Getting Paid: the Interplay Between the Judiciary Law and Part 137 – New York Law Journal, June 17, 2010

By: Virginia K. Trunkes and Paul F. Millus
New York Law Journal
June 17, 2010

By: Paul F. Millus and Virginia K. Trunkes.  

Currently, a bill in the state Assembly (A8697) proposes amending a statute so as to permit an attorney’s charging lien to attach to awards and settlement proceeds gained through alternative dispute resolution. The current law, codified in Judiciary Law § 475 and § 475-a, limits the charging lien to proceeds resulting from a court “or other proceeding,” but not alternate dispute proceedings or settlement negotiations. If passed, this would be the first time these sections have been revised since 1946 and 1955, respectively. Perhaps this is a good time to review those Judiciary Law sections and their interplay with Part 137 of the Rules of the Chief Administrator of the Courts (22 NYCRR §§ 137.0 – 137.12), which involves its own alternative dispute resolution: the fee dispute resolution program.

Judiciary Law § 475 and § 475-a permit an attorney to assert a claim for legal fees from a fund created from the attorney’s efforts in an “action, special or other proceeding in any court or before any state, municipal or federal department, except a department of labor.” This “charging lien” is a security interest in the favorable result of the litigation, [i] and attaches automatically upon the interposition of the claim, whether in a complaint or a responsive pleading. [ii] The Judiciary Law further provides that when the lien is asserted, the attorney is entitled to “a prompt hearing to fix the amount of the lien.” [iii]

The forum in which the hearing occurs is governed by the Part 137 Rules. As stated in Rotker v. Rotker, [iv] fixing the amount of the charging lien “is now complicated by the rules of the Appellate Divisions that establish a clear public policy in favor of the arbitration of attorney‑client fee disputes (see, 22 NYCRR 1230.1, 1400.7), in accordance with procedures established by the Rules of the Chief Administrator of the Courts (22 NYCRR part 137).” [v] These Rules govern an attorney’s right to seek disputed legal fees ranging from $1,000 to $50,000. (Arbitration is available for disputes involving less than $1,000 and greater than $50,000 if both parties consent. 22 NYCRR 137.1[b][2].) They are an offshoot of and replace the earlier “Part 136 Rules,” which had governed arbitration for fee disputes in matrimonial cases. [vi]

The Part 137 Rules are applicable “to all attorneys admitted to the bar of the State of New York who undertake to represent a client in any civil matter” beginning January 1, 2002. [vii] Like their predecessor, these Rules contain specific obligations imposed on attorneys seeking unpaid legal fees. The Part 137 Rules, however, “cast a much wider net,” and place a heavier burden on the attorney. [viii] Upon the development of a fee dispute, the attorney must serve the client with a written notice advising of the client’s right to arbitrate. [ix] From the date of service, the client has 30 days during which he or she may elect to resolve the dispute by arbitration. [x] If the client does not file the request for arbitration within the 30 days, the client has waived the right to request an action to recover the fee. [xi]

If the notice is required but not served, the attorney cannot recover a fee. [xii] This is true whether the attorney seeks a determination of the amount of the charging lien, [xiii] or commences a plenary action against the client, [xiv] because “fee disputes are required to be resolved by arbitration where the client so elects.” [xv]

To some extent, then, the Part 137 Rules temper what has otherwise been understood as an attorney’s “right.” That is, it is true that a charging lien is a security interest in the favorable result of the litigation which attaches automatically upon the interposition of the claim. [xvi] It is also true that a charging lien is a “right” afforded to an attorney pursuant to Judiciary Law § 475. [xvii] However, an attorney’s “right” to a charging lien does not supersede the attorney’s obligation to comply with the requirements necessary to recover on it. Following the Rules of Part 137 is necessary before a court can consider an attorney’s request for a charging lien. Serving the 30-day notice, and alleging same when seeking to recover the fee, [xviii] are requirements in those Rules. [xix] It is consistent with the “clear public policy in favor of the arbitration of attorney-client fee disputes.” [xx]

There aredisputes for which the arbitration is not available. They are substantive questions, like whether the attorney was terminated for cause and therefore is not entitled to any fee, [xxi] or disputes between the parties over matters other than the reasonableness of the fees. [xxii] Otherwise, in the event of a fee dispute, if the client so elects, the attorney must proceed to arbitration.

The courts have addressed the question of what constitutes a fee dispute. The Rules describe it as “where the attorney and client cannot agree as to the attorney’s fee.” [xxiii] Prior to the enactment of the Part 137 Rules, the Appellate Division, First Department interpreted Part 136 to require notice of the availability of arbitration even where the attorney and client had not previously disputed fees. [xxiv]

In contrast, at one point the Second Department explicitly declined to follow Paikin, holding, in Scordio v. Scordio, [xxv] that if the client had not disputed the reasonableness of the fees charged by outgoing counsel, the attorney was not required to serve the notice. However, there has since been a shift within the Second Department. As stated by the court in Wexler & Burkhart, LLP. v. Grant, [xxvi] as it rejected the plaintiff-attorney’s argument that the Rules did not apply because the defendant did not at any time dispute the amount stated on the bills, but rather simply did not pay them: “[t]his interpretation is untenable and would effectively eviscerate Part 137 of the Rules.” The Court elaborated:

Nowhere [within the Rules] is there a provision excluding compliance where a client does not object to the bill, but simply does not pay it.

* * *

Moreover, adopting the movant’s position would mean that a client, unschooled in the law and unaware of the fee dispute resolution program established in the Uniform Rules, would lose any chance of arbitrating or mediating bills he or she felt were excessive by simply remaining silent when the bills arrived. It is difficult to imagine how such a result comports with the overall plan evidenced by Part 137.

The Court in Wexler & Burkhart, LLP did recognize that it was bound by the precedent of the Appellate Division, Second Department, including Scordio. However, it observed that

the Scordio case addressed the predecessor Part 136 Rules, not the current version, which, “in its scope and detail, was clearly intended to cast a much wider net and, more to the point here, added a provision placing the burden on the attorney who did not notify the client of the right to arbitrate to plead that the controversy was excepted from the operation of the Part.” The Wexler & Burkhart, LLP Court also noted that a Second Department case rendered subsequent to Scordio cited with approval the First Department’s decision in Paikin v. Tsirelman, [xxvii] and added that the Second Department’s previous decision to the contrary “may no longer be good law.”

More recently, the Supreme Court, Westchester County, addressed this very issue and sided with the court in Wexler & Burkhart, LLP. In Messenger v. Deem, [xxviii] , the attorney emphasized that the client never raised any problems with the billing statements on a “line by line” basis or question specific items on the bills. In rejecting the attorney’s assertion that he was not therefore obligated to offer arbitration, the court stated that to find otherwise “would permit an attorney to disregard the obligation except in certain limited situations.” The court observed:

A “fee dispute” (22 NYCRR 137.2), or a disagreement as “to the attorney’s fee” (22 NYCRR 137.6 [a]), is not only found when the former client complains as to time billings on a line by line basis. Under part 137, arbitrators are entrusted to “determine the reasonableness of fees for professional services.” (22 NYCRR 137.0.) Here, the

defendant “disputed the reasonableness of the fees” plaintiff was charging. (See Scordio v Scordio, 270 AD2d at 329.) The “reasonableness” of the fee cannot be limited to disputes as to whether an attorney should have charged “1.0 hours of billing time” instead of “1.2 hours of billing time.” If such were the case a simple audit of the bill would be all that was necessary. Instead, arbitrators are given authority to evaluate and make a subjective finding of reasonableness. For something to be reasonable it must be fair and proper under the circumstances. To hold otherwise would render the section impotent and unenforceable.

The Court added that once the client interposed affirmative defenses to the attorney’s claim for fees, the attorney should have been alerted that the client disputed his fees and should have submitted the controversy the arbitration.

What is particularly noteworthy about Messenger is the stage of proceedings at which the issue of Part 137 compliance was litigated. The attorney had already obtained a jury verdict in his favor, and the client’s motion to set aside the verdict contained her argument for the first time that the Court lacked subject matter jurisdiction for non-compliance with the Part 137 Rules. And of course, where the subject matter jurisdiction of the court has not been invoked, any action taken therein is a nullity, [xxix], thereby eradicating the attorney’s recovery of the fee sought.

But what of the attorney’s “right” to a charging lien? Consistent with that principle, the Messenger Court added that the dismissal was without prejudice to the attorney’s refiling of an action after compliance with the pleading and notice requirements of Part 137 of the Rules of the Chief Administrator of the Courts.

Lesson learned: follow the Rules.

  1. See Lebandy v. Carnegie Trust Co., 222 N.Y. 525 (1917).
  2. See Banque Indosuez v. Sopwith holdings Corp., 98 N.Y.2d 34 (2002); LMWT Realty Corp. v. David Agency, 85 N.Y.2d 462, 467 (1995).
  3. See also Katsaros v. Katsaros, 152 A.D.2d 539 (2d Dep't 1989).
  4. 195 Misc.2d 768, 771, 761 N.Y.S.2d 787 (Sup. Ct. Westchester Co. 2003).
  5. Rotker at 771.
  6. 22 NYCRR Part 136 (repealed, effective January 1, 2002).
  7. 22 NYCRR. § 137.1.
  8. See Wexler & Burkhart, LLP. v. Grant, 12 Misc.3d 1162(A), 819 N.Y.S.2d 214 (Sup. Ct. Nassau Co. 2006).
  9. 22 NYCRR. § 137.6(a)(1).
  10. 22 NYCRR. § 137.6(b).
  11. 22 NYCRR. § 137.6(b).
  12. Rotker, at 772.
  13. Nosonowitz v. Nosonowitz, 284 A.D.2d 586, 726 N.Y.S.2d 486 (3d Dep't 2001).
  14. See Kerner and Kerner v. Dunham, 46 A.D.3d 372, 848 N.Y.S.2d 617 (1 st Dep't 2007); Peter Axelrod & Associates, P.C. v. Berk, 19 Misc.3d 1134(A), *2, 862 N.Y.S.2d 811 (Civ. Ct. NY Co. 2008); Lorin v. 501 Second St. LLC, 2 Misc.3d 646, 648-49, 769 N.Y.S.2d 361 (Civ.Ct. Kings Co. 2003).
  15. Rotker, at 771, citing 22 NYCRR 137.2; Code of Professional Responsibility DR 2 106 (22 NYCRR 1200.11 (e).
  16. Rotker at 770.
  17. See Delaj v. Jameson, 51 A.D.3d 450, 451, 855 N.Y.S.2d 898 (1 st Dep't 2008); Moody v. Sorokina, 50 A.D.3d 1522, 1523, 856 N.Y.S.2d 755 (4 th Dep't 2008).
  18. § 137.6(b).
  19. See Hobson Williams v. Jackson, 10 Misc. 3d 58 (App. Term, 2nd Dep't 2005); Omansky v. Gest, 2007 NY Slip Op 32168(U) (Sup. Ct. NY Co. 2007) ("Plaintiffs compliance with the statutory requirements of 22 NYCRR § 137.6 was a condition precedent to the successful commencement of this action.").
  20. Rotker, at 771 (citations omitted).
  21. See Klein v. Eubank, 87 N.Y.2d 459, 464 (1996); Shalom Toy v. Each & Every One of Members of N.Y. Prop. Ins. Underwriting Assn., 239 A.D.2d 196, 658 N.Y.S.2d 1 (1 st Dep't 1997).
  22. See Scott v. Jacobs, 2008 N.Y. Slip Op. 32812 (Sup. Ct. NY Co. 2008) (the cause of action for tortious interference with contract was unaffected by the arbitration); Part 137.1(b).
  23. 22 N.Y.C.R.R. 137.6(a)(1).
  24. Paikin v Tsirelman, 266 A.D.2d 136, 136 137, 699 N.Y.S.2d 32 (1st Dept 1999).
  25. 270 A.D.2d 328, 705 N.Y.S.2d 58 (2d Dep't 2000).
  26. 12 Misc.3d 1162(A), 819 N.Y.S.2d 214 (Sup. Ct. Nassau Co. 2006).
  27. Herrick v. Lyon, 7 A.D.3d 571, 777 N.Y.S.2d 141 (2d Dep't 2004).
  28. 26 Misc.3d 808, 893 N.Y.S.2d 434 (Sup. Ct. Westchester Co. 2009).
  29. See e.g. World Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 291, 100 S.Ct. 559, 564, 62 L.Ed.2d 490 (1980); Royal Zenith Corp. v. Continental Ins. Co., 63 N.Y.2d 975, 977, 473 N.E.2d 243 (1984).