Fee Disputes with Clients

“Absolutely,” Ethox responded. “What is happening?”

“We agreed to handle what we thought was a small litigation matter for a $20,000 fixed fee,” Paradox said. “The client advanced $10,000.

“The client proved difficult and the case took far longer than expected,” Paradox continued. “Then, right before we could settle the case, the client fired us and demanded we refund the full $10,000 advance.

“If we had billed our time at normal rates,” Paradox assured Ethox, “we would have charged the client at least $40,000. Do we really need to refund the $10,000 and waive any claim for fees?”

“No,” Ethox responded. “Section 37 of the Restatement (Third) of the Law says that sometimes lawyers may forfeit a right to fees, by abandoning the client or similar wrongdoing.”

“We did nothing wrong,” Paradox interjected.

“Good. Then we should have a right to a fee in quantum meruit, or whatever amount we earned.”

“Isn’t quantum meruit determined by taking the amount we worked and multiplying it by our normal hourly rate?” Paradox questioned. “If so, we should get the full $20,000 fee—and a lot more.”

“Unfortunately, that is probably not the right method,” Ethox answered. “Restatement section 40 directs that a lawyer discharged mid-representation can usually recover the lesser of either the ‘fair value of the lawyer’s services’ or a ‘ratable portion of the compensation provided by an otherwise enforceable contract.’

“So we are probably going to recover only a portion of the $20,000, the agreed fee,” Ethox explained, “depending on what portion of the representation we completed.”

“How much of the $20,000 will we get?” Paradox asked.

“That depends on how much work we performed, and also how close we were to resolving the matter,” Ethox said. “If the client discharged us at the end, basically attempting to deprive us of a fee, we are likely to get almost the entire agreed fee of $20,000. But if significant work was still required, we will probably get only a portion of the $20,000.

“We can try to negotiate a resolution with the client,” Ethox continued. “And if that does not work, we can use a bar fee dispute process or file a lawsuit.”

“So what do we do with the $10,000 we are holding in trust?” Paradox asked.

“Under Model Rule 1.15(e),” Ethox answered, “a lawyer is supposed to maintain any funds subject to a dispute separate—usually in the lawyer’s trust account—until the dispute is resolved.

“However, Rule 1.15(e) also requires a lawyer to distribute any portion of the funds that are not subject to the dispute. So if the client agrees we may keep some portion of the $10,000 as attorney fees, or that a third-party vendor should be paid from the advance, we can and should make those payments. Also, if we agree the client should receive some amount in refund, we need to refund that amount to the client. We cannot hold all the money hostage, perhaps to get leverage in the dispute.”

“What if the client never agrees to anything?” Paradox pressed. “And what if a lienholder also claims part of the advance?”

“Then we may need to file an interpleader action,” Ethox answered.

“An interpleader?” Paradox asked.

“Yes, the plaintiff sues all parties that claim a right to property or money, pays the money into the court registry, and then lets the judge sort it out. We would likely be the plaintiff and also a claimant.”

“This client is so difficult, I bet an interpleader will be necessary,” Paradox complained.

“That may be true,” Ethox assured Paradox. “But why don’t I call the client and see what I can work out first. Sometimes getting another lawyer involved to explain the firm’s position and let the client vent proves an efficient way to resolve a dispute like this before it grows into litigation.”

“That would be wonderful,” Paradox said warmly.