By Devika Kewalramani and Jordan Greenberger Contact All Articles
New York Law Journal
February 15, 2013
An advance payment retainer is a sum provided by the client to cover payment of legal fees expected to be earned during the course of a client representation; to the extent the legal fees advanced are not earned during the representation, the lawyer agrees to return them to the client. But to whom does an advance payment retainer belong: the lawyer or the client? To what account should the funds be deposited: the lawyer's or law firm's operating account or the client trust account?
How the lawyer or law firm that receives the retainer treats it may vary from one lawyer or law firm to another. The New York Rules of Professional Conduct (the Rules) do not mandate what the lawyer should do with the funds although there are ethics opinions providing guidance. Regardless, some attorneys consider the funds to be the client's property (until the fees are earned) that should be deposited in the client trust account. Other attorneys view the advance payment as their own and place the funds in their operating account, not to be commingled with any client funds. And still other attorneys decide to open a separate sub-account in the client's name to avoid any confusion or issues should the client change his mind about the engagement soon after making the retainer payment. While none of these options are per se unethical, some present greater benefits to the lawyer or client, and all present ethical duties that the attorney and law firm should be aware of.
Client's or Lawyer's Funds?
What Were Drafters Thinking? N.Y. State Bar Opinion 570 (1985) noted that the drafters of the Code of Professional Responsibility1 did not consider advance payments of fees to be client funds necessitating their deposit in a trust account. The opinion observed that "Normally, when one pays in advance for services to be rendered or property to be delivered, ownership of the funds passes upon payment, absent an express agreement that the payment be held in trust or escrow, and notwithstanding the payee's obligation to perform or to refund the payment. The lawyers who drafted the Code should not lightly be assumed to have overlooked these fundamental principles in choosing the language of DR 9-102(A)."2
Rules Are Not Explicit. The Rules dealing with legal fees (Rule 1.5), holding funds as a fiduciary (Rule 1.15), and withdrawal from representation (Rule 1.16) do not specifically refer to advance fee retainers. Rule 1.5(d) prohibits a lawyer from entering into an arrangement to charge or collect a nonrefundable retainer fee. Rule 1.15 governs "funds…belonging to another person." Rule 1.16(e) mentions advance fee payments and imposes a complementary obligation by requiring a lawyer who withdraws from representing a client to "refund promptly any part of a fee paid in advance that has not been earned." However, that provision does not identify from which account the funds should be returned. Thus, the Rules are not explicit; the Rules do not require that the advance payment retainer be placed in the client trust account, but the Rules also do not prohibit the attorney and client from agreeing to treat the fee advances as client funds for deposit into the client trust account until the fees are earned through services rendered.
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By Devika Kewalramani and Jordan Greenberger Contact All Articles
New York Law Journal
February 15, 2013
An advance payment retainer is a sum provided by the client to cover payment of legal fees expected to be earned during the course of a client representation; to the extent the legal fees advanced are not earned during the representation, the lawyer agrees to return them to the client. But to whom does an advance payment retainer belong: the lawyer or the client? To what account should the funds be deposited: the lawyer's or law firm's operating account or the client trust account?
How the lawyer or law firm that receives the retainer treats it may vary from one lawyer or law firm to another. The New York Rules of Professional Conduct (the Rules) do not mandate what the lawyer should do with the funds although there are ethics opinions providing guidance. Regardless, some attorneys consider the funds to be the client's property (until the fees are earned) that should be deposited in the client trust account. Other attorneys view the advance payment as their own and place the funds in their operating account, not to be commingled with any client funds. And still other attorneys decide to open a separate sub-account in the client's name to avoid any confusion or issues should the client change his mind about the engagement soon after making the retainer payment. While none of these options are per se unethical, some present greater benefits to the lawyer or client, and all present ethical duties that the attorney and law firm should be aware of.
Client's or Lawyer's Funds?
What Were Drafters Thinking? N.Y. State Bar Opinion 570 (1985) noted that the drafters of the Code of Professional Responsibility1 did not consider advance payments of fees to be client funds necessitating their deposit in a trust account. The opinion observed that "Normally, when one pays in advance for services to be rendered or property to be delivered, ownership of the funds passes upon payment, absent an express agreement that the payment be held in trust or escrow, and notwithstanding the payee's obligation to perform or to refund the payment. The lawyers who drafted the Code should not lightly be assumed to have overlooked these fundamental principles in choosing the language of DR 9-102(A)."2
Rules Are Not Explicit. The Rules dealing with legal fees (Rule 1.5), holding funds as a fiduciary (Rule 1.15), and withdrawal from representation (Rule 1.16) do not specifically refer to advance fee retainers. Rule 1.5(d) prohibits a lawyer from entering into an arrangement to charge or collect a nonrefundable retainer fee. Rule 1.15 governs "funds…belonging to another person." Rule 1.16(e) mentions advance fee payments and imposes a complementary obligation by requiring a lawyer who withdraws from representing a client to "refund promptly any part of a fee paid in advance that has not been earned." However, that provision does not identify from which account the funds should be returned. Thus, the Rules are not explicit; the Rules do not require that the advance payment retainer be placed in the client trust account, but the Rules also do not prohibit the attorney and client from agreeing to treat the fee advances as client funds for deposit into the client trust account until the fees are earned through services rendered.
CONTINUE READING HERE
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