Two recent decisions reiterate the ABA's approach to flat fees paid in advance

 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.

ABA Issues new formal opinion on advance "non refundable" fees

Way back in 2016 the Board of Professional Conduct of the Ohio Supreme Court released an advisory ethics opinion on whether a lawyer may enter into an agreement requiring a client to pay a flat fee in advance of representation and on whether a lawyer must deposit such a fee into a trust account. See Board of Professional Conduct of the Supreme Court of Ohio, Opinion 2016-1 (February 12, 2016).  Upon reading it, I thought the opinion reflected a common problem among jurisdictions that results in a confusing inherent contradiction within the applicable rule.  So, I wrote an article for Ohio Lawyer magazine (available here) in which I argued why the Board should have corrected the deficient drafting and interpretation of the rule.  

In essence, I argued a few relatively simple principles: that it would be unethical to charge or collect a fee that was not earned and that, therefore, if the fee was paid in advance, it had to be kept in trust until earned.  And, I made very specific suggestions on how to amend the rule and its comment to reflect the correct doctrine and to help lawyers better apply it.

The problem with the Ohio opinion, which is not uncommon among a number jurisdictions, is that it concluded it would be fine for lawyers to “deem earned” fees that had not been earned yet in order to allow the lawyers to place the money in their general accounts rather than in their trust accounts, while, at the same time, assuring clients that if the money was not earned eventually, they would be guaranteed a refund of the unearned portion of the fee.  

In my article, I argued this resulted in making the fees both earned and unearned at the same time, and inevitably lead to commingling regardless of where the money was placed.  It also prioritized the lawyers’ interests in getting their hands on the money at the expense of clients who were placed at risk of losing their money.  Thus, I suggested specific changes to the Ohio rules to fix the contradiction and to balance the interests of lawyers and clients.

But no one listens to me, and nothing changed.

So why am I writing about this today?  Because last week the ABA’s Standing Committee on Ethics and Professional Responsibility issued a new Formal Opinion (No. 505, available here), in which it adopts the views I argued for way back then.  I guess it took a long time, but finally we have a good opinion on the subject and hopefully jurisdictions will take notice.

Opinion 505 frames the issue from a slightly different perspective, but in the end addresses the same questions.  The opinion focuses on the question of whether lawyers can label advance fees as “non refundable” but in the process talks about the same practice I discussed years ago – the practice of saying that fees are “deemed earned” when in reality they are not.  On this point, the opinion is very clear: 

“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.” This approach does not withstand even superficial scrutiny. A lawyer may not charge an unreasonable fee.”  Thus, as the opinion points out, “[t]his approach departs from the safekeeping policy of the Model Rules described herein and creates unnecessary risks for the client.”

“Legerdemain,” by the way, means a skillful hiding of the truth in order to trick people.  Hiding of the truth to trick people.  That sounds bad.  You wouldn’t want to be known as a lawyer who hides the truth to trick people, would you?

Interestingly, the ABA Opinion has generated some criticism from some that say that lawyers and clients should be free to contract in any way they see fit.  Yet, this view forgets that rules of professional conduct interfere with lawyers’ “rights” all the time, for many reasons and on many topics because there are other interests at stake.  In response to that, some then argue that there is no valid interest at stake on the topic of fees paid in advance.  Yet, there is.  As the opinion argues, the interest is client protection.  The rules are there to protect clients and they do so by making sure that the lawyers abide by the rules related to safekeeping of money and the rules that mandate refunds of unearned fees.  

Some have argued that lawyers who might steal money from clients will take the money from trust accounts anyway, so mandating which account must be used to keep fees paid in advance makes no difference.  But this forgets that the idea behind mandating the use of trust accounts is not only to protect clients from the lawyer, but, more importantly, from the lawyer’s creditors.  

Finally, I’ve also heard some cite a case from Michigan called Grievance Administrator v. Cooper, 757 N.W. 2d 867 (Mich. 2008), in support of the position that it would be fine for a lawyer to charge a non-refundable flat fee paid in advance.  Unfortunately, this analysis is wrong for a basic reason: the case was wrongly decided since it did not involve a flat fee paid in advance.  It involved a security retainer, which, by definition, would be unreasonable if it were non-refundable.

One last point: the ABA Opinion refers to circumstances in which a lawyer does not have consent from a client.  An interesting question is whether a lawyer should be allowed to place an unearned fee in the lawyer’s operating account if the client gives consent.  In the District of Columbia, for example, that is allowed.  See In Re Mance 980 A. 2d 1197 (D.C. 2009).  

So, in conclusion, I think we can agree that when fees are paid in advance, they raise some ethical concerns.  One way to address these concerns is to ban lawyers from asking clients to pay in advance.  Another solution might be to stop requiring that lawyers use client trust accounts.  See, here and here, for example.   Yet, many reasons justify allowing the practice of asking for payment in advance and of requiring lawyers to keep separate trust accounts.  

The concerns can be addressed without having to go that far.  A better alternative is to eliminate the “legal fiction” of “deeming” a fee as “earned” when it is just a way to pretend that the amount of the fee belongs to the lawyer even though the work it is supposed to pay for has not been performed.  Instead of allowing this, lawyers and clients should agree on how (or when) portions of the fee are actually earned so that ownership of that portion of the money can be transferred to the attorney.  This way, the fee amount paid in advance is kept in the trust account, but the attorney can withdraw funds as they are earned before the end of the representation. 

Illinois Supreme Court announces changes to rules on attorneys' fees

The Illinois Supreme Court recently announced amendments to Illinois Rules of Professional Conduct 1.5 and 1.15 to clarify the law related to retainers.  Unfortunately, the changes do not address the most important issue that needed to be addressed.

On the positive side, the amendments explicitly note that nonrefundable fees and nonrefundable retainers are prohibited, and “any agreement that purports to restrict a client’s right to terminate the representation or that unreasonably restricts a client’s right to obtain a refund of unearned or unreasonable fees is prohibited.”  This is a clarification that would be helpful in many other states where the issue is still confusing.

However, the amendments did not get rid of the notion of a "special purpose (or advance payment) retainer."  The concept originates in the Court's decision in Dowling v. Chicago Options Associates, a case that was wrongly decided and which, in the end, validated a scheme to use a law firm to hide assets from a creditor.  

A special purpose retainer is defined as a “present payment to the lawyer in exchange for the commitment to provide legal services in the future."  Note how that is exactly the same definition of a security retainer, so to distinguish them it is said that the special purpose retainer "may be used only when necessary to accomplish some purpose for the client that cannot be accomplished by using a security retainer” and that, unlike the security retainer, a special purpose retainer is "earned immediately."

Thus, the special purpose retainer is considered to be a fee that immediately becomes the property of the lawyer, whether the services are performed or not.  If that means that the retainer pays just for the commitment to perform the services, then how is it different than a classic retainer?  On the other hand, if it pays for the actual services, then it is nothing other than a fee paid in advance, which can't be earned immediately because they can't be earned until the work is done.  So, in the end, if the special purpose retainer pays for services not yet rendered but is earned immediately nonetheless, it is actually earned and not earned at the same time.  And, if that is the case, it does not matter where the lawyer deposits the money, the lawyer will be commingling.  And that is just two of the problems with it.

Years later, the Court was confronted with the consequences of that new type of retainer and had a chance to get rid of it, but instead decided to ban it in certain types of cases only.  See, In re Marriage of Earlywine (2013).  I wrote about that case back then here.

In considering the amendments recently announced it seems that the Court had yet another opportunity to fix its original mistake but again failed to do so.  

You can read more about the recently adopted changes here or here.  You can read more about my thoughts on fees that are earned and not earned at the same time here and here.

Advice on what not to do in your retainer agreement

 Here is some advice on how not to prepare a retainer agreement by Carolyn Elefant of MyShingle.

New Jersey Supreme Court on arbitration clauses in attorney retainer agreements

Late last year, the New Jersey state supreme court held that law firms that want to include mandatory arbitration provisions in their client engagement agreements must explain to the client the benefits and disadvantages of arbitrating a prospective dispute.  The case is called Delaney v. Dickey, and you can read it here.

The Law for Lawyers Today has a comment here.

NJ Supreme Court validates use of mandatory arbitration clauses in retainer agreements

The New Jersey Supreme Court in Delaney v. Sills has validated the use of retainer agreements that provide that all disputes between attorney and client shall be subject to arbitration. On the other hand, the court emphasizes that the fiduciary nature of the attorney-client tie requires candid explanation to the client of the advantages and disadvantages of the arbitral forum.

In my opinion, mandatory arbitration agreements are inherently bad for consumers and lawyers should not be allowed to impose them on their clients.  I am glad that the court says lawyers have an obligation to explain the pros and cons of arbitration, but what good does that do when prospective clients are all but forced to accept it if they want the lawyer of their choice?  

The court summarized its decision as follows:

For an arbitration provision in a retainer agreement to be enforceable, an attorney must generally explain to a client the benefits and disadvantages of arbitrating a prospective dispute between the attorney and client. Such an explanation is necessary because, to make an informed decision, the client must have a basic understanding of the fundamental differences between an arbitral forum and a judicial forum in resolving a future fee dispute or malpractice action. . . . That information can be conveyed in an oral dialogue or in writing, or by both, depending on how the attorney chooses best to communicate it. The Court refers the issues raised in this opinion to the Advisory Committee on Professional Ethics (ACPE), which may propose further guidance on the scope of an attorney’s disclosure requirements. The new mandate will apply prospectively, except as to Delaney, who must be allowed to proceed with his malpractice action . . .. 

George Conk (a member of the ACPE) has a detailed comment on the decision here.  The Louisiana Legal Ethics Blog has a comment comparing the decision with the current state of the law in Louisiana.

Texas Bar issues opinion on whether attorney can renegotiate a flat fee

Long time readers of this blog might remember that I have published a couple of short articles on flat fees. (See here and here, for example.)  One issue related to flat fees that is interesting is whether an attorney should have the right to renegotiate the fee if it turns out that he or she miscalculated the amount of time the legal services would take.  Obviously, you would think that once the fee agreement is set, the attorney can't unilaterally change it to force the client to pay more.  The main reason a client would agree to a flat fee is the fact they know ahead of time how much the total fee will be.

This puts an attorney in a difficult position when it turns out the amount of work the fee pays for turns out to be a lot more than expected.  The attorney could ask the client to pay more, but what if the client refuses?  After all, they have a contract that says the services would be provided for the agreed amount and therefore have the right to expect the work will be done regardless of how much work it is.  In a case like that, the lawyer miscalculated and would suffer the consequences of his/her mistake.  Like I said, I guess there is nothing that says that the lawyer can't ask the client to pay more, but if the client refuses, the lawyer has to suck it up -- do the work diligently, competently and completely even if it means taking a financial loss.

So the question I would ask is whether it would be ethical for the lawyer to include in the initial contract a clause allowing the lawyer to recalculate or at least to force the client to agree to renegotiate the fee under certain conditions.

A few months ago, the Texas Bar issued an Ethics Opinion partially addressing the issue.  It concludes as follows:

A lawyer may renegotiate his fixed, flat fee for representing a client in a litigation matter after the litigation is underway if modification of the fee agreement is fair under the circumstances. The burden of proving fairness is the lawyer’s and will depend upon factors such as the length of the lawyer-client relationship, whether the reason for the renegotiation could have been anticipated at the outset of the representation, and the client’s level of sophistication. Before seeking to renegotiate a fixed fee, the lawyer should be mindful of the risks that the lawyer voluntarily assumed when proposing or agreeing to that fee—including the possibility that the fixed fee might not be adequate to compensate the lawyer when compared to other fee arrangements.

Notice that the opinion refers to "renegotiating the fee" not to including something in the initial contract.  Does that mean that the opinion considers it ethical for an attorney to seek to renegotiate with the client, or that it would be ethical for the attorney to change the terms of the original agreement?   It is not clear, but it seems to me it is talking about whether it is ethical to ask the client to renegotiate, and it concludes that it would be depending on certain factors.

But, to me, that does not really answer some of the other important questions.  Let's say it is ethical for the attorney to ask, what happens if the client refuses to agree to the new proposed fee?  Can the attorney force the client to accept new terms?  Does the fact that the attorney can ask a client to renegotiate the terms of the contract, make the new terms themselves part of the contract?    My guess is that these questions would need to be addressed in the original contract and the client would have to agree to the terms ahead of time.

Also notice that the opinion seems to be limited to litigation.  Why is that?  What if a client asks me to prepare a will and I agree to do it for a flat fee of $100, which is my hourly fee, because I think it won't take me more than an hour.  Later I realize it will take me a lot longer than that. If the language of the opinion is limited to litigation, I'd have to suck it up, which a litigator wouldn't.  Why the difference?  What makes their time or work more valuable than mine?

You can read the full opinion (which is very short) here.

California's proposal on "classic retainers" and flat fees

As you probably know, California is going through the process of revising it rules of professional conduct.  See here and here for recent updates on that.  If you are a long time reader of this blog, you may also know that I have often commented on the confused state of the law regarding flat fees.  See here, here and here for examples of why I have said that.  Much of that confusion relates to the issue of whether fees can be non-refundable.

California's proposal is actually pretty straightforward and, in my opinion, a good approach to the question.  It states, in part,

(d) A lawyer may make an agreement for, charge, or collect a fee that is denominated as “earned on receipt” or “non-refundable,” or in similar terms, only if the fee is a true retainer and the client agrees in writing after disclosure that the client will not be entitled to a refund of all or part of the fee charged. A true retainer is a fee that a client pays to a lawyer to ensure the lawyer’s availability to the client during a specified period or on a specified matter, but not to any extent as compensation for legal services performed or to be performed.

(e) A lawyer may make an agreement for, charge, or collect a flat fee for specified legal services as long as the lawyer performs the agreed upon services. A flat fee is a fee which constitutes complete payment for legal fees to be performed in the future for a fixed sum regardless of the amount of work ultimately involved and which may be paid in whole or in part in advance of the lawyer providing those services.

Section (d) says that a classic retainer can be non-refundable.  However, you must remember that the retainer is still subject to the rule that says that all fees must be reasonable.  So is it possible that under certain circumstances making the retainer non refundable can make it unreasonable?  How about a case where a client agrees to, and pays the retainer, and then decides the next day that he does not want the lawyer any more?  Or a case where the client pays the retainer and when he goes to ask the lawyer to provide services, the lawyer is not available?  In those cases, it seems to me the client would have a good argument that the lawyer has a duty to refund the retainer because otherwise the non-refundability aspect of it would make it unreasonable.  If I am right, then all the rules says is that, in the end, a classic retainer can be non-refundable only as long as making it non-refundable does not make it unreasonable.  I think that is pretty much the prevailing view, and I don't have a problem with it.

Section (e) is more controversial.  Many, perhaps most, jurisdictions, have held that flat fees (at least when they are paid in advance for work to be performed later) can't be non refundable.  However, I have argued that doing so eliminates the advantages of flat fees as alternatives to hourly fees.  For that reason I have argued that flat fees should be allowed to be non refundable as long as there is a real possibility that the work to be performed could take longer than originally expected or agreed upon.  Section (e) appears to take this approach.  As long as the service is completed, the fact that it is completed in less time than expected does not require the lawyer to reimburse the amount of money equivalent to the time saved.  Again, however, the fee is subject to the requirement of reasonableness, but in this case the reasonableness refers to the amount charged taking into account the difficulty of the task, how much time it is expected to take to complete, the market rate and other similar factors.  this is not the prevailing view, but, again, I don't have a problem with it.

On teaching how to represent a client with diminished capacity

The blog IP Ethics & Insights has a monthly feature on "what they don't teach you in law school" which is actually making me feel pretty good about my own teaching because the last two topics it has covered (here and here) are things I actually do teach in my class.  The first one was how to handle client's money, which I will be covering in class today, as a matter of fact.

The second one is how to represent a client with diminished capacity, which I cover as part of the discussion on the basic principles of an attorney-client relationship.  IP Ethics & Insights covers the basics here.  To discuss this material I assign a case called In the Matter of MR, 638 A.2d 1274 (N.J. 1994), which provides a good discussion of the basic principles and a helpful analysis on how to evaluate the proper role of the lawyer and the allocation of the decision making authority within the attorney client relationship. 

If you want more information about what I cover in my class (and how I do it), feel free to visit my course website here.

Florida adopts amendments to clarify issues related to different types of fees

About three weeks ago, the Florida Supreme Court adopted some changes to the state's rules to provide better definitions of some concepts related to fees.  See In re Amendments to Rule Regulating the Fla. Bar 4-1.5—Fees & Costs for Legal Servs., 2015 BL 300826, Fla., No. SC14-2112, 9/17/15.

According to the new text in Rule of Professional Conduct 4-1.5, a “retainer” is a sum paid to guarantee a lawyer's future availability, not payment for past or future legal services, while a “flat fee” is money paid for all legal services to be provided and may be termed “non-refundable.” An “advance fee” is a payment against which the lawyer will bill the client as legal services are provided.  Note that what Florida calls "advance fees" is what most other jurisdictions know as a "security retainer."

In addition to the new text of the rule, Florida amended the rule's comment to make clear that a nonrefundable retainer or nonrefundable flat fee should not be held in trust and that advance fees must be held in trust until earned.  The comment also says that nonrefundable fees, like all fees, are subject to the prohibition against excessive fees.

I find it interesting that the Court decided to allow non refundable flat fees.  Whether flat fees can be non refundable has been the subject of different (and often confusing) approaches by many courts.  See my previous comments on the subject here, here and here.

My own view on this topic is that it is not unreasonable to collect a non refundable flat fee if the task is completed in less time than originally expected.  In such a case, the attorney should be allowed to keep the value of the time saved.  If the task is not completed, however, as when a client dismisses the attorney before the task is completed, the attorney should refund the portion of the fee that is "unearned." 

If that is what Florida has in mind in its new rules, I am OK with it.  

Quick review of the basics of handling money

IPethics&Insights has a short post reviewing the basics on handling clients' money, firm bank accounts and the like, here.

Illinois Supreme Court finds "advanced payment retainers" can't be used in divorce case

Back in 2007, in a case called Dowling v. Chicago Options Associates, the Illinois Supreme Court recognized something it called an “advance payment retainer” which would allow a client to give a lawyer money the client wanted to keep away from the client’s creditors. The idea behind the concept was to protect a client’s ability to pay for legal representation, but as applied in that particular case and as explained by the court, the concept makes no sense and inevitably results in a violation of other rules of professional conduct.

Surprisingly, however, even though it makes little sense, the concept of the advanced payment retainer had not been challenged before the court until this year. This new case (In re Marriage of Earlywine) involved a divorce where the husband asked his lawyer to keep a certain amount of money so that the husband would not have to contribute to pay for the wife’s legal representation as determined by a specific statute. The statute was created to level the playing field in divorce cases by requiring a spouse with access to independent funds to help the other spouse pay for representation.

In Earlywine, the husband did not want to share his funds with his wife who was indigent. In an attempt to prevent her from getting access to the money, the husband gave the money to his attorney as an advanced payment retainer.

The court did not overrule Dowling, however, and simply ruled that the use of an advance payment retainer to protect a client’s funds from the obligation to share under the domestic relations act undermines the purpose of the statute in leveling the playing field which would render the act a nullity. The court found that it was “clear from the attorney-client agreement that the advance payment retainer in this case was set up specifically to circumvent the “leveling of the playing field” rules set forth in the Act. To allow attorney fees to be shielded in this manner would directly undermine the policies set forth above and would strip the statute of its power. If we were to accept [the husband’s] argument, an economically advantaged spouse could obtain an unfair advantage in any dissolution case simply by stockpiling funds in an advance payment retainer held by his or her attorney.” 

This makes sense to me and I think the decision reached the correct result. You can read the full opinion here.  What the court failed to accept, however, is that the same thing could have been said about the conduct of the client in Dowling. Although the court reached the correct result in this case, it should have taken the chance to get rid of the problem it created with its decision in Dowling.

As it is, an advanced payment retainer refers to money that belongs to the attorney, even though it is not actually earned until the work is performed. How it can be earned and not earned at the same time is a mystery. And if it is owned by the attorney, but not earned and thus owed to the client if not used, how can the attorney deposit it in either the general account or the trust account without commingling?