Tools for Recovery of Unpaid Legal Fees

Andrew S. Kowlowitz
New York Law Journal
August 30, 2013

An important risk-management issue for lawyers involves ethically and effectively securing payment of unpaid fees from current or former clients. This issue is especially prevalent where there is a breakdown in the attorney-client relationship and the lawyer either withdraws from a representation or is discharged without cause by a client. In addition to a plenary action for damages, attorneys are vested with two significant remedies: (1) the statutory charging lien; and (2) the common—law retaining lien. Notably, an attorney may simultaneously pursue a plenary action, a charging lien and a retaining lien, as the three remedies are “not exclusive but cumulative.”1 Determining which remedy is appropriate will often depend on the nature of the underlying case, the recovery sought in that action and the former client’s ability to satisfy the outstanding legal fees.

Charging Lien

Under New York Judiciary Law §475, an attorney is given an equitable interest in the proceeds of a client’s cause of action that was created through that attorney’s efforts. Specifically, §475 provides that an “attorney who appears for a party has a lien upon his or her client’s cause of action…and the proceeds thereof in whatever hand they may come.” The Judiciary Law further provides that a court, upon the petition of either a client or attorney, “may determine and enforce the lien.”

As an initial matter, the remedy of a charging lien is only available when an interest is created through the attorney’s efforts. New York courts have consistently held that “where the attorney’s services do not create any proceeds, but consist solely of defending a title or interest already held by the client, there is no lien on that title or interest.”2 From a practical standpoint, usually counsel for a plaintiff may be entitled to a charging lien, but rarely is a defendant’s attorney entitled to a charging lien—unless, of course, an interest is created as the result of a counterclaim brought by a defendant. The interest created has to be new, or the client must receive a benefit she did not previously have. As a general proposition, it stands to reason that often the remedy of a charging lien may be available to attorneys who handle claims on behalf of plaintiffs involving injury to persons or property. Conversely, this remedy would not ordinarily be available to attorneys who handle adoption matters, child custody disputes, immigration cases or criminal defense proceedings.

By way of an example, suppose a personal injury plaintiff discharges his lawyer after a complaint is filed and after the completion of discovery in the personal injury litigation. The outgoing attorney may pursue a charging lien against the proceeds from the personal injury lawsuit. The outgoing attorney may seek payment based on the value of her services rendered under a theory of quantum meruit, or the outgoing attorney may seek a percentage of any award or settlement in the personal injury action.

Conversely, if the defendant’s attorney in the same action was discharged and owed legal fees, the outgoing attorney would not be entitled to a charging lien. In this instance, since the outgoing attorney did not create an interest on behalf of his client, but was instead defending a client’s existing interests, the outgoing defense attorney would not be entitled to the remedy of a charging lien. The defendant’s attorney in this case would be entitled to pursue a plenary action, or seek a retaining lien (more on this below).

The mechanics of enforcement of a charging lien vary from court to court. That is, the Judiciary Law does not prescribe a specific or uniform procedure for the enforcement of a charging lien and, therefore, the procedure for enforcement should be prescribed by the court in which the proceeding is brought. Upon discharge, the outgoing attorney will serve all parties—former client, incoming attorney, and the defendant(s)’ attorneys—with a notice of charging lien. This ensures that all parties are “on notice” of the outgoing attorney’s right to the proceeds from the litigation, and will secure the outgoing attorney’s equitable right to the future proceeds of the action, regardless of whatever fee arrangements may exist between the client and successor counsel.

In fact, a defendant’s payment of settlement proceeds while on notice of a charging lien is made at the defendant’s own peril, as a defendant having knowledge of the charging lien is under an affirmative duty to protect the lien and retain sufficient funds to satisfy it. If a defendant fails to do so, he may be liable to the attorney who possesses the lien.3

At the conclusion of the litigation (i.e., following an award or settlement), the attorney holding the charging lien must file a petition with the court seeking enforcement of the charging lien and serve the petition on all necessary parties—usually the client, successor counsel and possibly defendant’s counsel. The attorney seeking enforcement of the charging lien is not entitled to a jury trial, as enforcement of the lien is generally considered to be equitable in nature.4Quite often, the judge presiding over the case will set the amount of lien, or the judge may refer the matter to a special referee to hear the dispute.5

Retaining Lien

The common-law retaining lien allows an attorney who withdraws or is discharged without cause to physically retain a client’s files or other property that comes into the attorney’s possession in the course of the representation.6 In other words, the retaining lien gives a withdrawing or discharged attorney a qualified right to retain any client property that comes into the attorney’s possession in connection with the representation. An attorney who wishes to assert a retaining lien should make an application to the court presiding over the underlying matter. The court will then determine the amount of the retaining lien. Notably, an attorney should never take it upon himself to maintain control over a client’s files or property, as doing so exposes an attorney to disciplinary action.7

Generally, an attorney is able to retain the property until the amount of his or her fee is fixed by agreement or by litigation and is paid or otherwise secured. In other words, where a client requests the return of his or her property and the attorney asserts a valid retaining lien, the attorney will be entitled to a judicial determination fixing the value of services rendered, and generally will not be compelled to turn over the client property until the amount due is paid or otherwise secured.8

However, if a client can make an “unrefuted or uncontroverted” showing of “exigent circumstances,” such as indigence or other compelling need for the property, a court may direct the attorney to relinquish the client’s property and relegate the attorney to a charging lien, if appropriate.9 The burden is on the client who seeks release of the property to establish the existence of exigent circumstances, and where the attorney can sufficiently challenge the claim of exigent circumstances, a hearing will be held regarding the claim.10 Notably, in cases where a retaining lien is opposed by a client claiming to be indigent, the court can award a former attorney a charging lien on any proceeds that may be received by the client upon resolution of the action (in lieu of a retaining lien).11

For example, suppose an attorney represents a client in a commercial dispute. Prior to the conclusion of the action, the attorney is discharged without cause by the client who owes $20,000 in unpaid legal fees. At the time of the discharge, the attorney possesses all of the client’s legal files, as well as $10,000 in personal property. The attorney would be entitled to assert a retaining lien on the client’s files and personal property until the amount of his fee is fixed by the court and is paid, or otherwise secured. If the client chooses to oppose the imposition of a retaining lien, he must prove to the court that exigent circumstances exist.

Conversely, suppose an attorney is representing a client in a murder trial. Suppose further that as a result of the client’s inability to pay legal fees, the attorney is forced to withdraw. Upon discharge, the attorney seeks a retaining lien on the file. The client disputes the retaining lien on the basis that his indigence and the importance of the property held by the attorney amount to exigent circumstances, and that the attorney should relinquish the file immediately. In this case, a court may be hard-pressed to grant the outgoing attorney a retaining lien.

Plenary Action

The use of a charging lien and/ or retaining lien can be an effective and economical tool in securing outstanding legal fees. By making use of one or both of these liens, an attorney can procure a judicial determination of fees owed on an expedited basis, and can do so without the time and expense of pursuing a plenary action for damages.

However, should an attorney seek to enforce payment of her fee by way of a conventional plenary action, the statute of limitations for bringing such a claim is six years from the date of breach.12 Similarly, if an attorney wishes to seek payment of outstanding legal fees under a theory of quantum meruit, a six-year statute of limitations is also applied.13

Attorneys who choose to pursue a plenary action for unpaid legal fees must be cautioned that quite often a client seeking to defend against such a claim and avoid payment of the fees owed, may assert a counterclaim for legal malpractice. This is often done to leverage settlement of the outstanding legal fee or to simply avoid payment altogether. The assertion of such a counterclaim will often trigger a series of unforeseen consequences for the attorney. For example, the attorney named in such a counterclaim may—and should—tender the counterclaim to her malpractice insurer. The insurer may then appoint counsel to defend against the counterclaim. Further, the fee action and counterclaim of legal malpractice may result in protracted litigation, very often against a pro se litigant. The time and cost involved with prosecuting the action for fees, while defending a counterclaim for legal malpractice, may make the commencement of the fee action cost/time prohibitive in the first instance.

From a risk management standpoint, if an attorney chooses to proceed with a fee action, it is advisable that any such action is commenced more than three years after the date the attorney was discharged, as claims of legal malpractice must be commenced within three years from the date of accrual.14 Should an attorney commence an action to recover unpaid legal fees more than three years after the attorney-client relationship was terminated, any ensuing counterclaim for legal malpractice more than likely would be subject to dismissal on statute of limitations grounds. A relatively straightforward pre-answer, pre-discovery motion to dismiss pursuant to CPLR 3211(a)(6) would be an appropriate means of discharging the counterclaim on an efficient basis so that the fee action may be pursued with minimal interference.

Andrew S. Kowlowitz is a partner at Furman Kornfeld & Brennan. Andrew can be reached at .

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Endnotes:

1. See Levy v. Laing, 43 A.D.3d 713, 483 N.Y.S.2d 542 (1st Dept. 2007).
2. See Zelman v. Zelman, 15 Misc.3d 372, 833 N.Y.2d 375 (N.Y. Cty. Sup. Ct. 2007) (citing Theroux v. Theroux, 145 A.D.2d 625, 536 N.Y.S.2d 151 (2d Dept. 1988).
3. See Schneider, Kleinick, Weitz, Damashek & Shoot v. City of New York, 302 A.D.2d 183, 754 N.Y.S.2d 220 (1st Dept. 2002).
4. See In re Estate of Sackler, 222 A.D.2d 9, 644 N.Y.S.2d 796 (2d Dept. 1996); see also Behrins & Behrins v. Chan, 15 A.D.3d 515, 791 N.Y.S.2d 566 (2d Dept. 2005) (distinguishing an action at law to recover outstanding legal fees from an action that is equitable in nature for purposes of a right to a jury trial).
5. See Haser v. Haser, 271 A.D.2d 253, 707 N.Y.S.2d 47 (1st Dept. 2000).
6. See Mosiello v. Velenzuela, 84 A.D.3d 1188, 924 N.Y.S.2d 480 (2d Dept. 2011).
7. For example, New York Rules of Professional Conduct §1.15(c)(4) provides that “[a] lawyer shall…promptly pay or deliver to the client or third person as requested by the client or third person the funds, securities, or other properties in the possession of the lawyer that the client or third person is entitled to receive.” A lawyer’s failure to relinquish client property without court approval could be a violation of the Rule.
8. See Rosen v. Rosen, 97 A.D.2d 837, 468 N.Y.S.2d 723 (2d Dept. 1983).
9. See id.
10. Pileggi v. Pileggi, 127 A.D.2d 751, 512 N.Y.S.2d 142 (2d Dept. 1987).
11. See Id.
12. See CPLR §213(2).
13. See Id.
14. See CPLR §214(6).