Paying Your (Bank’s) Lawyer: The Perils of Third-Party Billing

By Richard D. Rogovin
From the September 2012 issue of Columbus CEO

Earlier this year, a friend called about a legal fee statement he received from his banker for work done on his loan. The term was being extended, and the bank had asked outside counsel to prepare the necessary documents. Upon reviewing the statement and the documents, the fee did seem high. The statement charged time for several internal conferences, review by lawyers of the work of other lawyers, and hours of preparation of documents which appeared to have been computer-generated. I suggested my friend discuss the matter with his loan officer. As it turned out, neither the bank nor the law firm was willing to make any concession, and he had no alternative but to pay the statement in full.

This was unfortunate, but understandable, because the normal attorney-client relationship did not exist. In essence, he was a captive client of the law firm, and the real client—the bank—had no interest in controlling the fees that were being charged because the customer was paying them. While there is no doubt that the law firm did an excellent job protecting the bank, the fee was about double what it should have been. Fewer than five pages could have done the work of 20.

This brief foray into the mechanics of the banking world brought to mind the subject of legal fees and how they are billed. What do we find most objectionable about today’s legal fee statements? A little historical perspective might be useful in answering this question.

Most Americans think of Abraham Lincoln as a great president, but they sometimes forget that he was also a great lawyer. He started out riding the county courthouse circuit with the judge and other lawyers, where they would try small civil and criminal cases. One of these original courthouses, from Logan County, Ill., can be visited today on Main Street in Henry Ford’s Greenfield Village.

Eventually Lincoln’s reputation gained him the mother of all clients, the Illinois Central Railroad, for which he won a case worth millions in the Illinois Supreme Court. He submitted a fair statement for $5,000—the equivalent of $131,579 today—but was forced to sue his client for the fee. The jury awarded him the full $5,000, less the $200 retainer previously paid, based entirely on the results he obtained.

Lincoln’s bill was not itemized by time expended because in those days, lawyers did not record hours and minutes for every conversation, document and court appearance. Of course, telephones had not been invented, so the ubiquitous conference calls which appear on most fee statements today could not have been billed. Basically, legal fees worked like this: If you trusted your lawyer and had a good result, you were generally satisfied with his bill. That is, unless you were the mighty Illinois Central Railroad.

Even today, a legal fee is more easily justified by the results rather than the efforts, no matter how carefully those efforts are recorded and itemized. This debate has been going on in the legal community since hourly billing rates were invented decades ago.

 In a provocative article published in August 2007 in the American Bar Association Journal, legal mystery writer Scott Turow, a practicing attorney, made a strong argument that “the billable hour must die” because “It rewards inefficiency, makes clients suspicious, and may be unethical.” Turow admitted the difficulty of finding an alternative billing system that is fair to both the client and the lawyer, but concluded that “people as smart and dedicated as we are can do better.”

Turow was right. A system which depends solely upon billable hours is a poor one, but there has always been a better way. It includes open communication between the lawyer and his or her client at the very beginning of the relationship about the value of the lawyer’s services in terms of the desired outcome. It depends upon fee statements that discuss the result accomplished rather than the minute-by-minute efforts to achieve that result. It also requires the attorney to tear up or reduce the bill if the desired result was not fully achieved.

As for that captive client of the bank’s lawyers, once he has become a customer, there is very little he can do. Before that happens, a frank discussion with the loan officer needs to take place, in which the potential customer makes it very clear that he will either have the right to review and approve any legal fee statements from the bank’s counsel or will take his business elsewhere.

Richard D. Rogovin is chairman of U.S. Bridge in Cambridge, chairman of Edison Welding Institute in Columbus and a corporate and international business attorney with the Columbus office of Shumaker, Loop & Kendrick. He can be reached at (614) 209-5010 or at dickrogo@email.com.