This opinion addresses a matter of great interest to most
readers, and an issue of first impression by a Delaware court: The right of a
lawyer to retain the file of a client who has not paid her bill.
In Judy v. Preferred Communications Systems, Inc., C.A.
No. 4662-VCL (Del. Ch. Aug. 19, 2011) (opinion available here), the Court of Chancery addressed the following
issue: Whether an attorney may assert a retaining lien over a former (or
delinquent) client's documents without violating the Delaware Lawyers' Rules of
Professional Conduct, and other ethical obligations important to the practice
of law. A retaining lien is an attorney's equivalent of a mechanic's lien
or an artisan's lien-it is the right of an attorney to retain possession of his
client's property acquired in the course of rendering professional services, to
secure payment for services rendered.
Jill Agro of Eckert Seamans prepared this summary.
Plaintiff Michael Judy retained a Delaware law firm to
pursue claims against Preferred Communications Systems, Inc. ("PCSI").
Approximately one year later, Judy had fallen behind on his payments to the law
firm, which had been litigating vigorously on his behalf. With a trial
scheduled to begin soon, the law firm asked Judy to execute a new engagement
agreement to ensure that past due bills would be paid and future invoices would
be paid in a timely fashion. Judy signed the new agreement, and the firm
proceeded diligently with discovery to secure documents that would be necessary
PCSI produced documents in response to the discovery
requests close to the trial date, so the parties requested a continuance.
Within a few months, Judy fell behind on his payments again. His law firm
informed Judy that it could no longer represent him, but Judy promised to pay
and renegotiated an agreement with the law firm for the payment of past due
bills. Two months later, Judy had reneged on the deal. The law firm moved to
withdraw and the Court granted the motion.
With his trial date looming, Judy hired new counsel and
issued a subpoena to the original law firm for the documents they had received
during discovery. The law firm objected to the subpoena and asserted a
retaining lien over the documents that Judy was seeking. Judy then filed a
motion to enforce the subpoena and a motion to compel the production of
documents. The law firm objected to both, citing its retaining lien. The
value attributed to a retaining lien is subjective. The actual documents held
by the law firm had no real value to the firm, but they were necessary for Judy
to effectively litigate his claims against PCSI.
The Court's Analysis
The issue was whether the law firm could withhold
documents that were necessary for the effective administration of justice, and
necessary to protect the interests of a former client-and at the same time
still comply with the ethical obligations imposed by Delaware law. No Delaware
decision previously reconciled the competing concerns of legal ethics and
the economics of receiving payment for work done. Specifically, Judy
questioned whether the law firm could withhold the documents and simultaneously
comply with Delaware Lawyers' Rule of Professional Conduct 1.16(d), which
Upon termination of representation, a lawyer shall take
steps to the extent reasonably practicable to protect a client's interests,
such as . . . surrendering papers and property to which the client is entitled
and refunding any advance payment of fee or expense that has not been earned or
incurred. The lawyer may retain papers relating to the client to the extent
permitted by other law.
First, the Court determined that Delaware law permits
retaining liens based on the Lawyers' Rules of Professional Conduct
and prior Delaware case law, both of which acknowledge the right of retainer
liens, but neither of which provided guidance on the topic. Case law from other
jurisdictions was persuasive, particularly those decisions that balanced the
factors considered in the analysis that courts apply when a lawyer sues a
client for non-payment.
The Court refined the factors used by courts in other
states, and tailored a test to determine whether a retaining lien is
appropriate: The court should consider "the competing interests of the
attorney, the client, and the judicial system, determine whether the lien
should be enforced in whole or part, and evaluate whether the partial or
complete release of the lien should be conditioned on the client providing
alternate security." Six factors followed from the old seven-factor "fraud or
gross imposition" standard, including:
(1) the financial situations of both client and counsel;
(2) the sophistication of the client;
(3) the reasonableness of the disputed fee;
(4) whether the client clearly understood and agreed to
pay the amount owed;
(5) whether the imposition of the retaining lien would
prejudice important rights or interests of the client or other parties; and
(6) whether the posting of a security can protect
adequately the attorney's pecuniary interest and, if so, what form and amount
of security is warranted.
Neither the law firm nor Judy had any financial difficulties,
and the Court noted that Judy was savvy enough to renegotiate his legal bills
and hire multiple law firms. Judy plainly agreed to pay the costs of litigation
when he signed the original engagement letter and two supplemental agreements
with the law firm. While the lien was an imposition to Judy, the purpose of a
retaining lien is to impose on the client, and the Court found that the
inconvenience caused by the lien wasn't disproportionate or unfair. With regard
to the security, the Court suggested that it would have requested security for
the entire unpaid balance of the invoices, but the law firm "responsibly"
requested only 70%; so the Court required only that amount. That is, if the
client provided security in the amount of 70% of the fees due, then the files
would be returned. The Court explicitly declined to consider a seventh factor,
which asks whether failing to impose a lien would result in fraud or gross
imposition by the client.
This ruling provides Delaware attorneys with a clear
and principled approach to help them collect hard-earned fees from clients who
do not pay their bills.
Read more Delaware business
litigation case summaries and commentary on Delaware
Corporate and Commercial Litigation Blog, a blog hosted by Francis G.X.
Pileggi, of Eckert Seamans.
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