Bank Blog – Part 2

Have you been sued by Wells Fargo Bank? Was it represented by a law firm called Spiwak & Iezza in Thousand Oaks, CA? We are gathering information about collection cases filed by the big banks and would appreciate any helpful responses. We are also continuing to collect data about American Express and the law firm of Lena Michael & Associates in Thousand Oaks. Michael’s firm also does business as American Recovery Service Incorporated, or “ARSI.” For some reason, these debt collectors like to keep their offices in Thousand Oaks, probably because the rent is a lot cheaper there than in the big city. We thank you in advance for your contribution to the cause.

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Bank Blog – Part 1

Have you been sued by American Express? Was it represented by a law firm called Michael & Associates in Thousand Oaks, CA? I am looking for information on this subject for a pending case. Thanks!

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Hybrid Flat-Fee and Contingency Fee

Another interesting way to pay for a high-value fraud case (or any other kind of plaintiff’s business case, for that matter) is by means of a hybrid flat-fee and contingency fee.

In the previous post, we talked about why a pure contingency fee is not often the best way to compensate or motivate a business lawyer except in highly unusual cases.  A hybrid of the flat fee and the contingency fee provides some money upfront to the lawyer, while at the same time limiting the client’s risk to the amount paid for the flat fee.

Let’s look at a specific example.  Let’s say the client comes to the lawyer with a fraud claim against a vendor that is worth about $150,000 in potential damages, without an attorney’s fees provision in any contract.  The case could take a year to complete, and the lawyer cannot predict the amount of work required or the sophistication of the opponent in mounting a defense.

The first hypothetical has the lawyer taking the case on a 40% contingency fee.  In the best case scenario, if the lawyer prevails at trial, he will recover $60,000, and the client recovers $90,000.  Now, $60,000 is a lot of money to you and me.  But is the lawyer sufficiently motivated by that promise of $60,000 (not guaranteed) to do a good job and to win the case?

This analysis depends on the time required to complete the case and to obtain the favorable result.  In an easy case, where the opponent settles early, this contingency fee is a good bet by the attorney.  He puts in 100 hours and settles the case.  His average hourly pay is $600, more than he would have received if he was paid by the hour to do this case.  The lawyer made a bet and won.  Also, the client succeeded, because the client recovered $90,000 out of the $150,000 loss, reasonably quickly.

But cases do not often turn out that way, and it is impossible to predict which will and which won’t.  In the crisis, the trends seems to be for defendants to pay their own lawyers small amounts of money to drag out cases for months or years.  The defendants do this for two primary reasons:  (1) they want to delay the final outcome as long as possible, so they can make money in the meantime and possibly get rid of the case through a cheap settlement, overwhelming pressure on the plaintiff, or a lucky break from the judge or jury; or (2) they simply don’t have money to settle and found it was cheaper to pay an attorney than to try to pay something.  The second scenario has become much more common in the financial crisis.  If a defendant can’t get a loan and doesn’t have cash or liquid assets to settle, it is cheaper and easier to find an attorney looking for business and to pay him a much smaller amount, and maybe to carry an open balance on the lawyer’s bill.  By slow paying his lawyer, the defendant has essentially forced the lawyer to advance credit to the defendant to pay for the defendant’s own legal fees.  If the defendant’s lawyer continues to work, even though the defendant is not paying him promptly or fully, that lawyer has become yet another creditor of the defendant that might not get paid in the future.

This type of opposition makes it difficult for a plaintiff and her lawyer to try to work out a fair legal fee between themselves.  The plaintiff’s lawyer knows that if the defendant mounts a vigorous opposition, the case could require 900 hours or more of attorney time.  If the lawyer were being paid an hourly rate of $400, she could have received $360,000 for the same amount of work.  If she has a 40% contingency fee in our lawsuit example worth $150,000, the best she can recover is $60,000, for an effective rate of $67 per hour for 900 hours of work.  And she recovers this only if she wins.  Based on this perspective, the plaintiff’s lawyer should not agree to take the case at all.  She is better off waiting for a better case paying an amount more in line with the hourly rate, than to take a case where her maximum contingency fee will be only $60,000.

The lawyer needs to consider the opportunity cost to her of taking this case on contingency.  Opportunity cost is simply the value of opportunities that cannot be pursued when a particular alternative is chosen.  Here, the plaintiff’s lawyer is considering taking a case on contingency that could require 900 hours of work for a maximum fee of $60,000.  If she didn’t take the case, and left the 900 hours free for other opportunities, how much could she make in the alternative.  If she turns down the contingency fee case, and waits for a regular hourly paying client, she could earn her full $400 per hour rate for each of those 900 hours, for a grand total of $360,000.  If this is truly the opportunity cost of taking the contingency fee case, the lawyer should never take it, because she stands to earn five times more if she is patient and waits for a better client.

But let’s say that she has only a 50% chance of finding that regular paying client, because of the crisis.  Or let’s say that she must spend the first 100 hours marketing herself to land that client.  We could take the optimum opportunity cost of $360,000 and subtract out 100 hours for marketing, leaving $320,000.  Then we could reduce that subtotal by 50% to account for the risk of failure, producing a result of $160,000.  This may be a better measure of the opportunity cost that the plaintiff’s lawyer gives up if she takes this contingency fee case where she could earn a maximum of $60,000.  Still, she should turn down the contingency case and wait for better.

How then to motivate an attorney to take this $150,000 fraud case?  A very simple, but very productive, alternative is to offer the attorney a flat fee in addition to the contingency.

Taking the same example, let’s say that the plaintiff offers to pay the attorney $5,000 at the very beginning of the case, as a flat fee to retain the attorney’s services representing plaintiff.  And then let’s say that the contingency fee will be 40% of the recovery, less credit for the flat fee.  From the client’s perspective, the result is not a lot different from a pure contingency fee case.  In the beginning of the case, the client pays out an additional $5,000 on top of the $150,000 loss.  If the lawsuit is not a success, the client does lose an additional amount because of the flat fee, but at least the amount is capped at $5,000.  In the event of success, the client still recovers $90,000, which is the same as under the pure contingency fee scenario.  This is because the winning lawyer receives 40% of $150,000, or $60,000, less the original $5,000 paid to her.  The client gets repayment of the original flat fee from the successful outcome, and the lawyer essentially received a $5,000 advance on the contingency fee payment that she could keep whether or not she won the case.

None of this changes the fact that the plaintiff’s lawyer gives up an opportunity cost of $120,000 to take on a case worth $60,000 (to the lawyer) soaking wet.  But on the other hand, she gets $5,000 upfront, and as we all know, a bird in the hand is worth two in the bush.

This is how a hybrid of a flat fee and contingency fee, at a relatively low upfront cost to the client, can motivate a lawyer to take on a plaintiff’s case that otherwise would not seem to the lawyer to a good investment of her time.

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Pricing legal services: the high-value fraud case

This is a very interesting time to be a business lawyer.  For example, I have received numerous calls in the past couple of months about terrible frauds being committed on business people.  In some of the calls, I heard about hundreds of thousands of dollars in hard-earned money being taken away by crooks committing different forms of business fraud.

Can’t You Just Hire A Lawyer On Contingency?

The question is, what is the economical way to recover this money?  A pure contingency fee arrangement often does not work, because in a large-scale fraud like this, it takes too long to deliver income to the lawyer, and the lawyer needs cash flow to feed his family and keep his business alive.  The value proposition is great for the client, but it’s often terrible for the lawyer.  An unspoken conflict of interest may arise between client and lawyer when the lawyer sees he is being undercompensated, or vice versa, when the client believes it is paying the lawyer way too much.

When you sue someone on a million-dollar fraud claim, you want a motivated lawyer, but you don’t want to pay more than is justified for the amount, viability, and collectibility of the claim.

A pure contingency fee arrangement for business fraud works in only a few very high-dollar amount cases, where the lawyer is willing to take the personal risk that he will win or lose, has determined on a personal basis that the provable damages are large enough ($300k? $500k? $1m?) to offset the risk of loss on an expected value basis, and has assured himself that the opponent has assets sufficient to satisfy the judgment if obtained.

A client should be aware that a lawyer who readily takes on a smaller-value business fraud case on a pure contingency fee basis may not have the wherewithal to see it through to its ultimate conclusion.  He may lose interest or turn to other cases that are delivering current cash flow.  Or he simply may have taken the case out of sheer desperation and is not competent to reach a good result for the client.  You get what you pay for.

This situation also should be distinguished from the personal injury or medical malpractice context, where a lawyer carries 100 or more cases at any one time.  The PI lawyer depends on the frequent settlement of many low-value cases (e.g. a few thousand dollars each) to support his business on a daily basis while he waits for payday on a few high-value cases.  But if you’ve hiring a lawyer to represent you as plaintiff in a six- or seven-figure business fraud case, do you really want someone who has hundreds of other cases?  Or do you want someone who will do a good job in your case?

What About An Hourly Rate?

There are alternative ways to compensate a lawyer in a high-value fraud case.  One way of course is to pay the lawyer at an hourly rate.  But to take a case to trial in Los Angeles County, a client is likely to pay the attorney, at an hourly rate, a total ranging anywhere from $100,000 to $250,000 to $500,000 or more, in attorney fees alone, between the date of hiring and the time of trial.  The actual amount depends on a variety of factors such as the complexity of the case, the number of litigation activities (complaint, answers/demurrers/motions to dismiss, discovery and discovery-related motions, motions for summary judgment, pre-trial preparation and motions, the trial itself, and many other aspects), the quantity of witnesses and documents, the length t of time between the filing date and the trial date, and the vigor of the opposition in pursuing their own litigation activities that require a response each time.  But honestly, it is completely impossible to predict the eventual cost of the litigation at an hourly rate until everything is done and gone, at which time it’s not a prediction but a fact of life.  Also, these figures don’t include post-trial and appeal costs, which also can be huge.  And if a judgment is overturned on appeal, the client looks to start all over again with another round of titanic legal fees and costs.

How Does A Monthly Retainer Work For This Kind Of Case?

Now, it is possible for client and lawyer to take this estimated budget for taking a case to trial and to work with it to create a fee structure that a client can afford and predict.  For example, the client could pay the lawyer a form of monthly retainer for the case.  How does this work in a big money case?  Let’s say the amount in dispute is more than $500k.  (Otherwise, the case may not be cost effective and we need to look at alternate pricing.)  Client and lawyer could together estimate the total price of the case to be $180k or more, based on the complexity and other factors.  On this basis, the fee arrangement could be a flat $15,000 retainer each month for the 12 months expected to take the case to trial.

Does this help the client?  Of course, because the client can budget $15,000 per month for the case and will not be surprised by a $30,000 or greater bill in any given month.  A motion for summary judgment or an opposition to that motion, prepared in a given month, can easily cost $30,000 or more at a standard hourly rate.  However, the client takes the risk that it will be paying more for months in which there is no activity.  Cases have slow periods and heavy periods.  So the client may pay $15,000 for a month in which only $2,000 would have been billed.  However, the upside outweighs the downside because the client protects itself in the high billing months and can budget legal fees accurately on an ongoing basis.

This system works well for the lawyer, too, especially in the current crisis.  It provides steady cash flow, even in months when there is lower than normal activity.  It also helps protect against default risk, which is a fancy way of describing a client who stops paying the bills for whatever reason.  Simply put, a client is more likely to pay a budgeted amount than a surprise amount.

Our example provided for $15,000 per month flat for 12 months.  But a lot of cases don’t go to trial in 12 months.  What happens in the 13th month?  In our example, the payments stopped, but of course that would be a disaster for the lawyer.  The highest billing time on any case is the two or three months before trial, plus the trial itself.  This is when all the discovery gets done and all the trial preparation takes place.  In trial, the lawyer may be working double shifts — one shift in the courtroom, and a full-blown second shift preparing witnesses, examination outlines, evidentiary arguments, opening and closing statements, and the like, and often responding to surprises in the trial.  There may need to be more than one lawyer at the trial, depending on the complexity of the matter.  The lawyer must give up these months of his life to the case, and he needs to receive adequate compensation or he cannot do it.

To cover this scenario, the monthly retainer should probably be LESS than $15,000, say $10,000, and the client agrees to pay this amount each month until the case is over.  The lawyer does not get to earn the full amount in a $30,000 month, but on the other hand he gets steady cash flow and a client willing to pay.  It’s a good value proposition for the lawyer.  The client commits itself to pay $120,000 per year in legal fees.  Although the amount is certainly high, it is budgeted and cannot be overrun.  Of course, this works only if the potential damage award in the case is high enough to justify paying out $120,000 per year in fees.

Litigation costs must be addressed separately and cannot be priced the same way.  This is because someone’s got to pay them, when they need to be paid.  For example, if a damages expert needs to be hired to testify at deposition and trial, someone must be responsible for paying her cost, which could easily be $10,000 or more in a particular case.  Traditionally, these costs are paid by the client.  But still, if the client knows it is paying a flat $10,000 per month to the lawyer, a surprise coming from an expert’s bill or court reporter’s fees from a week of depositions can be more easily anticipated and digested.

We have been talking about fees expected to take cases to trial, and really all cases needed to be budgeted as if they go to trial.  Yes, the statistics say that 95% of more cases settle.  But an interesting effect of the crisis is that more cases seem to be getting right up to the trial date before they settle, if they settle.  This is because in a high dollar amount case, it may be cheaper to pay defense counsel to keep the case alive than it is to broker a meaningful settlement offer, in an economic environment where there is no credit to fund a settlement anyway.  Defendants are stalling, waiting for the crisis to end, but as of this writing, there is no end in sight.

What if the case settles early?  If the lawyer is being compensated on a flat monthly retainer, the client will of course stop paying him when the case is finally dismissed after settlement.  How does this affect the parties?  Let’s say the case took six months from filing to settlement, and the lawyer agreed to a flat monthly retainer of $10,000 per month.  At the end of the day, after settlement and dismissal, the lawyer was paid $60,000.  It sounds like a lot of money.  But if the lawyer took numerous depositions and prepared or opposed complex motions in this time, he could be LOSING money compared to what he would have made on an hourly rate.  Maybe he could have earned $100,000 in that time.  Or alternatively, if little work was done besides filing the complaint and some initial discovery, then the lawyer may get a windfall in this scenario.  He may earn $60,000 at a flat rate monthly for work that would have obtained only $25,000 at an hourly rate.  This may not seem fair, but this is the primary downside risk the client accepts in this situation.  Anyone who has ever hired a lawyer knows that, typically, legal fees run higher and not lower.  So the firm cap on the monthly budget for legal fees should be a fair exchange for the more remote possibility that a lawyer may earn more than his hourly billings would have generated.

But Aren’t Your Numbers All Wrong?  My Lawyer Told Me It Would Cost At Least $50,000 Per Month

If I work 100 hours in a month at a rate of $500 per hour, that’s $50,000.  I have easily worked 100 hours on a complex case in a given month, and I can have a 300-hour month on a case getting ready for a difficult trial.  At $500 per hour, that could result in a $150,000 legal bill for a single month!  These prices are enormous and are cost-effective only in cases worth millions of dollars.

But ask yourself the question:  In the middle of the worst economic crisis since the Great Depression, why are you paying $500 an hour anyway?  In Los Angeles at least, there are many high quality lawyers with years of great experience who are billing below that rate.  The only reason to pay this rate or higher is because you think you’ve hired a marquee lawyer who will win the case on the strength of his own personality.  But guess what?  In every trial, there is a winner and a loser.  If each side hires a marquee lawyer at a high hourly rate, one side or the other is going to have made a bad investment.  In time of crisis, cost considerations are extremely important.

On the other hand, if a client agreed to pay the lawyer a flat $15,000 per month, and the lawyer ends up working 300 hours, he will have made an effective hourly rate of $50.  Let me repeat:  $50 per hour!  Now that’s a value proposition for a client.  Has the lawyer made a serious mistake?  Not necessarily, because by the time the lawyer had to work the 300-hour month, he presumably earned $15,000 in previous months that required much less of an hourly commitment.  So in effect, he has already been paid for the 300-hour month.  Client wins and lawyer wins.

Next Time:  Hybrid Flat-Fee and Contingency Fees

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