In Rough Times, Get-Tough Measures For Non-Payment
By Rebecca U. Cho
Daily Journal Staff Writer
Credit card companies aren't the only ones getting aggressive about past-due collections during the recession.
Law firms are doing it too, as a recent spate of lawsuits filed by firms against their former clients for non-payment show.
In the flush times of the recent past, firms would look the other way as clients dawdled, not wanting to be perceived as going after their own clients. The recent spate of breach-of-contract lawsuits launched by law firms speaks to what some legal observers characterize as a shift towards a newly aggressive stance against slow-paying clients.
"Because of the economy, law firms may have more clients who find it more difficult to pay," said Edith Matthai, a legal malpractice attorney in Los Angeles who represents law firms. "At the same time, law firms may find it more difficult to simply write off a receivable."
When cash was flowing, law firms many times were forgiving of clients who failed to pay. But now, not only are lawyers increasingly having discussions about payment owed to them, they are rifling through past collections and suing late payers with a fervency that did not exist before the financial crisis, legal observers familiar with such lawsuits say.
Matthai said law firms have few alternatives in today's economic climate aside from going after fees owed to them. If they don't, law firms would be "sitting ducks" waiting on non-paying clients, she said.
Matthai said she believes malpractice suits, which often arise as a counterclaim against breach-of-contract cases, have increased in the downturn, though hard statistics are hard to find.
There are other indications that law firms are watching their collections more closely. In the past year and half, most big firms have switched from waiting until the end of the year to get accounts receivables in to pursuing the receivables quarterly or monthly, said Peter Zeughauser, a legal consultant with the Zeughauser Group.
In addition, Lucie Barron, founder and president of ADR Services, said for the first time, large law firms are asking the alternative dispute resolutions service to send bills directly to the firms' clients. In the past, law firms would gladly front the bill on behalf of their clients and wait for compensation. But law firms are now anxious over whether they will see their money again, she said.
"People don't know what the financial positions are of these companies and if they're weak, they're not going to tell you. And you don't know until they fold," Barron said. "So there's this fear that if [law firms] advance all this money on behalf of their clients, they may or may not see it again."
Although highly unusual, Barron said, on occasion ADR Services will send the bills directly to firms' clients in an effort to accommodate law firms. ADR Services has also seen an uptick in fee disputes from law firms suing clients, she said.
Law firms traditionally have tiptoed around money talk for reasons ranging from fear of losing a client's business to a belief that lawyers, as professionals, are set apart from talking about dues with their clients.
Also, the strong possibility that clients will answer a breach-of-contract allegation with a malpractice claim has been a big deterrent for firms to file such lawsuits in the past. About 90 percent of fee claims filed will get a cross complaint.
"The most common trigger for a malpractice claim is when a law firm needs to collect its fee," Zeughauser said. "Often many law firms don't pursue their accounts receivables as aggressively as other businesses might."
Since June, several prominent Los Angeles law firms have expressed their complaints against slow-paying clients by taking them to court. In a lawsuit filed in June, Quinn Emanuel Urquhart Oliver & Hedges alleged that Alhambra-based seafood distributor Ocean Fresh Trading Inc. failed to pay the firm's invoices for a period of five months starting in April 2008. The firm is asking for about $26,000 in unpaid legal fees. Quinn Emanuel represented Ocean Fresh Trading last year in an unsuccessful $6 million breach of fiduciary duty and negligence claim against East West Bank. A Los Angeles County Superior Court jury rejected the claims at a May 2008 trial.
Manatt, Phelps & Phillips launched two breach of contract suits in July. One, against the Los Angeles-based Thirsty Corp., asked for $25,000 for work performed until December 2006. Another breach of contract suit, against Reunite Investments Inc., a Los Angeles digital media services company, was filed just a day earlier in Beverly Hills on July 30.
Glaser, Weil, Fink, Jacobs & Shapiro is suing the Hendrx Corp., a water dispensary business, for unpaid legal fees in the amount of $34,190. The firm charged Hendrx for fees that accumulated in a one year period ending in June 2009.
Monte Lemann III, Manatt's general counsel, said the two breach of contract lawsuits his firm filed were not the result of a newly aggressive approach towards collections.
"We try to work with people so that they can meet their obligations, but sometimes that breaks down and we have to resort to collecting," Lemann said. "I don't think our rate of pursuing collections is dramatically greater today than before."
Nonetheless, Lemann acknowledged Manatt is watching its collections more carefully than before the downturn.
"We monitor it more closely because we know the environment can create greater pressures and can create them faster," Lemann said.
Robert A. Weinberg, an Encino-based sole practitioner who specializes in representing law firms in collecting debts and receivables, said he has seen a surge in law firms taking legal action to collect from clients, as well as less concern about retaliatory cross complaints.
"Many a law firm is looking at old receivables, or even receivables ripe in the last 18 months, and saying, 'Maybe we can get money out of those,'" Weinberg said.
Legal malpractice attorneys advise law firms to wait out the statute of limitations for making a malpractice claim, which in many cases is about a year after the end of the firm's representation of the client, or a year after the client should have discovered the malpractice, Weinberg said.
If law firms are choosing to sue before the statute of limitations ends for a malpractice claim, that may be telling about the financial strains some law firms are under, he said.
"It means the state of the economy for lawyers is even worse [than previous years] because they're willing to risk suing within a potential statute, leaving open the door for clients to sue for malpractice," Weinberg said.
Requests for comment from Quinn Emanuel's managing partner John Quinn were unanswered. Peter Weil, Glaser Weil's co-managing partner, said he did not know details of the specific case, but noted most of his firm's clients pay on time. He said he has not noticed that clients have had a harder time paying since the downturn.
Some firms may sue within the statute of limitations not because they need the money as soon as possible, but because they have studied their work for the client and found it highly unlikely that any malpractice claims would be merited, legal malpractice attorney Matthai said.
In an effort to avoid being viewed as litigating against clients, some firms have gone as far as outsourcing the collection to a third party so the firm's name would not appear on court filings, said Dana M. Warren, a former big firm lawyer and currently the co-director of the Business Law Practicum at Loyola Law School. But those times are over.
"They may not care at this point," Warren said. "Maybe they want to do it in their own name to send a message: 'Times are hard, but it doesn't mean you don't have to pay your lawyers. If services are rendered, you should pay.'"
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