Wisconsin Lawyer
Vol. 78, No. 11 November 2005

Beware Suing for Unpaid Fees

by Thomas J. Watson

Your former client still owes you more than $4,000 for your work on her divorce case that concluded more than six months ago. As the case dragged on longer than you anticipated, your client's costs exceeded the $2,500 retainer fee and she then fell behind on subsequent payments. She seemed generally satisfied with your work and you believe you did a good job for her. She achieved her main priority of keeping her retirement account in the property division. But the divorce left her bitter and angry. Despite the fair result, she continued to feel her ex-husband did not deserve what he received in the divorce.

Now you're wondering if you should take legal action to collect the rest of your fee. In a small office, $4,000 dollars goes a long way, and it's difficult to take a hit like that. Still, should you write it off and move on?

This real-life scenario for a Madison lawyer had a happy ending. He opted not to seek a judgment against his former client, and to his surprise, a check for the balance owed arrived in the mail several months later. Often, however, collecting fees isn't that easy.

Baraboo attorney Gretchen Viney says on the rare occasion that a client does not pay, she writes it off. "Years ago, I sued one client for fees for my former law firm and obtained a judgment. But I never collected anyway so it wasn't worth the hassle. I had a case three years ago in which I wrote off a partial fee for $1,500. My peace of mind was worth way more than the fees." La Crosse attorney Tom Sleik agrees. "Unless they owe you a lot of money, getting a judgment against a client is usually not worth it."

So how do you ensure that clients will pay for the work you do? Suing every client who owes you money is not a good business practice. Besides, it can lead to more unwanted trouble - namely, a malpractice counterclaim. Bringing suit also can affect your liability insurance, depending on your insurance carrier.

The best way to handle fee disputes is to be proactive: avoid them through the use of good procedures. Consider using billing and practice methods that can help you avoid using your valuable time to go after uncollected fees.

Communication Is the Key

1. Communicate with your client. Discussions of fees and bills are opportunities to communicate with your client. At the initial meeting, discuss the cost of representation with the client and assess the client's ability and willingness to pay.

"My belief is that being proactive at the outset in client selection, in assessing client expectations for timelines and outcome, [having a] discussion plus agreement on range of cost in advance, and [developing] a timetable for the work requested, all contribute to prompt payment," says Mondovi attorney Bob Hagness.

2. Draft very detailed and specific engagement letters or fee agreements. Hagness says it's all part of the communication gap between clients and lawyers. "Clients and lawyers place primary value on different aspects of the service and the relationship. In my engagement letters, I include the client's recitation of the facts, the client's goals and expectations, my added observations, my discussion of fees and costs, the client's agreement to these items, my timetable for the work, the client's agreement to the timetable, and any areas of law that might be relevant, so the scope of representation is quite clearly outlined."

The danger of not sending an engagement letter is too great to ignore, says Hagness. He remembers a few cases years ago in which he was not paid. "I tried to learn why that happened, and to change my practices accordingly." Without engagement letters, or fee agreements, Hagness says, misunderstandings are almost inevitable. "Most clients will not recall everything that was said, leading to dissatisfied clients, collection problems, and possibly other complaints."

Tom Sleik makes sure he's the one talking with the client about fees, not someone else in his office. "I try to get as personally involved in the case as possible and talk with clients directly about payments - rather than simply having someone in our office sending them a bill, or a cold, impersonal collection letter."

An unpaid bill is a communication to you from the client. Is something wrong? Does the client object to how the case was handled? The only way to find out is to ask in a timely fashion. Failure to follow up promptly gives your client your "permission" to ignore your bills.

3. Bill periodically and consistently. You should clearly detail the work performed and the charges submitted. A clear accounting is essential, says Sally Anderson, vice president-claims at Wisconsin Lawyers Mutual Insurance Company (WILMIC). "Often one of the first things asked for in a malpractice suit is a copy of all the attorney's bills. The lawyer who did the work should proofread them, and above all, prepare them for scrutiny. A lawyer's bills and billing procedures reflect directly on the professionalism of the lawyer."

4. Keep your client "in the loop." Keeping the client abreast of developments, especially negative developments, can lessen the "shock" of unexpected time or expenses, and may prevent a later dispute about the fee agreement and the amount or quality of work performed. "I try to conclude every letter to every client with a closing paragraph about what will happen next, and when it will happen," says Hagness.

Is Suing Worth It?

"Suing a client for fees should be a last resort," says Sleik. So is there ever a good time to sue a client for fees? Anderson says probably not, but sometimes suing is unavoidable. "Some clients deserve to be sued for fees and some don't. Just be sure you're picking the right ones."

Which clients are the right ones? That is a business decision each lawyer must make. Anderson tells the story of a four-person firm that decided to write off fees in excess of $65,000. The firm represented a company that was trying to sell the business and that planned to use the sale proceeds to cover all the bills, including those of the law firm. Protracted negotiations with two separate potential buyers fell through, and with no other buyers on the horizon, there was no money to pay the legal fees. Anderson says, "They decided, deal or not, the business client was likely to try to find some fault with the legal services to avoid paying. It just wasn't worth it for the firm to spend more time and money suing for fees, with no guarantee of a good result."

Avoiding Malpractice Counterclaims

Anderson says a lawsuit for unpaid fees often generates a malpractice counterclaim. "Approximately 11 percent of our malpractice cases are a result of a fee dispute." Keeping that in mind, undertake the following analysis before bringing a suit for fees:

• Was the client pleased with the outcome of the underlying representation?
• Are you critical of your own performance?
• Has an uninvolved attorney assessed your representation for possible areas of criticism?
• Is the amount at stake worth the risk of a claim? Even after taxes?
• Is there any alternative to a lawsuit for unpaid fees (a fee arbitration program, for example)?
• Would a judgment be collectable?
• How will your malpractice carrier view such a claim?

Check with Your Insurance Carrier

Suing for fees may lead to higher liability insurance premiums. Some insurance companies consider a firm's history of suing for fees when looking at that firm's insurability and the amount of the premium. Dennis Marx, vice president-underwriting at WILMIC, says it's a good idea for lawyers to check with their malpractice insurance carrier. "Ask your carrier whether it impacts the premium you're paying. Some carriers even consider dropping a policyholder, depending on the number of times a firm has sued for fees. It's definitely worth asking about."

Conclusion

While fee disputes often arise because of a lack of communication and understanding between the lawyer and the client, they also are something to which many lawyers don't pay much attention. "Billing is part of a good business plan, and some lawyers are very good at practicing law, but not as good at running a business," Anderson says. "Just being a good lawyer isn't good enough these days."

Wisconsin Lawyer