February 14, 1991
A nonrefundable retainer paid to a lawyer is the lawyer's property and may not be deposited in a client trust account.
If a fixed fee, or a portion of a fixed fee, is for services to be performed in the future, the fee must be placed in the client trust account until the lawyer has performed the services to which the client is entitled.
If a lawyer-client relationship is terminated before all services are rendered but after payment of a fixed fee, the lawyer shall refund any portion of the fee which has not been earned.
An agreement for delivery of legal services for a fixed fee may provide that certain portions of the fee are "earned" by the lawyer based upon the passage of time, the completion of certain tasks, or any other basis mutually agreed upon by the lawyer and client.
References: MRPC 1.5(a) and (b), 1.15(a); R-7; RI-10, RI-50.
A lawyer asks when a fixed fee retainer becomes the "property of the lawyer" for purposes of deposit into the lawyer's or law firm's operating account and for purposes of determining any refund due a client if representation is terminated before all contracted services are rendered.
MRPC 1.15(a) states:
"A lawyer shall hold property of clients or third persons that is in a lawyer's possession in connection with a representation separate from the lawyer's own property. All funds of the client paid to a lawyer or law firm, other than advances for costs and expenses, shall be deposited in an interest-bearing account in one or more identifiable banks, savings and loan associations, or credit unions maintained in the state in which the law office is situated, and no funds belonging to the lawyer or the law firm shall be deposited therein except as provided in this rule. Other property shall be identified as such and appropriately safeguarded. Complete records of such account funds and other property shall be kept by the lawyer and shall be preserved for a period of five years after termination of the representation."
The rule thus requires property of the lawyer to be kept separate from the property of the client, and requires property of the client to be placed in a trust account.
A lawyer is clearly allowed to charge a flat or fixed fee for services rendered to a client, RI-50. A lawyer may also charge a fee which under proper circumstances is nonrefundable, RI-10. However, in R-7 we stated:
"[If] the retainer is for work not yet performed, the retainer is unearned and must be deposited in the firm's client trust account. MRPC 1.15(a) specifically exempts advances of costs and expenses from deposit in the trust account, but does not exempt the deposit of unearned attorney fees. If the Supreme Court had intended fee advances to be exempt from deposit, the Court would have so specified. A lawyer may not withdraw 'anticipated fees.' The lawyer must explain to the client that the retainer is considered a deposit, inform the client that withdrawals will be made for fees, and may not withdraw more than has been billed, Grievance Administrator v Sauer, ADB 9-89, 12/8/89.
"If a retainer is nonrefundable, it may be deposited directly in the firm's operating account . . . . If any portion of the retainer is unearned because it is paid in advance for legal services to be performed in the future on an hourly, flat, or percentage basis, the retainer has not been earned and is not a nonrefundable retainer, RI-10. See also, Baranowski v State Bar, 24 Cal 3d 153; 593 P2d 613 (1979)."
It appears that semantics play an important part in determining how funds paid to a lawyer are to be handled. If the money is classified as a "nonrefundable retainer" then it need not be placed in a trust account. The nonrefundable retainer is exactly what it says it is and is clearly earned at the time of payment. It must, however, be in an amount which is not clearly excessive for the purpose for which it is intended.
If, on the other hand, funds are termed a "flat or fixed fee" and are charged in advance with no agreement between the client and lawyer as to refundability, because the services are to be performed in the future, the fee is unearned and must be placed in a client trust account until the lawyer has performed the services to which the client is entitled.
When employed on an hourly basis, and having obtained a retainer, a lawyer is entitled to withdraw the lawyer's fee from the trust account as the services contracted for are performed. When the contract provides for a flat or fixed fee for performance of all services, however, is the lawyer required to wait until the end of representation, i.e., until all services have been performed, before the lawyer can withdraw any of the fixed fee?
MRPC 1.5 imposes certain requirements relating to client communications and client consent in the establishment of fees. Nothing prohibits a lawyer and a client from agreeing that a portion of the fixed fee will be deemed "earned" by the lawyer, and thus the lawyer would be entitled to withdraw that portion for the lawyer's own use, at certain times or at the occasion of certain events. For instance, the lawyer and client could agree that at the end of thirty days, XX% of the fixed fee will be deemed "earned." The lawyer and client could agree that when investigation has been completed, $XXX of the fixed fee will have been "earned," filing pleadings will constitute $XXX "earned," and settlement or trial will constitute $XXX "earned." Such designations and agreements may be based upon the passage of time, the completion of certain tasks, or any other basis mutually agreed upon between the lawyer and client.
In proposing such designations and agreements the lawyer must abide by MRPC 1.5(a) and (b), which state:
"(a) A lawyer shall not enter into an agreement for, charge, or collect an illegal or clearly excessive fee. A fee is clearly excessive when, after a review of the facts, a lawyer of ordinary prudence would be left with a definite and firm conviction that the fee is in excess of a reasonable fee. The factors to be considered in determining the reasonableness of a fee include the following:
"(1) the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly;
"(2) the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;
"(3) the fee customarily charged in the locality for similar legal services;
"(4) the amount involved and the results obtained;
"(5) the time limitations imposed by the client or by the circumstances;
"(6) the nature and length of the professional relationship with the client;
"(7) the experience, reputation, and ability of the lawyer or lawyers performing the services; and
"(8) whether the fee is fixed or contingent.
"(b) When the lawyer has not regularly represented the client, the basis or rate of the fee shall be communicated to the client, preferably in writing, before or within a reasonable time after commencing the representation."
If a lawyer and client have agreed to representation based upon a fixed fee, and the representation is interrupted before all contracted services have been rendered, the client will be entitled to a refund of some portion of the advanced fee. If the contract does not set forth designations and agreements concerning when the lawyer has "earned" portions of the fixed fee advanced, MRPC 1.5(a) will be applicable in determining that portion of the fixed fee to which the client is entitled as refund.
Thus a contract which sets forth the lawyer's and client's agreement concerning performance of services under a fixed fee agreement not only assists the lawyer in determining when fees are "earned," but also provides evidence of whatever refund to which the client may be entitled in the event representation is interrupted.
In the absence of an agreement setting forth the conditions under which portions of a fixed or flat fee are earned, and in cases where the lawyer's employment is not terminated, then the lawyer must complete all services contracted for prior to withdrawing any amount of an advanced flat or fixed fee from a client trust account for the lawyer's personal use.