Over the past couple of years many jurisdictions have issued opinions on whether flat fees can be non-refundable and the result of these opinions is a mixed bag of approaches. By my non-scientific count (ie, what I have seen and written about here), the most common approach seems to be that flat fees are not earned upon receipt, and therefore must be deposited in a trust account until earned. That means that the client owns the money until earned. The advantage of this approach is that it makes sense to say that if the lawyer does not complete the task the fee is supposed to pay for, the lawyer is obligated to refund the client the portion of the fee that was not earned.
Some jurisdictions, however, have taken a different approach which, quite frankly I don't understand. The Board of Professional Responsibility of Ohio just issued an opinion that illustrates this alternative approach.
The opinion (available here) concludes, first, that a lawyer is
required to deposit
flat fees paid in advance into an
IOLTA trust account,
unless designated as “earned upon receipt” and
the fees as they are earned.
This is the generally accepted view I described above with the added caveat that the client may agree to say the fee is earned upon receipt. This is an important alternative for the attorney, because if the fee is earned upon receipt the attorney would be allowed to deposit the money in the attorney's general account. Since the fee has been earned, the money belongs to the lawyer and the lawyer can do with it as the lawyer pleases except leaving it in the trust account. Since the money belongs to the attorney - because it has been earned - leaving it in the trust account would mean the lawyer is commingling funds. The Board explains this in the opinion.
OK, so far, so good; but then the opinion goes on to say that "even if a
flat fee paid in advance of representation
“earned upon receipt,”
Prof.Cond.R. 1.5 requires
a lawyer to return any unearned portion of the fee
if the lawyer does not complete the
representation for any reason."
Here is what I don't understand: How can the fee be earned and unearned at the same time? If the fee is deemed earned, then it is earned. No? Or is the Board saying that "designating" a fee as earned does not mean that it "is" earned? That doesn't make sense to me. What would be the purpose of "designating" a fee as earned if the lawyer could not handle the money as if it had been earned?
Which brings me to the question: how is a lawyer going to handle the money? According to the opinion itself, if the fee is deemed earned upon receipt then the attorney can't leave the funds in the trust account. Doing so would be a violation of the rules against commingling. But once the money is deposited in the general account, if there is a refund to pay, where is the refund going to come from? It has to be from the general account where the money was placed, right? And if that's the case, doesn't that mean that the attorney had been commingling client money (the unearned amount to be refunded) and attorney money in the same account?
Thus, the Board's conclusion inevitably results in a violation of the rules. If the fee is earned but some of it has to be refunded, it means that some part of the fee was in reality not earned and by placing the full amount in the general account the lawyer commingled. On the other hand, if the fee is earned but the lawyer leaves even part of the amount in the trust account just in case maybe a portion of the fee will have to refunded, the lawyer has also commingled.
I understand the Board is trying to protect the client, but the only way to do that and still make sense of the other rules at issue is to say that a fee paid in advance has to be kept in the trust account until it is earned. In other words, I would eliminate the possibility of allowing the fee to be "designated" as earned upon receipt. OR you could say that the flat fee can be deemed earned upon receipt, but that meant that it can be non refundable. But you can't do both.
Thanks to the Legal Profession blog for the link.