New ABA ethics opinion warns about handling retainer and other fees

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Lawyers may not generally avoid the obligation to place client funds into a trust account upon receipt, according to an ethics opinion from the ABA’s Standing Committee on Ethics and Professional Responsibility released Wednesday.

Lawyers also cannot keep unearned client money, even if they label the agreement as a “nonrefundable retainer” or an “engagement fee,” except under limited circumstances, as such arrangements are really an advance or “deposit for fees.”

A May 3 ABA press release is here.

Applicable model rules

Sometimes lawyers label fees as nonrefundable and place those funds directly into their accounts. Such a practice can conflict with the ABA Model Rules of Professional Conduct, specifically Model Rules 1.5, 1.15 and 1.16. Model Rule 1.5 generally prohibits attorneys from charging unreasonable fees. Model Rule 1.15 provides that lawyers must place client money into a special fund that is separate from the lawyer’s account.

This rule furthers the so-called anti-commingling principle—that a lawyers shall not commingle client money with the lawyer’s money. Model Rule 1.16 deals with the termination of a lawyer’s representation of a client. A general requirement of this rule is that a lawyer must returned unearned fees upon the end of the representation.

The first part of the opinion addresses different types or labels placed upon fees, including advance fees.

“When a client pays an advance to a lawyer, the lawyer takes possession—but not ownership—of the funds to secure payment for the services the lawyer will render to the client in the future,” according to Formal Opinion 505.

The opinion acknowledges that there is a type of fee called a general retainer, whereby a client pays the lawyer a fee to “reserve the lawyer’s availability.” However, the opinion notes that general retainers are quite rare and not consistent with the modern practice of law. The opinion also cautions that a general retainer “may be determined to be an unreasonable fee or even unearned if the lawyer does not make himself or herself available.”

Rather, the term “retainer” should normally be labeled as an advance. The opinion also addresses flat or fixed fees, in which the client pays a specific sum of money for the lawyer’s services. The opinion notes that if such a fixed or flat fee is paid by the client in advance of the lawyer performing the legal work, the fees are an advance.

“The Model Rules of Professional Conduct do not allow a lawyer to sidestep the ethical obligation to safeguard client funds with an act of legerdemain: characterizing an advance as ‘nonrefundable’ and/or ‘earned upon receipt,’” according to the opinion.

Instead, Model Rule 1.15(c), which was adopted in 2002, provides that a “lawyer shall deposit into a client trust account legal fees and expenses that have been paid in advance, to be withdrawn by the lawyer only as fees are earned or expenses incurred.”

In a particularly incisive passage, the opinion explains that advances are unearned because they are payment today for work to be performed in the future. They were unearned upon receipt and remain unearned until the work is performed. The Model Rules mandate that advances belong to the client, must be preserved until they are actually earned, and must be refunded if the representation terminates before the fees are earned.

Three scenarios

The opinion then identifies three hypothetical scenarios involving lawyer fees. In the first one, a lawyer charges a client $6,000 retainer to handle a client’s divorce to be billed at $300 per hour. The client agreement states that after the lawyer works 20 hours, the attorney can charge additional retainers. However, after the lawyer has drafted a complaint, worked 5.5 hours and paid a $150 filing fee, the client reconciles with their spouse and wants to terminate the relationship.

The opinion explains that the client is entitled to a portion of that $6,000, even though the agreement labeled the retainer as nonrefundable. The opinion explains that “the $6,000 entitles client to 20 hours of lawyer’s work on the matter.” Thus, the lawyer must refund $4,200—the $6,000 minus the earned lawyer fees of $1,650 (for 5.5 hours of work) plus the $150 filing fee.

In the second scenario, the facts are identical, except that the client agreement provides that the lawyer is charging $6,000 as an engagement fee instead of a retainer. The opinion explains that the same result ensues, as the lawyer only worked 5.5 hours on the case, and the client is entitled to the same refund.

“Under the Model Rules, there are no magic words that a lawyer can use to change what is actually an advance payment for fees into a general retainer: ‘An attorney cannot treat a fee as “earned” simply by labeling the fee “earned on receipt” or referring to the fee as an “engagement retainer.”’”

In the third and final scenario, the lawyer charges a $15,000 nonrefundable flat fee for representing a client in a criminal law matter. The client pays the full fee, and the lawyer does some preliminary work on the case, including reviewing the police report, contacting the prosecutor’s office and law enforcement, handling the arraignment, and making an appearance. However, shortly thereafter, the client terminates the relationship and wants a refund.

The opinion explains that the lawyer must refund the portion of unearned fees, even though this was labeled as a nonrefundable fixed fee.

“Flat fees are not general retainers and must not be treated as such,” according to the opinion. “That the price set for the representation is not based on hours worked but is instead based on the completion of certain described services does not mean that the fee must be considered earned on receipt or nonrefundable when there is work yet to be done.”

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