Delaware Court of Chancery Defines Standard for Asserting a Retaining Lien for Unpaid Fees Over a Client’s Documents

Delaware Court of Chancery Defines Standard for Asserting a Retaining Lien for Unpaid Fees Over a Client’s Documents

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.

Background

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 for trial.

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 His law firm informed Judy that it could no longer represent him, but Judy promised to pay and renegotiated an agreement with the law firm for the payment of past due bills.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 provides that:

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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