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Category: Fee Collection

Texas High Court to Hear $42M Fee Dispute

March 6, 2017

A recent Law 360 story by Michelle Casady, “Texas High Court to Hear $42M Atty-Client Fee Dispute,” reports that the Texas Supreme Court on granted a request from the owner of a water supply company, who argued a lower court ignored a jury's findings and wrongly granted a new trial to his two former lawyers in a contingency fee dispute lawsuit involving their right to a stake in his company.
 
In October 2013, a jury rejected the claims of solo practitioners Thomas C. Hall and F. Blake Dietzmann that they were entitled to $42 million in damages under a contingency agreement with Dean Davenport, who won full ownership of a water supply company in an underlying suit.  But about 105 days after rendering judgment, the trial court vacated the judgment and granted the attorneys' request for a new trial.  After an appellate court directed the trial court to provide specific reasons for granting a new trial, it did so in March 2015, holding that the agreement unambiguously provided that fees would be paid out of the ownership in any business recovered, and that the jury's findings weren't supported by the evidence, Davenport told the court.  The high court has scheduled oral arguments in the matter for March 23.

In his petition for writ of mandamus, filed in November 2015, Davenport told the high court it should take the case because the dispute raises the important issue of when a trial court should be allowed to grant a new trial.  In this case, Davenport argued, the trial court disregarded a jury's findings, misstated the record, ignored evidence, credited disputed testimony and “substituted its judgment and credibility decisions for the jury's” in granting his former attorneys' request for a new trial. 

Davenport also argued that the court should weigh in on the “narrow circumstances” under which lawyers and clients can become business partners under contingent fee agreements.  Rule 1.08(a) of the Texas Disciplinary Rules of Professional Conduct allows for that only if the transaction is fair, reasonable and fully disclosed; the client is given a chance to seek advice from outside counsel; and the client consents to it in writing. None of those safeguards were met in this case, Davenport told the court.

“Nonetheless, the trial court concluded as a matter of law — eleven months after a jury verdict in favor of the client (and after the trial court determined the fee agreement was ambiguous) — that the fee agreement was unambiguous and supposedly entitled the lawyers to become partners in businesses the client purchased in settling his lawsuit,” Davenport wrote.  “In so doing, the trial court ignored the plain language of the fee agreement at issue and the special rules and ethical principles underlying the interpretation of attorney-client fee agreements and attorney-client business transactions, as set forth in Levine, Anglo-Dutch, and Rule 1.08.”

In a February 2016 response arguing against granting the mandamus petition, Hall and Dietzmann told the court that Davenport wants the court to “greatly expand Texas law in ways that would substantially reduce the significance and reliability of all written contracts.”  Their agreement with Davenport, the attorneys told the court, “expressly contemplates paying fees out of the recovery of a business ownership.”

“The trial court did not clearly abuse its discretion by granting a new trial for the reasons stated. As it relates to the payment of attorneys’ fees out of the recovery of an ownership of a business, the agreement is unambiguous,” the brief reads.  “Furthermore, the trial court did not abuse its discretion in concluding the evidence was insufficient to support findings that Hall and Dietzmann had waived or should be equitably estopped from asserting their right to be paid under their unambiguous fee agreement with Davenport.”

Hall and Dietzmann filed suit in February 2012, claiming that after the settlements because Davenport was “paid” through his former partners' ownership interests in Water Exploration Co Ltd., they were owed a percentage of the company, instead of the about $400,000 in cash he paid them in December 2009.  They sought about $24.6 million in damages, equivalent to what they said would be the current value of their alleged ownership interest in WECO, plus $18 million in punitive damages.

But the jury found Davenport's contingent fee agreement with the two attorneys did not include a potential ownership stake in WECO, and found the attorneys had waived their rights to seek ownership of WECO and were each estopped from trying to claim a stake in the company.  Jurors also found both attorneys complied with their fiduciary duties to Davenport.

The case is In Re Dean Davenport et al., case number 15-0882, in the Supreme Court of Texas.

Things to Consider Before Suing a Client Over Unpaid Fees

December 22, 2016

A recent The Recorder article, “Things to Think About Before Suing a Client Over Past-Due Bills,” by Randy Evans and Sheri Klevens considers suing clients over past due legal bills.  The article reads:

For several years, demand for law firm services has remained largely flat.  Consequently, firms have sought to capture additional market share and have adapted their economic practices to ensure viability.

In addition to strategic firm management decisions and rate increases, firms are also focusing their efforts on managing and collecting receivables.  Historically, firms have avoided suing clients for unpaid legal fees, leaving them uncollected, and for good reason—work was abundant and productivity consistently trended higher.  Other reasons governing this decision were unfavorable press, exposed business practices and increased costs.

But stagnation in the legal industry means that firms of all sizes and locations have been more willing to take on these risks to get paid.  When working to collect receivables, the challenge is to avoid reaching the point when suing the client is the only remaining option.  This involves following some simple but important steps.

Send Invoices Early and Frequently

Billing is simultaneously one of the least enjoyable aspects of a law practice and one of the most important.  Good billing practices benefit client relationships because most clients prefer to know early and often how much they owe and for what.  Moreover, the California Rules of Professional Conduct require attorneys to keep clients reasonably informed about developments relating to the representation, which arguably encompasses fees rendered for legal services. See Rule 3-500.

The single most preventable basis for a fee dispute is untimely billing where sizable bills are sent late (and even after the matter has been resolved).  On the other hand, regular, monthly billing is easier to digest than one big bill at the end.  Additionally, bills sent while there is a higher possibility of success are more palatable than those sent after a loss.  As a result, the most effective method for collection begins with creating and sending invoices early and regularly.

Pursue Non-payments

Non-payments rarely resolve themselves with the passage of time.  Instead, the outstanding fees inevitably become the focus of every conversation, meeting and written communication.  Left unaddressed, non-payment can evolve into claims.

Effective collection techniques typically involve use of a diary system that provides routine reports on when payments are received and when they are not.  Bills older than 60 days require attention and follow-up, while those older than 90 days require action.

Determining why a client has not paid a bill is an important step in the collection process.  There are four common reasons a client has not paid a bill.  The first is an unintentional oversight—the bill was lost or misfiled, the client reassigned the responsibility for accounts payable to a different person, or there was a computer or system processing error.  In these situations, the goal should be for a quick follow-up to remedy any minor issues to allow for payment.

Second, the client may have an administrative issue with the bill.  For example, the rate charged or number of hours worked on a project might be higher than the client and the firm agreed.  Perhaps the statements for services rendered do not comply with agreed billing procedures.  More often than not, the problem is resolvable and may be addressed before creating an issue for future invoices.

Third, a client may have insufficient funds to pay the bill.  When faced with this situation, many attorneys will evaluate the likelihood of getting paid, the impact of never getting paid, and the significance of the lawyer-client relationship.  This evaluation involves far less risk when conducted before the receivable has grown from a manageable write-off to a potentially debilitating bad debt.

If the law firm decides that it cannot continue without payment, it needs to communicate that decision to the client promptly.  If the client offers no acceptable alternatives, then the firm may seek to withdraw from the representation in accordance with the applicable rules and laws.

Finally, some clients are simply dissatisfied with the work performed or the value of the services billed.  When that happens, attorneys and law firms have to consider the options for resolving the fee dispute.

Resolve the Dispute

When a fee dispute arises, there are three options to consider before resorting to litigation.

An informal meeting between the client and the firm can yield good results.  It also can help to involve an attorney other than the one whose services are at issue for this discussion.  The challenge is to eliminate personal emotions so that a business solution is possible.  In the end, a good business decision will weigh the costs and risks against the likelihood and amount of recovery.

In some situations, informal discussions regarding outstanding fees are just too difficult for the law firm and the client to discuss in a productive way on their own.  When those situations occur, mediators can bridge the communication gap and save both parties fees, expenses and time.  Absent a client who is set on bringing an action for legal malpractice, the most common law firm response is to propose mediation before filing an action for attorney fees.

Finally, there is arbitration.  California has a Mandatory Fee Arbitration Code, under which the Mandatory Fee Arbitration Program (MFA) is administered to provide informal, confidential and relatively low-cost fee dispute arbitrations. MFA arbitration is mandatory for the lawyer if the client requests arbitration.

This service is beneficial for attorneys because it does not involve a counterclaim for legal malpractice, although the arbitrator can reduce an award if he or she believes the malpractice reduced the value of the attorney's services.  The decision to pursue fee arbitration, whether binding or nonbinding, is often considered before bringing an action for attorney fees and could be addressed in the fee agreement.

Carefully Consider Litigation

Deciding whether to sue a client for unpaid fees requires a careful balance of risks and rewards.  Although litigation is sometimes inevitable, the decision to sue is one not to be made precipitously.

In California, attorneys sometimes wait until after the statute of limitations for legal malpractice has expired to demand payment of unpaid fees because the time to sue for breach of contract is generally much longer than the time to sue for malpractice.  Nonetheless, by following these simple steps in the collection process, firms may be able to avoid having to reach that decision.

Elite Law Firms Increasingly Suing Clients to Collect Fees

December 8, 2016

A recent American Lawyer story, “Elite Law Firms Increasingly Suing Clients to Collect Fees,” reports that the days of large law firms allowing clients to skip or delay paying bills are dwindling.  Look no further than the courts, where if clients don't pay, they will face suit, no matter how prestigious or large the firm.

In an era when demand for legal services is softening, the country's largest firms are increasingly going to courts and arbitration against their former clients to collect fees in what consultants say is the "new normal."

According to a review of New York City court filings, fee disputes involving the wealthiest and largest law firms are rising from the past few years when filings were fewer or initiated by smaller firms.

So far in 2016, at least a dozen lawsuits have been filed in Manhattan or Brooklyn Supreme involving Am Law 100 and 200 law firms in fee disputes with their ex-clients, according to a New York Law Journal search, not counting many midsize firms that have also filed suits.

Fee litigation this year includes Wall Street firms such as Sullivan & Cromwell and Shearman & Sterling suing ex-clients in court to collect unpaid bills, to former clients suing firms such as Gibson Dunn & Crutcher and Boies Schiller & Flexner to stay arbitration demands against them over unpaid bills.

Other court cases this year include Arent Fox suing real estate firm Shinda Management Corp. for $506,125 in fees after representing it in NRLB litigation; Loeb & Loeb filing suit against ex-client Advanced Green Innovations for $825,000; Brown Rudnick obtaining a $645,717 judgment against Bartronics Asia Private Limited in September; Perkins Coie suing real estate investor Chaim Miller and others for $177,310; and Kaye Scholer suing Art Capital Group for $144,590, according to court documents.

Attorneys who frequently represent law firms in litigation say growing fee litigation is a signal of the flat demand for legal services, less loyalty between firms and clients, and delayed payments by corporations.

"This is the new normal, this is the environment we are in as law firms," said Philip Touitou, a Hinshaw & Culbertson partner who has represented law firms in fee litigation.  "Our clients expect us to be efficient and the law firms are demanding of themselves to be efficient.  What that translates to is we can no longer wait 90 days, 120 days, a year or more to collect fees."  Fee litigation, he said, is "now an unfortunate part" of law firms' business.

Firms are pushing back against clients who stall payments by attempting to enforce their retainer agreements, which typically provide payments are due immediately or up to 30 or 60 days from an invoice, Touitou said.

"The days when a client sent all their legal work of all their varieties [to a firm] and had a long-term relationship have [changed] and so one consequence is that law firms are feeling less obligated to await payment," Touitou said.

Ronald Minkoff, a Frankfurt Kurnit Klein + Selz partner who also represents attorneys in fee disputes, said there could be more fee litigation due to the pressure on firms to make budget, especially when associate salaries are rising and demand is flat.  Meanwhile, some of the stigma surrounding collection suits is gone, Minkoff said.

The suits are not only over large sums.  For instance, Shearman & Sterling, which generated $860.5 million in revenue in 2015, filed suit in March against Safka Holdings for $25,645 in unpaid fees from a proposed real estate purchase.  Invoices in court exhibits show that Shearman lawyers Alfred Groff and Chris Smith in 2013 billed $995 per hour and Ryan James Mahoney billed up to $610.

However, much of the litigation is over large sums in the hundreds of thousands of dollars or millions of dollars.  Sullivan & Cromwell filed a petition in May to confirm a $3.26 million arbitration award against coal baron Jim Justicenow the governor-elect of West Virginiaand his company, James C. Justice Companies, for unpaid fees.  The law firm had represented Justice in Delaware litigation.  The fee dispute was resolved by June when the law firm filed discontinuance papers in court.

Malpractice counterclaims are law firms' largest risk when suing clients for fees.  That's what happened when Atlanta-based firm Smith Gambrell & Russell sued mobile technology company TeleCommunications Systems for more than $2.39 million in fees and disbursements.  The law firm had represented the company, as well as Verizon and T-Mobile through indemnity obligations, in IP suits.

Shortly after the June 2016 lawsuit, Telecommunications Systems, represented by litigator Jonathan Lupkin, filed a $3.4 million counterclaim for malpractice, contending the law firm missed a deadline to file application for legal fees in an underlying Texas suit.

In opposition court papers, Smith Gambrell argued that no deadline was missed and that the Texas judge would have denied a fee application in any case.

Other cases tied to malpractice claims include Blank Rome's suit against Princes Point and others, seeking more than $1.4 million in unpaid fees.  The suit was filed shortly after Princes Point sued Blank Rome and others for legal malpractice.

Malpractice insurance carriers routinely discourage law firms from filing suit against former clients because of the high likelihood of malpractice counterclaims, Minkoff said.  Some law firms even temporarily hold off on fee litigation to wait out the three-year statue of limitations for malpractice claims in New York, he added.

Meanwhile, some large firms prefer the arbitration route, due to its privacy and lack of appeals processeven if the dispute ultimately lands in court.

Discover Growth Mutual Fund, a Cayman Islands fund, sued Gibson Dunn in late October, seeking to stay arbitration initiated by the law firm over $530,404 in unpaid bills.

The law firm had represented the fund in Southern District federal litigation.  The retainer agreement, filed in court, showed partners Robert Weigel billed $1,155 per hour, Robert Serio billed $1,125 and associate Andrew Keats $825.The fee litigation was discontinued less than a week after it began.

Coffee machine manufacturer Scanomat A/S filed suit against Boies Schiller & Flexner in November to stay an arbitration brought by the law firm over $427,481 in unpaid fees.

According to the firm's arbitration papers filed in court, after the ex-client's CEO claimed to be friends with chairman David Boies, the firm moved quickly to handle its case and "with extreme courtesy," including waiving a $500,000 engagement fee.  But the client refused to pay a dime, claiming it was "just a European company" with no understanding of the U.S. legal system, according to Boies' court papers.

Attorney Defends $6M Fee Request For $2.75M Class Award

June 15, 2016

A recent Law 360 story, “NavSeeker Attorney Defends $6M Fee, $2.75M Class Award,” reports that attorneys seeking a $6 million fee for winning a proposed $2.75 million buyout of minority shareholders stranded in an allegedly “stolen” company defended the class deal Friday in Delaware Chancery Court, saying the suit also proved NavSeeker Inc.’s overall worth despite the controlling company’s claims that it had no value.

At a hearing, class attorney Kurt M. Heyman of Proctor Heyman Enerio LLP called the $6 million a justifiable attorney share for work on the derivative suit, which was pursued by shareholders on the company’s behalf and yielded a $25.6 million company valuation used for the fee calculation.

Minority shareholders accused controlling shareholder HIMEX Ltd. of a boardroom takeover in 2012 and of profiting from NavSeeker assets without compensation.  Under the settlement, the minority holders would exit the company with $2.75 million they otherwise would not have gotten.

“Defendants have always characterized that stock as being worthless.  From the moment this litigation started through now,” Heyman said.  “We arrived at $2.75 million purchase price for plaintiff’s worthless stock,” along with establishing an overall value, he said.

But Heyman also conceded that the company could get pushed into bankruptcy by its remaining, hostile directors and controlling corporate shareholders unwilling to pay the fee bill.  “There have been constant, thinly veiled threats that they would file for bankruptcy and leave us and our clients without remedy,” Heyman said.

Vice Chancellor J. Travis Laster said he would approve the settlement but deferred a decision on the fee and overall deal, and at one point referred to the “predator profile” of the firms involved.  He also said the case reflected a systemic problem that makes it difficult for lawyers to risk taking on a minority shareholder oppression case.  “That then creates a scenario where we have the least incentive for enforcement in the situation where we need it the most,” Vice Chancellor Laster said.

NavSeeker distributes and manages devices that monitor motor vehicles and fleets for businesses and insurance companies.  In 2014, minority shareholders filed a suit accusing HIMEX of using its 80 percent ownership of NavSeeker shares to take control of its real and intellectual property.

NavSeeker’s loss of control worsened in 2013 and early 2014, when, the minority holders say, HIMEX counted NavSeeker’s assets with its own in agreements that gave U.K.-based Quindell, now Watchstone Group, an 85 percent ownership of HIMEX.

Navseeker attorney A. Thompson Bayliss of Abrams & Bayliss LLP said that the case and settlement were never presented to the company as a “pay us $25 million as settlement for the pillaging of NavSeeker.”  It was, he said, a matter of “what’s a fair buyout price for the plaintiffs?”

NavSeeker individual director attorney John L. Reed of DLA Piper said Heyman’s firm deserved a fee, but one based on the $2.75 million and secured from the minority shareholders who filed the suit, rather than other parties.

“We’re not all friends on this side of the courtroom,” said Reed, who also argued against a shareholder proposal to impose the settlement costs across all parties on a joint and several basis.  “I don’t have any reason to trust HIMEX or Quindell.”  Bayliss said NavSeeker is financed month to month with cash infusions from HIMEX and Quindell, including for its legal fees.

Fee Allocation Dispute Freezes Jury Award in Tobacco Case

April 12, 2016

A recent Daily Business Review story, “Fee Fight Freezes $3.5M Award in Tobacco Case” reports that a dispute among plaintiffs attorneys over the division of attorney fees has hung up the distribution of a $3.5 million jury award against R.J. Reynolds Tobacco Co. in an Engle progeny tobacco case after appeal.  A six-member legal team won the verdict three years ago, and the losing defendant isn't standing in the way of payment.

But Miami attorney Donald Fitzgerald of the Fitzgerald Law Firm filed a charging lien last December in Escambia Circuit Court, alleging a dispute exists about the undisclosed fee distribution agreement.

Details of the fee agreement are confidential.  However, the plaintiffs attorneys say the split by the six lawyers is not even.  Payment was approved by R.J. Reynolds but will not be made until the fee dispute is resolved in one of about 8,000 smoker cases filed after a statewide class action was disbanded by the Florida Supreme Court.

After unsuccessfully attempting to get the charging lien dissolved, one of Fitzgerald's former co-counsel sued him Friday in Miami-Dade Circuit Court.  Coral Gables attorney Richard J. Diaz sued on behalf of plaintiff Robert Thibault, the husband of the late smoker Evelyn Thibault, both residents of Navarre.

The other plaintiffs attorneys are Miami attorney J.B. Harris, Tallahassee attorney Robert Trammell, Coral Gables attorney Carlos Santisteban Jr. and Key Biscayne attorney John Crabtree.  The group has collaborated on a handful of other smoker cases but worked on only one with Fitzgerald before.

"We received a settlement on attorney fees that we felt was fair, and Mr. Fitzgerald took it upon himself to try to hold up the settlement," Harris said.  "As a result of his selfishness and greed, this will have the effect of holding up the distribution to a sick and elderly client — his own client."

Diaz's lawsuit alleges malpractice, breach of contract, breach of fiduciary duty and intentional infliction of emotional distress.  The lawsuit contends Fitzgerald filed the lien because he was in debt to a third-party litigation funding company — Appellate Advance — after borrowing money during the appellate process.  Many plaintiffs attorneys finance their litigation while waiting for the appellate process to wind down.

"Some time after the verdict, Fitzgerald applied for advanced funding from a third-party funding company during the appellate process," the suit said.  "These types of funding companies are quite unique.  Generally speaking, they gamble against the likelihood of an ultimate affirmation of the jury's verdict."

The companies provide 50 percent advance financing of the anticipated fee payable and require the attorney to repay 200 percent of the amount borrowed plus interest until the final judgment is paid.  The suit alleges Fitzgerald may have overstated the amount of fees he was due to get a higher loan.

"To obtain this advanced funding, Fitzgerald had to make certain representations to the funding company and assign all (or a part) of his interest in the expected final payout on the judgment," the suit continues.

The verdict was clearly less than the lawyers hoped for after asking jurors for $10 million.

Diaz's lawsuit accuses Fitzgerald of "placing his pecuniary interest" over that of his client.

"Fitzgerald is in a position of tremendous power over his own client, and Fitzgerald has abused that power and continues to abuse that power," the suit stated.

Law Firms Seek Unpaid Legal Fees

April 8, 2016

A recent Bloomberg BNA story, “Big Law Docket Scanner: Firms Do Battle Over Unpaid Fees” reports that some law firms use courts to collect unpaid legal fees.  Below is a list of large law firms...

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