Last May I wrote a comment on an ABA Formal Ethics Opinion on flat fees which concluded that flat fees paid in advance should be considered client funds and, therefore, should be held in a trust account until earned. In my comment I explained why I think this is the correct view even though there is some debate about it among some jurisdictions. You can read my comment here.
I am writing about this topic again today because of two interesting recent opinions, one from California and one from the District of Columbia.
In In re Alexei, ___ A.3d ___ (D.C. Ct. of Appeals 2024), 2024 WL 3611154, (available here) the court held that flat fees paid in advance are unearned until the legal services they are supposed to pay for are completed. As such, even though the attorney may have possession of the fees, the attorney does not have ownership and, thus, the fees property of the client until the fees are actually earned. If an attorney removes the unearned fees from their trust account, the attorney may violate Rule 1.15(a). The court also held that the fees are actually earned only upon completion of the entirety of the solicited services unless the fee agreement specifies otherwise.
Importantly, the court rejected the notion that a flat fee paid in advance should be considered earned upon payment because if a client consent could change when a fee is actually earned, it would not be true that a lawyer can’t earn a fee for doing nothing because a client could consent to an arrangement whereby the lawyer earns a fee upfront before actually performing any work for the client. Also, allowing a lawyers and clients to “deem earned” fees that are not earned yet goes against the intent of the rules that mandate safekeeping of property.
Having said that however, the court recognized that attorneys could depart from the default rule by either (1) specifying in the agreement for services when and how portions of the flat fee are earned or (2) obtaining informed consent from the client to treat unearned fees as their attorney property.
Notice how this second option contradicts the policy upon which the court based its decision to reject the notion that a flat fee paid in advance should be considered to be earned upon payment. In fact, the court essentially says that the attorney can negotiate with the client to have the client agree to do something the court has decided could result in a violation of the rules. This makes little sense, and I explore that topic in a forthcoming article called Advanced Magic in Illinois: Amendments to the Illinois Rules of Professional Conduct and the Confusion Over How to Handle Flat Fees Paid in Advance, 56 Loy. U. Chi. L.J. ___ (2024).
The second recent case addresses the question of whether a client’s creditor may seize funds held in trust pursuant to a flat fee agreement and concludes that, logically, the answer is yes if the fee held in trust has not been earned yet. The case is Dickson v. Mann, Super Ct. No. 37-2021-00042299-PR-TR-CTL (July 16, 2024), available here.
The court held, correctly, that “a flat fee paid by a client to a lawyer for future legal services does not belong to the lawyer until the fee is earned through the actual provision of legal services” and since the firm presented no evidence that it had performed any legal services yet the flat fee funds still belonged to the client at the time the creditor filed the notice of seizure. Accordingly, the court ordered the firm to produce the funds for seizure by the creditor.
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