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Category: Fee Engagement Letter

Article: A Lawyer’s Guide To Collecting Fees From Nonpaying Clients

August 12, 2022

A recent Law 360 article by Joshua Wurtzel, “A Lawyer’s Guide To Collecting Fees From Nonpaying Clients,” reports on collecting unpaid fees.  This article was posted with permission.  The article reads:

You've done the work and sent the bill, but haven't been paid. What do you do?  This is unfortunately a question that lawyers, from solo practitioners to BigLaw partners, confront all too often.  But most lawyers struggle with the answer.  And even worse, many end up doing nothing — leaving significant receivables on the table from clients who have the ability to pay.  Struggle no longer.  Here, I offer some recommendations on how to deal with a nonpaying client. The article focuses on the law on account stated in New York.  These principles and advice are generally applicable in most U.S. jurisdictions, though you should of course consult the specific law in your jurisdiction.

Make Sure Your Retainer Agreement Gives You Adequate Protection

Good collection starts with a good retainer agreement.  There are several important clauses any retainer agreement should have.

Thirty Days to Object

Your retainer agreement should include a clause stating that if a client has an objection to an invoice, the client must make a specific objection in writing within 30 days.  Courts have upheld these types of clauses, and have further held that a client that fails to make a specific, timely objection in accordance with this clause waives objections to the invoice.

Fee Shifting

Many lawyers avoid suing clients for unpaid fees because the time spent doing so can be better spent on other, billable tasks.  But if you include a fee-shifting clause in your retainer agreement, a nonpaying client could end up being responsible for fees you incur in bringing the suit.  Make sure, however, that the fee-shifting clauses run in favor of the client as well if he or she is the prevailing party, or else it will be unenforceable.

Choice of Forum and Acceptance of Service of Process

Your retainer agreement should also include a forum selection clause in the state in which you practice so you don't have to go out of state to sue a nonpaying client.  And it should also include a clause stating that the client agrees to accept service of process by mail or email, in case you have trouble serving the client personally.

Rely on the Retaining Lien and Charging Lien

New York law strongly favors attorneys who are stiffed by their clients.  So there are some tools you can use to try to collect without having to bring a lawsuit.

Retaining Lien

When a client has an outstanding balance with his or her former lawyer, the lawyer can assert a retaining lien over the client's file. This allows the lawyer to refuse to turn over the file to the client or his or her new counsel until the outstanding balance is paid or otherwise secured.  To lift the retaining lien, the former client must either pay the amount owed to the lawyer or post a bond for that amount.

Charging Lien

Under Section 475 of the New York Judiciary Law, "from the commencement of an action," the lawyer who "appears for a party has a lien upon his or her client's cause of action," which attaches to a verdict, settlement, judgment or final order in his or her client's favor.

This section gives the lawyer a lien on the proceeds of the former client's case to the extent of the amount owed to the lawyer, with the result that no proceeds can be distributed to the former client or his or her new counsel until the former lawyer is paid.

In 1995, the New York Court of Appeals in LMWT Realty Corp. v. Davis Agency Inc. held that this lien "does not merely give an attorney an enforceable right against the property of another," but instead "gives the attorney an equitable ownership interest in the client's cause of action."

Sue for Account Stated

If all else fails and you need to sue a nonpaying client, the account stated cause of action will be your best friend.  Indeed, in New York, this cause of action allows a professional services provider to sue a client for nonpayment of an invoice if the client has retained the invoice for at least a few months and has failed to make timely, specific, written objections.  This cause of action thus provides lawyers with a substantial tool to pursue a nonpaying client.

Invoice Requirement

To state a claim for account stated, you must show only that you sent the invoices to the client and the client retained them — usually for at least a few months — without making specific, written objections.  It is thus important to maintain a record of when invoices are sent and to whom — ideally by email to an email address the client gave to receive invoices.

Oral Objections

Generally, a client must make specific, written objections to an invoice; general or oral objections will not be enough to defeat a claim for account stated. Nor will general claims by a client that he or she is dissatisfied with a particular outcome suffice.

Reasonableness of Fees

Many nonpaying clients will defend against a nonpayment suit by claiming that they were overbilled or that the quality of the work was not to their liking.  But if these objections are not made in a timely way, with specificity and in writing, courts generally hold that they are waived.

This is significant for a lawyer pursuing a nonpaying client, as most clients will defend by claiming that there was something wrong with the work done by the lawyer.  And so if an account is stated by virtue of the client's retention of the invoices, the reasonableness of the fees and the quality of the work has no bearing on the merit of the account stated claim.

Underlying Agreement to Pay

While account stated is a powerful cause of action, it works only if there is an underlying agreement to pay for the services rendered.  So a person who randomly sends out invoices without having an underlying agreement with the recipients of the invoices can obviously not rely on account stated.

But if you have a retainer agreement that properly covers the scope of the work you will be doing, you shouldn't have a problem.  Nor is there a requirement that the client has agreed to pay for the specific invoices at issue, as long as the client has agreed to pay for your services generally.

The Dreaded Malpractice Claim

Most nonpaying clients faced with a lawsuit by their former lawyer will assert counterclaims for malpractice — even if the malpractice claim has no merit.  While the lawyer must, of course, still deal with the malpractice claim, courts generally go out of their way to sever a lawyer's account stated claim from a nonpaying client's malpractice counterclaim.  This is especially so if the alleged malpractice relates to different work from what is at issue on the unpaid invoices.

Further, as a strategic matter, unless the malpractice counterclaim has merit, most nonpaying clients will drop it after the lawyer obtains a quick judgment on summary judgment at the outset of the case.

Conclusion

Suing a former client is never pleasant, and is a last resort after the attorney-client relationship has broken down. But using efficient, streamlined ways to collect from nonpaying clients can allow a law firm to provide greater value to the rest of its clients.

Joshua Wurtzel is a partner at Schlam Stone & Dolan LLP in New York.

NJ Law Firm Keeps Attorney Fees in Fee Dispute Action

July 28, 2021

A recent Law 360 story by Nick Muscavage, “McCarter & English Keeps Win in $860K Fee Suit,” reports that a New Jersey state appeals court upheld an $860,000 judgment for McCarter & English in its suit seeking unpaid fees from former client Moerae Matrix, finding that the biotech company couldn't show how the fees were unreasonable.  Moerae Matrix, a Morristown-based biopharmaceutical company that develops treatments for fibrotic and inflammatory diseases, retained McCarter & English in August 2017 to provide legal services for intellectual property and patent matters, according to court documents.

By signing the engagement letter with the Newark-based firm, Moerae Matrix agreed to its terms, "including McCarter & English's hourly rates, according to court documents.  McCarter & English "regularly" emailed its invoices to Moerae Matrix for legal fees and expenses incurred throughout the course of its representation.  The invoices detailed the work performed by the firm, the attorneys involved, how much time was spent on the tasks, the date of the tasks and the cost of the services.

Although Moerae Matrix made "certain payments" to McCarter & English, it was not current on its fees.  In September 2018, Moerae Matrix proposed converting the full amount of the outstanding balance to a promissory note, "but the parties could not agree on terms," according to court documents.  Three months later, the biotech company notified McCarter & English by email that it decided to terminate the firm's representation and to transfer its legal needs to Cooley LLP.  The email sent to the firm said, "We truly valued all your support over the years and are committed to seeing that [McCarter & English] is paid in full for past services and costs," according to court documents.

In the record presented to the appellate court, Moerae Matrix did not provide the invoices from McCarter & English, according to court documents.  Instead, the biotech company provided only a detailed statement of account, which shows the amounts billed, payments made and the balance McCarter & English claimed was owed.  "As a result, we are unable to independently assess the invoices either to confirm their contents or to render an independent determination concerning the reasonableness or fairness of [McCarter & English's] fees," the appellate court wrote in its Tuesday opinion.

Beverly Lubit, a partner at McCarter & English, served as the originating, billing and handling attorney responsible for the day-to-day representation of Moerae Matrix.  In seeking a summary judgment of $860,593, McCarter & English submitted certifications to the trial court from Lubit and Daniel P. D'Alessandro, another attorney with the firm. Lubit certified that the legal services provided, and the expenses incurred as a result, "were reasonable and necessary," according to court documents.

In an effort to escape the unpaid legal fees, Moerae Matrix relied on certifications from Moerae Matrix's founder, chairman and chief executive officer, Dr. Cynthia Lander, who asserted that Cooley was handling the very same tasks that were handled by McCarter & English "for less than half of the cost."  She argued that McCarter & English "charged too much in fees for the work that it performed" and "that [McCarter & English] filed many more patent applications and filings than necessary to protect the intellectual property interests of [Moerae Matrix]."

Moerae Matrix relied on an additional certification, one from Texas patent attorney Frank Grassler, who claimed to be an expert in patent law.  "In short, Grassler opined [McCarter & English] did a great deal of work, which was simply not necessary," the three-judge appellate panel wrote in its opinion.  However, Moerae Matrix did not disclose Grassler as an expert in its responses to McCarter & English's interrogatories prior to the conclusion of discovery, as required by state court rules, nor did the biotech company move to amend its responses to identify Grassler as an expert or supply an expert report from him.

Instead, Moerae Matrix submitted Grassler's certification in opposition to McCarter & English's summary judgment motion "well after the conclusion of discovery and unaccompanied by a certification setting forth the reason [Moerae Matrix] failed to identify Grassler as an expert in its answers to [McCarter & English's] interrogatories," the appellate panel noted.

For these reasons, the appellate panel agreed with the trial court's decision to exclude Grassler's certification.  The appellate panel also found that Moerae Matrix could not point to "competent evidence it claims establishes [McCarter & English's] fees are unreasonable or unfair," according to court documents.  There is no basis to conclude that the trial court erred by awarding McCarter & English the unpaid legal fees, the appellate panel wrote in affirming the lower court's $837,524 judgment, plus interest and costs of suit.

Former AG’s Hourly Rate: $2,295

April 16, 2021

A recent Law.com story by Mike Scarcella, “Covington’s Eric Holder Bills at $2.295 Hourly, New Legal Services Contract Shows,” reports that Covington & Burling partner Eric Holder Jr., the Obama administration’s first U.S. attorney general and a veteran Washington lawyer, is billing at $2,295 hourly, according to a contract the law firm signed with a public university to conduct an internal investigation about workplace culture.  Holder is Covington’s lead partner on the legal services engagement with Oregon Health & Science University.  The school announced its retention of Covington in late March to lead a “comprehensive, independent investigation of institutional harassment, discrimination, retaliation and racism.”

Covington and other firms have long been hired to conduct internal investigations at companies and other institutions, but in many instances the engagement letters, revealing rates and the scope of legal services, are not matters of public record.  ALM obtained Covington’s contract through a public records request.  Holder’s $2,295 billing rate puts him at the high end of hourly figures.  Billing at other elite firms such as Weil, Gotshal Manges and Kirkland & Ellis have recently approached $2,000.

“Mr. Holder and Covington have conducted examinations of workplace culture and issues related to equity, diversity and inclusion for corporations including Uber, Starbucks and Airbnb,” the university said in announcing the retention of the Washington-based law firm.  The announcement noted that “Holder and the Covington team are also currently assessing race, equity, inclusion and diversity policies and practices at Seattle Children’s Hospital.”

Holder is working with Covington partner Nancy Kestenbaum, co-chair of the firm’s white-collar defense and investigations practice group and a former member of the firm’s management committee. Kestenbaum is billing at $1,445 an hour, the law firm’s engagement letter said.  Covington said it agreed to discount its rates by 10%.

“Hourly rates for other lawyers range from $595 for junior associates to $2,295 for senior partners; and for legal assistants from $290 to $545,” the firm said in its engagement letter.  The firm said it reviews and adjusts rates yearly as of Jan. 1, “although there are circumstances in which we may adjust rates at other times.”  Part of the contract contained information that the university would not release.  The information pertained to clients Covington is advising on clinical trials being conducted at the university.

“As you recognize, we are a large law firm with multiple practices in multiple offices throughout the world, and we represent many different clients in many different industries, including clients who are competitors of each other and sometimes adversaries in legal matters,” Holder wrote.  “In taking on this representation, we commit that we will not represent any other client in any matter adverse to you that is substantially related to this matter.”

A private law firm charging a public client is not rare.  Public records show major U.S. law firms have charged local or state government clients to take a case to the U.S. Supreme Court.  Not every engagement, however, is charged. Some work is done pro bono.