When Clients Stop Paying: Act Quickly to Cut Your Losses

Vol. 16 No. 10

By

Peter T. Snow is an associate at Faruki Ireland & Cox P.L.L. in Dayton, OH, where he handles complex litigation matters. He may be reached at psnow@ficlaw.com.

 

You are an up-and-coming associate who just brought in your first client: a start-up company that, like many businesses, is struggling to turn a profit in today’s sluggish economy. A consumer class action lawsuit was just filed against the company, and the company is looking for an experienced associate who can run the case at a more affordable rate. You are excited to start building your book of business and agree to the representation.

Months later, after you and your client successfully obtain a dismissal of the original complaint, the court denies the motion to dismiss the amended complaint. In the lull between filing the company’s answer and the onslaught of discovery, you review the case file and see, to your consternation, that the client has not paid your last two bills. The client’s retainer has long since been spent and, with discovery imminent, there is a lot of work ahead of you. What do you do?

Dealing with a client who has not paid your bills requires prompt action and clear communication. The first step is to discuss the unpaid bills with the client. 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, inform the client that if he fails to pay the past due amounts, you will have to withdraw from the representation. ABA Model Rule of Professional Conduct (RPC) 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 that he will pay, secure his commitment to pay by a certain date and then immediately confirm your discussion in writing.

If you do not receive payment by the agreed date, the next step is to withdraw from the representation. When you have put a lot of time and effort into a case, this step can be difficult. 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 at some later date. Resist that temptation. 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. In litigation matters, court rules commonly require the court’s consent before an attorney may withdraw. Courts weigh various factors in deciding whether to grant such consent, including the prejudice to the client and the withdrawal’s effect on case deadlines. Courts routinely deny motions to withdraw made on the eve of trial—even if it means that the attorney will be trying the case for free.

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. 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.

A withdrawing attorney’s duty to “take steps to the extent reasonably practicable to protect a client’s interests” (RPC 1.16(d)) generally includes surrendering the client’s files. An exception to this duty applies where the attorney has the right to exercise an attorney’s lien (i.e., to retain the client’s files pending its payment of fees). If you have such a right, proceed with caution. Because an attorney’s lien can be such a powerful weapon, many ethics committees and courts have placed limitations on the circumstances in which it 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.

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