Collecting what's due: Ethical boundaries when pursuing unpaid legal fees

Lawyers work hard for their clients. They can help with some of the biggest challenges their clients will ever know. And yet, clients sometimes do not pay the fees and costs that are due to the lawyers who counseled them and helped them navigate their problems to resolution.

In such a situation, a lawyer may not want to walk away from what is due to them. That can mean engaging in collection efforts. While that is a perfectly acceptable path to pursue, it can sometimes represent a hazard for a lawyer who is less familiar with the process and their obligations associated with it.

A prevalent issue in collection efforts is what information may be shared. The most commonly cited source for information on the subject is California Evidence Code section 958. It provides that a communication relevant to an issue of breach, by the lawyer or by the client, of a duty arising out of the lawyer-client relationship is not privileged for purposes of resolving that dispute.

Indeed, courts have confirmed that section 958 applies not just to malpractice cases, but also a lawyer's claims against their clients for unpaid fees. And this can be so even if co-clients, who have not breached their obligations to the lawyer, object to disclosure of the information.

But that does not mean that the mere existence of a dispute gives the lawyer carte blanche to share all information learned during the representation. Rather, any disclosure must be narrowly tailored to the evidence reasonably necessary to prove the lawyer's claim or to rebut the affirmative defenses the client raises.

Of note, California Lawyers Association Formal Opinion 2022-1 addressed whether financial information learned during a representation could be used for collecting an undisputed debt. Logically, the same analysis would apply to a once disputed debt that has since been resolved.

Specifically, the opinion addressed whether the lawyer could use confidential banking, asset and financial information that the lawyer received during the representation. The answer in many cases will be no.

Of course, the first step is to determine whether such information is, in fact, confidential. As cited in multiple California ethics opinions, the secrets that lawyers are charged with protecting includes information the lawyer obtains during the professional relationship, or relating to the representation, which the client has requested to be kept confidential or the disclosure of which might be embarrassing or detrimental to the client. For such information, Rules of Professional Conduct, rule 1.6 prohibits a lawyer without informed client consent from revealing what they have learned. Likewise, rule 1.9 precludes lawyers from using or disclosing a former client's confidential information to the disadvantage of the client.

Consider, for example, a matter where a lawyer learns about a client's banking and asset information, partially from the client and partially from others during a representation. Regardless of the source, the information is confidential because it was obtained because of the lawyer's representation of the client. And its disclosure to levy upon client's assets would be detrimental to client. Therefore, it would be considered a client secret within the meaning of the statutory duty of confidentiality and its use for collection efforts precluded by rule 1.9.

This same analysis would apply to information that the lawyer learned that may not have been relevant to the matter the lawyer assisted the client with. Relevancy to the representation does not change that the lawyer received it by virtue of the professional relationship with the client. So, it too would be subject to confidentiality. Indeed, as the California Lawyers Association opinion points out -- though not directly decided in California -- there may be a good argument that even the bank and checking account information that appears on checks that the client used to pay a portion of the lawyer's fees could be confidential.

Lawyers should keep in mind that once the fact and amount of the debt is determined or agreed to, there is no disputed fact that would implicate the permissive disclosure of information under Evidence Code Section 958. And even in resolving any dispute with the client, the client's financial information would, in many cases, be irrelevant to whether and how much the client owes to the lawyer.

This can pose a practical risk to using a collection agency. In general, disclosure of client information to such agencies must be the minimum necessary for the collection effort and no more. It would not, as set forth above, permit the disclosure of information regarding particular assets learned about through the representation. The collection agency would need to obtain such information independent of any assistance from the lawyer.

One other issue to consider when using a collection agency is how that contract is structured. Whereas a lawyer may be permitted to share a portion of the amount recovered with the collection agency, the lawyer may not sell or otherwise assign the account receivable to the agency. Doing so could be considered to be fee sharing with a non-lawyer.

Let's assume, however, that there is a dispute as to whether or how much the client owes the lawyer and it cannot be resolved between the two. Then what?

Before or at the filing of a lawsuit, a lawyer should provide the client with a Notice of Client's Right to Fee Arbitration form approved by the State Bar. The client then has 30 days to request the mandatory fee arbitration.

Like any other creditor, a lawyer may bring a suit to recover unpaid fees. But that does not absolve them of their ethical responsibilities. As alluded to above, Evidence Code section 958 provides that the lawyer may reveal information relating to the representation to the extent necessary to establish a claim or defense on behalf of the lawyer in the dispute with the client. As such, a lawyer entitled to a fee is permitted to prove the services rendered in an action to collect it. Indeed, it would be unfair if the client, as the beneficiary of the fiduciary relationship, could exploit the fact of the relationship to the detriment of the lawyer fiduciary.

But the fact that a client has not paid the entirety of the bills does not provide the lawyer with an opportunity to exploit that situation to embarrass the client, perhaps by raising issues unrelated to whether fees are owed. Though the Model Rules, particularly as they pertain to confidentiality, differ from California's Rules of Professional Conduct, they provide useful guidance on this point. Comment 16 to Rule 1.6(b)(5) provides that a lawyer should limit the confidential information they share with a tribunal "or other persons having a need to know it" and seek appropriate protective orders to the "fullest extent practicable." Indeed, lawyers risk discipline when they seek to leverage the ability to reveal confidential information in fee disputes. For example, the Washington Bar suspended a lawyer for six months after he threatened a client in a fee dispute that he would be forced to reveal the client's confidential information to the court.

Lawyers work hard to serve their clients and earn their fees. But the fact that the representation has concluded with the client breaching their obligation to pay does not permit the lawyer to breach their ethical obligations. There are paths forward to collecting the fees. But continuing to respect confidentiality and the process for collecting their fees is important.