The Risk Manager, Fall 2010

One of the surest ways to receive a malpractice claim is to get into a fee dispute with a client. One source for a problem over fees concerns advance fees and when a lawyer earns them. Kentucky Rule of Professional Conduct 1.15(e) requires that advance fees and expenses be deposited in a client trust account:

(e) Except for non refundable fees as provided in 1.5(f), a lawyer shall deposit into a client trust account legal fees and expenses that have been paid in advance, to be withdrawn by the lawyer only as fees are earned or expenses incurred.

Comment (5) to the Rule emphasizes this requirement as follows:

Paragraph (e) requires that when a lawyer has collected an advance deposit on a fee or for expenses or a flat fee for services not yet completed, the funds must be deposited in the trust account until earned, at which time they should be promptly distributed to the lawyer. The foregoing shall not apply to non-refundable fees. At the termination of the client-lawyer relationship the lawyer must return any amount held that was not earned or was an unreasonable fee, as provided by Rules 1.5 and 1.16(d).

The issue of unethical conversion of client funds is raised if a lawyer transfers advance fees to an operating account before they are earned. Conversely, if earned advance fees are not promptly moved to an operating account, the issue of comingling client funds with firm funds is raised. Unfortunately, there is no available Kentucky authority on how to risk manage this dilemma. To fill the gap what follows is a paraphrase of the well-reasoned D.C. Bar Association Ethics Opinion 355 (June 2010). It contains helpful guidance on determining when advance fees are earned that should be useful for Kentucky lawyers.

General guidance for managing advance fees:

  • A lawyer must deposit a flat or fixed fee paid in advance of legal services in the lawyer’s client trust account.
  • Such funds must remain in the lawyer’s client trust account until earned.
  • The lawyer and client may agree concerning how and when the attorney is deemed to have earned some, or all, of the flat fee. Such an agreement must bear a reasonable relationship to the anticipated course of the representation and must avoid excessive “front-loading.”
  • A written agreement or a writing evidencing the agreement is strongly recommended but not mandatory.
  • In the absence of an agreement with the client with milestones by which the lawyer earns portions of the fixed fee, the lawyer has the burden of establishing that advance funds transferred to the lawyer’s operating account were earned.

A structure for lawyer and client agreement on when advance fees are earned:

Earned advance fees may be measured by milestones based upon the passage of time, the completion of certain tasks, or any other basis mutually agreed upon between the lawyer and the client, provided that there is no extreme front loading of payment milestones (citing In re Mance, 980 A.2d 1196 (D.C. 2009) at 1204).

Examples of milestones are:

  • Agreement on withdrawals based on the application of an hourly rate to the lawyer’s efforts.
  • Withdrawals timed to events in a representation, e.g.,
    • Completion of discovery,
    • Hearings or the setting of a trial date, or
    • Completion of specific tasks, such as witness interviews, filing of motions, or, in a non–litigation matter, the completion of specified draft documents.
  • Setting alternative milestones to address uncertainties about the future course of a representation.

Other considerations:

  • The agreement may contain language reflecting that the lawyer will earn the entire fee at the conclusion of a representation even if certain specified milestones have never been reached.
    • For example, a lawyer who persuades a prosecutor to dismiss criminal charges in advance of trial could earn the entire fee, even if the lawyer and client had specified the trial as a milestone in their agreement.
  • The milestones and approaches used should be tailored to the type of engagement. Those suitable for a criminal matter may not be appropriate to use for a real estate transaction or the drafting of a will.

Advance fee withdrawals when there is no agreement:

  • Rule 1.15 requires a lawyer to withdraw from a trust account funds that have been earned even when there is no agreement. A lawyer who has charged a client, for example, two thousand dollars for the preparation of an estate plan has under most circumstances earned some portion of the fee when the lawyer sends the client a set of draft documents. A lawyer in a criminal matter has likewise ordinarily earned some amount when the lawyer appears for the trial date prepared to present a defense.
  • In the absence of an agreement with the client, the burden is on the lawyer to demonstrate that the amount withdrawn from the client trust account was earned. Under such circumstances, the lawyer’s conclusion as to what portion of a flat fee was earned must be reasonable. Further, the lawyer should give notice to the client of the withdrawal so that the client will have an opportunity to review the amount of the withdrawal, question the lawyer and perhaps contest it.