Money Is the Root of All Evil: Liability Risks and Ethical Pitfalls

Rush Smith
November 15, 2022

Reading time: 5 minutes

Money Is the Root of All Evil: Liability Risks and Ethical Pitfalls

Browsing through your inbox, you notice that the check from the insurance carrier you recently settled
a claim with has arrived. Imagining all the wonderful things you can do with your portion of the proceeds, you pick up the phone to call your client and ask her if she wants to stop by the following day and pick up her portion. “How much do you get out of that again?” she asks skeptically.

Being used to these sorts of questions, you kindly respond that the fee agreement she signed with you two years ago entitles you to one-third of the proceeds of any settlement. After an uncomfortably long pause, she angrily states, “I don’t see why you deserve one third of my money. I was the one injured when that tractor-trailer rear-ended me.” You give her your canned response as to the time you spent on the case, including the numerous depositions you attended and the hearing you attended over a discovery dispute with the opposing counsel, as well as the costs you fronted along the way. Without a second’s hesitation, she yells through the phone, “I don’t care how much work you put in, you don’t deserve one-third of my money!” You feel your heart sink as the dial tone echoes in your ear. What do you do now?

Steps to Take During a Fee Dispute

Unfortunately, the client-attorney interaction played out above happens in law offices across the country every single day. Some of the main reasons clients dispute the fees they are charged include:

  • Little perceived value
  • Poor service
  • Lack of comprehensive written fee agreement
  • A perceived lack of aggression on behalf of the client

For attorneys not on a contingent fee basis, clients may dispute fees due to lack of timely and detailed billing, or because they have the impression the attorney intentionally ran up the bill.

Although the attorney in the above scenario has the advantage of being able to deposit the settlement proceeds into the trust account prior to disbursing any undisputed portions to his client and his operational account, not all attorneys have it so lucky. Some attorneys will find that, even after billing a client for services provided, the client refuses to pay all or some of the amount billed. At that point, the attorney, utilizing his knowledge and skill, may choose to litigate the unpaid fee.

In addition to the obvious costs and headaches created for attorneys in such scenarios, fee disputes have the potential of causing costly and severe collateral damage via malpractice claims and ethical complaints.

An American Bar Association (ABA) study found that almost seven percent of all insured malpractice claims arose in an attempt to collect an unpaid fee. The study suggested, however, that the percentage may be even higher since it did not cover uninsured or unreported claims. Some legal malpractice defense counsels estimate that 20 to 30% of all malpractice claims and counterclaims are attributable, either directly or indirectly, to disputes over legal fees and expenses.

So, what can an attorney involved in a fee dispute do to maximize the chances receiving some, or all, of the unpaid fee while at the same time minimizing the chances that the fee dispute will blossom into a malpractice or ethical complaint? There are three main options available to attorneys to collect their fee: litigation, self-help and fee dispute programs.

Settling a Fee Dispute with Litigation

Filing a lawsuit against a client frequently results in a counterclaim by the client. In fact, malpractice carriers include questions in their application forms asking whether the applicant has filed any suits against clients to enforce collection. When considering issuing or renewing coverage, the increased risk of a lawsuit against the applicant who sues clients for fees is increased considerably.

Settling a Fee Dispute with Self-Help

The second option is self-help. In the above scenario, you may try discussing the fee agreement with your client and listing all of the work you did to earn the fee. You may even try to negotiate with your client for your fee, or a discounted amount of your fee. Regular email updates to the client regarding work done on the case goes a long way toward preventing this dispute down the road.

The informal self-help approach is preferred by many lawyers and may feel less adversarial to clients, not to mention it can save on the time and expense of litigation. However, this informal resolution does not come without risks for the attorney.

For instance, a settlement between a lawyer and client can be voidable at the election of the client in the event the client is not represented in settlement negotiations. Settlements become even riskier when the lawyer still represents the client but is advocating their own interests seemingly to the detriment of the client. When considering a self-help remedy such as settlement, a lawyer should consider the ethical rules regarding business transactions with clients (ABA Model Rule1.8) and the duties of an attorney when communicating with an unrepresented person (ABA Model Rule 4.3).

Settling a Fee Dispute with Mediation

In the event that the self-help approach proves unsuccessful, or that you choose not to expose yourself to the potential ethical pitfalls of self-help, you can look to your local state bar for assistance. Many states have mediation or arbitration programs available to their attorneys to handle fee disputes with clients. These programs vary from state to state, with some of them being optional and others being mandatory. Typically, these programs are less formal than litigation and less costly, and they eliminate the ethical concerns associated with self-help. The downside, of course, is that alternative dispute resolution almost always means that you end up receiving less than the fee you billed. However, considering the pitfalls of both litigation and self-help, this may be well worth it.

So, the next time you end up with a fee dispute with a client, take a moment to step back from the scenario and consider that litigation and self-help can lead to more serious issues. Given these potentially costly risks, think about researching the programs your state bar organization has in place. Mediation or arbitration programs can very well get you a good portion of the fee you so diligently earned, while at the same time, minimize the chances of a malpractice or ethical complaint.

Rush Smith is General Counsel and Chair Emeritus of Hall Booth Smith, PC’s Professional Liability Practice group. He has achieved Martindale-Hubbell’s highest rating for legal ability and ethics for more than 20 years. He has been listed for the past 14 years as one of Georgia’s “Super Lawyers” by Atlanta Magazine in a peer-reviewed selection process utilized around the country as well as in its Corporate Counsel edition.

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