One previously unanswered question in Delaware, one I have seen come up before, is whether a lawyer may retain a client’s papers as security for payment of an overdue legal bill. In the U.S. such a procedure is recognized generally but countered by the equally well-recognized ethical obligations of attorneys to their former clients. The clash of these principles has reached varying resolutions in different US jurisdictions. In a case of first impression, the Court of Chancery recently held that a lawyer may assert such a lien subject to a multi-factor balancing test governing whether and how to do so.
In Judy v. Preferred Communications Systems, Inc., available here, plaintiff fell behind on his legal bills to his original counsel to the tune of hundreds of thousands of dollars. Plaintiff ultimately retained new counsel then demanded the old firm forward his legal papers.
The Court quoted at length Informal ABA Committee Opinion No. 1461. This Opinion sets out several factors which have been used by other courts adjudicating this issue. These factors included:
- Financial situation of the client
- Sophistication of the client in dealing with lawyers
- Whether the client clearly understood and agreed to pay the amount now owing
- Whether the retaining lien would prejudice important rights or interests of the client or other parties
- Whether there are less stringent ways to resolve the matter
- Whether there was agreement on amount or method of calculating a fee
Applying the factors to the case, the Court concluded that a retaining lien was appropriate, because among other reasons plaintiff was sophisticated, clearly understood and agreed to the fee owed, and did not assert it was in financial difficulty.
The Court indicated it would take into account the financial situation of counsel as well as client.
The Court noted that the client is commonly required to post security while client and counsel resolve their dispute, form and amount of security dependent on the circumstances (e.g. less if the client is impecunious). The court approved counsel’s “responsible” request for 70% security, but indicated that it otherwise would have approved 100% or close to it.
The Court rejected a more stringent factor asking whether the lien was necessary to prevent fraud or gross imposition. It reasoned that such a factor ignores the financial issues nonpayment of fees can present to the lawyer. And it emphasized that it was deciding counsel’s legal ability to assert the lien and not whether doing so was ethical, citing the Delaware Supreme Court decision In re Infotechnology restraining parties in certain cases from using allegations of ethical violations in Delaware civil litigation.
Thus after Judy Delaware counsel now have a caselaw foundation for asserting retaining liens as well as guidance to understanding how courts will consider and handle this issue.
Filed under: Court of Chancery, Delaware Supreme Court
Delaware Corporate Law Update 