YourABA: November 2012
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When clients stop paying: How to cut
your losses

You just brought in your first client: a start-up company struggling to turn a profit in today’s sluggish economy. The company is facing a consumer class action suit and is looking for an associate who can run the case at an affordable rate.

You and your client successfully obtain a dismissal of the original complaint, but the court denies the motion to dismiss the amended complaint. As you prepare to file the company’s answer and gear up for discovery, you review the case file and see that the client has not paid your last two bills. The client’s retainer has long been spent, and with discovery imminent, there is a lot of work to do. What do you do?

If the client says he will pay, set a due date
and confirm your discussion in writing.

Peter T. Snow, an associate at Faruki Ireland & Cox PLL in Dayton, Ohio, who handles complex litigation matters, answers this question in a recent issue of The Young Lawyer, published by the ABA Young Lawyers Division.

Dealing with a client who has not paid your bills requires prompt action and clear communication, Snow says. “The first step is to discuss the unpaid bills with the client,” he says. “He may have simply misplaced the invoices or made a deliberate decision not to pay due to cash-flow problems — which, of course, the client did not share with you.”

Regardless of the client’s explanation, tell the client that if he or she fails to pay the past-due amounts, you will have to withdraw from the representation, Snow says. ABA Model Rule of Professional Conduct 1.16 permits a lawyer to withdraw from representing a client for nonpayment of fees — as do most states’ ethical rules — if the client “has been given reasonable warning that the lawyer will withdraw unless the obligation is fulfilled.” If the client says he or she will pay, secure the commitment to pay by a certain day and confirm your discussion in writing, Snow says.

If you do not receive payment by the agreed-upon date, the next step is to withdraw from representation. “When you have put a lot of time and effort into a case, this step can be difficult,” Snow says. “Not only are you invested professionally, but you also have a substantial financial investment in the case, in the form of an account receivable.”

You may be tempted to keep the case based on the client’s promise to pay, Snow says, but don’t do it. “By continuing to represent a client who is not paying you, you will make it significantly more difficult, if not impossible, to withdraw later — when you finally give up on getting paid,” he says.

Next, the court has to grant consent to withdraw. Sometimes these motions are denied on the eve of a trial, even if it means the lawyer will be trying the case for free, Snow says.

“If the court grants your motion to withdraw, send a letter to the client terminating the attorney-client relationship and enclosing a copy of the court’s order,” Snow says. “Remind the client of any upcoming deadlines, which, in most cases, will include a deadline to retain new counsel. You may also state the amount due for your services through the date of termination to preserve your right to payment should the client’s financial situation improve.”

The lawyer’s duty to protect a client’s interests generally includes surrendering the client’s files. An exception is when the lawyer has the right to exercise an attorney’s lien, Snow says. However, many ethics committees and courts have placed limitations on the circumstances in which a lien can be used. “In the end, the best course may be to make a clean break by surrendering the client’s files — despite any lien that you might have — so that you can move on to the next, more profitable matter,” Snow says.

Read the full article here.

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