Ethics Opinion 983

Ethics Opinion 983

10.8.2013

By Committee on Professional Ethics

New York State Bar Association
Committee on Professional Ethics

Opinion 983 (10/8/13)
Topic:  Legal fees; advance payment retainers
Digest:   Lawyer may retain unearned portion of prior retainer on conclusion of matter, at client’s request, as advance payment of fees for future legal services; such advance payment may be treated as client-owned funds depending on agreement with client.
Rules:    1.5; 1.15

FACTS

1.   The inquirer is a lawyer who settled a case he was handling for his client.  He had been paid a retainer (the “first retainer”) that was not exhausted, and he sought to return the balance.  The client asked him to keep the balance in his escrow account, telling the lawyer she “might need [him] for something else.”

QUESTION

2.   May the lawyer, at the client’s request, keep the unearned portion of the first retainer in his escrow account, as an advance against unspecified legal services to be provided in the future?

OPINION

3.   The inquiry concerns advance payment retainers, which the Committee has previously addressed. [1]  “An advance payment retainer is a sum provided by the client to the lawyer to cover payment of legal fees expected to be earned during the representation.”  N.Y. State 816 ¶3 (2007).  The arrangement proposed by the inquiry is of this type – it is a deposit toward payment of fees for future legal services – even though there is not yet any agreement between client and lawyer as to what further legal services, if any, will actually be provided. [2]  Any ultimately unearned portion of an advance payment retainer must be returned to the client. [3]

4.   The inquiry raises a question about how an advance payment retainer may be handled from the time it is provided to the lawyer until it is either earned by the lawyer or returned to the client.  Under our opinions, the parties may choose either of two options.  One option is to treat advance payment of legal fees as client funds, in which case the lawyer must deposit the advance payment into an escrow account and may not retain interest earned on the funds. [4]  Alternatively, the parties may “agree to treat advance payment of fees as the lawyer’s own.” N.Y. State 816 ¶5.  Under this option, the lawyer may use the money as the lawyer chooses (except that the lawyer may not deposit it in a client trust account), subject only to the requirement that any unearned fee paid in advance be promptly refunded to the client upon termination of the employment. In [this] case, any interest earned on the advance payment of fees would belong to the lawyer.

N.Y. State 570 (citation omitted).  By allowing both options, the New York ethics rule differs from rules in a number of other jurisdictions where the client necessarily continues to own the funds until earned, and thus the lawyer must keep the funds in an escrow account. [5]

5.   An advance payment retainer, in either of these two variations, is to be distinguished from a “general retainer,” which is not a payment for specific legal services.  Rather, it is “a payment to the lawyer for being available to the client in the future and for being unavailable to the client’s opponents,” and it is “earned upon receipt.” [6]

6.   On the facts of the current inquiry, the first retainer was an advance payment retainer to pay for services in the matter that has now been concluded, and the funds in question are the unused balance of that first retainer.  These funds are now intended to pay for unspecified legal services in the future, if and when the parties agree that such further services will be provided, rather than to secure the availability of the lawyer to the client.  Thus these funds are being maintained as a further advance payment retainer.

7.   The client has requested that the funds be kept in the lawyer’s escrow account, and as seen above, the lawyer is free to agree to that request.  The parties are thus agreeing that the funds will be treated not as belonging to the lawyer, but rather as belonging to the client unless and until earned by future provision of legal services.  “[O]nce a lawyer agrees to treat a fee advance as client property, the lawyer is bound by that agreement and all of its consequences,” including all ethical requirements “applicable to client funds and trust accounts.”  N.Y. State 570 (1985).

8.   We note an additional question about the lawyer’s ongoing duties during the period from completion of the first matter until such time as the parties may agree on the performance of further legal services.  The inquiry does not specify whether the parties contemplate that their attorney-client relationship will continue during that period.  It is possible that the lawyer could serve merely as an escrow agent for the funds without continuing as attorney for the person whose funds are being held.  Even then, however, the lawyer would remain bound by certain ethical duties to that person.  See, e.g., Rule 1.9 (duties to former clients); Rule 1.15 (preserving identity of funds of others, fiduciary responsibility, and record keeping).

9.   Alternatively, the attorney-client relationship may continue while the lawyer holds the advance payment retainer, in which case lawyer would continue to be bound by the full set of ethical duties owed to clients.  The inquiry does not say that the lawyer has told the client that the representation has terminated.  The parties have discussed the possible future provision of legal services.  And the lawyer is agreeing to keep possession of the client’s funds for that purpose.  Each of these circumstances is a factor that may bear on whether the client reasonably views that the representation will continue. [7]  However, whether there is an attorney-client relationship during the interim between past services and potential future ones is a legal rather than an ethical question.  We have mentioned some relevant factors but it is not our province to opine whether the representation continues.  See, e.g., Rules Scope ¶[9] (“principles of substantive law external to these Rules determine whether an client-lawyer relationship exists”); N.Y. State 963 ¶10 (2013).

10. Of course the lawyer would be well advised to try to avoid misunderstandings as to either the treatment of the advance payment retainer or whether the representation is continuing.  See, e.g., N.Y. State 816 ¶9 (2007) (“imperative for a lawyer at the outset of the representation to discuss the advantages and disadvantages of advance payment retainers and to reach an agreement about the treatment of any such advances”).  Moreover, to embody agreements with the client in writing, whether or not required, [8]may enhance clarity.  See, e.g., Rule 1.3, Cmt. [4] (“Doubt about whether a client-lawyer relationship still exists should be clarified by the lawyer, preferably in writing, so that the client will not mistakenly suppose the lawyer is looking after the client’s affairs when the lawyer has ceased to do so.”).

Conclusion

11. At the client’s request, the lawyer may retain the unspent portion of the retainer on the conclusion of a matter as an advance payment of fees to be used for unspecified future legal services.  Such advance payment retainers may be treated either as client-owned funds, to be kept in the lawyer’s escrow account, or as lawyer-owned funds, subject to the lawyer’s obligation to reimburse the client for any portion ultimately not earned in fees.

(6-13)

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[1] See N.Y. State 570 (1985), adhered to in N.Y. State 816 (2007).  These opinions were decided under the prior Code of Professional Responsibility, but we see no reason that the current Rules of Professional Conduct (the Rules) would lead to different results.

[2]There are variations in terms used to describe retainer agreements.  Here we follow the usage of our prior opinions, but what we are calling an advance payment retainer or advance fee retainer is also sometimes called a “special,” “specific” or “security” retainer.  See Grievance Administrator v. Cooper, 06-36-GA (Mich. Att’y Disc. Bd. 2007).  The term “special retainer” is also sometimes used to denote a broader category of arrangements, as distinguished from the “general retainers” described in paragraph 0 below.  Special retainers in that broader sense can be further divided into “security retainers,” which are advances intended to secure the client’s payment of fees when earned for future legal services, and “advance fee retainers,” which in this usage means “a present payment to a lawyer as compensation for the provision of specified legal services in the future,” generally “intended to compensate the lawyer for all work to be done on a matter, regardless of the time required or the complexity of the assignment,” and also known as “fixed” or “flat” fees.  See, e.g., In re Hann, 819 N.W.2d 498, 505-06 (N.D. 2012) (quoting D. Richmond, “Understanding Retainers and Flat Fees,” 34 J. Legal Prof. 113 (2009)).  Using this terminology, the present inquiry concerns a proposed security retainer.

[3] See Rule 1.5(d)(4) (“A lawyer shall not enter into an arrangement for, charge or collect … a nonrefundable retainer fee,” though a retainer agreement may include a reasonable and clear minimum fee clause); id., Cmt. [4] (lawyer “may require advance payment of a fee, but is obliged to return any unearned portion”); Rule 1.16(e) (upon termination of representation, lawyer shall take steps to avoid foreseeable prejudice to the rights of the client, including “promptly refunding any part of a fee paid in advance that has not been earned”); N.Y. State 816 ¶¶ 3-4, 8, 10 (2007); In re Cooperman, 83 N.Y.2d 465 (1994) (interpreting prior Code to prohibit nonrefundable advance payment retainers).

[4] See N.Y. State 816 ¶5, quoting N.Y. State 570; Rule 1.15(b)(1) & Cmt. [1] (money “that is the property of clients” or prospective clients must be kept in one or more trust accounts).  Interest earned on the funds while in an escrow account must be remitted to the client unless the funds are deposited into an “interest on lawyer account” or “IOLA”, which is an unsegregated interest-bearing account for the deposit of moneys “which, in the judgment of the attorney, are too small in amount or are reasonably expected to be held for too short a time to generate sufficient interest income to justify the expense of administering a segregated account for the benefit of the client or beneficial owner.”  Judiciary Law §497(1), (2).  Under Judiciary Law §497(6)(c), interest on such accounts is remitted to the IOLA fund established by State Finance Law §97-v.

[5] See N.Y. State 570 (1985) (noting that “majority of opinions by other ethics committees that have addressed the issue … would require that advance payments of legal fees be deposited in a client trust account and retained there until earned,” and citing examples).  Some jurisdictions have adopted explicit rules to this effect.  E.g., Arizona ER 1.15(c); Maine Rule 1.15(b)(1); see ABA Model Rule 1.15(c) (lawyer “shall deposit into a client trust account legal fees … that have been paid in advance, to be withdrawn by the lawyer only as fees are earned”).  Some others have adopted such a rule as a matter of interpretation.  E.g., In re Lochow, 469 N.W.2d 91, 97-98 (Minn. 1991); State v. Fellman, 678 N.W.2d 491, 497 (Neb. 2004); In re Dawson, 8 P.3d 856, 859 (N.M. 2000); Oklahoma Opinion 317 (2002); Philadelphia Opinion 96-7.  Other jurisdictions yet have adopted this rule only as a default.  E.g., Att’y Grievance Comm’n of Maryland v. Stinson, 50 A.3d 1222, 1226 n.4 (2012) (fees to be deposited into client trust account unless client “gives informed consent, confirmed in writing”); In re Mance, 980 A.2d 1196, 1201 (D.C. 2009) (advances of unearned fees to be treated as property of client “unless the client gives informed consent to a different arrangement”).  See generally Kewalramani & Greenberger, “Advance Payment Retainers: Whose Property? What Account?,” N.Y.L.J (Feb. 15, 2013); O’Shea, “Advance Fee Retainers: Should We Change the Rules?,” N.Y. Prof. Resp. Report (July 2001) (arguing against amending Code to require that advance fee payments be held in trust until earned, and opining that N.Y. State 570 “has served for many years as clear and largely uncontroversial guidance for the New York Bar”).

[6]N.Y. State 570 n.1; accord N.Y. State 816 ¶3.  According to one source:

A general retainer is also known as a “true,” “classic,” or “availability” retainer, or as an “engagement fee.”  A true retainer fee is an amount a lawyer charges the client not for specific services but to ensure the lawyer’s availability whenever the client may need legal services.  Such a fee is a charge separate from fees incurred for services actually rendered.   In other words:  A fee is an engagement retainer only if the lawyer is to be additionally compensated for actual work, if any, performed. … A retainer purporting to be “both for availability and for services” has been called a “hybrid” and is usually treated as a special retainer or advance payment of fees.

Grievance Administrator v. Cooper, 06-36-GA (Mich. Att’y Disc. Bd. 2007) (footnotes and internal quotations omitted).

[7]“If a lawyer has served a client over a substantial period in a variety of matters, the client sometimes may assume that the lawyer will continue to serve on a continuing basis unless the lawyer gives notice of withdrawal.” Rule 1.3, Cmt. [4]; see Restatement (Third) of the Law Governing Lawyers §14(1)(b) & cmt. e (2000) (relationship of client and lawyer arises when “a person manifests to a lawyer the person’s intent that the lawyer provide legal services for the person … and … the lawyer fails to manifest lack of consent to do so, and the lawyer knows or reasonably should know that the person reasonably relies on the lawyer to provide the services”).

[8]The Rules do not state that the terms of a representation must be written, and depending on the circumstances, a writing may or may not be required by law.  See Rule 1.5(b) (lawyer “shall communicate” to client the scope of the representation and the basis or rate of fee and expenses); 22 N.Y.C.R.R. §§ 1215.1(a), 1215.2(a), (b) (written letter of engagement not required where “the fee to be charged is expected to be less than $3000,” or “the attorney’s services are of the same general kind as previously rendered to and paid for by the client”).