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In a newly released ethics opinion from the ABA’s Standing Committee on Ethics and Professional Responsibility, lawyers have been reminded of their obligations when handling client funds. The opinion, which was made public on Wednesday, highlights the importance of placing client funds into trust accounts and restricts lawyers from retaining unearned client money. Even if labeled as a “nonrefundable retainer” or an “engagement fee,” lawyers are generally not allowed to keep unearned client money except in limited circumstances.
The ABA’s press release on May 3 further emphasized the significance of the ethics opinion.
The opinion specifically points to several relevant Model Rules of Professional Conduct, including Rules 1.5, 1.15, and 1.16. Rule 1.5 generally prohibits attorneys from charging unreasonable fees, while Rule 1.15 mandates lawyers to keep client money separate from their own accounts. This rule aligns with the principle of preventing client and lawyer funds commingling. Rule 1.16 focuses on the termination of a lawyer’s representation and requires the return of unearned fees at the end of the representation.
The ethics opinion begins by addressing the different types of labels that lawyers may place upon fees, including advance fees. It clarifies that when a client pays an advance to a lawyer, the lawyer assumes possession but not ownership of the funds, as they are intended to secure payment for future services. The opinion acknowledges the existence of general retainers, where a client pays a fee to reserve the lawyer’s availability. However, it notes that general retainers are rare and not aligned with modern legal practice. The opinion also cautions that a general retainer could be deemed an unreasonable fee or even unearned if the lawyer does not make themselves available.
According to the opinion, the term “retainer” should typically be labeled as an advance. It also addresses flat or fixed fees, explaining that if a client pays such a fee in advance, it constitutes an advance payment for services. The ethics opinion makes it clear that lawyers cannot evade the ethical obligation to safeguard client funds by labeling advances as “nonrefundable” or “earned upon receipt.” Model Rule 1.15(c), implemented in 2002, requires lawyers to deposit advance legal fees and expenses into a client trust account and withdraw them only as fees are earned or expenses incurred.
The opinion goes on to explain that advances are considered unearned because they are paid in advance for work to be performed in the future. They remain unearned until the work is completed. The Model Rules dictate that advances belong to the client, should be preserved until earned, and must be refunded if the representation is terminated before the fees are earned.
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The ethics opinion presents three hypothetical scenarios involving lawyer fees to illustrate its points. In each case, it is clarified that even if a retainer is labeled as nonrefundable, the client is entitled to a refund of the portion that remains unearned. This applies regardless of whether the retainer is referred to as an engagement or flat fee.
The opinion concludes by stating that flat fees should not be treated as general retainers, as they are based on the completion of specific services rather than hours worked. It emphasizes that the fee cannot be considered earned upon receipt or nonrefundable when there is still work to be done.
This ABA ethics opinion serves as a valuable reminder for lawyers to adhere to their ethical obligations when handling client funds. By following these guidelines, lawyers can ensure compliance with the Model Rules of Professional Conduct and maintain the highest ethical standards in their practice.
The implications of this ethical opinion are significant for legal professionals. It underscores the importance of handling client funds responsibly and transparently. Lawyers must be diligent in distinguishing between earned and unearned fees and maintaining proper trust accounts to safeguard client funds. Failure to adhere to these obligations can result in ethical violations and potential disciplinary actions.
