Law Firm Suites’ founder and corporate attorney, Stephen Furnari, spouts off about deadbeat clients and questions why lawyers do not pursue collections more aggressively.
The number of clients who just don’t pay their legal bills never ceases to amaze me. Frankly, it pisses me off.
You’d think that clients would think twice about stiffing a professional who is in the lawsuit business, but they do not.
It used to happen to my firm more frequently, but over the years I’ve modified our billing practices to eliminate many sources of collection problems. Yet, despite our best efforts, problems still come up, as it did last month.
Should attorneys pursue collections against their clients who do not pay?
Every effort should be made by the lawyer to not get into a situation where the client refuses to pay their bill. However, sometimes best practices are followed, the amounts invoiced were agreed to and are fair. In those cases, lawyers should aggressively pursue collections for non-payment.
My client blows up a deal.
I was representing a client who was planning to invest several hundred thousand dollars in a start up company. He retained my firm to review the offering materials and the issuer’s LLC operating agreement.
Long story short, we did some of the work on a fixed fee basis that was paid up front. We did the remainder of the work on an hourly basis, sending periodic invoices that were paid by the client in a timely fashion.
There was a flurry of legal activity as we got close to closing the deal, which is common in any corporate finance transaction. This time represented the balance of the client’s bill.
After months of difficult negotiations, the company had acquiesced to nearly all of the client’s requirements. Then it happened. At the 11th hour and seemingly out of nowhere, our client decided to “dial back” his investment by 50%.
The company went berserk, and who could blame them? They had run up their own substantial legal bill negotiating with the client in good faith. The negotiated terms that were palatable to management at the full investment were abhorrent at half that amount. My guy got greedy and took things too far.
Not surprisingly, the deal blew up.
The client refuses to pay.
I promptly sent a final bill to the client, but at that point knew collecting the balance of the fee was going to be an uphill battle.
The next day I received a voicemail from the client. He felt that I should dial back my bill by 50%. He advised me that he wanted the bill to be where he, in his mind, thought it would be at the beginning of the project.
I got indignant.
Fuck you, I thought.
You signed an engagement agreement that specifically listed our economic arrangement. You paid other hourly-rate invoices. You had the opportunity to negotiate a fixed fee deal for future services at any time before asking my firm to render them (it says so in the engagement agreement) and did not. You asked us to negotiate this deal and produce contracts on your behalf, and to do so promptly each time the deal heated up. But, I should take a 50% haircut? Yeah, right.
And if you suggested that we work for half our hourly rates before asking us to perform these services, we would have gladly returned your file and referred you to a less experienced, but more budget friendly attorney.
My time is valuable, and I have other projects that I can work on. But here we are.
As attorneys, the primary thing we have to sell is our time. The time that I spent on this client’s matter is now gone forever. The deal is dead, and I’m left with an outstanding bill without much leverage to collect.Time spent on a client matter that is not paid for is gone forever #attorneybilling Click To Tweet
Traditional recommendations about collections don’t apply.
Of course, I can hear the legal billing pundits: “you should have had a retainer”; or “don’t get too far ahead of clients with your billing”. But in a corporate practice, it’s not so easy to require that an advance retainer be maintained throughout the course of a deal. You just won’t get the work.
This is particularly so when the client is referred by another client of the firm with a long-standing payment history, as was the case here.
And with transactional work, it’s possible to get ahead of your client, in terms of billing, in just a few days. But usually the deal closes, everyone is happy, and checks get written to the professionals.
But when a deal blows up, like it did here, collecting can be a challenge.
A reasonable offer is made…and rejected.
Because I’m a reasonable guy, I offered the client a 10% discount provided the bill was paid within the week; a generous offer in light of the circumstances. We typically only offer this discount to clients who do repeat business with the firm and have demonstrated a reliable payment history. This was a one-off deal and we did not expect this client to do any repeat business with the firm.
When the deadline passed without receiving payment (or any other contact from the client) I took a scorched earth tack and started collection proceedings immediately.
Why lawyers are afraid to pursue deadbeat clients more aggressively.
Like many lawyers, I used to think twice about suing clients for unpaid bills. Clearly, you won’t be doing future business with that client, and it may jeopardize your relationship with the original referral source.
Plus, the deadbeat client will surely tell all their friends about what an asshole they think you are.
You’ll have to disclose the collection proceeding on your next PLI renewal form, and lawyers know that a common client defense to a collection proceeding is a spiteful malpractice counterclaim or bar complaint.
For many lawyers, they would rather walk away from the money then risk the fallout.
There is a certain contingency of clients who seem to have figured out that lawyers won’t be aggressive about collections. I am sick of these clients.Some clients know lawyers won’t be aggressive about collections. I’m sick of these clients Click To Tweet
Will the bank “dial back” my mortgage?
Can you imagine telling your firm’s landlord that, despite the lease that you negotiated, they should dial back the rent 50%, and then just not pay when you don’t get the answer you want? Or the bank that holds the mortgage to your home? Or Verizon Wireless, who will call you relentlessly when they don’t get their check on the exact billing due date?
These companies don’t put up with deadbeats, why do lawyers??
Why don’t lawyers pursue clients for unpaid bills more aggressively?
Many lawyers walk away from unpaid invoices because they fear being sued by the client for malpractice or having baseless ethics complaints filed against them, or for fear of angering the person who referred the business in the first place.
The reasons lawyers don’t go after deadbeat clients are baseless.
The reality is, all the reasons why lawyers choose not to sue clients for unpaid invoices are generally non-events:
- You shouldn’t do business with clients who do not respect the value of your services;
- You shouldn’t do business with referral sources who may get angry when you sue their deadbeat friends. The referral sources should be embarrassed that their friends don’t pay their bills;
- When it comes to fee disputes, the ethics folks and courts are well aware of clients’ baseless counterclaims and complaints; and
- Your PLI premium is going to go up a ridiculous amount next year regardless.
I choose to risk it.
And I wish more attorneys would do the same, because it just makes it harder for the rest of us to collect our fees.Sometimes #solos have to go scorched earth on clients to collect #attorneycollections Click To Tweet
Sometimes a client just can’t pay. I get that. And in those cases, I will work with a client to reach an amicable resolution to settle their account.
There have been times when I have messed up, not on a malpractice level, but by not setting realistic expectations with a client about their bill. You can’t tell a client that something will cost $5,000, bill them $20,000, and not expect the client to be unhappy about it. In these cases, you have an obligation to work things out.
But when you have done a good job, and a client has the ability to pay and just won’t, I have no mercy.
Thankfully, I’ve only had to go scorched earth a few times to collect fees. More often than not, these matters don’t go further than submitting the Part 137 arbitration notice.
Only once did I actually have to buy an index number to file a complaint. But, if you go down this road, you have to be prepared to take your claim to a judge, which I am every time.
So far with this client, I’ve sent my Part 137 notice, which got the client’s attention. The complaint is drafted and is ready to be served once the 30-day notice period runs.
Hopefully this ends amicably, and I will keep you posted on how it shakes out.
What about you? Why do you think deadbeat clients are so prevalent? And why are lawyers so reluctant to deal with their own collection issues as aggressively as they would for a client? I’d love to know your thoughts. Please leave a comment below.
Updated for 2021
What about you?
Why do you think deadbeat clients are so prevalent? And why are lawyers so reluctant to deal with their own collection issues as aggressively as they would for a client?
I’d love to know your thoughts. Please leave a comment below.