Ethics Rules Help Distressed Lender Beat Collection Suit

• Lawyers can’t assign right to sue clients for fees, federal judge says
• Court throws out suit accusing mortgage lender of bilking lawyer it hired to go after delinquent borrowers

Ethics rules forbid law firms from assigning the rights to sue clients for unpaid fees, a federal judge in Florida held Feb. 9.
The decision—which took up a question that few courts have squarely addressed—extinguished a collection suit against a distressed mortgage lender accused of stiffing its foreclosure counsel.

The lender, Statebridge Company LLC, convinced the U.S. District Court for the Middle District of Florida to invalidate a contract that gave a collection agency the right to sue for $429,527 owed to the allegedly bilked law firm.
Statebridge argued that it intended to challenge the reasonableness of the underlying fees, and could not do so without being forced to reveal confidential information about the firm’s representation.

“The Court is persuaded by this argument to the extent that [the firm] assigned its right to sue in order to collect,” Judge Susan C. Bucklew wrote.

Bucklew acknowledged that there was “no clear, binding authority controlling the issue of whether a law firm can assign a client’s legal fee debt to pursue through litigation.”

But Bucklew said concerns about confidentiality compelled her to find that “lawsuits to collect legal fees must be brought by the attorney that is owed the fee.”

Void as Against Public Policy

“The importance of confidentiality between a lawyer and client cannot be overstated, and this Court will not condone such a breach of confidentiality,” Bucklew wrote.

Bucklew said public policy concerns thus required her to invalidate the assignment contract that The Law Offices of Damian G. Waldman P.A. executed with the plaintiff in this case, Collectarius Financial LLC.

The judge noted that in a 2007 case “the Florida Supreme Court determined that protecting attorney-client confidences was a reason for not allowing clients to assign their attorney malpractice claims.”

“If clients cannot assign their attorney malpractice claims based on confidentiality concerns, then it seems that the same confidentiality concerns should bar lawyers from assigning their right to sue their clients to collect disputed attorneys’ fees,” Bucklew wrote.

Ethics Overview

Bucklew’s opinion aligns with the advice that ethics panels—in Florida and elsewhere—have provided on collection-related issues.

District of Columbia Ethics Op. 298, 16 Law. Man. Prof. Conduct 464 (2000) offers a comprehensive overview of that authority.

The opinion notes that although “the vast majority” of jurisdictions have said that lawyers may use collection agencies, the “outright sale of client accounts receivable to a collection agency would prevent a lawyer from fully complying with” ethics rules that permit the disclosure of client information only “to the minimum extent necessary” to establish or collect a fee.

“The key consideration is whether the lawyer retains sufficient control over the collection process (including any fee litigation that may arise) to satisfy her ethical responsibilities,” the committee said.

Because “[s]ufficient control would require, at a minimum, that the lawyer remain informed about efforts to collect the debt, and be able to veto activities that are inconsistent with the lawyer’s legal or ethical requirements,” the committee said assignments “by which a lawyer steps entirely out of the collection process” are impermissible.

Bajo Cuva Cohen & Turkel P.A. represented Statebridge. Collectarius was represented by Goetz, Hartman & Landsteiner.
The case is Collectarius Fin., LLC, v. Statebridge Co., 2018 BL 44723, M.D. Fla., No. 8:18-cv-137-T-24 AEP, 2/9/18.

To contact the reporter on this story: Samson Habte in Washington

To contact the editor responsible for this story: S. Ethan Bowers