When legal fees outpace the recovery to the client, it can give rise to serious implications from New Jersey's Rules of Professional Conduct (RPCs). New Jersey's Disciplinary Review Board (DRB) has found multiple RPC violations in such situations, including RPCs 1.4 (Communication); 1.5 (Fees); and 8.4 (Misconduct). These situations almost always stem from insufficient communication, including lack of: oral or written fee agreement; discussion regarding expected recovery; regular invoicing; and explanation of how settlement proceeds will be allocated. These situations clearly cross into ethical violations when attorneys, on notice of a dispute over funds, nonetheless withdraw the funds to satisfy their legal fees. Violations can result in a range of consequences, from admonition to disbarment; as well as disgorgement of all fees, imposition of disciplinary hearing costs, and supplemental continuing education requirements. As illustrated by the following DRB decisions, sufficient communication is key to avoiding these disputes.
In In Re Barbour, DRB 96-073, an attorney received a one-year suspension after he attempted to retain the entire settlement amount to satisfy his legal fees. In Barbour, an attorney charged a retainer fee of $1,500; however, no written fee agreement was ever drafted, and there were no discussions of his hourly rate or scope of representation. However, there was an understanding that the adversary would be responsible for the legal fees pursuant to a local ordinance. The client ultimately accepted a settlement offer of $17,500. At the time of the settlement, the outstanding legal fees were in excess of the settlement amount. The attorney claimed the client understood the settlement proceeds would be used exclusively to satisfy his legal fees. The client claimed the settlement was always understood to be $17,500 plus attorney fees. After receiving the settlement check, the attorney began withdrawing settlement funds toward his legal fees without the client's knowledge or consent.
The DRB found the attorney's conduct violated RPC 1.5 because he failed to advise a new client of the amount or basis for his fee in a written document. He also violated RPC 1.4 because he failed to keep the client sufficiently informed of the progress of the case to permit her to make an informed decision regarding the settlement. Finally, he violated RPC 8.4(c) because he misrepresented that his fees would be paid by the adversary. He was also found to have committed recordkeeping violations and unauthorized taking of fees from settlement funds without the client's knowledge or consent. The DRB suspended the attorney for one year, ordered restitution of $19,000, and conditioned reinstatement on the restitution.
In In Re Dranov, DRB 03-249, the DRB imposed a six-month suspension on an attorney after he took the entire settlement amount to satisfy his legal fees. In Dranov, the engagement letter provided that if the client replaced the attorney before the motor vehicle lawsuit was completed, the client would reimburse the attorney for all expenses and pay the attorney "a reasonable value at the rate of $200 per hour ." The client sent a letter advising she had retained new counsel at the same time the attorney settled her property damage claim for $2,134.92. The attorney responded with an invoice for $2,246, applied the entire property settlement amount to this fee, and noted a balance of $111.08. The District Ethics Committee found a violation of RPC 1.5(a) because "it cannot be reasonable to charge a client 105% of the sums received in recovery." The DRB found the services were necessary, and the nature and frequency reasonable. However, the DRB found a violation of RPC 1.5(a) and 8.4(c) because the attorney charged $200 per hour for both attorney and paralegal work, and "his attempt to justify the retention of the entire settlement award, by charging an inflated rate for [his paralegal's] services, amounted to overreaching." The DRB imposed a six-month suspension and supplemental continuing education.
In In Re Brown, DRB 13-341, an attorney received a three-month suspension after retaining the client's entire judgment to satisfy her legal fees. In Brown, the engagement letter in the security deposit dispute provided for a non-refundable fixed fee of $750. It provided that if additional services were required, the parties were to execute another agreement, but no additional agreement was ever executed. The attorney sent invoices totaling $750, which noted "fixed fee" and a $0 balance. The client prevailed at trial for $1,391.84 (the security deposit plus costs). After the attorney received the judgment check, she sent the client another bill for $1,500 showing payments of $1,391.84 (the entire judgment check), and a balance of $108.16, which she waived. The DRB found violations of RPC 1.4(b); 1.5(a); and 1.15(b) and (c). The DRB noted admonition was proper for each individual violation; however, taken together, a three-month suspension was appropriate.
In In Re Levin, DRB 12-190, the DRB noted it appeared excessive when an attorney charged $30,000 in a $15,000 dispute, and applied the entire $10,000 settlement to his outstanding fees; however, insufficient evidence was presented to impose more than a censure. In Levin, legal fees in a breach of contract suit (with no fee agreement) began to outpace the maximum potential recovery of approximately $15,000. As the legal fees mounted, the client pressured the attorney to settle, and suggested dropping the claims. The attorney pressured the client to allow the case to "percolate a little longer," and offered to cap his fees at $30,000. The claims settled for approximately $10,000, which the client agreed to allow the attorney to keep as part of a global resolution of a number of claims and issues between them. The DRB found no violation of RPC 1.2(a) (Scope of Representation and Allocation of Authority Between Client and Lawyer), because the client mentioned dismissing the claims to curtail legal fees, but never expressly instructed the attorney to dismiss the claims. The DRB found no violation of RPC 1.5(a), because the attorney capped his fee at $30,000, and while $30,000 in fees for a $15,000 dispute appeared excessive, only $10,000 was collected. As to whether $10,000 in fees was excessive, the DRB noted it lacked any information regarding the hourly rate, work performed, or whether excessive time was taken on each task. The DRB found censure appropriate.
In In Re Ledingham, DRB 06-235, an attorney received a three-month suspension for concealing his fee balance until the end of the engagement, and then threatening criminal action to promote payment. In Ledingham, an attorney was retained at $175 an hour to assist in the purchase of a small franchise. Contrary to the engagement letter, he issued no monthly bills. The client repeatedly offered to make payments; however, the attorney claimed fees were only "several thousand dollars" and he preferred to take care of billing at the end of the engagement. At the conclusion of services, he billed the client $51,450 in fees, plus $1,292.57 in expenses. The client paid $15,000 and questioned the balance. The attorney began demanding payment, including calls and unannounced appearances at her business. The attorney then wrote threatening criminal prosecution for "theft of services," citing potential repercussions including losing her business, losing her personal residence, and losing her teaching license. The client filed for Fee Arbitration and the matter was referred to the Office of Attorney Ethics. Upon receipt of the Fee Arbitration notice, the attorney returned the $15,000 to the client, and forgave the balance. The DRB found the fee unreasonable in violation of RPC 1.5(a) and 8.4(c), the letter a violation of RPC 3.4(g), and imposed a three-month suspension.
Some of the cited decisions also involved other allegations unrelated to fees which may have impacted the discipline imposed. Additionally, fee overreaching has incurred more severe discipline, including disbarment. See, e.g., In re Ort, 134 N.J. 146, 159 (1993) ("We have disbarred attorneys who knowingly have misrepresented the amount and value of services provided.")
These situations can almost certainly be avoided with sufficient communication. Specifically, attorneys should always prepare written fee agreements, even when not required. Frank discussions with the client at the outset of the engagement as to potential recovery and expected fees can help set reasonable expectations. Regular invoices can keep the client informed of the billing progress. Supporting time records can justify fees in later disputes. While there is no express prohibition on encouraging a skittish client to continue litigation, attorneys should recognize they may be giving the impression they will reduce or waive their fees in the event of limited recovery. Should the client disagree, the attorney must heed the client's express direction to dismiss the litigation regardless of the impact on recovery. All settlement offers should include a discussion of how the settlement funds will be allocated prior to acceptance. Perhaps most important of all, attorneys, on notice of a dispute over funds, should never withdraw any disputed funds. The DRB routinely finds withdrawal of disputed funds to be more egregious conduct than the excessive fee. Should fee issues develop, attorneys should remember they may seek to withdraw due to "unreasonable financial burden." Pursuing fees in excess of the recovery may not only subject the attorney to ethical issues, but further, many Fee Arbitration and DRB decisions result in full disgorgement of all fees. Accordingly, as a practical matter, reducing fees to a reasonable portion of the actual recovery may permit collecting something as opposed to nothing.
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