Vermont’s rules on fees that are labeled “nonrefundable” or “earned upon receipt.”

Last week’s #fiveforfriday legal ethics quiz included a question on “flat” and “nonrefundable” fees.  Today’s post responds to what I perceive to be a common misconception about how the Vermont Rules of Professional Conduct require lawyers to handle fees that are paid in advance of legal services being rendered.

Our approach has changed over time.  A few years ago, I blogged about its evolution.  Caught up in the history, I didn’t do a great job explaining the current rules.  They are Rule 1.5(f), Rule 1.5(g), and Rule 1.15(c).  I’ll address each in order.

Rule 1.5(f) begins:

“A lawyer may enter into an agreement for a client to pay a nonrefundable fee that is earned before any legal services are rendered. The amount of such an earned fee must be reasonable, like any fee, in light of all relevant circumstances. A lawyer cannot accept a nonrefundable fee, or characterize a fee as nonrefundable, unless the lawyer complies with the following conditions

(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.”

I emphasized the last sentence of the first paragraph for a reason.  It is only if the conditions that follow that sentence are met that a lawyer may characterize a fee as nonrefundable or accept a fee so characterized.

So far, so good.  Right?  If a lawyer provides the client with a writing that confirms that the fee is nonrefundable and that defines the scope of availability and services that the client will receive, the lawyer may characterize the fee as nonrefundable.

Of course, that’s not the end of the story.   And here’s where I sense that confusion exists.

The fact that the lawyer and client have agreed to a fee that complies with paragraph (f)(1)  is not tantamount to the client’s agreement to an unreasonable fee.  Indeed, here’s paragraph (f)(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 reasonableness 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.”

In other words, while paragraph (f) allows a lawyer to accept nonrefundable fees, it does not override paragraph (a)’s requirement that a lawyer refrain from agreeing to, charging, or collecting an unreasonable fee.  On this point, Vermont’s approach is not novel.  Among others, the New York State Bar Association has opined that “flat” and “nonrefundable” fees paid in advance remain subject to the reasonableness requirement.

Next, paragraph (f)(3) reinforces the fact that it is only when a lawyer complies with paragraphs (f)(1) and (f)(2) that a lawyer may describe a fee as “nonrefundable” or “earned upon receipt” or the like. It says:

• “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, and perhaps most critical given the gravity of improperly handling client funds, the rules are very clear that it is only after a lawyer has complied with paragraph (f) that the lawyer may treat a fee that is paid in advance of services being rendered as the lawyer’s own.  

First, paragraph (g) states:

• “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.”

Rule 1.15 is entitled “Safekeeping Property.”  Paragraph (c) says:

• “Unless a lawyer has entered into a nonrefundable fee agreement that complies with Rule 1.5(f), 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.”

In conclusion, the key takeaways are:

• If a lawyer complies with Rule 1.5(f), the lawyer may characterize a fee as nonrefundable, accept the fee an advance of services being rendered, and treat the fee as the lawyer’s own upon receipt. This necessarily means that a fee that complies with Rule 1.5(f) must not be deposited into trust.
• Even if eligible to be characterized as “nonrefundable” or “earned upon receipt” by virtue of a lawyer’s compliance with Rule 1.5(f), a fee paid in advance of services being rendered remains subject to the reasonableness requirement of Rule 1.5(a) and must be refunded if not earned.
• If a lawyer does not enter into an agreement that complies with Rule 1.5(f), a fee that is paid in advance of services being rendered remains the property of the client until earned, must be deposited into trust, and shall only be withdrawn as earned.

As always, be careful out there.

Trust Accounting Resources

Videos

•  Don’t Fear, Simplify.  (25 minutes)
• Basic Requirements(41 minutes)
• Contingent Fees, Referral Fees & Fee Sharing(22 minutes)
• Flat Fees, Misappropriation & Trust Account Scams(35 minutes)
• Collecting & Disbursing Funds(33 minutes)

Blog Posts

• Beware the “severance payment” scam
• Reconciliation (again!) is a good thing. Plus, a tip to protect against check fraud.
• A lawyer’s professional responsibility to identify common trust account scams
• Lawyers aren’t Kramer: when it comes to trust accounting, there are no excuses
• Back to (trust account) school
• Safeguarding Client Funds: Tech Competence & Mobile Payment Apps
• Taylor Swift & Trust Accounts: Don’t Say I Didn’t Warn Ya
• Disbursing without Collected Funds
• Mobile Payments & Legal Fees
• Trust Accounting Tips
• Trust Account Scams Continue
• I. & Jack Torrance: an overview of the trust account rules
• Third-Party Claims against Client Funds
• With trust accounts, verify
• Misappropriation: Don’t.
• Misappropriation: Don’t.
• Trust Account Tuesday: Nonrefundable fees
• Teddy KGB on prompt notification and delivery
• When a third-party asserts an “interest” in funds held in trust
• Trust Account Tuesday: (generally) don’t disburse absent collected funds.
• Trust Accounting: Basic Requirements
• Trust Account Tuesday: Don’t Commingle
• Trust Accounts & ACH Transfers
• Trust Account Scams: Change in Wire Instructions? CAUTION!!!!
• Don’t overcomplicate trust accounting.