How to handle lawyer-client fee disputes
The Florida Bar Ethics Hotline frequently receives inquiries regarding a lawyer’s ethical obligation when the client disputes the lawyer’s right to fees. The lawyer’s ethical obligations in such situations are addressed in various provisions of the Rules of Professional Conduct and opinions of the Professional Ethics Committee.
When a lawyer and client have become involved in a dispute over fees, the lawyer must assess whether the dispute creates a conflict of interest. Rule 4-1.7, Rules Regulating The Florida Bar, is the general conflict of interest rule. The rule states that a lawyer shall not represent a client if the representation will be “materially limited … by a personal interest of the lawyer.” Rule 4-1.7(a)(2). If the representation would be limited in such a way, a conflict exists. Unless the consent and waiver requirements of 4-1.7(b) can be met, the lawyer must withdraw from representation. Notably, subdivision (b) requires that the lawyer, in spite of the conflict, reasonably believe that he or she “will be able to provide competent and diligent representation” to the client. Further, subdivision (b) requires that the client give informed consent to the continued representation, “confirmed in writing or clearly stated on the record at a hearing.” If the conflict cannot be waived, Rule 4-1.16(a) requires the lawyer to move for withdrawal because continuing the representation would result “in a violation of the Rules of Professional Conduct or law.” In sum, if the fee dispute has made it impossible for the lawyer to place the client’s interests ahead of his or her own, a conflict exists and the lawyer should move to withdraw.
Ethics Opinion 88-1 is relevant to the conflict question presented by fee disputes. This opinion dealt with a lawyer’s representation of a client in a domestic matter where, in the midst of representation, the client reneged on the fee agreement and refused to pay the lawyer as agreed upon. The lawyer questioned whether it would be appropriate to bring suit against the client for unpaid fees while actively representing the client. The Professional Ethics Committee stated that doing so would violate the conflict of interest rule:
- The attorney may not allow his personal interests to interfere with his ability to adequately represent his client. Furthermore, he may not take any action that might be contrary to his client’s interests without her consent. Rule
- 4-1.7(b), Rules Regulating The Florida Bar.
Rather than bring suit against an active client, the lawyer should, according to the committee, proceed on one of two paths. First, if the fee dispute will not adversely affect the lawyer’s continued representation, the lawyer may continue to advocate for the client until the representation is concluded. See Rule 4-1.7(a)(2) and (b). However, “if the client’s failure to comply with the fee agreement has adversely affected the attorney’s ability to zealously represent the client, then this conflict of interests requires that the attorney promptly attempt to withdraw.” See 4-1.16(a).
Lawyers should note however, that if a motion to withdraw is denied by the court, the lawyer is required to “continue representation notwithstanding good cause for terminating the representation.” 4-1.16(c). In any event, the lawyer must wait until representation has concluded before bringing suit against a client for unpaid fees. See also The Florida Bar v. Fields, 482 So. 2d 1354 Fla (1986) (Supreme Court of Florida upheld trial court finding of misconduct where lawyer sued client for unpaid fees without first determining whether the client had an ability to pay the fee, whether the fee in question was substantial in nature, or if the client had steadfastly refused to pay the fee).
In addition to the conflict and termination rules, Rule 5-1.1 is applicable to lawyer-client fee disputes. The rule states in part:
(f) Disputed Ownership of Trust Funds.
- When in the course of representation a lawyer is in possession of property in which two or more persons (one of whom may be the lawyer) claim interests, the property shall be treated by the lawyer as trust property, but the portion belonging to the lawyer or law firm shall be withdrawn within a reasonable time after it becomes due unless the right of the lawyer or law firm to receive it is disputed, in which event the portion in dispute shall be kept separate by the lawyer until the dispute is resolved. The lawyer shall promptly distribute all portions of the property as to which the interests are not in dispute.
The comment to 5-1.1 elaborates:
- Lawyers often receive funds from which the lawyer’s fee will be paid. The lawyer is not required to remit to the client funds that the lawyer reasonably believes represent fees owed. However, a lawyer may not hold funds to coerce a client into accepting the lawyer’s contention. The disputed portion of the funds must be kept in a trust account and the lawyer should suggest means for prompt resolution of the dispute, such as arbitration. The undisputed portion of the funds shall be promptly distributed.
Thus, if a client is disputing all or part of the lawyer’s fee, the lawyer must retain the disputed funds in trust and move any undisputed portion to the lawyer’s operating account. However, as the comment suggests, the lawyer may not simply allow the disputed funds to remain in the trust account indefinitely. The lawyer must attempt a “prompt resolution” of the fee dispute with the client. Several methods of resolution are possible. First, the lawyer may directly negotiate the fee dispute with the client. However, if the client is represented by counsel as to the fee dispute, the lawyer must comply with Rule 4-4.2, the rule regarding communications with represented parties, and communicate with the client’s lawyer. Also, The Florida Bar offers a fee arbitration program aimed at resolving such disputes. For more information about this free service, contact the Bar at (850) 561-5719. Finally, as the comment to 5-1.1 suggests, the lawyer may “where appropriate … consider the possibility of depositing the property or funds in dispute into the registry of the applicable court so that the matter may be adjudicated.”
A related issue, and a frequently asked question, involves the propriety of the lawyer asserting a retaining lien over client files because of unpaid fees and/or costs. Ethics Opinion 88-11(Reconsideration) is instructive. In this opinion, the committee set forth its view on when it is ethical for a lawyer to assert a retaining lien on a file for unpaid costs or fees. The committee pointed out that in Florida, unlike many other states, the case file is considered to be the property of the lawyer. See Dowda and Fields, P.A. v. Cobb, 452 So. 2d 1140 (Fla. 5th DCA 1984). Under normal conditions, the lawyer should provide the client a copy of the case file at cost to the client. However, the committee found that in certain situations, a lawyer may refuse to provide a copy of the case file:
- In appropriate situations, however, an attorney is entitled to refuse to provide copies of material in the file and instead may assert an attorney’s lien. Such situations include a client’s refusal to reimburse a discharged attorney for the attorney’s incurred costs or to provide a reasonable guarantee to the attorney that the costs will be repaid at the conclusion of the case.
- Florida Ethics Opinion 71-57. While in such a situation it may be ethically permissible for an attorney to assert a lien with respect to materials in a case file, the validity and extent of the lien is a question of law to be decided by the courts.
The committee also noted exceptions to a lawyer’s ability to assert a retaining lien over unpaid fees and/or costs. First, the committee held, citing to The Florida Bar v. Doe, 550 So. 2d 1111 (Fla. 1989), that a lawyer may not assert a retaining lien over unpaid fees and costs in a contingent fee case where the contingency has yet to occur. However, the lawyer may assert a retaining lien on unpaid costs if repayment of the costs was not contingent on the outcome of the case. The underpinning of this holding is that where the contingency has not occurred, the lawyer has no present right to the fee. Further, the committee found that a lawyer has an ethical obligation to avoid prejudice to the client’s interests. The lawyer may not retain portions of the file when doing so would result in such prejudice. As an example, if the client had a pending trial or an imminent statutory deadline, the lawyer may have to turn over portions of the file to allow the client to meet those obligations.
Another exception to a lawyer’s ability to assert a retaining lien is stated in Ethics Opinion 87-12. In 87-12, a lawyer represented two clients in a matter involving title to a vessel and a related mortgage given by the clients to a lender. As part of the representation, the clients placed a $50,000 certificate of deposit in the lawyer’s trust account, to be held “as collateral for the loan.” The clients then discharged the lawyer and obtained new counsel. At that point the clients owed $21,000 in fees to the original lawyer. The clients then decided to liquidate the C.O.D. and satisfy the loan. The amount due on the loan at that point was less than the amount of the C.O.D. and the original lawyer desired to “claim a retaining lien on that ’equity.’” The committee, citing the Florida Supreme Court’s opinion in The Florida Bar v. Bratton, 413 So. 2d 754, 755 (Fla. 1982), opined that a lawyer may not assert a retaining lien on client funds held for a specific purpose where the parties have not agreed that the lawyer’s fees should be paid out of the funds held. Thus, if a lawyer is holding client funds for a specific purpose, the lawyer may not assert a retaining lien on those funds. This principle is also codified in Rule 5-1.1(b), which states that “[m]oney or other property entrusted to an attorney for a specific purpose, including advances for fees, costs, and expenses, is held in trust and must be applied only to that purpose.”
Another related issue is the ethical propriety of a lawyer’s use of a collection agency in collecting a delinquent fee. The Professional Ethics Committee addressed this issue in Ethics Opinion 81-3. The committee held:
- We see no justification for proscribing a method of collecting delinquent fees that has been accepted in other professions, and we do not find the use of a collection agency to be necessarily inconsistent with the confidentiality that must exist between a lawyer and his client.. . . It is the Committee’s view that as long as the attorney makes a reasonable attempt to collect the fee through his or her own efforts and, failing this, is careful to divulge to the collection agency no details regarding the representation of the client that are not relevant to the debt owed, the use of a reputable agency to collect a fee would not be unethical.
Thus, the committee authorized lawyers to utilize reputable collection agencies to collect delinquent fees owed by former clients. This alternative exists when the fee is not in dispute and reasonable efforts to collect the delinquent fee have proven unsuccessful. The committee admonished lawyers to reveal no more information than is absolutely necessary. Opinion 81-3 also stressed the need to ensure than any delegated collection efforts are conducted by a reputable organization and in accordance with Florida Bar rules governing lawyer conduct.
Finally, a recent issue presented to the ethics department is the propriety of a lawyer threatening to file a Form 1099-C (cancellation of debt) with the Internal Revenue Service in order to induce the client to pay unpaid fees and costs. A staff opinion concluded that such a threat by the lawyer would be unethical and a violation of Rule 4-1.6, the rule of confidentiality. The staff opinion cited to New Hampshire Ethics Opinion 2010/11-01, which found that it is a violation of the confidentiality rule and the former client conflict of interest rule to notify the Internal Revenue Service that a lawyer considers a client’s unpaid legal fees to be a forgiven debt. The staff opinion also noted that the Iowa Supreme Court has disciplined a lawyer for unethical conduct in connection with charging and collecting legal fees including, among other practices, the use of Form 1099. See Iowa Supreme Court Disciplinary Bd. v. Powell, 726 N.W.2d 397 (Iowa 2007). The staff opinion concluded that the proposed conduct would involve threatening to disclose confidential client information not permitted by an exception in Rule 4-1.6. Rather, the threat would be a coercive, prohibited attempt to leverage the client to pay an overdue bill.
In summary, when a lawyer and client are involved in a fee dispute, the lawyer should consider whether or not a conflict of interest exists in continuing the representation. If such a conflict exists under 4-1.7 and cannot be waived, the lawyer must withdraw from representation. A lawyer should not bring suit against a current client for unpaid fees as this would involve a violation of the conflict rule. Additionally, Rule 5-1.1 requires the lawyer to hold in trust funds that are in dispute between the lawyer and client while taking measures to resolve the dispute. The lawyer must resolve the dispute before disbursing the funds. A lawyer may assert a retaining lien on the case file over unpaid fees, but there are several exceptions to this right that the lawyer must be aware of. Additionally, funds held in trust by the lawyer for a specific purpose must be held in trust and applied only to that purpose. Further, a lawyer may use a reputable collection agency in attempting to collect a delinquent fee, provided the lawyer otherwise complies with the Rules of Professional Conduct. Finally, a lawyer may not file, or threaten to file, a Form 1099-C in order to induce a client to pay a delinquent fee.