Tuesday, March 22, 2011
Ind. Decisions - A teaching moment: "Non-refundable" fees [Updated three times now]
On Feb. 14, 2011, the ILB posted the Supreme Court's Feb. 11th disciplinary ruling: In the Matter of Heather McClure O'Farrell, a 12-page, 3-2 ruling concerning attorney fees, and noted that it "should be closely reviewed by all practicing attorneys."
Donald R. Lundberg, Barnes & Thornburg, who formerly was the Indiana Supreme Court Disciplinary Commission Executive Secretary, has published a four-page article, titled "Fun with refundability: when lawyers owe their clients money," in the March 2011 issue of Res Gestae. The ILB is pleased to be authorized to make the article available online. [Warning: because of the color, this is a large file - I'll try to remedy that.]
In addition, Kevin P. Mcgoff and James J. Bell have published an article headed "Money and Ethics: 'Non-Refundable' Fees," for the Indianapolis Bar Association. [ILB: Here, thanks to Mr. Mcgoff, is a copy of the March 16, 2011 article from the IBA.]
Fees and their handling are a difficult area. Here are some reader comments the ILB has received:
Did you happen to read Don Lundberg's article in the recent Res Gestae about flat fees? I am so frustrated with this whole thing. I used to put a client's flat fee into my business account and consider it my money. Well, that was until the Supreme Court told lawyers that we have to be prepared to "promptly" refund the client a portion of the fee if they decide to fire me or otherwise end the litigation. That's hard for someone who has a small number of clients and, thus, a small balance in my business account.[Updated at 1:43 pm] Don lundberg writes:
So I started putting flat fees into my trust account and billing against the fee as I did work on the case. That way, if the client fired me, I had invoices of all the work I had done, and I merely refunded them the remaining amount of the fee from the trust account.
Well, Lundberg's article now says that I can't do it that way either. I have no choice but to put the money into my business account, and then come up with a refund nearly immediately if the client requests one. That may not be a big deal for some larger firms, but for a small practitioner it is huge. Because I can't leave it in my business account until the representation is over (my cases often take years to complete); if I do, I have to pay taxes through my business on that revenue. But if I pay it to myself as income, then if the client demands a refund, I have to hope I have enough money in my business account to cover the refund.
And Lundberg's article goes even farther and says that I cannot put anywhere in my fee agreement that the fee is nonrefundable. I'm getting to the point where I'm going to have to draft my fee agreements to say only what the fee is and what I'll do for that fee. And nothing else. But I'm sure there's something wrong with that too.
Part of the frustration is that we can't ask the Disciplinary Commission for advice before we make a mistake. Instead, we have to guess what we think we should be doing, and hope we're doing it right.
So my law partner and I "corrected" our trust account by moving all of our flat fees to our business account. But yesterday we were presented with a dilemma when my partner was retained on a guardianship case. The client paid him a flat fee plus a filing fee for the action. The client paid with one check. Where to deposit the check? Technically the filing fee is supposed to go in our trust account, and the flat fee is supposed to go in our business account. But there's only one check to deposit.
I'm sure situations like this aren't going to draw the wrath of the Disciplinary Commission, but I think it highlights why this whole thing is so difficult.
One part of your commenter's dilemma is addressed in the Disciplinary Commission's Trust Account Management handbook, available on-line. It might be nice to alert your readers to the fact that this very helpful resource is available to them. It is, if you will, a form of "advice" from the Commission that your commenter says is not available. Here is the language that addresses what to do with combined trust/non-trust funds (on page 7):[Updated at 2:20 pm] Just received this note from Ted A. Waggoner, Peterson Waggoner & Perkins, LLP, Rochester.Receipt of Aggregated Non-Trust and Trust Funds: Funds paid to the lawyer by a client in a single check or credit card transaction some of which belong in trust and some of which do not belong in trust should be initially deposited in trust and a trust account check written to promptly disburse the non-trust monies. Initial deposit of such a check or credit card transaction into an operating account should be avoided as it places those funds at risk, even if for a brief period of time.As to the other concern about the refundability/non-refundability of fixed fees, my article says this:One might thereby think of a flat fee as non-refundable—and it is, in the sense that the lawyer need not generally refund any money at the conclusion of the representation merely because the matter went more smoothly than anticipated. But it is not nonrefundable in all events. If the attorney-client relationship ends by action of either lawyer or client before the contemplated representation is complete, the lawyer will generally owe the client some form of refund based on equitable considerations underlying the doctrines of quantum meruit and unjust enrichment.As wordsmiths, it should not be too difficult for lawyers' to draft their fee agreements for fixed fee representations to state, in substance, that the fee is non-refundable assuming the representation as contemplated is completed, but in the event the relationship is terminated before the contemplated representation is complete, the lawyer may equitably owe the client a refund of some amount that cannot be determined in advance.
Marcia,[Updated at 2:56 pm] The original reader writes again:
One thing you might add to the dialogue on fees is that while the Disciplinary Commission does not provide guidance on the RPC, the ISBA Legal Ethics Telephone Hotline panel will. It is comprised of experienced committee members who will work through legal issues with the members of the Bar. The Disciplinary Commission will give you the number of the lawyer assigned to your district as will the ISBA at their toll-free number 800-266-2581.
Also, while Don Lundberg is comfortable with the concept of a non-refundable retainer, I agree with McGoff that the words should not be used or even hinted at. It has not been an approved phrase in any opinion over the past 8 years that discussed it. The court has not declared the phrase forbidden, but has not provided an example of the proper use of that phrase. Life is too short, leave the concept behind in your fee agreements and in your approach to the fees paid to the firm, small or large. It does not matter how good a wordsmith you imagine yourself to be.
I appreciate the responses on the flat-fee case. But I noticed that neither responded to my fundamental concern with the flat fee setup as it now stands: it is hard on solo or small firm practitioners who handle almost exclusively flat-fee cases to operate when they know that clients can terminate their representation for any reason, or no reason at all, and be entitled to a refund.
I understand that not all of the money must be refunded simply because the client terminates representation. My problem is simply with the idea that the flat fee is earned the minute it is paid, so I can't put the money into my trust account, but the money isn't really income until I complete my work on the case. It is either earned upon payment or it isn't.
I hope more people provide their views. I would be interested in hearing what other people think about all this.