The Double-Edged Sword of Suing a Client

Reprinted from:

Published 11/09

When all other collection efforts fail, suing a client for nonpayment of your fees may be an unpalatable but necessary step. You must, though, tread carefully and look closely at all the corresponding dangers.

One of the most visible signs of how law firms have been hit by the down economy is the increasing number of news reports about firms suing their clients for nonpayment of bills for legal services. Recent examples among the nation's largest firms include the following:

• A major multinational law firm sued a client, a telecommunications company, for more than $600,000 in unpaid legal bills, alleging that the company abruptly stopped paying for services provided by a lawyer it had worked with for more than 30 years—ever since the company had been a small family business.
• A New-York based firm sued a Texas investment company for $2.8 million in unpaid bills. The client responded that it had made a good faith payment, but that it was refusing to pay further because the firm had overbilled it.
• A Washington, D.C., firm sued a client to seek payment of more than $2 million in legal fees. Interestingly, the firm and the client had earlier resolved their differences over nonpayment by reaching an agreement that the client would initially pay one-third of the disputed amount, followed by a subsequent payment of the rest. The client, however, not only refused to honor the settlement agreement, but even intimated that it would allow legal proceedings about the bill to drag on in the belief that the firm would eventually settle for a lesser amount.
• Management Questions Behind Payment Problems

Such litigations are perhaps made more urgent by firms' economic needs in the face of declining revenues, but they also might be more indicative of management rather than economic concerns, reflecting any number of questions. Among them, why did the firms involved allow the amounts in dispute to get so high in the first place? Were they aggressive enough in their collection efforts prior to their finding the need to sue the client? Was the work in dispute done according to a budget that was communicated to and updated for the client? The simple fact is that if clients have the ability to pay but are not paying, it is likely that they're unhappy with some aspect of the representation and have chosen to express that unhappiness by stopping the payment schedule.

As regular readers of this webzine know, I consider the client intake procedure to be the most importa nt step in the collection process. An appropriate conversation and written agreement with a client about payment of fees in the beginning of the relationship will go a long way toward ensuring payment at the matter's close. Shared expectations, effective communication and dependable follow-through by lawyer and client all define the kind of good relationship that results in collecting a higher percentage of your billings. Sometimes, however, problems do occur, even if you set up what you thought was a solid engagement and fee agreement with the client. To avoid such problems, you must stay in continual touch with the client about progress according to the budget. But if the fact remains that the client owes money and shows very little inclination to pay it, the relationship is clearly on the rocks. What should you do next?

Preliminary Steps to Take

If dissatisfaction is an issue in a client's nonpayment, find out what the client's concern is and strive to arrive at a mutual solution for remedying the problem. If that concern cannot be resolved, suing a client may be a potential next step—but only after exploring other alternatives.

The first of these alternatives is for the law firm to use a collection service . There are certainly ethical snares involved, but they can be avoided by disclosing to the collection service only those details that are absolutely necessary for the service to do its job without jeopardizing client confidentiality. Moreover, it is a given that such a collection effort should not be pursued without prior review of the client file to make sure there are no documented or even presumed reasons why the client would not have paid, i.e., that there was no lawyer negligence. The next step, consistent with your jurisdiction's rules of professional conduct, is to stop work for clients who do not pay. A lawyer cannot ethically cease representation when the client will be prejudiced—for example, by withdrawing within 60 days of a court date. But the ABA's Model Rule of Professional Conduct 1.16 allows lawyers to withdraw if the client has not met an obligation to pay and the lawyer has given adequate warning that representation will end. That step should focus the client's attention on the problem, thereby providing the client with a last opportunity to discuss what can be done to resolve the billing dispute. This generally should not be used as an opportunity to allow the client to negotiate a discount. However, in a collection situation, it is important to do whatever is necessary to resolve the conflict. Clients who argue about over-billing are often just angling for a discounted bill. If, after all other efforts to collect have been exhausted, the client may be merely interested in a fee discount, it may be worth doing to get rid of the matter—and the client.

The Decision to Sue

If the firm chooses not to go the latter route, suing the client may 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 the vast majority of litigation against a client-debtor. At the same time, there are, of course, obvious drawbacks. First is that there is an automatic loss of future business—the client who has been sued will not provide referrals or new matters to the firm. Second is the negative publicity that such litigation can bring to the firm, either in the local press or in the legal news media. Perhaps the greatest danger of all is a malpractice cross-complaint by the client. Thus, before deciding to sue a client, the firm should first and foremost review the client file to make sure there are no legitimate potential claims of malpractice. Solo practitioners should ask a colleague for peer review of the file to confirm the conclusion that no malpractice is evident. If a client can prove that it halted payment because the lawyer's representation was negligent, the result may be a state bar disciplinary action against the lawyer or firm, complete with future requirements to perform work pro bono to fulfill ethical obligations toward the client.

The Malpractice Assessment

This danger requires taking a close look at the firm's insurance situation. You need to realize that the malpractice insurance carrier has risk management policies in place and assess the effect that these may have in the event of litigation. For example, policy coverage may exclude fee disputes, or the carrier may increase future deductibles or increase future annual premiums if the firm sues and loses. Perform due diligence to uncover the position of the insurance carrier before bringing suit. Also, be aware that malpractice involves dimensions beyond the provision of legal services alone. Consider that the responsibility to protect and preserve client property and files requires precautions against the likelihood of harm to those materials. Documentation of proper file security procedures, as well as property and casualty insurance, is a must. Technology is another insidious opening for allegations of incompetency. Rules of professional conduct require that a lawyer be competent to handle a given matter, measured as the standard of care in the local community. If a small firm is not using current technology when competitor firms are, for example, that firm may be perceived as willfully less competent than the competitors—potentially both a malpractice issue and a disciplinary matter. Finally, make sure that all accounting of client trust funds is accurate and up to date. The lawyer is a fiduciary who must keep accurate accounting records of all client funds under every state's rules of professional conduct. And when dealing with fiduciary matters, every state imposes a fiduciary duty to properly account for clients' funds to prevent misappropriation or negligence. Failure to provide accurate accounting records when requested in a counterclaim can be fatal not only to the law firm's litigation, but to its license as well.

Counting the Odds

When lawyers sue for payment of fees, they are often met with malpractice claims either as an offset (counterclaim) or direct attack (cross-complaint). Of all the suits filed by lawyers to collect their fees, about half will cause a claim of malpractice. Be prepared for it. Assess where the firm is positioned 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. Then, define your claim, file suit and be prepared to prove your case.