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, 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.
My memory isn’t perfect. However, I don’t remember receiving a single complaint between 2005 and 2009 that challenged the reasonableness of a flat fee, minimum fee, or fee labeled “earned upon receipt.”
- 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 Such funds are to be withdrawn by the lawyer only as fees are earned or expenses incurred.”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 did Lawyer earn it?
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 on these exact questions.
- Rule 1.5 is amended to allow nonrefundable fees that are the lawyer’s own upon receipt.
In 2015, the Professional Responsibility Board studied the different approaches taken in other states. In the end, the Board recommended that the Court adopt a rule like Maine’s. The Court agreed. Rules 1.5(f) & (g) took effect in May 2016.
As amended, the rules allow a lawyer & client to agree to a nonrefundable fee that is earned before the lawyer provides any legal services. The fee must be reasonable and, no matter how designated, is subject to review for reasonableness and will be refunded if not.
So, where do such fees go?
Per Rules 1.5(f) & (g), if the lawyer confirms in writing:
- that the fee is nonrefundable; and,
- the scope of availability & services that the client will receive in exchange,
then the fee is the lawyer’s upon receipt and must not be deposited in trust.
Absent strict compliance with Rule 1.5(f), an advance fee remains the client’s until earned by the lawyer and, therefore, must be deposited into trust.