During tough economic times, the pressure to collect fees is intense. Clients who are “slow pay” increasingly become “no pay.” This dynamic creates stress on attorneys and law practices already stretched thin financially.

Attorneys and law firms that plan ahead have many ways to mitigate the risk of clients who fail to pay. One example is to request an upfront cash retainer. Other strategies include frequent and consistent billing, and a willingness to terminate the attorney–client relationship when unpaid fees and expenses reach a certain amount or when fees remain unpaid after a predetermined amount of time.

While these strategies may increase client compliance with payment requests, there are times when even the best practices are unsuccessful. These clients require attorneys and law firms to consider the only option remaining for payment: filing a collection action.

Some attorneys and law practices are willing to file lawsuits to recover unpaid attorney fees and unreimbursed out-of-pocket expenses. Others, however, may have adopted a “never sue a client” policy. Such a policy is only risk-free in theory; the economic reality is that too many unpaid invoices put the firm at risk in other ways.

Filing a suit against a client does involve risk. As many as two of every five clients sued for nonpayment of fees file a counterclaim for legal malpractice.¹ Most legal malpractice insurers require attorneys and law firms to report when a legal malpractice claim is filed against them, regardless of whether the claim is asserted first by the client or in a counterclaim in response to a lawsuit for unpaid fees. Insurers also request disclosure of legal malpractice claims—or of “circumstances that might give rise to a claim”—on their insurance applications.

Malpractice policies often require the insurer to provide a defense for any claim filed against the attorney, but not for affirmative fee claims against a client or former client. This dynamic may complicate the situation. When the insurer provides a defense for the malpractice claim, the attorney no longer has complete control over how the fee claim is handled. The interests of the attorney seeking to recover fees and those of the legal malpractice insurer defending the counterclaim do not perfectly align. The attorney has an interest in recovering a fee; the insurer has an interest in ending the litigation.

In light of the risk of a counterclaim, the decision to bring a suit for fees should not be made lightly. Attorneys and law firms who consider suing a client must balance the interests of getting paid against the costs and risks of filing suit. Additionally, the attorney must be able to honestly and reasonably conclude that assigning a claim for nonpayment of fees to a collection agency or bringing a suit against the client is ethically justifiable.² The questions below can help attorneys and law practices determine whether to file a suit for nonpayment of fees and expenses.

Is the amount of unpaid fees and expenses significant?

The first question to consider is whether the amount of money owed by a client is worth the risk. While seemingly obvious, this question is sometimes missed by attorneys and law practices desperate for revenue and the reimbursement of expenses. After considering the out-of-pocket expenses associated with filing a lawsuit, the value of attorney time that would be invested in a suit, and the risk of a malpractice counterclaim, many firms and attorneys find a suit for a small sum not worth the financial investment.

Every attorney and law firm will need to evaluate the benefit-to-risk ratio before filing a claim. Many small firms are likely to find a suit for less than $2,500 not worth the risk. For large firms, the operational costs alone may justify a higher benefit-to-risk balancing point. Some firms even have a formula for calculating what amount balances the risks and benefits of bringing suit against a client.

With the relatively high chance of a counterclaim, the ratio of reward to cost should be no less than 2:1. Before deciding to bring an action for fees against a client, do the math.

Is a judgment collectible?

Attorneys and law firms should also assess the likelihood that a judgment against a client would be collectible. When an attorney or firm knows the likelihood of collecting on a judgment against a client is low, the risk and expense of obtaining a judgment may outweigh the potential benefit.

The best advice is for the attorney to take off his or her lawyer hat and replace it with a business hat. Lawsuits against customers who have no assets involve lots of risk for only a theoretical reward. A good business owner would work to find a balance point between risk and expense, and the likelihood of success before filing suit. Attorneys should too.

After doing the math in step 1, the next step is to gather evidence of the assets of the potential defendant to ensure the client can pay the outstanding fees. There are myriad services an attorney can use. Which service an attorney selects is less important than ensuring the search is actually performed. The question then becomes: How likely is it that the client will receive future assets from which the attorney or law firm could collect? If the chances are small, the incentive to file a suit for fees should be the same. There is no reason to throw good money after bad.

What is the likelihood of success?

Every attorney believes the amount of his or her fees is justifiable. Therefore, the attorney pursuing an unpaid fee is often the worst person to ask about the chances of success in establishing the reasonableness of the fee or the value of the legal services. An independent review by another attorney within the lawyer’s firm who did not work on the matter is best. This peer review or “fresh look” at the file should focus on what, if any, concerns, issues, defenses, or claims might be raised by a defendant client.

Generally, the question “why did the client not pay the bill?” can tell an attorney and law practice everything they need to know before deciding whether to bring a claim. If the review reveals no error by the attorney, sufficient client assets, and the collectability of a judgment is high, a suit may be appropriate. However, if the attorney is aware the client believes the attorney committed legal malpractice (even if the attorney disagrees), a suit may be ill-advised.

Is asserting an attorney’s lien an option?

When contemplating a suit against a client or former client for fees, the attorney or law firm should consider whether to assert an attorney’s lien. Under Colorado law, there are two types of such liens: the retaining lien and the charging lien. Both retaining liens and charging liens are created by statute.³

A retaining lien gives the attorney the right to retain any money, securities, books, papers, files, or other property belonging to the client until the attorney fees have been paid.⁴ The value of the property retained by the attorney cannot exceed the amount owed by the client.⁵ A retaining lien attaches as soon as the representation begins and the attorney earns his or her first penny, as long as the fee is for professional services and is consistent with the attorney’s fee agreement with the client.⁶

A charging lien is a lien placed on a “judgment obtained as a result of [the attorney’s] service and skill.”⁷ A charging lien can be for money or property, but can only include those amounts earned by the attorney rendering legal services.⁸ Additionally, the lien must be placed while the attorney is actively engaged in the client’s case or after the court has entered a judgment in favor of the client.⁹ If an attorney is fired or withdraws from the representation before the attorney perfects the lien, a charging lien is no longer available.¹⁰

An attorney can perfect a charging lien by providing written notice to the clerk of the court in which the case is pending or in which the judgment was entered, and to the adverse party.¹¹ As a best practice, the attorney should also provide written notice to the client to ensure that the client has notice of the lien.¹² While there is no standard form of notice required to perfect a charging lien, the terms of the fee agreement between the attorney and the client should be included with the notice. It is advisable for the attorney to consider attaching to the notice a signed copy of the fee agreement.¹³ Once filed, the lien attaches and no judgment is required.¹⁴ Thus, if a case settles, the attorney is still entitled to enforce the lien.¹⁵

The Colorado Rules of Professional Conduct (Colorado Rules or Colo. RPC) permit an attorney to acquire a lien to secure the lawyer’s fee or expenses.¹⁶ As noted above, an attorney’s right to a lien can accrue as soon as the attorney–client relationship begins, and is available “when the client is financially able to pay outstanding fees, but fails or refuses to do so.”¹⁷ However, Colorado Ethics Opinions 110, 82, and 20 set forth limitations on when it is permissible for an attorney to assert a retaining lien or charging lien against a client. Unless an attorney is assisting a client “in obtaining proceeds or property,” an attorney is not permitted to assert a charging lien.¹⁸ Under the following circumstances, an attorney is not permitted to assert a lien:

1.   There is no legal basis for the assertion of the lien.

2.   The lawyer has been suspended or disbarred.

3.   The lawyer is guilty of misconduct in the particular matter.

4.   The representation is in a contingency-fee case prior to completion of the case.

5.   The client furnishes adequate security.

6.   The client’s papers are essential to preservation of an important personal liberty interest.

7.   The lawyer has withdrawn without just cause or reasonable notice.

8.   The lawyer is validly discharged for professional misconduct or conduct prohibited by the Colorado Rules.

9.   The client is financially unable to post a bond or pay the fees, unless the client’s inability to pay or post bond is a result of fraud or gross imposition by the client.¹⁹

Colo. RPC 1.7(b) is also implicated when an attorney or a law firm files a lien against a client. The rule requires the attorney to “reasonably believe[ ] that the [attorney] will be able to provide competent and diligent representation” when a conflict of interest occurs.²⁰ Although the rule does not require it, it is a best practice for an attorney to withdraw from representing a client before filing suit against the client.²¹

Is fee arbitration an acceptable alternative?

The CBA Legal Fees Arbitration Committee reviews arbitrators’ decisions on attorney fees and publishes the procedures for the arbitration process.²² The advantage of fee arbitration is that it typically shifts the attorney’s focus from whether the attorney collects unpaid fees and expenses to how much the attorney could collect.²³ After assessing the risks and the costs associated with suing a client, many attorneys rethink their approach to fee collection. The attorney may, instead, begin to view a decision not to pursue payment from a client as a “discount” from the expense of suing the client, by focusing on the risk of a possible malpractice counterclaim, the anticipated costs to defend the counterclaim, and the potential increase in insurance premiums.

Conclusion

Deciding whether to sue a client for unpaid fees and expenses requires a careful and in-depth analysis of the risks and benefits of bringing such a claim. Attorneys should be wary of the risk of a malpractice counterclaim, as well as the financial risks associated with a collection suit.

Notes

1.   See Browne, “Fee Collection Checklist,” Lawyers Perspectives Newsletter 2 (Sept. 2010), www.cavignac.com/publications/publications-lawyers-perspectives/lawyers-perspectives-suing-for-unpaid-fees-think-again.

2.   See CBA Formal Ethics Comm. Op. 20: Fee Collection at 4-17 ( June 21, 1997), www.cobar.org/index.cfm/ID/22347/CETH/Formal-Ethics-Opinions.

3.   CRS § 12-5-120 authorizes an attorney to establish a retaining lien, and CRS § 12-5-119 authorizes an attorney to establish a charging lien. Colorado law does not recognize a common law attorney’s lien for unpaid fees. See Donaldson, Hoffman & Goldstein v. Gaudio, 260 F.2d 333, 335 (10th Cir. 1958).

4.   See Donaldson, Hoffman & Goldstein, 260 F.2d at 335.

5.   See Collins v. Thuringer, 21 P.2d 709, 710 (Colo. 1933).

6.   See People ex rel. MacFarlane v. Harthun, 581 P.2d 716, 718 (Colo. 1978) (an attorney’s right to obtain a charging loan also manifests after the attorney begins work on a client’s case).

7.   See Collins, 21 P.2d at 710.

8.   This excludes child support payments. See In re Marriage of Etcheverry, 921 P.2d 82, 83 (Colo.App. 1996).

9.   See CRS § 12-5-119.

10.  See Cope v. Woznicki, 140 P.3d 239, 241 (Colo.App. 2006).

11.  See CRS § 12-5-119.

12.  See id.

13.  See People ex rel. 18th Judicial Dist. of Dist. Atty. Family Support Div. in re J.W., 174 P.3d 315, 317 (Colo.App. 2007) (holding that client’s actual notice of lien was sufficient to enforce the lien).

14.  See id.

15.  See id.

16.  See Colo. RPC 1.8(i)(1).

17.  See CBA Formal Ethics Comm. Op. 110: Assertion of Attorney’s Charging Lien/Security Interest in Property at 4-363 (June 21, 1997), www.cobar.org/index.cfm/ID/22347/ CETH/Formal-Ethics-Opinions; CBA Formal Ethics Comm. Op. 82: Assertion of Attorney’s Retaining Lien on Client’s Papers at 4-185 (June 21, 1997), www.cobar.org/index. cfm/ID/22347/CETH/Formal-Ethics-Opinions.

18.  CBA Formal Ethics Comm. Op. 110, supra note 17 at 4-364 (examples of when a lawyer does not assist in obtaining proceeds or property for a client include, but are not limited to, when an attorney assists a client as a (1) special advocate, (2) guardian ad litem, and (3) criminal defense attorney).

19.  CBA Formal Ethics Comm. Op. 82, supra note 17.

20.  CBA Formal Ethics Comm. Op. 110, supra note 17 at 4-366.

21.  Colo. RPC 1.16(d) applies even when the reason for withdrawal is failure to pay. Rule 1.16(d) requires an attorney to “take steps to the extent reasonably practicable to protect the client’s interests, such as giving reasonable notice to the client, allowing time for employment of other counsel, [and] surrendering papers and property to which the client is entitled. . . . ”

22.  See CBA Legal Fee Arbitration Committee, www.cobar.org/index.cfm/ID/20203/ CLFA/Legal-Fee-Arbitration.

23.  See id.; Pulkrabek, “Arbitration and Mediation of Fee Disputes,” 1 Lawyers’ Professional Liability in Colorado 7-1, 7-20 (Michael Mihm ed., 2015) (an attorney cannot require a client to arbitrate a malpractice claim, but he or she can enforce a provision in a fee agreement to arbitrate a fee dispute).