A recent Law 360 story by James Mills, “Appeals Court Says Calif. Firm Must Share Fees With Ex-Atty,” reports that a California state appellate panel held that an attorney's fee sharing agreement with her former law firm was enforceable.  The panel ruled the memorandum of understanding between Los Angeles litigator Ibiere Seck and The Cochran Firm in Los Angeles was enforceable since it clearly spelled out a fee sharing agreement about cases she had worked that would remain with the firm upon her departure.  The firm had contended the MOU was not definitive enough to be enforced, despite the fact the firm had no issues with the fee sharing agreement regarding five other cases covered by the MOU.

"The material terms of the fee sharing agreement between the parties can be readily ascertained from the MOU. The Cochran Firm was required to pay Seck 25 percent of the net attorney fees for a specified list of cases," the three judges on the Second Appellate District wrote in their non-published opinion.  "We are provided with no reasonable explanation why The Cochran Firm contends that the MOU was not sufficiently definite given that it performed under the terms of the agreement on five separate occasions without incident."

Seck worked at The Cochran Firm for 10 years, departing at the end of 2018 to start her own firm, Seck Law, in downtown Los Angeles, according to her LinkedIn profile.  She represents plaintiffs in civil litigation, including catastrophic injury, wrongful death, traumatic brain injury and civil rights cases.  The MOU included a list of specific cases that Seck had worked on that were remaining with The Cochran Firm for which she would receive 25% of the attorney fees.  The court ruling detailed that in 2019, the firm paid her 25% of five cases covered by the MOU.

However, in October 2019, the John Reddick v. Los Angeles County Metropolitan Transportation Authority personal injury case settled for $5 million.  When Cochran did not share the money with Seck, she asserted a lien for 25% of the attorney fees.  Seck had started with that case in 2017, and it was specifically covered by the MOU.  The Cochran Firm filed a complaint against Seck regarding the Reddick case saying the MOU did not cover it as Reddick did not consent in writing to the fee agreement.  The Cochran Firm also sought to have the court declare that Seck had no legal right to assert a lien on the firm.  However, a trial court ruled in Seck's favor in July 2020.

After that ruling, Seck made a formal demand for payment in the Reddick case but The Cochran Firm rejected the demand. In October 2020, Seck filed a cross complaint for breach of contract for The Cochran Firm's refusal to pay her 25%.  Seck moved for summary judgment on the breach of contract claim and in April 2022, the trial court granted the motion, finding the MOU created a valid fee sharing agreement between the two parties.

In May 2022, the trial court entered a judgment in favor of Seck and awarded her $500,000, which was her 25% share of the Reddick case attorney fees plus interest.  The trial court also ruled she was entitled to receive court costs.  At the same time, the court stated that The Cochran Firm's complaint against Seck was resolved and therefore moot.  But The Cochran Firm appealed, contending that the MOU was unenforceable because it was not sufficiently definite.

In addition to ruling in Seck's favor regarding the enforceability of the MOU, the appellate court also dismissed The Cochran Firm's contention that the MOU was unenforceable because it violated the Rules of Professional Conduct, rule 1.5.1, which prohibits lawyers who are not in the same law firm from dividing a fee for legal services, unless certain conditions are met including written consent from the client.  The court noted that Seck was still employed at The Cochran Firm when the MOU was enacted, thus the fee sharing agreement was not subject to rule 1.5.1.  The appellate court further ruled the amount of time Seck spent working on any of the cases on the MOU, including the Reddick case, was irrelevant.  If a specific case was listed on the MOU, she should be paid the 25% agreed to.

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.