The collection of your fees from a former client can be a minefield for the unwary practitioner. There are ethical, technical, and practical issues that can have a major impact on the collection process.
Collecting attorney fees begins with your retainer agreement. In addition to any ethical or statutory requirements to have a written agreement with your client, it is a good practice to spell out the hourly rates, costs, and other essential terms of your agreement with your client. But when is the last time you sat down and read through your retainer agreement? When is the last time you reviewed a colleague’s retainer agreement? If you haven’t done either, now may be a good time to do a little reading.
One of the first things to pay attention to is whether you want to have an arbitration clause in the agreement. Some people prefer to resolve all disputes through binding arbitration, and others feel it can be less costly to proceed with litigation. It is a good idea to check with your malpractice insurance carrier to see if they have a preferred method of resolving an attorney-client fee dispute.
Also verify whether your policy will cover you if you sue a former client and a cross-complaint is filed. Some policies will not provide coverage for a cross-complaint. If your policy is that type, then it is a good idea to think long and hard about whether you even want to pursue the fees. Some lawyers have a general policy that they will not pursue former clients for outstanding bills due to the pitfalls of a possible malpractice complaint. It is possible that the insurance carrier offers lower rates if your firm agrees to not pursue former clients.
In terms of resolving disputes in arbitration, one advantage may be that you can find a good retired judge who is familiar with family law. Perhaps other retired judges may not grasp some of the nuances involved in a dissolution of paternity matter. If you, in fact, want to have an arbitration clause, make sure it is very specific. Such a clause should clearly specify the following: the method of determining who will be the arbitrator, where any arbitration should take place, the fact that an arbitration is governed by the laws of your jurisdiction, the payment of the arbitrator’s fees, and the method for compelling arbitration should the former client not want to participate.
Often, a former client will use the “ostrich” defense and simply bury his or her head in the sand and ignore your communications; therefore, it may be necessary to file a petition to compel arbitration and also for the court to appoint an arbitrator. Because this type of action is in fact calling for specific performance of your contract, it is important that a court has enough detail to compel the arbitration. It is also important to specify the method of selecting an arbitrator for the same reasons. Additionally, it is a good idea to specify the qualifications of the arbitrator, for example, a retired judicial officer of the superior court with experience in family law.
Proceeding to arbitration is no guarantee that you will be able to obtain a favorable result against the former client. Arbitration can also be costly as you will most likely have to advance the arbitrator’s fees. If your agreement calls for the splitting of the fees or has a provision that the losing party will bear the cost of the arbitration, then at the end of the process you may recoup the fees. Keep in mind that you are already pursuing the client for the unpaid fees and you will just be adding this to the total that is owed.
If a client is going to have another person pay his or her bills, such as a parent or other relative, a written third-party guarantee is a must. You should also have a separate written agreement with your client that acknowledges this arrangement and acknowledges that the client is fully informed and consents to this arrangement. Failure to have such arrangements in writing can be fatal to pursuing any fees, even against your client, in some jurisdictions. There is no prohibition against a third-party guarantee in the ABA Model Rules; however, you should check with the ethical rules and or any applicable statutes governing attorneys in your jurisdiction. California, for example, requires such an agreement in writing and signed by the client and the Guarantor.
It is unethical to be paid on a contingency fee basis in a dissolution of marriage action. Such fees may also be prohibited expressly by statute in your state. Further, the ABA Model Rules expressly state that an attorney shall not enter into such a fee arrangement regarding the outcome of a domestic relations matter. It is permissible in some jurisdictions to enforce or collect past due amounts owing on a contingency basis. So, for example, an attorney could not handle a divorce where his or her fees are contingent on securing a particular support order, but the attorney could collect past due spousal support on a contingency arrangement.
A contingency fee may be a good way for a client to not pay out of pocket when he or she is already owed money. Some people do not want to throw good money after bad if they have had difficulties collecting. In some cases, it may be beneficial to the client and the lawyer to do a blended retainer fee that is partially on a standard hourly rate and partially on contingency. This way the attorney is guaranteed a certain amount in the hourly fee portion and then the client and attorney share in the success of the collection matter as well.
Charging Lien/Attorney’s Lien
Some retainer agreements contain attorney’s or charging liens. These are not bad, but generally require a client to have independent counsel review the retainer agreement to make the lien valid. It may be a good idea to check the ethical rules and statutes in your jurisdiction to ensure that such a lien is not a breach of your duties, as it may be an interest adverse to your own client. Due to the potential ethical pitfalls of a charging lien, some jurisdictions do not permit an attorney to have such a provision in his or her retainer agreement.
Think about if you obtain a lien on the client’s real property. At some point, if there is a fee dispute, that lien could have significant legal effects by preventing the sale of that real property. If your former client disputes the amount you are asserting is owing, or if the client believes no further fees are owed, yet you still have a lien on his or her home, that could certainly be seen as you having an interest that is adverse to your former client.
It is also good to remember that there will still need to be an adjudication of the actual amount of fees owing before you can enforce such liens. The court hearing the dissolution of marriage matter may even be empowered to void your lien.
Despite the pitfalls of obtaining some sort of lien against your client, having a lien can be good leverage in settlement negotiations. If the client is concerned about the attorney having a lien on his or her home, that client may be more apt to settle the matter.
Statute of Limitations
If you have made the decision to file a lawsuit or commence an arbitration, be mindful of two extremely important statutes of limitations: (1) the statute of limitations for legal malpractice and (2) the statute of limitations for breach of contract. Make sure you are aware of the statute of limitations for legal malpractice in your jurisdiction.
Like most attorneys, you probably feel that you did a good job representing your client and may even have the results to prove it; however, it is quite common when a former client gets served with a lawsuit that he or she will file a cross-complaint for legal malpractice. This is often done to dissuade the attorney from pursuing the unpaid fees. Once the former client consults a friend or lawyer, the client will probably find out that by serving a cross-complaint, the attorney will be forced to notify his or her malpractice insurance carrier. That is a call no one wants to have to make.
Be mindful of any possible real such claims a former client may make. Did you miss any deadlines? Have you not kept the client fully informed of every aspect of the matter? Did you advocate for a settlement that may be well below what the client could possibly achieve? These are often difficult questions to ask, but prior to commencing litigation or an arbitration, it is a good idea to be honest with yourself.
As for the statute of limitations regarding breach of contract, most jurisdictions have different time limitations for an oral versus a written contract. For example, in California, the statute of limitations for an oral contract is two years (California Code of Civil Procedure § 339), while the statute of limitations for a written contract is four years (California Code of Civil Procedure § 337). This is yet another reason to have a written contract with your client.
It is wise to wait until the statute of limitations for legal malpractice has run before commencing a lawsuit or initiating arbitration proceedings against your client, provided there is a gap between these time periods. So hopefully the clock has run on the former client’s ability to pursue a legal malpractice claim but not your ability to pursue your fees. Even if the statute of limitations has run on a legal malpractice claim, most jurisdictions would still allow such a claim to be pursued as an offset against any fees the attorney is seeking; however, the client would not be able to pursue affirmative relief against the attorney, that is, damages.
Like any business dispute, it is good practice to pursue any way to resolve the fee dispute with the former client before initiating litigation or commencing arbitration proceedings. You may save court fees and costs as well as shelling out thousands of dollars for a retired judge arbitrator. It may be better to give a $5,000 discount to the client instead of spending close to that on an arbitration because even though you may be confident, there is no guarantee as to the outcome of an arbitration.
Often the process of resolving a billing dispute can be done well before it even comes to the thought of filing a lawsuit or pursuing arbitration. If a client raises an issue with a billing statement, it may make sense to give a discount or adjust the billing as the matter is ongoing. Sometimes this is helpful for maintaining a good relationship with the client and can go a long way toward heading off any billing disputes. If writing off the fees is viable and would avoid other issues (i.e., a malpractice complaint), then this step should be taken without attempting to issue a 1099 to the former client as a taxable forgiven debt. Such a tactic seems heavy handed and, even though the debt is written off, could lead a former client to pursue a malpractice action as revenge for being issued a 1099.
Before you proceed with litigation or arbitration, you may wish to reach a settlement agreement and should have such a settlement agreement in writing. It is possible to have the client execute a promissory note to help secure the debt; however, a promissory note would still require the filing of a lawsuit to enforce if the client still does not pay. While a promissory note is helpful in reducing the amount owing to a sum certain, a promissory note is not self-executing.
A better option would be to have a stipulation for entry of judgment. Such an agreement would permit you to have a judgment entered against your former client in the event of a default and no timely cure. That can obviate the costly and time-consuming process of litigating the claim entirely.
A typical scenario is that the client agrees to pay a certain amount each month towards the agreed-upon settlement total. If the client defaults and does not cure the default in a specified period of time, the attorney can obtain a judgment against the client. Once a judgment is entered by the court, it is always a good idea to record the judgment, or an abstract of judgment, with the county recorder in any county in which the former client/debtor owns any property. Be sure to check the law in your jurisdiction as to whether recording a copy of a judgment is effective, or if it is necessary to record an abstract of judgment.
Even if you proceed with litigation or arbitration and obtain a judgment against your client, there is still value in settling the dispute. Just because you have a judgment for $100,000, for example, that does not mean the former client will just write a check to pay it off. You may even know that such a payment is not possible based on your knowledge of your former client’s finances. You could spend time and resources going after the client in the form of bank levies or wage garnishments that may only yield drips of money anyway. Accepting less than what is owed can be a good way of giving the client a “deal” and getting paid.
Be sure that any settlement agreement reached has a mutual release of any and all claims. You would not want to settle your fee dispute and get paid only to have the client turn around and pursue a malpractice action. If the settlement agreement only covers the fees owing and does not mention all claims between the lawyer and former client, the lawyer is vulnerable to such an action.
Many law firms have begun accepting credit cards, Zelle, Venmo, Apple Pay, Law Pay, or other modern payment methods. These are all ethically permitted and can be a good way to help your clients pay their bills.
Credit cards pose their own set of possible issues due to the ability of a client to dispute a charge and the potential for money to be charged back—which would result in money being taken from your bank account. In order to avoid a charge back, it is best to get something in writing signed by the client every time a credit card is charged. Often a client will tell you to just charge the card you have on file; however, with no record of this communication and nothing signed by the client, such a charge may be successfully disputed by the client. It is very difficult for the client to prevail in a dispute if the credit card company can see the client’s signature authorizing a specific charge.
Another possible issue with using a credit card is that the proceeds of a credit card charge should be deposited into your general account. This avoids the possibility of a charge back from the credit card company against your attorney-client trust account. That could be an ethical issue and could create accounting problems. Be careful if you accept a credit card for an initial retainer fee because you will need to transfer any unearned amount of the retainer fee into your attorney-client trust account.
If the client is unwilling to settle the matter and you are successful in litigation or arbitration, you may still need to employ collection actions post-judgment. A judgment is not self-executing. This brings up an ethical issue of whether you can use information you have obtained in your representation of the client in order to collect on your judgment. There is no such prohibition in the ABA Model Rules, and technically you are not broadcasting the confidential information. You may supply such information to the sheriff or other levying officer, but that is a necessary action brought about by the former client’s failure to honor the judgment you have obtained against him or her. Further, some information may not even be confidential any longer as often such financial information is contained in the court files.
Once you have a judgment against the former client, such a judgment is fully enforceable just as any other civil judgment. There is nothing that would prevent the employment of any collection method authorized in your jurisdiction. Bank levies, vehicle levies, wage garnishments, charging orders, and assignment orders are all good ways to enforce a judgment. A wage garnishment for a civil judgment can reach up to 25% of the former client’s earnings; however, this may not be the best way to enforce a judgment if the former client is self-employed. As surprising as it may sound, self-employed people can find ways around a garnishment by not paying themselves “wages.”
It is a good idea to either review the enforcement of judgment procedures in your jurisdiction or even retain an attorney who specializes in such work. Generally, collection actions do not deal in esoteric legal theories, but they are often very technical. Failure to file a proper form or missing a deadline can delay or even foreclose a collection method.
When deciding whether to pursue a former client for fees, all possible negative consequences must be weighed. Consider the time and effort it will take to initiate a lawsuit or an arbitration proceeding, and then actually collecting the money if you prevail in litigation or arbitration. It is possible to spend as much time pursuing collections against the former client as you had spent on his or her case. Further, consider the cost of retaining an attorney to handle the collection matter. Is it reasonable to pay $400 per hour to an attorney to go after the former client, or to part with one-third of the judgment if you can find someone to represent you on a contingency basis? Factor in the ethical limitations and potential cross-complaint for malpractice, as well as how collectible the former client may even be. Once you conclude that you simply do not want to let the fees go, then take a deep breath and be prepared to spend some time on the matter.