Screening Out "Problem Clients": New Matter Evaluation
by Kirsten Christophe, Esq.
(County Bar Update, September 2001, Vol. 21, No. 8)


Screening Out "Problem Clients":
New Matter Evaluation

By Kirsten Christophe, Esq.
(c)2000 Christophe Consulting

When considering whether to accept a new matter, a careful evaluation of the client and the matter for which they seek representation is key.

In the August 2001 issue of this newsletter, we addressed client-related considerations that form part of an effective new business screening process.

A second part of the client intake process is consideration of the nature of the matter presented in light of the firm's resources, strategic direction and desired client/matter risk profile.

Likelihood of Litigation: Professional Independence

One key issue to consider in reviewing a new matter is the likelihood that litigation will arise from the representation. If the matter involves litigation, for example, the risk that a sanction motion will be filed should be evaluated. If a corporate matter is involved, the extent to which investors or other third parties are likely to sue the firm should be analyzed.

Several factors will increase the chance of a suit being filed. Many of these factors are controllable by the firm or lawyer involved.

Dual Roles. If anything goes wrong in the transaction, a legal malpractice suit is a real risk. For example, if a member of the firm is a director or a significant officer, independence will be at issue. Acting in a ministerial capacity, such as assistant secretary, should not involve the same risk.

Fee Arrangements. Independence may be affected by the type of fee agreement negotiated. For example, instead of receiving a check for services and expenses, firms may be tempted to accept securities issued in a securities transaction. The trier of fact is likely to focus on the firm's incentive to close the transaction since only in that way can the lawyer assure that payment is made. The apparent lack of independence and the fact that economic gain is dependent upon closing the deal become the focal points, making it difficult to demonstrate that the attorney's decisions were based on independent, professional considerations.

Client Dominance. Consideration should be given to what portion of the firm's revenue is generated by a particular client. The smaller the firm, the greater the risk the firm could be perceived to lack independence if the client in question generates much of the firm's revenues. Any client that generates more than 10 percent of gross revenues should be viewed with care. If a client generates 20 percent or more, the situation warrants closer scrutiny. A plaintiff might prove that, but for the revenue from that client, the firm's net income would drop precipitously.

Absence of an Independent Review Process for Opinions. Although a poorly organized independent review might not benefit either the firm or the client, when properly done it will assist in preventing claims and in minimizing damages. To do so, the review must include a partner who isn't personally involved in the transaction. Moreover, that partner needs sufficient time to complete the review and additional time as needed to correct any deficiencies.

Probable Range of Damages if Litigation Ensues

In analyzing whether to accept intake of a new client matter, it's helpful to evaluate the probable range of damages if a suit is filed.

If the underlying matter involves litigation and a Rule 11 claim is the threat, the conservative approach is to estimate the total fees and expenses the other side will incur.

If the matter involves a trust, the tax benefits may be the measure of damages.

Availability of Other Defendants. The ability of other potential defendants to share in the judgment also is important. For example, a securities transaction analysis should include the financial strength of accountants, underwriters and lenders and their insurance coverage, if known.

Risks Extrinsic to the Transaction

When considering acceptance of a new client matter, determine if there are any specific risks that are extrinsic to the transaction. For example, although securities transactions can be risky, many firms have handled dozens of offerings for established corporations without being sued.

Growth and Financing Patterns. An evaluation of the firms that successfully handle offerings while avoiding malpractice claims in this area reveals that the issuers are ongoing corporations that have grown over time and gone through several stages of financing. In contrast, firms that have had several claims involving securities transactions typically have represented newer ventures that desired rapid growth without going through preliminary stages of financing. In other instances, the suits were generated by ventures formed for a specific purpose, whose existence depended on the initial offering of securities.

Type of Investor. The type of investor also can be an important characteristic in examining the risk of a securities transaction. Unsophisticated investors are more likely to sue and more likely to prevail. However, institutional investors are better able to finance such cases and can be formidable adversaries.

Client's Financial Stability

The ability of the client to pay is important in assessing the risk of a transaction. For example, an hourly fee may be negotiated for a real estate or corporate transaction, when in reality there will be no payment or something less than full payment unless the transaction closes.

Firm Cash Flow and Fee Arrangement. Because attorneys in the real estate and corporate areas usually cannot obtain a significant fee through a contingency, they may have a poor year if they aren't paid when one or two major transactions don't close.

In contrast, litigators who primarily depend on contingent fees learn to evaluate their cases so that the number of losers usually doesn't drastically affect their income. The contingent fee itself, when set properly, is designed to compensate for those cases where no recovery is obtained.

This economic distinction suggests that a contingent fee won't cloud the objectivity of plaintiffs personal injury attorneys.

On the other hand, when a real estate or corporate attorney spends significant time on a transaction and realizes there will be a serious shortfall in fees and expenses unless the transaction is closed, the emphasis is likely to be on closing the transaction rather than doing so safely. Yet, even the litigator in need of funds may seek to settle the matter prematurely.

Practical and Strategic Issues Related to Your Practice

Consider whether the subject matter of the representation is within the firm's expertise or an area in which a lawyer could quickly obtain competency. This evaluation should also include available staff or office resources that the representation may require.

Similarly, determine whether the representation will create a conflict of interest that might preclude the firm from taking other more desirable matters in the future.

An Educated Judgment Call

Both the client analysis and the transaction analysis must be examined, but sometimes the evaluation of one may dominate the other.

For example, an individual who, as a securities promoter, has breached fiduciary duties, engaged in securities fraud and filed bankruptcy may be an acceptable client if the firm is asked to defend an SEC injunctive action. The transaction analysis will probably show that the matter is relatively safe despite the dangerous characteristics of the client. Yet, one would never want to represent a corporation if that individual had material involvement in a corporate securities transaction.

By consistently employing both a client and transactional analysis in considering each and every prospective new client or matter, you will be implementing an important malpractice prevention tool.


This article, which originally appeared in the Aon Attorneys' Advantage Risk Management Newsletter, "The Quarter Hour", is reprinted with permission of the copyright holder through Aon Attorneys' Advantage.

This article is intended to inform the reader of potential liability exposures for attorneys. These exposures and their management vary among attorneys and over time. This article reflects general principles only and does not render legal advice. This article does not establish or recommend specific guidelines or standards for legal practice or its management, or for attorney liability exposures or their management. Readers should consult legal, financial, insurance and other advisors if they have specific concerns. Neither the Los Angeles County Bar Association,

Aon and its affiliates, nor "The Quarter Hour" assumes any responsibility for how the information in this article is applied in practice or for the accuracy and completeness of this information.

Reproduction without written permission is prohibited.

# # #