Tough economic times may cause clients to avoid paying legal fees, placing lawyers and law firms—who may be cash-strapped themselves—in a difficult situation. While attorneys and firms have historically avoided suing their own clients, litigation to recoup unpaid legal fees has grown in recent years, as has the amount of money at stake, as law firms pay closer attention to their margins.
Mitigation practices—like collecting cash retainers upfront, frequent and consistent billing, or a willingness to end the attorney-client relationship when unpaid fees and expenses reach a certain amount or remain unpaid after a specific period—are not feasible for every law practice. Thus, even the most prudent lawyers may find themselves considering a collection action to recover unpaid attorney fees and unreimbursed out-of-pocket expenses.
Deciding to assign a claim for nonpayment of fees to a collection agency or bring a suit against the client means determining that doing so is ethically justified, as well as balancing the interests of getting paid against the costs and risks of pursuing collection.
A primary concern is whether the unpaid amount is significant enough to warrant the out-of-pocket expenses, investment of attorney time, and the risk of a malpractice counterclaim. Some firms apply a formula for calculating what amount balances the risks and benefits of suing a client. Since most clients sued for nonpayment of fees file a counterclaim for legal malpractice, the ratio of reward to cost should be high.
The involvement of legal malpractice insurance can complicate matters. The insurer will usually provide a defense for any malpractice claim, regardless of whether it’s asserted as a counterclaim in response to a lawsuit for unpaid fees. The covered lawyer or firm must contend with the insurer’s interference with the fee claim, since the attorney’s interest in recovering the fee may conflict with the insurer’s interest in ending the malpractice litigation.
As with any other lawsuit, lawyers ought to also evaluate their likelihood of success, the collectability of a judgment, and the adequacy of alternatives to litigation like asserting an attorney’s lien or engaging in fee arbitration.
Gaining the perspective of another lawyer, perhaps another associate within the same firm who did not work on the matter, could help to determine what concerns, issues, defenses, or claims a defendant client might raise. Investigating a potential defendant’s existing or future assets to satisfy a judgment would also be worthwhile. A suit might be appropriate after analyzing why the client did not pay the bill and finding no error by the attorney, sufficient client assets, and a high likelihood of judgment collectability.
If there is a possible malpractice counterclaim, considering alternatives to litigation might reframe the issue. Rather than focus on whether they can collect the unpaid fees in full, the lawyer or firm can assess what amount they can reasonably expect to receive, considering the counterclaim, the anticipated costs of defending against it, and the potential increase in insurance premiums.
Experts note that lawyers and firms need a compelling reason to write off six- or seven-figure legal fees. Absent a serious oversight, problem with the representation, or some other policy reason, they are likely to find a collection lawsuit well worth their while.
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