Page 4 - When Client Relationships Don't End Amicably

some payments. That fact, the court nation that the plaintiff never even are due for the specific work product,
held, provided an alternative basis to questioned the attorneys’ fees until or the work product is incomplete. If the
protect the firm from Kent’s breach of after the unsuccessful resolution of bankruptcy court, however, determines
contract claim. the case the attorneys were hired to that the work-product is needed to
The so-called voluntary payment doc- handle. Dubrow shows the limits of administer the bankruptcy estate, then
trine generally “bars recovery of payments the voluntary payment doctrine as a section 542 trumps any contract-based
voluntarily made with full knowledge of safe harbor from breach of contract right to withhold work-product.
the facts, and in the absence of fraud or claims. While failing on a motion to This provision of the Bankruptcy
mistake of material fact or law” [Dillon v. dismiss does not necessarily portend Code mitigates the risk that attorneys
U-A Columbia Cablevision of Westchester, losing the case entirely, it does mean or accountants might pressure debtors
Inc., 100 N.Y.2d 525, 526 (2003)]. Kent additional legal fees and the stress of into paying their claims ahead of other
argued that he did not have “full knowl- continued litigation. creditors by using their work product
edge of the facts” because the invoices Although the firm in Kent success- as leverage. An accountant facing a
he received from the firm did not attach fully beat back the breach of contract situation like the one in Kent has the
detailed time entries. But the court did not claim, the case contained an ironic option of placing a retaining lien on the
find that factor persuasive, particularly in coda involving a provision of the bank- work-product. But such a lien does not
light of testimony from the firm’s partners ruptcy code. The court ordered the firm prohibit a court’s order to turn over the
that, had Kent ever asked for itemized to turn over the work-product they pos- work-product pursuant to section 542.
breakdowns of time spent on his mat-
ter, the firm would have provided them.
(Indeed, the firm did promptly provide
that information to Kent’s attorney during The last thing any accountant wants to
the litigation.)
But the lesson from Kent is not that once imagine when entering into a relationship
a client makes some payments a future with a client is the possibility that the rela-
breach of contract action is off the table.
A court’s analysis of whether the voluntary tionship sours and leads to litigation.
payment doctrine applies to any given
situation will be highly fact-dependent.
Transparency with clients about the nature
of work being performed is therefore vital.
In a case from New York, Dubrow sessed regarding Kent (whatever that Instead, if the court orders accountants
v. Herman & Beinin [70 N.Y.S.3d 181 might have been) pursuant to section to turn over work-product, they may be
(App. Div., 1st Dept. 2018)], attorneys 542(e) of the Bankruptcy Code. entitled to a replacement lien or adminis-
were accused of breach of contract Section 542(e) provides: “Subject to trative expense. [See In re Herrera, 390
by a plaintiff who made payments in any applicable privilege, after notice B.R. 746, 748 (Bankr. S.D. Fla. 2008).]
exchange for the attorneys’ services. and a hearing, the court may order The last thing any accountant wants
The attorneys filed a motion to dis- an attorney, accountant, or other per- to imagine when entering into a rela-
miss, arguing that those payments were son that holds recorded information, tionship with a client is the possibility
voluntary and thus barred the suit. including books, documents, records, that the relationship sours and leads to
But the court declined to dismiss the and papers, relating to the debtor’s litigation. But, as Kent shows, choices
case, noting that the attorneys failed property or financial affairs, to turn made at the outset of a relationship can
to show—at least at that stage of the over or disclose such recorded infor- end up being highly consequential. It
litigation—that the plaintiff understood mation to the trustee [of the bankruptcy is therefore important to consider all
all the relevant facts, such as how estate]” [11 USC section 542(e)]. The scenarios—including the worst-case—
many hours the attorneys spent on contract with Kent reserved the firm’s before undertaking new work. ■
the matter, and whether the plaintiff’s right to withhold work product if they
payments were reasonably related to were not paid. The AICPA Code of Dan Davidson, JD, is an associate
the value of the attorneys’ services. Professional Conduct 1.400.200 allows at Kostelanetz & Fink, LLP, New
It did not affect the court’s determi- CPAs to withhold work product if fees York, N.Y.

DECEMBER 2020/JANUARY 2021 | THE CPA JOURNAL 71

12/29/20 8:14 PM
00-12_01_2021-PracticeManagement-Davidson.indd 71
00-12_01_2021-PracticeManagement-Davidson.indd 71 12/29/20 8:14 PM