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How to Lose Your Legal Fee, Part 3: Fee Disputes with Clients in Federal Court

April 18, 2017 • Current Issue

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By Ronald C. Minkoff

More than a year ago, we embarked on a three-part series on “How to Lose Your Legal Fees.” Part 1, in our February 2016 edition, examined excessive fees, and Part 2, in our July 2016 edition, focused on legal fee forfeiture. In this issue, we move to Part 3, concerning how to prosecute legal fee claims against clients in New York federal courts. We will concentrate on how a withdrawing lawyer in a federal court proceeding may protect his or her contractual rights to fees. While generally protective of lawyers, the case law in this area is often confusing and contradictory, requiring the lawyer to proceed with caution. This article will not address statutory fee claims.

 

The Basic Principles

First, a few basic principles, equally applicable to fee disputes in federal court and New York state court. Lawyers are entitled to fees only when they are discharged without cause; if they are discharged with cause — because they violated the New York Rules of Professional Conduct (RPCs) or committed other misconduct — their right to fees is forfeited. See, e.g., Teichner by Teichner v. W & J Holsteins, Inc., 64 N.Y.2d 977, 979 (1985) (if the lawyer can show that he or she has been “discharge[d] without cause before the completion of services, then the amount of the attorney’s compensation must be determined on a quantum meruit basis”) (emphasis added).

Lawyers discharged without cause have three remedies available to them (Three Remedies): (1) a common law retaining lien, which allows the lawyer “to keep, with certain exceptions, all of the papers, documents and other personal property of the client which have come into the lawyer’s possession” until his fee has “been paid or secured” [see, e.g., Universal Acupuncture Pain Servs., P.C. v. Quadrino & Schwartz, P.C., 370 F.3d 259, 262 n.3 (2d Cir. 2004) (Univ. Acupuncture) (citation omitted); Kariman v. Time Equities, Inc., 2011 WL 1900092 at *6 (S.D.N.Y. May 11, 2011) (citation omitted)]; (2) a statutory charging lien under N.Y. Jud. Law §475, which affords the “attorney of record” the right to have outstanding fees paid from the proceeds of any judgment or settlement, “in whatever hands [those proceeds eventually] may come” [see, e.g., Itar-Tass Russian News Agency v. Russian Kurier, Inc., 140 F.3d 442, 448–49 (2d Cir. 1998) (Itar-Tass); Bretillot v. Burrow, 2015 WL 5306224 at *4–7 (S.D.N.Y. June 30, 2015) (Bretillot)]; and (3) a plenary lawsuit for fees based on quantum meruit (because a discharged lawyer may not sue on the original fee contract) that “can be exercised by the attorney against all the former clients’ assets’ — not merely against the recovery obtained from a defendant.” Ocean World Lines v. Atlant (USA) Inc., 2008 WL 1776415 at *2 (S.D.N.Y. Apr. 17, 2008). An attorney entitled to a judgment in quantum meruit is to be paid “the reasonable value of the services rendered,” as determined by the court or jury based on a number of factors. See, Bretillot, 2015 WL 63062224 at *13 n.1 (listing factors).

Importantly, these Three Remedies are cumulative: A discharged lawyer does not have to choose one or another, but can invoke as many as apply. Id. at *12 (citing cases); Moody v. Sorkina, 50 A.D.2d 1522, 1523-24 (4th Dept. 2008) (“[T]he remedies available … to recover the value of [a lawyer’s] legal services are cumulative rather than exclusive.”). This gives the lawyer a formidable array of weapons against a recalcitrant client. But how does a dispute like this play out in the real world?

 

The Motion to Withdraw

It starts with the lawyer seeking to withdraw. This can be because the client discharged the lawyer [see RPC 1.16(b)(3) and (d) (discharge by client results in mandatory withdrawal, subject to court’s permission)] or, more often, because the lawyer wants out due to disaffection or disagreement with the client. The grounds for withdrawal, some mandatory and some discretionary, all set forth in RPCs 1.16(b) and (c) respectively, can provide fodder for an article of their own. See R. Simon & N. Hyland, Simon’s New York Rules of Professional Conduct (2016 ed.) 938–65 (Thomson Reuters 2016). For our purposes, suffice it to say that for a litigation matter the lawyer needs to present the grounds to the Court by motion, often using various euphemisms (“professional considerations”) or devices (redactions, sealing) to protect confidentiality. See id. at 946–48. The motion to withdraw is brought in the Southern and Eastern Districts of New York under the deceptively simple Civil Local Rule 1.4 (Local Rule 1.4), which reads:

An attorney who has appeared as attorney of record for a party may be relieved or displaced only by order of the Court and may not withdraw from a case without leave of the Court granted by order. Such an order may be granted only upon a showing by affidavit or otherwise of satisfactory reasons for withdrawal or displacement and the posture of the case, including its position, if any, on the calendar, and whether the attorney is asserting a retaining or charging lien. All applications to withdraw must be served upon the client and (unless excused by the Court) upon all other parties. (Emphasis added).

 

Though Local Rule 1.4 does not say it, our experience shows that usually the District Court will require this motion to be brought by Order to Show Cause, to ensure the client and other relevant parties are informed, and that a properly redacted format is used. The District Court will also usually rule on the application to withdraw quickly, so as not to hold up the case and prejudice the other parties.

 

Inherent Authority & Supplemental Jurisdiction — Traditional Views

When the client owes the outgoing lawyer fees, the landscape alters: The motion to withdraw is coupled with an application for one or more of the Three Remedies. Until the mid-1990s, federal courts in New York took inconsistent positions as to whether they even had the authority to impose these Remedies. This was because the Second Circuit itself provided unclear guidance. On the one hand, in Natl. Equipment Rental Ltd. v. Mercury Typesetting Co., 323 F.2d 784, 786 (2d Cir. 1963), the Court upheld a District Court’s decision to condition a lawyer’s withdrawal on “the client’s either paying the attorney or posting security for the attorney’s reasonable fees and disbursements, as these may be determined,” citing cases going back to 1921. “This power,” the Court explained, “resides in the federal court as ancillary to its conduct of the litigation,” as it “relat[es] to the protection of the court’s own officers … .” Id. at 786 and n.1. Under this view, the withdrawal itself became yet another cudgel to use against the client to force fee payment: If the client did not pay, the client could not get a new lawyer or move the case forward.

On the other hand, while giving lip service to Natl. Equipment Rental, the Second Circuit and lower courts subsequently made clear that this so-called “ancillary jurisdiction” is discretionary, not mandatory. “It is well settled that ‘[a] federal court may, in its discretion, exercise ancillary jurisdiction to hear fee disputes … between litigants and their attorneys when the dispute relates to the main action … .’” Petition of Rosenman Colin Freund Lewis & Cohen, 600 F. Supp. 527, 531 (S.D.N.Y. 1984) (emphasis added) (citation omitted); see also Cluett, Peabody & Co., Inc. v. CPC Acquisition Co., 863 F.2d 251, 256–57 (2d Cir. 1987) (citing discretionary factors). The factors used were similar to those applied for so-called pendant jurisdiction — jurisdiction over related state law claims in federal question cases — under United Mine Workers v. Gibbs, 383 U.S. 715, 726 (1966). That case emphasized that “pendant jurisdiction is a doctrine of discretion, not of plaintiffs’ right,” and requires the District Court to “consider and weigh … the values of judicial economy, convenience, fairness and comity” in determining whether to hear the case.

 

The Itar-Tass Decision — a Turning Point?

While the District Courts in Rosenman and Cluett, among other cases, took on the ancillary fee disputes before them, many others used the Gibbs factors to decline, citing, among other things, the delay and distraction that would result, the risk of prejudice to the client from the disclosure of privileged material (permitted in fee disputes under RPC 1.6(b)(5) and its predecessor), and the availability of state courts to hear these disputes. The Second Circuit attempted to put a stop to this in Itar-Tass, 140 F.3d at 442, where the District Court had done exactly that. There, in a non-jury copyright litigation, the plaintiffs’ attorney and expert sought to withdraw in the latter stages of the case, and also to have the Court determine their contractual fee claims and fix the statutory charging lien. They cited 28 U.S.C. §1367, the supplemental jurisdiction statute which had been passed since Cluett and Natl. Equipment Rental had been decided. Id. at 444. The motions to withdraw were unopposed, and the lawyer was permitted to leave. Id. The District Court, however, invoked the Gibbs factors to refuse to exercise supplemental jurisdiction over the lawyer’s fee disputes, claiming those disputes were “‘entirely separate from the underlying action’” and adjudicating them “‘would not serve the interests of judicial economy.’” Id. at 445.

The Second Circuit disagreed. It held that whether to adjudicate a fee dispute between a litigant and an outgoing attorney now depended solely on 28 U.S.C. §1367. Id. The relevant portion of that statute [28 U.S.C. §1367(d) (Section 1367(d))], said the Court, allows a trial judge to decline supplemental jurisdiction only when: “(1) the case raises a novel or complex issue of state law; (2) the claim substantially predominates over the claim or claims over which the district court has original jurisdiction; (3) the district court has dismissed all claims over which it has original jurisdiction; and (4) in exceptional circumstances there are other compelling reasons for declining jurisdiction.” The Court held that the statute had “altered the Gibbs analysis,” and that even the catch-all provision of Section 1367(d)(4) was limited: “declining jurisdiction outside the ambit of [Section] 1367(c)(1)–(3) appears as the exception rather than the rule. Thus, federal courts ‘must ensure that the reasons identified as “compelling” are not deployed in circumstances threatening this principle.’” Id. at 448, citing Executive Software N. Am., Inc. v. U.S. District Court, 24 F.3d 1545, 1558 (9th Cir. 1994).

 

Will a Federal Court Hear Your Plenary Fee Claim?

One would think Itar-Tass would have made things simple: District Courts in the Second Circuit generally cannot decline supplemental jurisdiction over fee disputes, especially when the underlying case has not been dismissed. As far as retaining and charging liens at least this appears to be true. We have found no case since Itar-Tass where a court has refused to exercise jurisdiction over a lien claim in a pending case, and many where those claims have been determined. See, e.g., Jos. Brenner Assocs., Inc. v. Starmaker Entertainment, Inc., 82 F.3d 55, 59 (2d Cir. 1996) (granting a retaining lien); Hampshire Grp., Ltd.. v. Scott James Co., L.L.C., 2015 WL 5306232 at *5–8 (S.D.N.Y. July 27, 2015) (granting retaining lien and denying charging lien); Bretillot, 2015 WL 5306224 at *4–7 (ruling on lien claims).

Plenary fee claims, however, have been a different story, particularly where a trial court tries to circumvent Section 1367(d) by invoking the court’s ancillary authority under Natl. Equipment Rental to either prevent withdrawal or stay further proceedings until the legal fees are paid.

There is one unpublished Second Circuit decision, Silva Run Worldwide Ltd. v. Galaxiworld.com Ltd., 2 F. App’x 78 (2d Cir. 2001), which relies on Natl. Equipment Rental to prohibit a client from proceeding on its cross-claims and counterclaims until it satisfied a $10,000 fee judgment in favor of the party’s outgoing lawyers. Id. at 80. But generally, this form of judicial strong-arming has fallen into disfavor, as has Natl. Equipment Rental. As early as 1985, the Second Circuit clarified that in Natl. Equipment Rental “we stated that the ‘district court may condition the substitution’ of counsel on the payment of fees. Nowhere did we say that the district court must condition the substitution on the payment of fees.” Pay Television of Greater New York, Inc. v. Sheridan, 766 F.2d 92, 94 (2d Cir. 1985) (emphasis added in original), citing Natl. Equipment Rental, 323 F.2d at 786. Other courts proved reluctant to expand on Natl. Equipment Rental. See, e.g., Carter v. Helmsley-Spear, Inc., 1995 WL 347367 at *2 (S.D.N.Y. June 7, 1995) (refusing withdrawing lawyer’s request that co-counsel be precluded from litigating underlying case during pendency of fee dispute); Rosenman & Colin, 674 F. Supp. at 1987 (refusing to delay withdrawal until legal fee claim satisfied).

More recently, the use of such “drastic” “creative remedial efforts” to help lawyers in fee disputes came under withering attack from Magistrate Judge Dolinger. Hampshire, 2015 WL 5306232 at *12. Holding that lawyers were limited to the Three Remedies to obtain their fees, the court rejected a lawyer’s attempt to condition dismissal of a settled case on the payment of the lawyer’s fees. Id. at *10–14. In addition to the fact that the lawyer had two of the Three Remedies (a retaining lien, and a plenary fee claim) available to him, Judge Dolinger called the proposed remedy “an extraordinary step” that would hold the closing of the case “hostage to the defendant’s willingness to compensate his attorney” — something that would be both unfair to the settling plaintiff and inconsistent with “the court’s ability to efficiently manage its cases.” Id. at *13.

This is all as it should be. By seeking to stay in a case until her fee claim is resolved, the lawyer not only slows down the court system and prejudices other parties, but puts herself at risk. She violates her ethical obligation under RPC 1.16(e) to “take steps, to the extent reasonably practicable, to avoid foreseeable prejudice to the rights of the client” upon withdrawal. She also creates liability risks for her firm, as she remains responsible for the case even though she has a hostile client who is not paying her, while preventing that client from moving the case forward with another lawyer.

While the type of remedies in Natl. Equipment Rental may have fallen out of favor, the exercise of discretion in determining whether to take on a withdrawing lawyer’s plenary fee dispute remains. See, e.g., Levitt v. Brooks, 669 F.3d 100, 103–04 (2d Cir. 2012) (granting ancillary jurisdiction over a fee dispute arising out of criminal case); Jos. Brenner & Assocs., 82 F.3d at 58. These courts have cited several “non-exhaustive factors” to determine whether to exercise “ancillary jurisdiction,” including “familiarity with the subject-matter of the suit [and] the amount and quality of the work performed by the attorneys,” “the convenience of the parties,” and “judicial economy.” Levitt, 669 F.3d at 104.

But what of Itar-Tass, which supposedly eliminated these discretionary factors in favor of the limited exceptions of Section 1367(d)? Why are courts mentioning ancillary jurisdiction at all, rather than supplemental jurisdiction? Time and again in recent years, District Courts have invoked discretionary factors to refuse to decide plenary fee claim in civil cases, even after deciding related retaining and charging lien claims, without squaring their reasoning with Itar-Tass. See, e.g., Bretillot, 2015 WL 5306224 at *22 (declining to exercise jurisdiction where contested issues of fact and court had minimal familiarity with attorneys; court decided lien claims); Springut Law P.C. v. Rates Technology, Inc., 2014 WL 2751031 at *2–3 (lack of familiarity with case); Guallpa v. NY Pro Signs, Inc., 2012 WL 1197178 at *1 (S.D.N.Y. Apr. 5, 2012) (court not familiar with attorney, who had done little work on the case).

In short, local federal courts can still find ways to avoid deciding plenary fee claims, regardless of Itar-Tass. Particularly where the lawyer cannot rely on a retaining or charging lien, the consequences for the outgoing lawyer can be tough. Instead of a streamlined process in federal court with a judge familiar with the underlying case, the lawyer must start from the beginning in state court, with all the attendant delays.

 

Deciding a Plenary Fee Claim

This, of course, does not mean that federal courts in New York generally refuse to decide fee disputes arising out of civil cases. The opposite is true. e.g., Univ. Acupuncture, 370 F.3d at 263–65 (deciding fee issue); Hampshire, 2015 WL 5306232 at *14–18 (same), Often, however, the lawyer encounters a timing problem. Although the lawyer is entitled under New York law to have the fee determined on a quantum meruit basis immediately upon withdrawal [see, e.g., Cohen v. Grainger, Tesoriero & Bell, 81 N.Y.2d 655, 658 (1993)], the Second Circuit has held that a district court does not “abuse[] its discretion by postponing the determination of the fair and reasonable value of an attorney’s services either in order to avoid unnecessary delay in the underlying litigation, or if, under the particular circumstances of the case, a more accurate determination can be made later.” Univ. Acupuncture, 370 F.3d at 264. This puts the outgoing attorney at the mercy of the new attorney, whose strategic errors can make a perfectly good case worth much less.

There is one final but very important point: Who decides the plenary fee claim? From Natl. Equipment Rental on, the cases show that often the District Court judge decides the legal fee claim on the motion papers. See, e.g., Levitt, 669 F.3d at 100; Univ. Acupuncture, 370 F.3d at 262; Natl. Equip. Rental, 323 F.2d at 786; Hampshire, 2015 WL 5306232 at *14–17. But it is important to remember that the claim for quantum meruit is a plenary action. “The characterization of this outlet as a ‘plenary action’ is not some off-handed label. Such claims are most often brought not as ancillary proceedings, but as separate actions. … A lawsuit in quantum meruit obviously requires all the judicial rigor and procedural attention given to other litigations.” Bretillot, 2015 WL 5306224 at *20 (citing cases) (emphasis in original). Because a quantum meruit claim is an action at law, both lawyer and client are entitled to a jury trial. See, e.g., Ogletree, Deakins, Nash, Smoak & Stewart, P.C., 243 A.D.2d 877, 879 (3d Dept. 1997) (“Plaintiff’s quantum meruit action is essentially an action at law, inasmuch as it seeks money damages in the nature of a breach of contract”); Gooden v. Turman, 222 A.D.2d 163, 168 (1st Dept. 1996) (quantum meruit claims seeking only money damages “are quasi-contractual in nature and would, also have been actions at law,” requiring jury trial); see also Cluett, 863 F.2d at 254 (upholding jury verdict on fee claim from withdrawing lawyer). Along with this goes the full panoply of discovery and dispositive motions. Bretillot, 2015 WL 5306224 at *20. Faced with the possibility of a whole separate fee lawsuit arising out of original case — giving the district judge two cases for the price of one — it is easy to understand why a judge would try to find ways to avoid or postpone these disputes.

 

Conclusion

For lawyers, the confusing and sometimes contradictory case law we have discussed teaches some important lessons:

1. Remember there are three remedies available. A lawyer discharged in the middle of the case who is owed fees by a client has three remedies under New York law: the retaining lien, the charging lien and a plenary suit for fees. These remedies are cumulative: more than one can be invoked simultaneously if the circumstances warrant.

2. Make clear which remedy you want. When the lawyer moves to withdraw, Local Rule 1.4 requires the lawyer to specify if a retaining or charging lien is sought. The lawyer should also specify whether he is asserting a plenary fee claim.

3. Don’t try to hang around. Lawyers should not seek to have their withdrawal, or the continuation of the case, conditioned on payment of their fees. Doing so raises ethical and risk management concerns for the attorney and the firm, and Natl. Equipment Rental remains dubious and limited authority.

4. Try to keep the case in federal court. Unless a lawyer has committed misconduct (or the judge thinks the lawyer has), it is almost always to the lawyer’s advantage to keep a fee dispute in federal court, where the judge knows the lawyer’s contribution and it will be resolved faster.

5. Don’t be afraid to invoke Itar-Tass: Judges remain reluctant to hear plenary fee disputes between clients and outgoing lawyers. Remember to invoke Itar-Tass early and often to prevent the judge from citing improper discretionary factors to avoid ancillary or supplemental jurisdiction.

 

Fee disputes are unpleasant for clients and their lawyers. Such disputes become thornier when lawyers do not recognize the consequences of the various options. With knowledge lawyers are better prepared to resolve disputes, minimizing the burden and difficulty for all involved.

 


Ronald C. Minkoff is the Chair of the Legal Ethics and Professional Responsibility Group at Frankfurt Kurnit Klein & Selz, P.C. and co-Managing Editor of the New York Legal Ethics Reporter.

 

DISCLAIMER: This article provides general coverage of its subject area and is presented to the reader for informational purposes only with the understanding that the laws governing legal ethics and professional responsibility are always changing. The information in this article is not a substitute for legal advice and may not be suitable in a particular situation. Consult your attorney for legal advice. New York Legal Ethics Reporter provides this article with the understanding that neither New York Legal Ethics Reporter LLC, nor Frankfurt Kurnit Klein & Selz, nor Hofstra University, nor their representatives, nor any of the authors are engaged herein in rendering legal advice. New York Legal Ethics Reporter LLC, Frankfurt Kurnit Klein & Selz, Hofstra University, their representatives, and the authors shall not be liable for any damages resulting from any error, inaccuracy, or omission.

 

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