Category: Cash Flow – Finances

IOLTA accounts may be in jeopardy

Under current law, clients’ trust accounts are protected under the IOLTA program. The FDIC provides unlimited insurance coverage.

However, unless extended by Congress, beginning January 1, 2013, such unlimited coverage will terminate and the new limit will once again be $250,000 per depositor. All funds held in such trust accounts as well as all funds held, personally, by the same client in the same institution will be considered in the $250,000 limit.

Be careful and review your bank’s regulations and the funds you are holding for the benefit of your clients. Watch Congress for any "lame duck" laws on this and the FDIC and its responsive regulations. You may have to split clients’ funds into two or more banking institutions in order to keep his/her money insured. And you may once again have the responsibility of checking on the financial soundness of the banking institution in which you maintain your clients’ trust account.

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Prices come down! Do sales go up?

Echoing an earlier comment I made about the decreasing salaries for first year graduates,  NALP  recently said the decrease is 35%!  This further promotes change in the profession, from additional hiring, to out-sourcing, to independent contracting … and much more.

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Public Justice versus Private Judges

Justice should be free. However, the State of California has just cut the budget of its court system by more than $500 million!  Litigants will be left to fend for themselves.  One blogger suggests that private judges are not expensive when comparing the speed of justice in a private matter with the delays and increased costs of the public judicial system. 

In the 1960s and 1970s, the State of California began changes to its pension system, which culminated in a major change in 1994.  Judges elected or appointed before that year could with qualifications retire as early as age 60 at 75% of salary, but if they stayed on the bench after age 65 the percentage went down.  Judges who assumed their jobs after 1994 got a further reduction. Many of these judges found it more advantageous to retire and hire themselves out as private judges. Thus began the two-tier system of justice, one for the rich who could afford to move quickly with a private judge, and the other for everyone else.

The recent budget cut further exacerbates the problem by giving incentives to even more people (who can afford it) to enter into the private judging world … a boon for them and a catastrophe for the average citizen with an average matter who can’t afford the added expenses of a private judge.

Our Constitution says everyone is entitled to right to counsel. In at least one instance, this applies to civil matters as well as criminal matters. Shouldn’t this right also include that everyone is entitled to the right to be judged by a competent and objective individual, paid by the state?  Private judging sounds too much like the old vigilante justice.  Am I unfair when I ask whether these judges will be influenced by which lawyers use their services more? If this is a question raised in my mind, I wonder what the litigants might wonder …. And that is not how justice ought to be delivered or viewed. 

As a postscript, there are already those who predict that the national system of health care under the now-validated Affordable Care Act will lead certain physicians to opt out of the system and care only for wealthy individuals who can afford them.  Would such doctors refuse to see or treat a patient who could not demonstrate the required level of net worth? 

Lincoln famously observed that a house divided against itself cannot stand. Ultimately the same can be said about a society divided against itself, between those who can pay and those who can’t.

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Legal fees are high – according to whom?

In today’s Wall Street Journal,  staff writer, Jacqueline Palank discusses the Justice Department’s attempt to control fees that bankruptcy lawyers seek. Creditors and employees may, at times, be a bit disgruntled by such fees. So, now, the U.S. Trustee Program appears to be entering the fray.

Before going further, it should be noted that i) any fee sought by an attorney must first be approved by the client going into bankruptcy; ii) the fee cannot be paid before a Bankruptcy Court Judge approves the fee request; iii) the legal fees most often are a pittance compared to the debts of the company and thus have little or no impact on either the creditors or the employees. In fact, the current proposal is limited to companies whose assets and debts exceed $50 million, hardly your “normal” bankruptcy.

The only reason for focusing on the legal fees is that this is a topic that makes good reading in the tabloids, including the WSJ. While the quoted hourly rate received by some attorneys seems high, by comparing this to the compensation received by incompetent CEOs and others in the C-suite offices, it is insignificant. Why don’t the tabloids focus on the cause of the bankruptcy? Why not focus on the compensation of the management team, oftentimes earning historically astronomically higher multiples compared the lowest paid employees of the company? Why not seek redress against the management that is responsible for bringing the company to its knees? Although  this focus may be more important for us to understand how our economic system works, it clearly is not sexy enough to sell many papers.

The U.S. Trustee is proposing, according to the writer, several new approaches to control lawyers’ fees, including:
•    Though the lawyer applicant must disclose his/her hourly rate now, the Department wants the lawyer to disclose the lowest, highest and average hourly rates the law firm charges in all its matters.
•    The Department wants the lawyer applicant to create and disclose to the Court a budget for legal expenses. This budget would, necessarily, disclose to all involved, including the creditors who are adversaries of the bankrupt, the legal strategy to be engaged in by the client.

In the 1960s, the Supreme Court ruled that it was anti-competitive for bar associations to maintain a listing of suggested fees for different types of work. This listing, in particular, helped younger and newer lawyers set their fees at rates that were more in line with more senior lawyers. Not having such a list would compel lawyers to set their own fees, the theory being that lawyers would then be more competitive with one another to the consumers’ benefit.  The Trustee by its first proposal ignores this. The existing disclosure already provides information that tends to be anti-competitive. Law firms can see what others are charging and price their services accordingly, causing rates to slowly increase over the years.

Intruding into practice areas, such as general business matters, estate planning, tax work, and other areas of work performed by the firms who also do bankruptcy work has no bearing on the special expertise of large company bankruptcy lawyers. No area of law other than bankruptcy requires such disclosure for court approval. Fees are left to be negotiated between attorney and client. Other than precedent, there is no reason disclosure should be made here either. But, the process should not be extended. “Transparency” is a bogus issue. This is not some backroom conspiracy. All the proceedings are public and must be approved by the Court before attorneys are paid anything.

Budgets are good. I recommend them to my attorney-clients with whom I consult. This is a process, however, between the client and the attorney. By requiring that these budgets, which reveal legal strategy, be made public, the U.S. Trustee is saying that bankrupt companies have no rights. They have no right to advocacy; they have no right to develop a strategy that might affect creditors’ claims; and they have no right of privacy. This is clearly contrary to the U.S. Constitution and our entire judicial system. While the bankrupts, and their inept management, may have proceeded down an economically unwise path, they still have rights to seek the best of what is left to them in their economic environment.

Don’t worry about the lawyers hourly rates once the bankruptcy petition is filed. They are regulated first, by the client, and second, by the Court. Who is watching the compensation of the management team before they enter bankruptcy? Why are they not punished with fines, or worse, for malfeasance and negligent management tactics? Why are they allowed to benefit so expansively at the expense of their workers? Why don’t the tabloids focus their sharp light there?
Oh, I forgot, the tabloids need to sell papers, they are part of the industrial complex that both Presidents Washington and Eisenhower warned us about as they left office.

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Generation warfare will grow in law firms

In a recent issue of a major legal publication, as reported by the American Bar Association, the magazine looked at pension plans of law firms. It appears that a number of the country’s largest law firms have pension plans that are unfunded. In other words, these are firms with pension plans, but without money to pay the obligations of those pension plans as their lawyers retire. What we will increasingly see are law firms with the bulk of their lawyers leaving the practice for retirement with the hope and prayer that the fewer remaining, younger partners will be willing to fund the firms’ obligations. We will also see many situations where these younger lawyers will find it to their economic advantage to torpedo the existing law firm and its pension obligations in exchange for creating a new firm with no pension obligations. Doing so will give them the opportunity to take on more of the revenue that is produced by their efforts. They will earn more and pay less.

This phenomenon will exacerbate the generation warfare that is building in today’s law firms.

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Check Clearing Policies

Your bank will not always let you withdraw your money! Ed talks about bank check clearing policies that could affect your law firm.

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Alternative fees – proportionate refund

An interesting question was raised recently in the discussion about alternative fees. What happens in either of two scenarios:  i) When the client terminates the relationship before the legal services are concluded and ii) When the fee is challenged in a dispute between attorney and client.

In the former case, how do you apportion work already done versus work yet to be done, especially when the fee agreement is silent on the subject? This question is set against the backdrop that a lawyer refund any advance payment of fee that has not yet been earned. And, though a fixed fee, the fee must be placed into the client trust account until earned. Does one have to refer back to the time spent (hourly billing)? And if the subject is covered in the fee agreement, are we building into the relationship all kinds of negative vibes between attorney and client?

And, though fixed fees/alternative fees are designed to reduce conflict between attorney and client, should a dispute arise, how do we test the reasonableness of the fee?  Again, usually by reference to the hourly billing rate and time spent.

This subject once again points to the need for good client relations and effective, frequent communication between attorney and client to make sure such disputes don’t arise and/or are settled quickly.

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Alternative fees – Redux

The Wall Street Journal seems to focus on fees being charged by large law firms to large clients. It seems almost every other week, there is an article on the subject. In today’s paper, Jennifer Smith writes about the "resetting of legal costs." Her basic premise is that clients who obtained the "upper hand" during the Great Recession" in negotiating fees with law firms are not going back to the old ways of the billable hour despite the more robust economy today.

Alternative fees have become a larger percentage of law firms’ revenue. To use alternative fees, usually meaning fixed fees, requires a trusting relationship between law firm and corporate client. Of course, alternative fees also depends on the practice area. For example, it’s easier for lawyers to quote a fixed fee in areas such as estate planning or a percentage fee in personal injury or debt collection than it is in litigation. But, even litigators are moving to alternative fees when they can work with the client as a trusted adviser … and both sides look out for the interests of the other side.

What Ms. Smith ignores, however, is the real impetus for alternative fees. It is technology. Because of advances in technology,some tasks such as document review that used to take hundreds of lawyers many hours can now be done in a fraction of the time with a fraction of the number of lawyers.  Further, when lawyers charge by the hour and see their time reduced, and thus their revenue, there is an impetus to charge a fixed fee. The client gets certainty. The lawyer gets to keep a portion of the savings resulting from the technology. Both sides benefit.

This is classic in every industry where technological innovation occurs. The legal profession is now experiencing the same upheaval. And both clients and lawyers are benefiting.

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Cash Flow Runs the Law Firm

Cash flow is the lubricant that enables all businesses to function. When you grow your revenue, or when you take too much money out of the organization, you will have a cash flow challenge. Only a supermarket or amazon-type organization can function with losses — they get great long term payment terms from their suppliers but receive cash immediately on making a sale.  

A law firm is not like this.  And in the case of many law firms, the lawyers get accustomed to larger-than-life styles of living, are unwilling to fund the organization out of a sense of entitlement, and are really only silos of sole practitioners under an umbrella. They are not organization people. They think, and oftentimes correctly, that they can jump ship and continue their flagrant disregard of the firm.

Lowering the lawyers’ compensation to appropriate levels in accordance with the revenue and expenses of the firm, and keeping debt only for long-term purchases (not for lawyers’ draws) is the only way to protect the cash flow and keep the law firm vibrant and afloat.

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Internal financial controls

One would think that lawyers could keep their eye on the ball. But, somehow, despite the importance of cash and cash flow to the very survival of the law firm, lawyers tend to focus their attention elsewhere. I find this to be true not only in the small firm, but also in some of our larger brethren as well.

Recently, I was asked to consult about "missing cash." The bottom line is that it’s easy, for even a longtime and trusted staff person, to lose his or her moral compass … when money is readily available … and not regularly monitored! Establish policies for handling cash and for paying bills, the two easiest areas of manipulation by one so inclined. Be persistent in the application of these policies. Ask for an external review of these policies periodically … and their application. Insist that there be no shortcuts in handling the finances of the firm.

Nothing less than the firm’s reputation and standing is at stake! … And the lawyer’s license to practice law.

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