An effort to bring clarity to the awarding of attorney’s fees in collection cases might have the unintended effect of discouraging creditors from suing to collect small amounts, a debt-collection attorney said Friday.
Under a proposal that’s pending before the group that suggests changes to court rules in Maryland, Maryland District Court judges could cap the amount they order defendants to pay in debt collection cases at 15 percent of the recovery.
If approved by Maryland’s top court, the proposal would replace the current system under which judges calculate fee awards by multiplying a “reasonable” hourly rate by the number of “reasonable” hours worked.
The current approach encourages creditors to bring small claims because, if they prevail, they can also collect their reasonable attorneys’ fees from the debtor. But if the fee award against the debtor is capped at 15 percent, creditors might find it’s not worth their while to sue, said attorney Thomas C. Schild, who represents homeowners associations.
For example, under the current system, a reasonable legal fee to recover a $1,000 homeowner assessment might be $500. If association prevails, it would get an award of $1,000 for the assessment and a fee award of $500 with which to pay its attorney.
But if the fee award is capped at 15 percent, or $150, the association could wind up paying the remaining legal bill of $350 out of its own pocket. That would reduce its actual recovery to $650.
The client “might pay the lawyer more than they would collect,” said Schild, who heads the Thomas Schild Law Group LLC in Rockville.
The decision not to pursue a debt is often the cost of doing business for a retail establishment but can be devastating for a homeowners association, where word spreads fast around the neighborhood, Schild said.
“If you are a business, none of the other customers knows you have written off one of your other customer’s bills,” he added. “Our type of client is especially penalized.”
Not so simple
The 15 percent discretionary cap is part of the Standing Committee on Rules of Practice and Procedure’s broader proposal to bring clarity to the calculation of attorney’s fees in Maryland courts.
The committee will accept public comments on its proposal until May 20, when the proposal will be submitted to the Court of Appeals for approval.
Under Maryland law, attorney’s fees can be awarded if authorized by contract between the parties to the litigation or by the statute at issue in the litigation.
The existing formula for calculating fees seems simple: just determine what a reasonable hourly rate would be for the work performed and multiply it by a reasonable number of hours worked.
But that calculus, set by Maryland’s high court in a series of opinions, has sparked confusion among judges and attorneys regarding what factors would go into determining reasonableness and when fees should be awarded.
“It’s not so crystalline,” said retired Judge Alan M. Wilner, chairman of the rules committee.
Judges and attorneys need “a road map of how to proceed” in the calculation and awarding of attorney’s fees, Wilner added. “There really isn’t one size fits all. You’ve got to look at each case.”
To aid in the calculation, the committee’s proposal includes guidelines, such as what factors courts should use in determining compensable legal expenses for fee award purposes.
For example, the proposal would limit the situations in which fees will be awarded for the work of more than one attorney — for example, where there are multiple clients “with common and conflicting interests,” the proposal says.
A lead attorney should be appointed for each task, and fees for lawyers who assist the lead attorney should be awarded only if their work is “directly related” to their own client’s interest.
In addition, fees should not be awarded for more than one attorney per client to attend a deposition, unless a “valid reason” can be shown for the additional lawyer’s presence. (Such a reason could be that the other side had more than one attorney at the session, a committee note says.)
Timothy F. Maloney, an attorney and member of the rules committee, said the proposal has taken several years to draft and underwent several revisions in an effort to ensure clarity.
“This [proposal] is designed to clear up a lot of ambiguity and clear up the questions of how, what and when, when it comes to attorney’s fees,” said Maloney, of Joseph, Greenwald & Laake P.A. in Greenbelt.
“The touchstone is reasonableness,” he added. “That underlies everything.”