How You Can Protect Yourself Against the Nonpaying Client: The Retaining Lien and The Charging Lien
Every lawyer deals with nonpaying clients. It’s a part of the business of law. And it’s something every firm has to confront more often than they’d like to admit—from the biggest law firms in the world down to the solo practitioner working out of his or her house. Deciding whether to pursue collection from a client who refuses to pay is often a delicate exercise, requiring the lawyer to balance the cost of pursuing collection against the amount due and the likelihood of recovery. But short of suing a former client, there are two much-simpler remedies that lawyers have under New York law to collect unpaid fees—the retaining lien and the charging lien.
The Retaining Lien
When a client has an outstanding balance with his or her former lawyer, the lawyer can assert a retaining lien over the client’s file—which allows the lawyer to refuse to turn over the file to the client or his or her new counsel until the outstanding balance is paid or otherwise secured.
A lawyer asserting a retaining lien should tell the former client that he or she is asserting a retaining lien, and it’s also a good idea to explain to the former client what this means. But there is nothing the lawyer has to file to “perfect” the retaining lien.
To lift the retaining the lien, the former client must either pay the amount owed to the lawyer or post a bond for this amount. See Concrete Flotation Sys., Inc. v. Tadco Const. Corp., 2009 WL 1209141, at *1 (E.D.N.Y. May 2, 2009) (lawyer not require to produce papers over which he asserted a retaining lien “without a resolution of the fee dispute or the posting of an adequate bond”). Some courts may also allow the former client to put the amount owed in an escrow account maintained by a reputable escrow agent. But regardless of how the amount owed is secured, the idea is that the retaining lien acts as security for the amount owed to the lawyer, so if the amount owed is secured in another way—like the posting of a bond—there is no need for the retaining lien.
A court may also vacate a retaining lien if the former client can show that the lien is causing extreme hardship or other extraordinary circumstances. But this is usually limited to instances in which the former client shows that he or she cannot pay what is owed to the lawyer and will be prejudiced if the file isn’t turned over.
Assuming the client pays what is owed or otherwise secures this amount, there may still be a dispute over what the lawyer must turn over to the former client as part of the client’s “file.” Documents filed or produced in the former client’s case are clearly part of the “file.” But a former client is not entitled to “‘documents intended for internal law office review and use,’” such as “internal conversations among law firm partners” (In re Refco Sec. Litig., 759 F. Supp. 2d 342, 346 (S.D.N.Y. 2011) (quoting Sage Realty Corp. v. Proskauer Rose Goetz & Mendelsohn LLP, 91 N.Y.2d 30 (1997))), or “attorney notes, internal research memoranda, and research outline[s]” (Lippe v. Bairnco Corp., 1998 WL 901741, at *2 (S.D.N.Y. 1998)). And if the lawyer’s “file” does not include e-mails or other documents that the lawyer would have to spend time searching for and compiling to give to the former client, then the lawyer may insist on getting paid for his or her time in preparing these materials—as long as the lawyer’s filing system was reasonable. See NYCBA Ethics Opinion 2008-1 (firm may charge former client for “retrieving electronic documents from their storage media and reviewing those documents to determine client’s right of access”); Sage Realty, 91 N.Y.2d at 38 (assembling and delivering file to client is “properly chargeable to the client under customary fee schedules of the firm”).
The Charging Lien
While the retaining lien is a creature of the common law, the charging lien is provided for by Judiciary Law section 475, which states that “from the commencement of an action,” the lawyer who “appears for a party has a lien upon his or her client’s cause of action,” which attaches to a verdict, settlement, judgment, or final order in his or her client’s favor. This section gives the lawyer a lien on the proceeds of the former client’s case to the extent of the amount owed to the lawyer, so no proceeds can be distributed to the former client or his or her new counsel until the former lawyer is paid.
Like the retaining lien, the lawyer doesn’t need to file anything to “perfect” the charging lien, though the lawyer should make sure that the former client’s new counsel, adversaries in the case in which the lawyer represented the former client, and the court know that the lawyer is asserting a charging lien.
The New York Court of Appeals has held that the charging lien “does not merely give an attorney an enforceable right against the property of another,” but instead “gives the attorney an equitable ownership interest in the client’s cause of action.” LMWT Realty Corp. v. Davis Agency Inc., 85 N.Y.2d 462, 467 (1995). And so the charging lien maintains priority over other creditors’ claims when those other claims are “merely a general indebtedness asserted against the client.” Id. at 486. This is important if a former client has other creditors, some of whom may have judgments, who are looking to recover from the same pot of proceeds. In this instance, the charging lien will have priority over these other creditors’ claims, even if they arose before the charging lien. Beadwear, Inc. v. Media Brands, LLC, 2001 WL 1622207, at *1 (S.D.N.Y. Dec. 18, 2001) (charging lien “takes priority over other claims against the funds, including the claims of judgment creditors”).
There may also be a dispute over what property is subject to a charging lien, especially if the litigation involved a dispute over specific property, rather than money damages. But courts generally apply the charging lien broadly, and hold that it attaches to any property the lawyer’s efforts helped the former client get—even if that property changed form or previously existed. See Tunick v. Shaw, 45 A.D.3d 145, 148-49 (1st Dep’t 2007) (“‘the general rule is that a lien upon property attaches to whatever the property is converted into and is not destroyed by changing the nature of the subject . . . [i]t follows its subject and cannot be shaken off by a change of form or substance,’” and “‘[i]t clings to any property or money into which the subject can be traced’”) (alteration in original) (citation omitted); Coleman v. The Roth Law Firm, PLLC, 2014 WL 338823, at *7 (Sup. Ct. N.Y. Cty. Jan. 22, 2014) (Kornreich, J.) (charging lien upheld when firm successfully brought declaratory judgment action for “retrieval of [plaintiff’s] property”; court rejected argument that lawyer did not create “identifiable fund” to which lien attached because property retrieved already belonged to plaintiff—holding instead that the “simple maintenance of possession” (which does not give rise to a charging lien) is “distinguishable from the reclamation of possession” (which does)).
Of course, the charging lien is effective only when the former client has a claim against someone else in a litigation, and is thus not effective to secure payment from a former client in a non-litigation matter or when the former client is a defendant in a litigation with no chance of affirmative recovery.