Monday, April 25th, 2016
By Gideon Grunfeld
In my experience consulting with law firms, almost every attorney knows what the rules say about collecting unpaid fees from an existing client. That’s because the applicable rules and regulations are relatively straightforward. Generally speaking, a lawyer may end a representation if the client isn’t paying the lawyer. But the ethics rules sometimes prohibit a lawyer from firing a dead beat client if doing so would prejudice the client. In addition, lawyers are aware that pursuing an uncollected fee may cause the client to retaliate by filing a malpractice action or pursuing a complaint with the disciplinary authorities. That’s why it is customary for lawyers to wait for the statute of limitation on malpractice actions to pass before filing a collections action against the client.
Taken together, the regulatory framework governing collection of unpaid fees causes lawyers to pursue deadbeat clients less aggressively than other service providers. Some lawyers, however, mistakenly conclude that the ethical risks are so great that pursuing collections is almost never justified.
Despite knowing the applicable rules, too many lawyers do foolish and potentially career-threating actions when faced with an existing client who owes them money. The frustration is understandable, especially when lawyers have good reason to know that the client has the money to pay their invoice. Because it’s easy to get emotionally involved and act rashly, it’s important to develop a systematic approach to collections issues.
Lawyers are more likely to get into trouble when their cash flow is poor. And collections can and do often play a role in improving a firm’s short-term cash flow. But lawyers need to understand that being motivated by cash-flow concerns is a red flag. Focusing too much on cash flow risks causing lawyers to overreach when pursuing the client’s money,
The most common collections-related mistake that law firms make is failing to balance the amounts involved with the time needed to collect and the risks associated with pursuing clients. This has to be an individualized determination. Certain clients are more likely to cause problems than others, and too often the lawyer who is owed the money is too close to the situation and too emotionally invested to make a sound decision. Law firms should therefore set up a process where a small committee of impartial partners has the authority to decide whether and how to pursue a specific unpaid debt.
In addition, it is helpful if the discussion of what to do with a specific client begins with an evaluation of the extent to which the client will be prejudiced if the firm withdraws from the representation. Starting with the applicable ethical requirements increases the chances that the firm won’t focus too intently on the money it is owed, without regard to the firm’s ethical risks.
One of the ironies of collections for law firms is that focusing too much on the client’s money is often problematic. Law firm collections are yet another example of where discretion is the better part of valor.