the value of the attorney time invested, the decision to sue over a small amount of outstanding fees just does not make a lot of sense.
While each attorney and law practice is different, it rarely makes sense to bring a suit for fees for an amount less than $2,500. For larger firms, where the operational costs are greater, the minimum number is much higher. Beyond the minimum, there are formulas that some firms use to make the decision. Here is one: add the out-of-pocket expenses to the projected costs of attorney time in pursuing the suit and compare it with the amount at issue. With a 40 percent chance of a counterclaim, the ratio of reward to costs should be no less than 2:1. This assumes that an independent review yields no significant concerns of legal malpractice. Regardless, before deciding to bring an action for fees, do the math.
• Is a judgment collectible?
It makes little sense to take risks with a small chance for reward. An uncollectible judgment means no chance for reward. So why take the risk?
This is a good example of a situation where the best advice for an attorney is to stop thinking like a lawyer and instead to think like the owner of a business. Lawsuits against customers who have no assets involve all risk and no reward. A good business would not do it.
After doing the math, the next step for attorneys deciding whether to bring a suit for fees is to conduct an asset search on the potential defendant. There are myriad services that attorneys, like any business, can use in this regard. The important thing is actually doing the asset search. And there is always the possibility of future assets. In the plaintiff’s litigation context, a properly and timely asserted attorneys’ lien can be effective. Beyond that, the question becomes: How likely is it that the client will receive future assets from which the attorney or law firm could collect? If the chances are small, the incentive to file a suit for fees should be the same. There is no reason to throw good money after bad.
• What’s the likelihood of success?
Every attorney believes she or he earns her or his fee. Therefore, the attorney pursuing a fee is often the worst person to ask about the chances of success in establishing the reasonableness of the fee or the value of the legal services. An independent review by another attorney within the lawyer’s firm who did not work on the file is best. This peer review or “fresh look” at the file should focus on what, if any, concerns, issues, defenses or claims might be raised by the defendant client.
Generally speaking, one question can tell an attorney or law practice everything they need to know in deciding whether to bring a suit for fees: Why did the client not pay the bill? If the answer is that the client has no money or assets, that implicates the collectability of any judgment.
If the answer is because the client believes that the attorney committed legal malpractice, then it implicates the calculus for weighing the risks of a counterclaim against the rewards of a collectible recovery.
• Is fee arbitration an acceptable alternative?
The State Bar of California has available a low-cost fee arbitration service for the resolution of fee disputes. The advantage of fee arbitration is that it typically shifts the focus from whether the attorney collects to how much the attorney collects. On the other hand, many attorneys believe the trade-off for avoiding the risks of a counterclaim for legal malpractice is a discount from the amount of fees sought.
Randy Evans and Shari Klevens are partners at McKenna Long & Aldridge, which has six offices throughout California. Suzanne Y. Badawi is special counsel at Sheppard Mullin Richter & Hampton LLP. She is an appointed member of the California State Bar Committee on Professional Liability Insurance and represents insurance companies in courts throughout California. The authors defend attorneys and law firms and regularly speak and write on issues regarding the practice of law, including “The Lawyer’s Handbook: Ethics Compliance and Claim Avoidance” (ALM 2013), “Georgia Legal Malpractice Law” (ALM 2014), and “California Legal Malpractice Law” (ALM 2014).
In Practice articles inform readers on developments in substantive law. Contact James Cronin with submissions or questions at