A Collection Policy To Avoid Write-Downs

07/31/2013
Published in the final edition of Lawyers USA, 7/31/2013

A firm's realization rate is fundamental to "The Business of Law." Realization is simply the percentage of what is billed that is actually collected, and in today's economy low realization remains the biggest financial problem for most lawyers. A 95 percent realization rate means that, even as the firm pays expenses at 100 cents on the dollar, it is earning five cents less. This is lost cash flow, and cannot continue. For any firm, the old advertising cliché, "we lose a little money on each sale but make it up in the volume," is simply suicidal.

Defining a collection policy

Low realization results from not telling clients at the beginning of an engagement what is expected of them, and from failure to follow through with the consequences of their failure to pay, consequences that you have discussed with them in your very first meeting.

When this happens, it is because firms have failed to establish, explain and enforce an effective, written collection policy. Such a collection policy should cover everything from the beginning of the relationship with the client to the payment of the final bill to alternatives for handling a fee dispute.

Because the collection policy is the foundation for all future fee and collection considerations, be as detailed as possible in the terms spelled out in a written fee agreement. Typically a written fee agreement is required for contingency work but not for hourly or transactional work, though states increasingly require all agreements to be in writing. Lawyers should embrace having a written fee agreement and a budget by which the client affirms what to expect in terms of events, money and time. Both of these items also provide marketing benefits by defining and managing client expectations and by removing uncertainty about fees.

Handling a write-down request

Even with a collections policy and a budget in place, a dilemma in these tough economic times may occur. If a client receives the lawyer's bill, contends that it is too high, and refuses to pay it unless the invoice is written down, there are at least two ways to respond to such a request, depending on how the collection policy for the engagement has been structured.

If the client signed an engagement agreement before the matter began, the lawyer is under no obligation to write down the invoice simply because the client thinks it is too high. Because the engagement agreement is the foundation for all invoices, be as detailed as possible in the terms spelled out.

Two criteria in particular can prevent a write-down request. The first, as noted previously, is to include a written fee agreement. Second is to define the collection cycle that sets specific dates of the month by which clients will be billed. For example, state in the agreement that invoices will be sent on or about the twenty-fifth of the month with payment due by the twentieth of the following month. With the terms established, bill in a regular and timely way, using statements that contain a full narrative of the work done and the goal accomplished by that work.

However, a lawyer could consider a fee write-down to adjust bills that are in dispute in order to match value as seen by the client. The only professional requirement is that a fee should be reasonable and in proportion to the value of the services performed.

Does the lawyer have the skill and experience to justify the fee? Does the client understand the amount and nature of the fee and the work done to justify it? Answering "no" to either of these questions could mean that an invoice write-down is warranted.

Note that what is being discussed here is not the result of a matter but the value a client attaches to it. For lawyers to guarantee a result in a legal matter comes under Rule of Professional Conduct 7.1's prohibition of false or misleading communication, which the ABA's commentary says includes "lead[ing] a reasonable person to form an unjustified expectation" about what an attorney can accomplish. However, lawyers and law firms can be held accountable to a level of effort and standard of performance for service within the lawyer's own control, and a firm may feel that a write-down is the best way to resolve a dispute.

Pursuing the last resort

If a voluntary write-down is not warranted, a 2012 opinion from the New Jersey State Bar's Advisory Committee on Professional Ethics affirms that it is ethically permissible to retain a collection agency to secure payment from former clients who have not paid their bills. The caveat the Committee made, namely that only such information as "is reasonably necessary for the agency ... to collect the debt" should be revealed, is simply common sense; confidentiality of files is a fundamental lawyer responsibility. However, the Committee also asserted, "Lawyers may not initiate a collection action against current clients." This flies in the face of everything embodied by "The Business of Law" and is not required by the Rules of Professional Conduct.

Rule 1.16 ("Declining or Terminating Representation") allows lawyers to withdraw from a representation if "the client fails substantially to fulfill an obligation to the lawyer regarding the lawyer's services and has been given reasonable warning that the lawyer will withdraw unless the obligation is fulfilled."

Withdrawal cannot be made without adequate notice and without careful records of the client's billing and payment performance. But if these two caveats are observed, using a collection agency or initiating fee arbitration on current clients who are not paying is perfectly justified, assuming a collection policy is in place. Otherwise, the representation becomes a pro bono assignment, and pro bono service not stipulated in the engagement agreement is unnecessary.

Some say that law is different from other businesses, and with respect to ethics issues that may be true. But there is nothing unethical about wanting to get paid and taking steps to get paid, while continuing all ethical obligations. Lawyers are subject to the Rules of Professional Conduct, but law firms are and will continue to be subject to the rules of economics.

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