Several times per week we receive calls and emails from potential new clients asking about the contingency fee rates we charge in commercial debt collection matters. It is not uncommon for the inquirer to propose an objectively low rate combined with a phase-down, i.e. as the amount of the recovery rises the fee rate declines. Quite often the low rate/phase-down accounts sought to be placed are of poor quality, whether because of age, sustainable defenses or collectability issues.
Not surprisingly, the clients with which we maintain our best and long-standing relationships forward good quality claims and pay a reasonable contingent fee for the high degree of recovery we usually obtain. Of course, the caliber of the referrals to a lawyer has much to do with the due diligence undertaken prior to the credit granting. Clients want us to spend our time hunting down actual cash rather than chasing rainbows. By its nature a successful contingency fee arrangement requires mutual respect and understanding between attorney and client, with each consistently keeping in mind the full range of concerns of the other, and openly communicating about them.
Regardless of the size of the law firm involved and the related economies of scale, the handling of too many poor quality claims will spell a lack of profitability for the law firm and lower rates of recovery for the clients which actually place good quality accounts, given the reduced attention their matters will receive.
Human nature dictates that an attorney handling matters on a contingency fee basis will devote more of his or her time to recoverable accounts tendered by clients willing to pay reasonable and appropriate fee rates.
It is counterintuitive to an aggressive attorney to receive comparatively less compensation the more successful the outcome of a matter. The often proffered argument that it takes the same amount of time and other resources to recover $250,000 as it does to recover $25,000 is largely not sustainable. As a general rule, the greater the amount at issue the harder a debtor will fight, the more the debtor will employ maneuvers to deny ultimate recovery, and the higher the likelihood that there will be a Chapter 11 filing. Besides, as is the case with our firm, as part-and-parcel of a reasonable contingency fee arrangement the better commercial debt collection law firms continue the aggressive pursuit of a recovery in bankruptcy court at no extra cost, an endeavor usually requiring sizeable time expenditures.
Following the theory that better contingent compensation will incentivize superior performance, several of our clients pay us a higher fee rate for more recovery, as well as a lessor fee rate for less recovery. For example, we represent an international company with sizeable referrals that pays us 20% for a recovery constituting less than 25% of the principal amount at issue, 25% for a recovery constituting 25-74% of the principal amount, and 30% for a recovery constituting 75% or greater of the principal amount placed. We welcome this type of arrangement, which compensates the client if a recovery is on the low side and rewards the firm if the recovery is on the high end.