The Business Divorce Law Report
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Attorneys have common law and statutory security interests in the proceeds of recoveries of their clients, generally referred to as charging liens.
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A statutory lien is created when a lawyer files a pleading with an affirmative claim for recovery and may be enforced by filing a petition in the underlying action.
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Clients have an interest in the assertion of an attorney charging lien and must be notified of their right to have the amount of the fee determined by arbitration.
Attorneys that provide services to clients with that yields a financial recovery to the client will typically have a security interest in that recovery to secure their fee. The lien may be statutory or, in some cases, the attorney may have a lien that is enforceable in equity. These two types of liens, statutory and equitable, have significant differences, but both types of liens provide the lawyer with a security interest in the proceeds of the case.
In this article, we will take a look at some of the mechanics of asserting and enforcing a lien. In a subsequent post, we will examine the manner in which courts have allocated competing claims for fees.
The Attorney Charging Lien
A lien is more than just a claim for fees. It is a secured interest in the recovery that a client achieves – through the lawyer’s efforts, of course — for the satisfaction of the debt. It may be asserted over all of the recovery and, therefore, even against the client. As a practical matter, liens are asserted when a lawyer is replaced or in rare instances when a client fires the lawyer in an attempt to avoid paying a fee.
Liens can arise is great numbers in a business involving a law firm with a significant amount of contingent-fee cases. A departing lawyer or practice group may solicit client matters, causing the client to terminate the old firm and hire a new lawyer or lawyers. Most law firms are prepared to assert liens, as they should, against the recoveries that they handled.
A lien, the Supreme Court held in Princeton Office Park, LP v. Plymouth Park Tax Services, LLC (opinion here) is a “charge upon real or person property for the satisfaction of some duty.” It is an encumbrance that follows the property, as opposed to a judgment that must be collected by levy or execution.
Charging liens were initially recognized at common law as arising out of the promise to pay the lawyer from a recovery. The common law was codified and expanded in the statutory lien.
After the filing of a complaint or third-party complaint or the service of a pleading containing a counterclaim or cross-claim, the attorney or counsellor at law, who shall appear in the cause for the party instituting the action or maintaining the third-party claim or counterclaim or cross-claim, shall have a lien for compensation, upon his client’s action, cause of action, claim or counterclaim or cross-claim, which shall contain and attach to a verdict, report, decision, award, judgment or final order in his client’s favor, and the proceeds thereof in whosesoever hands they may come. The lien shall not be affected by any settlement between the parties before or after judgment or final order, nor by the entry of satisfaction or cancellation of a judgment on the record. The court in which the action or other proceeding is pending, upon the petition of the attorney or counsellor at law, may determine and enforce the lien. N.J.S.A. 2A:13-5.
Liens also can be created as a matter of equity, either when the parties have contracted to make payment from a specific source, or when necessary to prevent unjust enrichment. For lawyers, the issue is the agreement to represent the client on a contingent fee. As the Supreme Court held in VRG Corp. v. GKN Realty Corp (opinion here), “the imposition of an equitable lien is primarily contractual in nature.”
Because statutory liens attach only once the claim has been filed, the equitable lien may be critical in protecting a lawyer’s financial interest until the case has been filed. Clients have settled matters directly after having engaged counsel, and cases may leave a firm before they are put into suit. In practical terms, lawyers need to identify the lien as a condition of their engagement on a contingent fee.
Perfecting and Enforcing the Statutory Lien
A lien is created at the time that the attorney files the pleading, but it is not perfected until a specific action is taken to enforce the lien. Some courts have held that written notice to the client and adversary counsel will preserve the rights of the attorney. Other courts, however, have held that the lien is perfected with the filing of a petition or complaint, which is what the language of the statute requires.
In H&H Ranch Homes, Inc. v. Smith (opinion here), the Appellate Division outlined the process that an attorney seeking to enforce a statutory charging lien should follow:
The attorney should make application to the court, as a step in the proceeding of the main cause, by way of petition, which shall set forth the facts upon which he relies for the determination and enforcement of his alleged lien. The petition shall as well request the court to establish a schedule for further proceedings which shall include time limitations for the filing of an answer by defendants, the completion of pretrial discovery proceedings, the holding of a pretrial conference, and the trial. The court shall, by order, set a short day upon which it will consider the application for the establishment of a schedule. A copy of such order, together with a copy of the petition, shall be served upon defendants as directed by the court. The matter should thereafter proceed as a plenary suit and be tried either with or without a jury.
The New Jersey Supreme Court took up the issue of the enforcement and timing of a statutory attorney changing lien in its 2002 decision in Musikoff v. Jay Parrino’s The Mint, LLC. (opinion here). In that case, the Third Circuit Court of Appeals certified to the Supreme Court the question of whether an attorney must seek to enforce a statutory lien by filing a petition before the underlying case has been resolved. The attorney that had previously represented the plaintiff did not seek to assert the charging lien until after the case was resolved.
An attorney need not file its petition until after a matter has been resolved, the court held.
In sum, the Act is grounded in equitable principles and was designed to protect attorneys who have represented their former clients competently and with diligence, but have gone unpaid. In furtherance of that design, the Act describes the forum in which a lien petition may be brought; it does not limit the period within which the petition must be filed. We affirm the basic elements of the process articulated in H. & H., except that we do not interpret the process to require an attorney to file and enforce a lien petition prior to settlement or judgment in the underlying action. Our conclusion is consistent with the Legislature’s intent in enacting the statute, faithful to the Act’s common-law roots, and reflective of a sensible reading of the statute’s text
Notice to Client is Required
An attorney asserting a charging lien also must provide clients with notice of their right to binding fee arbitration under New Jersey Court Rule 1:20A-6. The notice, however, does not need to be filed before the underlying action has been closed. It may be filed at the same time as a charging lien petition as an “ancillary proceeding,” the Appellate Division held in Shalit v. Shalit. (opinion here). In giving notice to the client, the attorney should provide a clear statement of the amount claimed and the basis for the claim.
Asserting the Lien Claim in a Business Divorce
My own experience with business divorce cases involving personal injury attorneys is that the assertion of charging liens is necessary to protect the interest of the firm that originated the matter. It is also the catalyst for settlement since neither side wants to be involved in litigating multiple lien claims in quantum meruit. Lawyers and law firms that lose a matter to a departing client should consider sending an immediate notice of the client’s right to arbitrate the fee and advising the client and the succeeding law firm of the assertion of the lien (either statutory or equitable).
When the matter has reached conclusion, the lawyer may then pursue the statutory charging lien by filing the appropriate petition to enforce the charging lien or a lawsuit to declare and enforce the equitable lien.