Sign O' the Times" More Firms Suing Slow-Paying Clients

By Gina Passarella
The Legal Intelligencer
New York Lawyer
October 5, 2009

PHILADELPHIA - There's no denying collections have been a challenging, sometimes uncomfortable, situation throughout the recession as clients are finding it more difficult to pay and law firms are all the more eager to get the money they are owed into their coffers.

With varying motivations and frequency, some firms have said, "enough is enough," and have taken their delinquent clients to court in hopes of forcing payment.

As Wolf Block's operations wind to a close, the firm is looking to collect some of the money it is owed. The firm, through attorney Michael D. LiPuma, filed four suits in Philadelphia Common Pleas Court in September seeking a total of $1,344,243 from four former clients.

Two of the clients are businesses and two are individuals. The complaints are nearly identical to one another with the exception of the defendant and the dollar amount, which ranges from $12,575 to $1.2 million.

While Wolf Block is no longer a going concern and has little to lose in terms of suing its clients, other firms are reluctant to do so.

Cherry Hill, N.J.-based consultant Joel Rose said an active firm would most likely only sue clients in the most "dire of circumstances" because the fear is that the client would turn around and file a legal malpractice counterclaim and argue it isn't paying because it received bad advice. Firms also aren't eager for the potential publicity, he said.

Firms might sue if they know the client is a "total deadbeat" with little chance of providing future work or payment for past services, he said. But rather than sue clients, Rose said his clients are doing more to tighten up their intake procedures and check the creditworthiness of potential clients.

David I. Grunfeld, of counsel at Astor Weiss Kaplan & Mandel, has been handling collection work for more than 40 years and has represented law firms large and small in this city for about 25 years. Most recently he has filed suits on behalf of Schnader Harrison Segal & Lewis and Fox Rothschild. He said he is seeing somewhat of an uptick in this work during the recession partly because firms are more eager to collect what they're owed, and partly because clients are less willing,or able, to pay.

"Yes, I think there is perhaps a little more now, but I've had a steady stream of it for all these decades and it's probably because some of these larger firms realize it's something worth pursuing," Grunfeld said.

Many of these clients, he said, bounce from firm to firm.

"You're talking about former clients in almost all of these cases, and generally speaking, it's companies that have been former clients for a year or two," Grunfeld said.

Many firms put their own attorneys on the cases so that they don't have to give away a portion of the collection, he said. Obermayer Rebmann Maxwell & Hippel and Stradley Ronon Stevens & Young are two examples of firms that have filed a number of cases on their own behalf since the beginning of 2008, according to The Legal 's review of recent case filings in Philadelphia Common Pleas Court.

Grunfeld handles cases both on a contingent basis and on an hourly rate. He also handles the collection process once judgments are entered.

There are certainly firms, Grunfeld said, that have made it a policy never to sue clients because of the fear of a potential retaliatory claim for malpractice. But he said such claims are rare, and when filed, almost never prevail.

Once filed, several claims against former clients end up with default judgments, those under $50,000 get scheduled for arbitration and claims for more than that sum typically get set for trial, he said.

Grunfeld said a great many cases see default judgments entered because clients know they don't have an argument. He said he then works on collections and sometimes the firms have to take a loss. It is very difficult, Grunfeld said, to collect from individuals in Pennsylvania. According to dockets in several of these cases, many are settled or discontinued at the request of the firm.

The Breakdown

According to a review by The Legal of cases filed by large firms in Philadelphia Common Pleas Court from the beginning of 2008 through the end of September 2009, Obermayer Rebmann, Schnader Harrison, Stradley Ronon and Fox Rothschild have filed 47 cases among them for enforcement of contracts with former clients. In total, they were seeking a combined $2.62 million in fees, which in some instances includes interest, according to the complaints and docket entries made in the cases.

It's difficult to tell whether these cases are being filed because of the recession or just as a part of the normal course of business for these firms. According to the complaints, the firms had last seen payment from the clients in some instances upward of five years before the suit was filed and in some cases only months before the firms brought suit. Many of the suits were filed toward the end of 2008 and throughout 2009.

While such patterns could lead to the conclusion that the suits were filed around the same time regardless of how stale the claim was in order to collect on needed fees in a tough economy, it should also be mentioned that many of the firms have filed an equal number of suits throughout the few years preceding the recession.

Grunfeld said timing for filing these suits varies. One thing that is often taken into consideration is the two-year statute of limitations on malpractice claims and the four-year statute of limitations on breach of contract claims. Often he will wait to file the breach of contract suits until after the two-year limit on malpractice claims has passed in an attempt to avoid malpractice counterclaims from the client. Though the firms may have been trying to collect on fees for some time, some of the cases reviewed by The Legal were filed within months of the last partial payment, according to the complaints.

Since the beginning of 2008, Obermayer Rebmann has filed 15 suits against former clients, seeking a total of nearly $1,715,000. Some of the individual suits received default judgments and the totals include interest. The sum includes a default judgment against a corporate client for $1.07 million with interest, according to the docket.

Robert I. Whitelaw, managing partner of Obermayer Rebmann, was unavailable for comment Friday.

Schnader Harrison filed 14 suits against clients since January 2008, seeking a total of $386,360. The largest case was against an individual for $71,418. A default judgment was entered in that matter, according to the docket. Grunfeld was used in nine of the cases.

Stradley Ronon filed 12 cases against clients since early 2008 with a total value of $389,843. The largest case was seeking more than $151,000 in damages. The majority of their cases were against individuals as opposed to corporate clients.

No one from Stradley Ronon was available for comment by the time of publication and Schnader Harrison declined to comment, citing client confidentiality.

Fox Rothschild by far filed the fewest cases within the nearly two-year time frame. The firm sued six clients, seeking a total of $129,846. Two cases have been discontinued and the firm received default judgments in the other four.

Fox Rothschild General Counsel Thomas D. Paradise said it is a "rarity" for the firm to sue a client because of the chance of a malpractice counterclaim, regardless of how meritorious the counterclaim is. If the firm does take the step of suing a client, it is after Paradise has reviewed the file and typically after the statute of limitations on the malpractice claim has passed, he said.

When someone stops paying his electric bill, the electric gets shut off, Paradise said. But lawyers don't always stop doing the work when a client isn't paying.

"As far as collecting by virtue of lawsuits, I don't think we've gotten any more aggressive, but in other collection efforts we certainly have increased our attention to those issues," Paradise said.

While the economy hasn't made Fox Rothschild quicker to sue, he said it has affected its decisions on how aggressive the firm gets with ending client relationships if they aren't paying their fees.

Wolf Block's attorney, LiPuma, did not return a call for comment by press