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ABA Formal Opinion Addresses Retainers and Fees Paid in Advance

The Standing Committee on Ethics and Professional Responsibility of the American Bar Association has released a formal ethics opinion discussing the treatment of retainers and fees paid in advance. Formal Opinion 505 was issued May 3, 2023.

The Committee begins by noting, “Fees for services may be paid after completion of the services, of course. However, for certain matters, many lawyers request or require that funds in a certain amount be paid to the lawyer at the outset of the representation to secure payment for the lawyer’s later work.” Under the terms of Model Rule 1.15, such fees must be placed in a trust account. The Model Rule allows lawyers to protect themselves from the prospect of nonpayment by requiring payment in advance, and the requirement to place such funds in trust protects the client against the risk that the lawyer may be unable to repay them if the fees are not earned.

The opinion comments, “When a client pays an advance to a lawyer, the lawyer takes possession – but not ownership – of the funds to secure payment for the services the lawyer will render to the client in the future.”

The Committee acknowledges that some lawyers refer to fees paid in advance as “retainers” but points out that this term does not appear in the Rules of Professional Conduct. They note that a general retainer to assure the attorney’s availability may be considered earned when received but state that this does not mean the general retainer is nonrefundable if the lawyer does not perform services contemplated in connection with the retainer. The Committee characterizes such true general retainers as rare but claims that fees are nonrefundable on this theory are more common.

The Committee notes that many lawyers charge flat or fixed fees for certain services such as real estate transactions, will preparation, or business incorporation. Such fees are permissible but are still fees paid in advance which the lawyer must keep in a trust account until the services are performed.

On the subject of “nonrefundable” retainers, the Committee states, “The Model Rules of Professional Conduct do not allow a lawyer to sidestep the ethical obligation to safeguard client funds with an act of legerdemain: characterizing an advance as ‘nonrefundable’ and/or ‘earned upon receipt’.” It points out that Comment [4] to Rule 1.5 specifically states that such fees cannot be characterized as nonrefundable and must be placed in a trust account and refunded if not earned.

The Committee observes, “In 2002, Model Rule 1.15 was amended to address specifically the issue of advance fees in a new paragraph (c): ‘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.’” It is noteworthy that this language was not incorporated into Pennsylvania’s version of RPC 1.15 which differs dramatically from the ABA Model Rule. However, RPC 1.15(i) states, “A lawyer shall deposit into a 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, unless the client gives informed consent, confirmed in writing, to the handling of fees and expenses in a different manner.”

The Committee goes on to note that Model Rule 1.16(d), regarding termination of services, requires that, upon termination of representation, the lawyer must refund “any advance payment of fee or expense that has not been earned or incurred.” According to the Committee, Rules 1.15 and 1.16(d) work in tandem to protect the client against loss due to the conduct of unscrupulous lawyers. The Committee notes that apportioning earned and unearned fees can be difficult but that courts routinely apportion the services completed and sum earned when a representation ends before completion of the intended goals.

The Opinion concludes with three hypothetical situations, involving a “nonrefundable” retainer, a general retainer, and a flat fee arrangement. The Opinion as a whole provides detailed guidance for lawyers dealing with different fee structures and the approach to be taken when a representation ends short of completion of the contemplated goals.

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