Pursuing former clients for unpaid fees is one of the least pleasant aspects of practicing law, but it can be good training for a firm's younger lawyers. However, this work may well be non-compensable because of the so-called American Rule that governs attorneys fees, not to mention case law on what can be recovered when a law firm keeps collection matters in-house.
Any firm that wants to handle its collection cases internally and still get paid for the effort needs to consider a revision to its client-engagement letters. The instructions that accompany the State Bar's sample forms caution that the attorneys-fee clauses in engagement letters should be cleared with the attorney's malpractice insurance carrier, and then the instructions suggest this language: "The prevailing party in any action or proceeding arising out of or to enforce any provision of this Agreement, with the exception of a fee arbitration or mediation under Business and Professions Code Sections 6200-6206, will be awarded reasonable attorneys' fees and costs incurred in that action or proceeding, or in the enforcement of any judgment or award rendered."
Be aware that this formula will not be effective if the firm uses in-house lawyers to bring the case. Precedent teaches that to collect attorneys fees incurred in a client-collection case, the law firm must refer the matter out to another lawyer. (See Trope v. Katz
, 11 Cal. 4th 274, 292 (1995) ("[A]n attorney who chooses to litigate in propria persona
... cannot recover 'reasonable attorney's fees'
... for the time
... he expends on his own behalf ...").
Some distinctions have been developed to get past this rule. For example, in one case the court held that "an attorney litigant represented by other attorneys in his firm" is not "a litigant in propria persona
and thus Trope
does not bar his recovery of reasonable attorney fees...." (Gilbert v. Master Washer & Stamping Co.
, 87 Cal. App. 4th 212, 220 (2001).)
Recently a law firm tried to avoid the Trope
rule in a dispute in which the engagement letter read that a delinquent client must pay "expenses and/or legal fees incurred in the collection of overdue balances ... to the extent authorized by law." The expenses identified in the agreement included "those of our in-house personnel as well as those of any outside agency which we may employ." (Soni v. Wellmike Enter. Co.
, 224 Cal. App. 4th 1477, 1480 (2014).)
The law firm attempted to characterize itself as a sole proprietor and the lawyers who did the collection work as outside lawyers - all designed to bring the matter within the exceptions to Trope
that were developed in Gilbert
The law firm's approach was creative but unsuccessful. The court of appeal noted that "in working to recover fees ... the associates were performing services for the law firm which employed them. Accordingly, this case is governed by the general rule that a law firm which represents itself in litigation cannot recover its own attorney fees." (Soni
, 224 Cal. App. 4th at 1490.)
Using the phrase "to the extent authorized by law" in the engagement letter seemed to require that Trope
be overturned, distinguished, disregarded, or ignored - none of which happened.
A viable way to solve the problem is to insert language in a client retainer agreement stating that the prevailing party will be awarded attorneys fees and costs incurred in a collection proceeding. This sum will include, without limitation, the value of the time spent by the firm's own attorneys to prosecute or defend such a proceeding, with fees calculated at the normal hourly rate the firm charges to clients.
This actually happened in Lockton v. O'Rourke
(184 Cal. App. 4th 1051, 1075 (2010)). After reciting the specific language used, the court of appeal ruled that the law firm had avoided the Trope
prohibition. "Based on the broad language of the fee clause, we conclude that [the client] agreed to pay [the law firm] for the value of the time spent by attorneys in that firm to prosecute or defend an action based on the attorney-client relationship created by the retainer agreement." (184 Cal. App. 4th at 1076.)
The lesson from these cases is straightforward and powerful: Round up the many engagement letters that your firm may be using and adopt the exact language cited by the Lockton
Gerald G. Knapton is a partner at Ropers Majeski Kohn & Bentley in Los Angeles.