Lawyers' Weekly Article - April 28 2000 Issue.

by Robert A. Klotz

COLLECTING THE BILL FROM THE MATRIMONIAL CLIENT:

THE FAMILY LAWYER AS CREDITOR

The cost of contested matrimonial proceedings can lead to the bankruptcy of one or both spouses. The unpaid family lawyer may become a significant, or indeed the only creditor. How can the family lawyer enforce his or her payment rights? What happens when the client goes bankrupt and his creditors consist of his family lawyer and his former spouse? It is remarkable how often this occurs. This article gives a few tips.

• A mortgage against the matrimonial home is normally void because of the statutory restraint against alienation provided by the Family Law Act. However, nothing in the FLA prevents a family lawyer, or any creditor, from suing his or her own client and filing a writ of execution against the land. For this reason some lawyers periodically arrange for unopposed assessments of their fees, each time registering a writ of execution. By doing so they bypass the supposed inviolability of the home. Although some lawyers have been criticized, or found to be estopped, if they do not disclose such executions to the opposing counsel, the execution will normally take priority over any subsequent equalization claim or court-ordered transfer or security obligation. For this reason, it is sometimes prudent to check title before and during trial, to ensure that the opposing spouse's solicitor has not issued an execution that may take priority over a subsequent equalization order. Note that the FLA Act explicitly exempts from the restraint against alienation, the acquisition of an interest in the matrimonial home by way of a legal aid lien.

• The legal fee is always released by the client's assignment in bankruptcy and subsequent discharge, even if the fee was incurred to obtain or defend against a support order.

• There is no solicitor's lien on the file, that is the papers comprising the file, if the client becomes bankrupt. Subject to issues of privilege, the trustee can require delivery of the file.

• Whether or not the client becomes bankrupt, the solicitor may be entitled to a lien or charging order on the fruits of the litigation if the solicitor's efforts were instrumental in preserving or recovering property for the client. This lien is a secured claim not against the client, but against the property so preserved or recovered. It is discretionary. The most common circumstance occurs where the solicitor has successfully defended or prosecuted a claim for property division. To the extent that the legal fee relates to the property in issue, but only to that extent, a charging order may be sought against that property.

• The solicitor for a successful support claimant can obtain a solicitor's lien over any cost award in the client's favour. The cost award will survive the payor's bankruptcy, and can be enforced even if the client becomes bankrupt. However, the courts are extraordinarily reluctant to grant a charging order against a support order itself, even one obtained solely through the lawyer's efforts.

• A true retainer paid to the family lawyer cannot be garnisheed, or seized by the client's trustee in bankruptcy. This rule apparently applies even if the services have not yet been rendered, provided the retainer amount is reasonable in connection with the anticipated services.

• If the client pays off substantial arrears of legal fees shortly before filing an assignment in bankruptcy, or shortly before being fixed with a substantial judgment, the payment may later be challenged as a fraudulent or unjust preference. Preferential intent may be rebutted by showing that the payment was a condition of the lawyer's continued provision of legal services, or some other good consideration such as the release of the file. If the account was brought up to date in order to obtain continued representation, and further representation was indeed provided to more than a nominal extent, the debtor's intent was probably not preferential.

• The unpaid lawyer can issue a bankruptcy petition. This option is a last resort as a petition is a quasi-criminal proceeding, for the benefit of all creditors, which is not designed to function as a collection tool. It should be used only when there is some specific impropriety that necessitates utilizing the remedies and investigative tools available under bankruptcy law. A petition against a former client will not sit well with the court.

• The unpaid family lawyer can oppose his or her former client's discharge from bankruptcy. However, the lawyer may be regarded as a highly disfavoured creditor when the bankruptcy court comes to exercise its discretion. Courts often impose an obligation on matrimonial lawyers, moreso than on the litigating clients, to put a brake on unreasonably expensive or vituperative litigation - thus transferring moral responsibility to the lawyer for creating the substantial legal debt. Many courts view the lawyer in this context as a commercial businessperson with the means and sophistication to protect his or her fee, and who is in a better position than the client to absorb the loss. There is no rule of thumb in these cases; most turn on the sad facts of the client's current means and expenses, and often do not recognize the durable benefit (a support stream, a reduction in support, a custody order) that has been conferred on the client thanks to his or her unpaid lawyer. It may be a good strategy to attempt to find another creditor to also oppose, with whom the court may be more prepared to sympathize.

• "Sweetheart" deals: As the legal fees rise, some clients become motivated to settle their matrimonial litigation independently of their own counsel, with the goal of relinquishing their assets to the prejudice of the legal debt. These cases are, fortunately, infrequent. They can best be avoided if the lawyer asserts a claim for a charging order, both in communication and formally through a court motion, as soon as the retainer is terminated in suspicious circumstances.

Robert Klotz, of Klotz Associates, Toronto, practices commercial and international litigation and bankruptcy law. He is the author of Bankruptcy, Insolvency and Family Law (1994, 2nd ed. pending, April 2001, Carswell)