This post aims to provide guidance on how to handle fees paid in advance. It requires some background.
Advisory Opinion 2005-04.
In 2005, the Vermont Bar Association’s Professional Responsibility Committee issued advisory opinion 2005-04. The Committee concluded:
- an attorney may charge a flat fee or a minimum fee, so long as the basis for the fee is understood by the client and the fee is reasonable.
- an advance payment remains the property of the client until earned and must be deposited in the attorney’s trust account.
- if, however, the client knowingly agrees that the fee is “earned upon receipt,” the fee is the lawyer’s property and, as such, must not be deposited into trust.
- otherwise, the lawyer must draw upon the fee as work is done and certain agreed upon milestons are met, or, wait until the matter ends to take the fee out of trust.
- regardless of how labeled, a fee must be refunded if not reasonable.
The 2009 Amendment to Rule 1.15.
Rule 1.15 is entitled “Safekeeping Property.” In 2009, subsection (c) was added. It reads:
- “A lawyer shall deposit legal fees and expenses that have been paid in advance into an account in which funds are held that are in the lawyer’s possession as a result of a representation in a lawyer-client relationship. Such funds are to be withdrawn by the lawyer only as fees are earned or expenses incurred.” (emphasis added).
The Reporter’s Note cautioned lawyers to:
- “[n]ote that new Rule 1.15(c) requires deposit in a lawyer’s trust account of any fees . . . paid in advance, no matter how designated, if the funds are to be applied as compensation for services subsequently rendered.”
As amended, the rule sets out a different standard than the advisory opinion. Whereas the advisory opinion concluded that a lawyer and client may agree that a fee becomes the lawyer’s upon receipt, the rule clarifies that, no matter how designated, a fee paid in advance must remain in trust until earned.
When is a fee earned?
Over the next several years, questions arose as to when a fee is earned. For instance, consider this oversimplification:
- Client is charged with DUI
- Lawyer & Client agree to a $1500 flat fee that is “earned upon receipt.”
For several years, advisory opinion 2005-04 had authorized such an arrangement and allowed Lawyer to treat the $1500 as Lawyer’s own upon receipt. Thus, to avoid commingling, Lawyer did not deposit the fee in trust.
Rule 1.5(c) changed practice. The fee, no matter how designated, was for work that Lawyer had yet to perform. To comply with the rule, then, Lawyer had to deposit the $1500 in trust, where it was required to remain until earned.
When could Lawyer treat it as earned? After arraignment? If so, all of it or only part of it? After the civil suspension hearing? After the matter resolved? I received many inquiries that asked these exact questions.
Rule 1.5 is amended to allow lawyer’s to treat certain fees as earned own upon receipt.
In 2015, the Professional Responsibility Board recommended rule changes that the Court approved and adopted. Rules 1.5(f) & (g) took effect in May 2016.
As amended, Rule 1.15(f) states that a lawyer may characterize a fee as “nonrefundable” and accept such a fee in advance of services being rendered only if:
- “(1) The lawyer confirms to the client in writing before or within a reasonable time after commencing representation (i) that the funds will not be refundable, and (ii) the scope of availability and/or services the client is entitled to receive in exchange for the nonrefundable fee.”
- “(2) A lawyer shall not solicit or make any agreement with a client that prospectively waives the client’s right to challenge the reasonableness of a nonrefundable fee, except that a lawyer can enter into an agreement with a client that resolves an existing dispute over the 2reasonableness of a nonrefundable fee, if the client is separately represented or if the lawyer advises the client in writing of the desirability of seeking independent counsel and the client is given a reasonable opportunity to seek such independent counsel.”
It is only under these specific conditions that a fee may be characterized as “nonrefundable” or other similar term. Indeed, here’s the next paragraph:
- “(3) Where it accurately reflects the terms of the parties’ agreement, and where such an arrangement is reasonable under all of the relevant circumstances and otherwise complies with this rule, a fee agreement may describe a fee as “nonrefundable,” “earned on receipt,” a “guaranteed minimum,” “payable in guaranteed installments,” or other similar description indicating that the funds will be deemed earned regardless of whether the client terminates the representation.”
Finally, paragraph (g) directs the way fees will be handled:
- “(g) A nonrefundable fee that complies with the requirements of (f)(l)-(2) above constitutes property of the lawyer that should not be commingled with client funds in the lawyer’s trust account. Any funds received in advance of rendering services that do not meet the requirements of (f)(1)-(3) constitute an advance that must be deposited in the lawyer’s trust account in accordance with Rule 1.15(c) until such funds are earned by rendering services.”
Again, I must stress that, no matter how designated, a fee that paragraphs (f) and (g) authorize a lawyer to treat as earned upon receipt remains subject to the reasonableness standard in paragraph (a). The rule and the 2016 Reporter’s Note make this clear. In my view, an unreasonable fee must be refunded even if labeled “non-refundable.”
As always, be careful out there.