Comments on: An Interesting Technique for Getting Legal Fees Paid: Shouldn’t Lawyers Be Better Than Mobsters?

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By: Ellen Freedman

Ellen Freedman — Tue, 16 Dec 2008 17:22:20 +0000

I appreciate the comments offered by Carolyn on what is one of my favorite blogs. I’m compelled to comment because Carolyn’s post is based upon an article written NOT by me, but about a session I presented for the Illinois State Bar. It also references one of my blog posts (“Revenge Is Less Sweet” which was updated a day later with different and clarifying information.
As it turns out, it is NOT improper for a law firm to file a 1099-C. While it is REQUIRED that this form be filed by financial institutions and others when writing off defaulted debt, it is totally legal and appropriate, according to an IRS service letter, for other entities to voluntarily file a 1099-C for unpaid debt. So the lawyer does not violate any rules whatsoever by doing so.
I don’t disagree with Carolyn that every effort should be made, from initial engagement letter or agreement, through on-going communications with the client, to be sure the client 1) knows payment terms and 2) has every opportunity to express any dissatisfaction with the service or amount of the bill. That was a big part of the seminar content upon which the article was based.
I DO disagree with the concept of suing the client in most cases. The prevalence of malpractice countersuits which arise (estimated at 30 – 40% by most insurers) just makes the risk/reward ratio too high in most cases. And I don’t think it helps or hurts to use an outside firm to handle the suit, other than they may be more adept at this area of practice.
So let’s assume that the client is NOT unhappy, and has had more than ample time to air any grievance. There are, unfortunately, too many clients who just do not pay. Sometimes, maybe more often than we think, because they know most lawyers will not sue out of fear of a retaliatory countersuit.
If the amount in question is far above your deductible, and if an independent set of eyes examines the file and advises you have crossed your t’s and dotted your i’s, and if a fee dispute committee is not available in your area or a suitable solution, then you should probably sue if you can. (Some LPL policies actually prohibit suit for fees.) But other factors, like your firm’s claims history and whether you are a “desirable” insured or practice in “hot, undesirable” areas based on the underwriter’s perspective, will also impact whether or not you should take the risk and sue.
I do not and did not advocate sitting quietly until the statute runs out and then surprising the client with a 1099. But during the period the statute runs, the smart lawyer is making continual contact trying to offer the client every opportunity to express what holds them back from payment, and work out a suitable compromise. If that does not happen, and the prospect of suing is not the deemed appropriate action, I think it is better to give the client one last chance, e.g. warn them that since all other efforts have not achieved the results, your remaining option will be a write-off and issuance of 1099-C.
Not only is it an emotional psychic reward for the lawyer to finally do SOMETHING, (yes, revenge is an appropriate word), but sometimes it actually prompts the client to pay, when all else has failed.

By: Christopher McKinney

Christopher McKinney — Mon, 08 Dec 2008 09:50:40 +0000

Whether or not it would be illegal to file the improper tax form, a lawyer should not do it. Lawyers are not held in high regard these days and it is exactly this kind of stunt that leads to the profession’s bad reputation.
If lawyers wish to be seen as ethical professionals (which most of them are) then they must act like it. If you have a billing dispute with a client then handle it in a straight forward professional manner. If a lawyer doesn’t wish to proceed with normal collection procedures or use one of the Bar’s dispute resolution programs for such a billing, then there is likely a problem with the bill to begin with.

By: LaToya

LaToya — Sun, 07 Dec 2008 21:01:08 +0000

Okay. 1099-C cannot be sent to a client. I stand corrected on that fact, but the law firm can still write the loss off as a business bad debt, and if later collected report it as income in the year collected or amend the tax return.

By: Eric Cooperstein

Eric Cooperstein — Sun, 07 Dec 2008 18:22:48 +0000

Knowingly sending someone a tax form that was improperly completed as a way of compelling them to pay a debt could violate several ethics rules, including ABA Model Rule 3.1 (frivolous claims), 4.1 (false statements), 4.4 (violating the legal rights of others), 8.4(c) (general dishonest conduct), and 8.4(d) (conduct prejudicial to the administration of justice).
Not only that, a former client who receives a hostile (and deceptive) letter is just the type of client who would be likely to file an ethics complaint. Seems like a poor fee collection strategy all around.

By: LaToya

LaToya — Sun, 07 Dec 2008 12:43:51 +0000

I don’t think that it is unethical to write the debt off and send the client a 1099 for the forgiven debt. You don’t even need to wait until the malpractice sol passes. If the debt is uncollectible then it is proper to charge it off as bad debt and report it to the IRS. If it is later collected, then the attorney can report the income in the following year.