Byte of Prevention Blog

by Jay Reeves |

7 Ways to Avoid Suing Clients Over Unpaid Bills

dollar signsFacing a tough legal market, large law firms are becoming more aggressive in suing clients for unpaid bills.

It’s a risky move. It goes against the usual advice of their insurers. And it often results in a counterclaim for malpractice.

“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 this article in the New York Law Journal.

The Law Journal surveyed New York court filings for 2016 and found that at least a dozen lawsuits had been brought by Am Law 100 and 200 law firms against their ex-clients for unpaid fees.

The plaintiffs included some of Wall Street’s heavyweight firms, and though the amounts in dispute were typically in the hundreds of thousands – or even millions – some of the suits involved much smaller sums.

Observers cite several reasons for the spike in fee suits:

  • Flat demand for legal services
  • Less loyalty between firms and clients
  • Push-back against clients who delay payments and ignore the terms of fee agreements
  • Rising associate salaries
  • Increasing pressure on firms to make budget
  • Lessening stigma against collection suits

“This is the new normal, this is the environment we are in as law firms,” said one litigator who represents law firms in fee suits. “[W]e can no longer wait 90 days, 120 days, a year or more to collect fees.”

Mid-size and small firms were not included in the survey. There is no clear evidence that solos and small firms are filing more collection actions today than in prior years.

Seeing Their Clients in Court

In one of the cases cited by the Law Journal, Sullivan & Cromwell sued to enforce an arbitration award against a former client for $3.26 million. The matter settled shortly afterwards.

In other cases, Arent Fox sued a client it had represented in NLRB litigation for $506,125, and Kaye Scholer sued Art Capital Group for $144,590. Meanwhile, Shearman & Sterling, which generated $860.5 million in revenue in 2015, sued a former real estate client for a relatively paltry $25,645.

The big risk for law firms is that clients will fight back with a malpractice counterclaim. That’s what happened when an Atlanta-based firm sued TeleCommunications Systems in June 2016 for more than $2.39 million in unpaid fees and disbursements. The defendant filed a $3.4 million counterclaim, alleging the firm missed a deadline to apply for legal fees in an underlying suit. The firm denies the claim.

Because of this risk, some firms are holding off suing for fees until after the applicable malpractice statute of limitations has passed, the Law Journal noted.

7 Steps to Avoid a Legal Clash With Your Client

  1. Use written fee agreements.
  2. Discuss your fee policy in detail at the outset of representation.
  3. Bill regularly and don’t allow arrearages to accumulate.
  4. Meet your client and talk face-to-face about an overdue bill.
  5. Choose mediation or arbitration instead of litigation.
  6. Write off small debts as a learning experience.
  7. Contact Lawyers Mutual and discuss your situation with a claims attorney.

Sources:

 

About the Author

Jay Reeves

jay.reeves@ymail.com | 919-619-2441

Jay Reeves practiced law in North Carolina and South Carolina. Over the course of his 35-year career he was a solo practitioner, corporate lawyer, legal editor, Legal Aid staff attorney and insurance risk manager. Today he helps lawyers and firms put more mojo in their practice through marketing, work-life balance and reclaiming passion for what they do. He is available for consultations, retreats and presentations.

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