There is an inherent conflict in almost every attorney-client relationship—it’s called “attorney fees.” Here are some guidelines that might allow you to pilot your way to a happy client and a financially successful relationship.
The first step is having the client sign a written fee agreement. Most states require the client to sign a written fee agreement, especially when the client is an individual and certainly when the lawyer is seeking a contingency fee. The fee agreement’s essentials follow the same contract rules we litigate all the time. Cover all the key terms. Think of potential problems and resolve them in advance. Draft the fee agreement for yourself much as you would advise your client in a contractual negotiation. Be mindful of your state’s particular rules.
Other problems arise in multiple representations. What happens if a conflict later rears its ugly head between the joint clients? Equally important, what if one client pays his or her share of the fee but the other client does not? These are issues that should be resolved in the drafting stage.
There are three general categories of retainers: a classic retainer, a security retainer, and an advance payment or flat-fee retainer. The classic retainer is earned in its entirety by the attorney upon payment—the client relinquishes all interest in its return. A security retainer is a payment for prospective services, where the client retains an interest in the funds until the services are actually rendered. The attorney holds the funds as an escrow holder for the client. Finally, an advance payment or flat-fee retainer involves fees paid as compensation for services to be rendered in the future. But payment passes to the attorney whether the service is actually rendered or not.
Most lawyers think that a retainer protects them from the client’s bankruptcy. Not true. Under the security retainer agreement, the client retains an interest in the money in your client trust account. If the client files bankruptcy or a creditor levies upon your trust account, these funds must be disgorged. These are not your funds. You are merely holding them as a trustee for your client, much like a bank.
One way to protect yourself against such levies or disgorgement is to require the client to convey a Uniform Commercial Code (UCC) security interest in the funds placed as a retainer in your client trust account or to create such security interest in the written fee agreement itself. The attorney becomes a secured creditor and can protect his or her retainer against either the bankruptcy trustee or another creditor of the client.
When an attorney is discharged after receiving a retainer in the client trust account, the attorney ordinarily can keep the funds necessary to cover the outstanding bill, but most states require that any remaining amount be released to the client. A more difficult issue exists where the retainer is intended to be non-refundable or a flat fee. Courts are grappling with the question of whether an attorney having one of these retainers is limited to compensation based on quantum meruit if the client discharges the attorney. Again, the safest way to deal with these problems is to point out the application of a retainer in the fee agreement.
For most lawyers, billing is based on time. At the end of each month, we total up the time and multiply it by the hourly rate. Block billing, on the other hand, groups tasks into a single, itemized block for each day. The risk of block billing is that it merges each task into a solid block of time, which some have criticized as making it impossible to determine how much time each task took. On the other hand, block billing eliminates one of the banes of private practice—maintaining time sheets. Whether you bill by task or in a block, it is essential that the description in your time records be sufficiently detailed and accurate to convey that you rendered something of value. When entering time descriptions, use common sense and good judgment.
The first “alternative fee” was the contingency fee—the lawyer working for a percentage of the recovery in lieu of being paid an hourly rate. Today, clients are looking at “flat fees,” where a single fee is paid for the entire litigation, or an over-under approach in which the lawyer discounts the fee for work that takes more time than originally budgeted but gets a percentage of the savings bonus if the case is brought in under budget.
Any departure from an hourly rate creates a potential conflict between lawyer and client. A lawyer on a fixed fee has an economic incentive not to take that extra deposition—the lawyer gets the savings. The contingency fee accommodates that conflict because the lawyer and client are aligned and both are paid if success is achieved. Because the flat or fixed fee leaves the issue open, you can minimize the potential for conflicts by laying out in the fee agreement a careful budget, with the number of anticipated depositions, motions, and the like. But lawsuits are inherently unpredictable, making that sort of budgeting difficult at best. In the over-under approach, the conflict is diminished, but it exists nonetheless. No one has yet come up with a solution for this conflict, but it merits a full discussion with the client and carefully spelled-out terms in an initial fee agreement and as the litigation progresses.
If the lawyer is a special creditor, many states recognize a “retaining lien” by statute. This lien is on the cause of action and all pleadings and papers relating to the lawsuit. Other states recognize a common law charging lien to secure the attorney fees in these assets (the cause of action and the files). Such liens are crucial when you represent a plaintiff who actually gets something out of the lawsuit, but they are more illusory when you represent a defendant for whom victory is merely keeping the status quo.
It is important that attorneys “perfect” the lien. In order to make sure the other side does not pay twice, a party must file a notice of lien in the lawsuit. That way, if the defendant pays the plaintiff money, it is charged with the knowledge of the attorney’s lien, which usually means the defendant will not pay unless he or she gets release of that lien from the attorney who filed the lien or is indemnified by the recipient of the funds.
How do you value that lien? In an hourly case, where there is a written fee agreement, it is usually a simple task, although when the attorney fires the client, the client may attempt to reduce the value of the lien by the cost of finding replacement counsel. In a contingency case, it is more problematic. Courts generally follow the approach of quantum meruit—the terminated lawyer getting a fair compensation for his or her labors.
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