Your Recourse If The Client Refuses to Pay

08/03/2012
A recent opinion by the New Jersey State Bar's Advisory Committee on Professional Ethics raises a major alarm bell for any lawyer who has trouble collecting money from a client. The Committee's Opinion 723, issued March 7, affirmed that it ethically is permissible to retain a collection agency to secure payment from former clients who have not paid their bills. The caveat the Committee made, namely that only such information as "is reasonably necessary for the agency ... to collect the debt" should be revealed, simply is common sense; confidentiality of files is a fundamental lawyer responsibility.

The troubling part of the opinion is a flat statement by the Committee: "Lawyers may not initiate collection action against current clients." This flies in the face of everything embodied by "The Business of Law" and does not appear to be required by the Rules of Professional Conduct. Lawyers arbitrarily cannot leave a nonpaying client. Rule 1.16 ("Declining or Terminating Representation") allows lawyers to withdraw from representation if "the client fails substantially to fulfill an obligation to the lawyer regarding the lawyer's services and has been given reasonable warning that the lawyer will withdraw unless the obligation is fulfilled." Withdrawal without adequate notice, for example right before a trial date, and without careful documentation of the client's nonpayment may bring a state bar disciplinary action.

But if a lawyer continues the client representation, using a collection agency or initiating fee arbitration on clients who are not paying perfectly is justified if an engagement agreement is in place. Such an agreement essentially states the responsibility of the lawyer (provide the best representation possible) and the client (cooperate with the lawyer and pay the bill). If the law firm has a collection policy, it should be enforced, including by the retention of a collection agency. Otherwise, the representation becomes a pro bono assignment, and if pro bono service is not stipulated in the engagement agreement, it is unconscionable for the Bar to require it.

Suing the client might be an unpalatable but necessary step. This should not be done lightly, and not without adequate communication and careful records of the client's billing and payment performance. However, it can be effective — some statistics show that the lawyer-creditor is successful in more than 95 percent of litigation against a client-debtor. There are, of course, obvious, drawbacks: loss of the client's business and referrals, and negative publicity in the local news media or in the legal news media.

When lawyers sue for payment of fees, they might be met with malpractice claims either as an offset (counter-claim) or direct attack (cross-complaint). But, one carrier's survey shows this happens in fewer than 10 percent of the cases and lawyers win most those. There is no way to assure that such a complaint will not be filed; the only thing to do is be prepared for it. Assess where the firm stands from a malpractice standpoint, evaluate the risk, know the insurance carrier's risk management policies and evaluate the likelihood of winning an unpaid billing claim before filing suit. And make sure your file will withstand peer review. But don't hesitate to do what's necessary.

There is nothing unethical about wanting to get paid and taking steps to get paid, while continuing all ethical obligations. Lawyers are subject to the Rules of Professional Conduct; but law firms also are and will continue to be subject to the rules of economics. They must take steps, no matter how difficult, to solve collection problems.

This Article is categorized for the following audience(s):

This Article is listed under the following categories: