April 25, 2008
When a lawyer accepts credit card payments for advance (unearned) legal fees and expenses and earned legal fees and expenses, requirements with respect to client property under MRPC 1.15 must be met, and confidentiality protected.
There are two alternative methods by which a lawyer may enter into credit card arrangements for payment of advance legal fees. The first and less problematic practice would involve the use of two bank accounts. The credit card company would make deposits for advance legal fees and expenses into the lawyer's trust account and takes merchant fees and chargebacks from the lawyer's business account.
If the credit card company insists on using one account, all credit card payments for advance legal fees and expenses must be deposited into the lawyer's trust account and the lawyer must transfer legal fees and expenses to the business account as they are earned.
Lawyers may want to enter into two credit card merchant contracts: one for earned legal fees and expenses and one for advance legal fees and expenses. Where the lawyer has a separate contract only for earned fees and expenses, all credit card company deposits, fees and chargebacks must be made into and taken out of the lawyer's business account. Fees are deemed earned when billed. The lawyer is responsible for insuring that the transactions are handled under the correct merchant contract so that earned legal fees and expenses are deposited into the business account and advance legal fees and expenses are deposited into the trust account.
If the lawyer uses one account for earned and advance legal fees and expenses, all credit card company payments must be deposited into the lawyer's trust account and handled as described in this opinion.
Lawyers must make sure that the trust account balance never goes below the amount of all monies belonging to clients and third parties ("Trust Money") and must therefore deposit the amount of credit card company fees into the trust account before the credit card company deducts them from the account.
To insure that credit card chargebacks do not impact the trust account, where chargebacks and credit card company fees are deducted from the trust account, legal fees and expenses paid by the credit card company into the trust account should not be considered fully earned until the credit card dispute period has expired.
Lawyers should provide receipts to their clients at the time of the transaction.
Lawyers are responsible for becoming familiar with the specifics of their credit card contracts and must inform their clients how the use of a credit card may implicate the lawyer/client relationship, including among other things, confidentiality and return of unused fee advances.
A lawyer wants to accept credit card payments for the payment of legal fees and expenses, both unearned ("advance fees") and earned. The lawyer asks whether it is permissible to have all the payments deposited into one account and the fees associated with maintaining a relationship with the credit card company deducted from the same account. The lawyer maintains two accounts—a trust account that holds money belonging to clients and third parties and a business account used in the operation of the lawyer's practice which contains no client or third party monies. The lawyer proposes three options for the deposit of credit card payments:
- All funds are deposited into the business account and advance fees are immediately transferred into the trust account.
- All funds are deposited into the trust account and earned funds are immediately transferred into the business account.
- All funds are deposited into a third account set up solely for the purpose of receiving funds from the credit card company. Funds are then immediately transferred to the appropriate account.
Clients may use credit cards to pay legal fees. RI-168, ABA Formal Opinion 00-419. See generally Constance V. Vecchione, "No Easy Credit," www.mass.gov/obcbbo/credit.htm, October, 2001 (last accessed March 28, 2008). The questions addressed here relate to use of a single account for receipt of both earned and advance fees and expenses and handling of credit card transaction fees and chargebacks. The intricacies of trust account requirements have led some jurisdictions to strongly discourage the use of credit cards for advance fees. See Vecchione, supra.
MRPC 1.15 provides in relevant part:
(d) A lawyer shall hold property of clients or third persons in connection with a representation separate from the lawyer's own property. All client or third party funds shall be deposited in [a client trust account].
(f) A lawyer may deposit the lawyer's own funds in a client trust account only in an amount reasonably necessary to pay financial institution service charges or fees or to obtain a waiver or service charges or fees.
(g) Legal fees and expenses that have been paid in advance shall be deposited in a client trust account and may be withdrawn only as fees are earned or expenses incurred.
Funds belonging to the lawyer cannot be commingled with funds belonging to clients and third parties. MRPC 1.15(d). Advance fees, which are by definition unearned, must be deposited into the lawyer's trust account. MRPC 1.15(g). The trust account may contain unearned fees of many clients and monies belonging to third parties. MRPC 1.15(d). The trust account may never be depleted below the level of Trust Money. R-7.
While RI-168 addresses the use of credit cards for legal fees, the issues addressed in this opinion are different from those addressed in RI-168. That opinion involved earned fees and an atypical arrangement where "the lawyer is actually involved in the solicitation of customers for the credit card company" and the lawyer's receipt of funds was related to the client's credit risk as determined by the credit card company. Here we assume a typical credit card arrangement where the lawyer's client/credit card company's customer and the lawyer each have an independent relationship with a credit card company. Because RI-168 involves a unique situation, it is limited to the specific facts presented. Accordingly, requirements stated in RI-168 such as obtaining the credit card company consent not to sue the client until the representation has ended do not apply in the typical credit card scenario addressed here.
We interpret the rules to prohibit depositing advance fees into the business account and to require deposit into the trust account. MRPC 1.15(g). While MRPC 1.15(f) prohibits the mixing of lawyer funds and Trust Money, earned fees and expenses may be temporarily deposited into the lawyer's trust account where they are mixed with advance fees and expenses. "When one check consists of funds belonging to the lawyer and funds belonging to a client . . . the funds must be first deposited into the lawyer's trust account, then the lawyer may withdraw the portion belonging to the lawyer after accounting." RI-64 (emphasis omitted). Where the lawyer maintains one credit card contract for earned and advance legal fees and expenses, credit card deposits would be comparable to checks containing funds belonging to the lawyer and clients and must be initially deposited into the trust account.
We assume a credit card merchant contract where advance fees may be charged with a credit card. A lawyer may choose to have two merchant contracts with the credit card company—one for strictly earned legal fees and expenses (payment for billed work that has been performed) and the second for advance legal fees and expenses, which over time will convert to earned fees and expenses as legal services are performed and expenses incurred. The lawyer is responsible for making sure that transactions are handled under the proper contract. Under the first contract (billed and earned fees and expenses only), credit card company payments must be deposited into the business account and credit card company fees and chargebacks relating to those transactions are then deducted from the business account. Under the second contract (advance fees and expenses), credit card company payments must be deposited into the trust account and funds shall be transferred to the lawyer's business account as legal fees and expenses are earned. In this second contract scenario, credit card fees and chargebacks relating to those transactions are handled as described in this opinion. As described above, where the lawyer uses one merchant account for earned and advance legal fees and expenses ("Combination Fees"), all credit card company payments must be deposited into the trust account and the lawyer must promptly transfer funds as legal fees and expenses are earned from the trust account to the business account. Credit card fees and chargebacks are to be handled as described in this opinion.
Credit card companies charge fees to the merchant/lawyer, who is responsible for payment. If there is a separate merchant contract for earned legal fees and expenses, the credit card payments for these legal fees and expenses will be deposited into the business account and the credit card company fees and chargebacks will be deducted from the same account. They are thus treated the same as payments by check or cash.
Where credit card payments are deposited into the trust account, other precautions are necessary because trust account funds may never fall below the required amount of Trust Money. Unless the credit card fees can be borne by others, the lawyer must deposit into the trust account an amount sufficient to pay all credit card company fees. MRPC 1.15(f). The lawyer must determine the credit card company fees that will be assessed and must fund them so the account is never below the required level of Trust Money. The timing of withdrawals and amount of credit card fees may vary depending on the contract and the way in which the transaction is processed—for example, the fee is higher when the credit card number is manually entered (e.g., when the number is received via telephone or internet) than when the card is presented and swiped. The lawyer must become aware of the timing and amount of these withdrawals and make the deposits in advance thereof.
Credit card companies give their customers a period of time in which to dispute a charge. When the customer informs the credit card company of a dispute, the credit card company removes the charge from the customer's account (here the client) pending investigation of the dispute and charges it back to the merchant's account (here the lawyer). If the chargeback is accomplished by withdrawing funds from the trust account and the lawyer has withdrawn the disputed amount believing that the legal fees had been earned, the Trust Money will be depleted below the required level and the lawyer will have committed an ethical violation. The less problematic practice would be to obtain the credit card company's agreement to withdraw chargebacks from the business account. If not, the lawyer should conclude that the fees and expenses are not earned until the dispute period has passed. Whether the dispute period begins to run from the time of the bill for the original charge or from the time of the bill to withdraw funds may depend on the credit card company contract and truth in lending laws.
There are several other issues that should be considered. "[A] lawyer shall promptly notify the . . . client . . . when funds . . . in which a client . . . has an interest is received." MRPC 1.15(b)(1). This rule applies where a third party is providing funds in which the client has an interest. Here, the funds are actually the client's funds, loaned by a third party. The lawyer should give the client a receipt at the time of the transaction, which shall serve as notice if required under this rule.
Credit card contracts may require information about the lawyer's services and thereby implicate confidentiality rules. Lawyers accepting credit cards should use general descriptions such as "services and expenses" or "consultation" on credit card paperwork and advise clients that certain confidences such as client identification would be revealed in credit card transactions that might not be revealed if payments are by other means. Credit card contracts may also require the lawyer's cooperation in the event of a dispute between the client and the credit card company. The lawyer should advise the client of this possibility and must comply with confidentiality rules in the event of a dispute. MRPC 1.6.
Credit card contracts may also require that refunds be credited to the same account as the charge. In this situation if some of the advance fees remain after the client's matter is concluded, the lawyer must credit the client's credit card account for the unused fees. If the credit card contract requires credits to be handled this way and thus prohibits cash return of unused fees, the lawyer must explain this to the client before accepting credit card payments. MRPC 1.4; 1.5.