Opinions

Ethics Opinion 355

Flat Fees and Trust Accounts: (a) must a lawyer deposit flat fees paid in advance of the conclusion of a representation in a trust account?; and (b) when are such funds earned so that a lawyer can transfer them to an operating account?


In its decision in In re Mance, 980 A.2d 1196 (D.C. 2009), the District of Columbia Court of Appeals held that, absent informed consent from the client to a different arrangement, a lawyer must deposit a flat or fixed fee paid in advance of legal services in the lawyer’s trust account. Under Mance, such funds must remain in the lawyer’s trust account until earned unless the client gives informed consent to a different arrangement. This Opinion provides guidance for the Bar concerning these rulings.

The lawyer and client may agree on how and when the attorney is deemed to have earned some, or all, of the flat fee and thereby entitled to transfer trust funds into the lawyer’s operating account. Such an agreement must bear a reasonable relationship to the anticipated course of the representation and must avoid excessive “front–loading.” A written agreement or a writing evidencing the agreement is strongly recommended but not mandatory. In the absence of any agreement with the client regarding milestones by which the lawyer will have earned portions of the fixed fee, the lawyer will have the burden to establish that whatever funds that have been transferred to the lawyer’s operating account have been earned.

Alternatively, a lawyer may place unearned funds in an operating account provided that the lawyer obtains informed consent from the client as provided in Rule 1.15(e).[1] In order to obtain such consent, the lawyer must explain to the client that the funds may also be placed and kept in a trust account until earned and that placement in an operating account does not affect a lawyer’s obligation to refund unearned funds if the client terminates the representation. The lawyer should also explain the additional protection offered by a trust account. For the lawyer’s and client’s protection, these disclosures should be in writing, but the Rules do not mandate a writing.

Applicable Rules:

  • Rule 1.0(e) & (o)
  • Rule 1.5(b)
  • Rule 1.15(a) & (e)

Inquiry
The Committee has not received a specific inquiry in this case. The Court in Mance stated that its holding made new law in the District of Columbia. The “application [of the Rules] to flat fees is not clear on its face” and “the understanding among lawyers with respondent’s type of practice [criminal defense] has been that flat fees belong to the lawyer upon receipt.” 980 A.2d at 1206. Recognizing that many practitioners had long followed a contrary practice, the Court invited the D.C. Bar to “provide attorneys with helpful guidance on how to conform their practice to the rule we announce in this opinion.” Id. Pursuant to the Court’s comments, after outlining the Court’s holdings in Mance, we address the issues relating to agreements between the client and the lawyer regarding transferring portions of a flat fee from a trust account to an operating account prior to the conclusion of the representation.[2] We also address a lawyer’s ability to transfer funds in the absence of an agreement. Finally, we discuss those disclosures that must be made to a client in order to obtain informed consent under Rule 1.15(e) to place the entire flat fee in an operating account at the outset of an engagement. 

Discussion

A. In re Mance.
Mance addressed whether a flat fee paid in advance of services rendered has been “earned” by the lawyer under Rule 1.15(e) at the outset of the engagement. A flat fee is a fee that “embraces work to be done, whether it be relatively simple and of short duration, or complex and protracted.”[3] Id. at 1202 (internal quotations omitted). The respondent argued (and the Hearing Committee and Board of Professional Responsibility agreed) that such funds were earned upon receipt because a flat fee was “not an ‘advance’ but the agreed upon fee regardless of how much (or how little) legal work was required.” Id. at 1200. The Court of Appeals disagreed, holding “that when an attorney receives payment of a flat fee, the payment is an “‘advance[] of unearned fees’ and ‘shall be treated as property of the client…until earned unless the client consents to a different arrangement.’” Id. at 1202, quoting Rule 1.15(e).[4]

The Court further concluded, as “[a] corollary to the rule that a flat fee is an advance of unearned fees…the fee must be held as client funds in a client’s trust or escrow account until they are earned by the lawyer’s performance of legal services.” Id. at 1203. In support of this conclusion, the Court cited the “preservation of the client’s right to choose his or her counsel, including the right to discharge an attorney…. Since a flat fee is not owned by an attorney until it has been earned through the performance of services to the client, ‘the client will not risk forfeiting fees for work to be performed in the future if the client chooses to discharge his attorney.’” Id. at 1203, quoting In re Sather, 3 P.3d 403, 410 (Colo. 2000).

Beyond stating that the fee agreement “may” address the issue, the Court did not address in detail “how and when the attorney is deemed to earn the flat fee or specified portions of the fee.” Id. at 1204. It cited with approval the use of “milestones ‘based upon passage of time, the completion of certain tasks, or any other basis mutually agreed upon between the lawyer and the client.’”[5]

After recognizing that “the default rule is that an attorney must hold flat fees in a client trust or escrow account until earned,” the Court identified an alternative available under the Rules. Id. at 1206. Under Rule 1.15(e), an attorney may place a flat fee, even if not earned, in an operating account with the informed consent of the client. The Court set forth the requirements for such consent, relying upon the Colorado Supreme Court’s decision in Sather:

The attorney must expressly communicate to the client verbally and in writing that the attorney will treat the advance fee as the attorney’s property upon receipt; that the client must understand the attorney can keep the fee only by providing a benefit or providing a service for which the client has contracted; that the fee agreement must spell out the terms of the benefit to be conferred upon the client; and that the client must be aware of the attorney’s obligation to refund any amount of advance funds to the extent that they are unreasonable or unearned if the representation is terminated by the client.

Id. at 1206, quoting Sather, 3 P.3d at 413.

The Court then reviewed the record regarding the extent to which the above considerations were discussed between the respondent and his client and noted that respondent did not mention that the client had the option of having the funds placed in an escrow account. “Where there is no discussion regarding the fee arrangement besides merely stating the overall fee, and no mention of the escrow account option, a client cannot be said to have a sufficient basis to give informed consent to waive the requirements of a rule designed to protect the client’s interests.”Id. at 1207. Even where an attorney does obtain informed consent to place a flat fee into the attorney’s operating account, such consent does not alter the obligation of the lawyer to refund any portion of the fee that ultimately is not earned, even if through no fault of the lawyer. See id. at 1204-05 and 1206-07 (obligation to refund exists even when representation is terminated by the client).[6]

B. Client-Lawyer Agreements Concerning When Some Flat Fees Held in Trust Have Been Earned.
Under Mance, lawyers remain free to wait until the representation has been completed before withdrawing any portion of the flat fee from a trust account. Mance states that the “fee agreement may specify how and when the attorney is deemed to earn a flat fee or specified portions of the fee.” Id. at 1204 (emphasis added). Accordingly, a lawyer has the option of simply keeping the entire flat fee in a trust account and transferring such fee to an operating account in one lump sum at the conclusion of the representation. In theory such a practice could be seen as commingling, as in many instances the lawyer would likely have earned at least some of the fee prior to the end of the representation and yet will have kept all of the fee in a trust account. Given the Court’s emphasis on an attorney’s obligation to refund unearned funds, the quantum of which may often be a matter of dispute, we do not believe that the Rules as applied to the typical flat fee engagement support such a result. Nothing in the Mance opinion encourages the creation of a regime where lawyers are subject to discipline unless they can correctly calibrate how much they have earned at all points in a flat fee representation and then withdraw the corresponding amounts as earned.

As Mance recognized, however, waiting until the conclusion of the representation before getting access to any portion of the flat fee “could impose a financial hardship on solo practitioners and lawyers in small firms.” Id. at 1204. In the event that the lawyer wishes to make interim withdrawals or transfers from the trust account, the lawyer should address the issue in the fee agreement. We do not read Mance, however, as requiring that the fee agreement be the only way that this issue can be addressed or, similarly, as holding that the matter must be the subject of an agreement reached at the outset of the representation. In the latter regard, we note that circumstances change over the course of an engagement. A matter that at the outset is viewed by the client and lawyer as likely to be simple and brief may become complex and protracted.

While there is potential for abuse whenever a lawyer seeks to modify the financial terms of a representation in mid-stream, such considerations do not absolutely prohibit a lawyer from increasing a fee.[7] If the law does not prohibit a lawyer from changing the underlying fee after the engagement has commenced, then, similarly, it should not be read to prohibit a client and lawyer from addressing the issue of when a lawyer has earned portions of a flat fee after the fee agreement has been signed and the engagement is underway. Lawyers are cautioned that such agreements are subject to scrutiny to ensure that they were not the product of overreaching by the lawyer, just as with any other modification to an existing fee arrangement.

The next logical question is whether the agreement between the lawyer and the client regarding the treatment of flat fees held in trust accounts must be in writing. Rule 1.5(b) requires a writing for clients not regularly represented by the lawyer but that writing must address only “the basis or rate of the fee, the scope of the lawyer’s representation, and the expenses for which the client will be responsible.” Nothing in the Rules indicates that the requirement to set forth the “basis or rate of the fee” in writing encompasses the details of how or when a flat fee is earned. Comment [1] to Rule 1.5 states “[i]t is not necessary to recite all of the factors that underlie the basis of the fee.” Comment [3] indicates that providing a fixed fee schedule for routine matters, such as uncontested divorces, is sufficient to comply with the requirement to set forth the “basis or rate of the fee” in writing.   

In addition to the writing requirement of Rule 1.5, a number of Rules require the lawyer to obtain “informed consent” from the client regarding various issues in the lawyer-client relationship but do not impose any writing requirement. See, e.g., Rules 1.2(c) (limitations on scope of representation); 1.6(e)(1) (disclosure of confidences and secrets); 1.7(c) (conflict waivers); 1.15(e) (treatment of unearned client funds). Under the definition of “informed consent,” a writing is only required when the underlying Rule requiring informed consent so specifies. See Comment [3] to Rule 1.0; see also Rules 1.8(a)(3) and 1.8(g).

There are other important facets in the lawyer–client relationship where writings are not mandatory. For example, Rule 1.16(b)(3) allows a lawyer to withdraw from a representation of a client when the client “fails substantially to fulfill an obligation to the lawyer regarding the lawyer’s services and has been given reasonable warning that the lawyer will withdraw unless the obligation is fulfilled.” There is no requirement in the Rule or the Comments that the “warning” be in writing. Rule 1.4 imposes a number of broad requirements concerning communication and consultation between a lawyer and client but does not mandate that any of those communications or consultations be in writing.

The foregoing militates against reading the Rules to require that an agreement between a client and a lawyer concerning the treatment of flat fees be in writing. As a matter of prudence, however, such agreements should be in writing or at least memorialized in writing.[8] Writings avoid confusion and misunderstanding and can frequently prevent disputes. Writings protect both the lawyer and the client. Cf. Comment [28] to Rule 1.7 (“It is ordinarily prudent for the lawyer to provide at least a written summary of the considerations disclosed and to request and receive a written informed consent” to a conflicts waiver).

In terms of the substance of an agreement between a lawyer and a client, Mance explicitly permits the use of “milestones based upon the passage of time, the completion of certain tasks, or any other basis mutually agreed upon between the lawyer and the client,” provided that there is no “extreme ‘front loading’ of payment milestones.” 980 A.2d at 1204. There are many approaches that would fit within these general categories. A lawyer and client could agree on withdrawals based on the application of an hourly rate to the lawyer’s efforts. Withdrawals could be tied to events in a representation, such as completion of discovery, hearings or the setting of a trial date, or to the completion of specific tasks, such as witness interviews, filing of motions, or, in a non–litigation matter, the completion of specified draft documents. The lawyer and client can agree upon alternative milestones to address uncertainties about the future course of a representation.

The agreement can also contain language reflecting that the lawyer will earn the entire fee at the conclusion of a representation even if certain specified milestones have never been reached. For example, a lawyer who persuades a prosecutor to dismiss criminal charges in advance of trial could earn the entire fee, even if the lawyer and client had specified the trial as a milestone in their agreement. The milestones and approaches used can and should be tailored to the type of engagement. Those suitable for a criminal matter may not be appropriate to use for a real estate transaction or the drafting of a will.

C. Interim Trust Account Withdrawals in the Absence of Agreement Between the Lawyer and the Client.
Mance does not address whether a lawyer may transfer some portion of a flat fee from a trust account to an operating account prior to the conclusion of a representation where there is no agreement between the lawyer and the client. Such a course is not without peril for the lawyer but is not per se a violation of the Rules. Rule 1.15 allows, indeed requires, a lawyer to withdraw from a trust account funds that have been earned. A lawyer who has charged a client, for example, two thousand dollars for the preparation of an estate plan has under most circumstances earned some portion of the fee when the lawyer sends the client a set of draft documents. A lawyer in a criminal matter has likewise ordinarily earned some amount when the lawyer appears for the trial date prepared to present a defense.

In the absence of an agreement with the client, the burden will be on the lawyer to demonstrate that the amount withdrawn from trust has been earned. Under such circumstances, the lawyer’s conclusion as to what portion of flat fee has been earned must be reasonable. Further, the lawyer should give notice to the client of the withdrawal so that the client will have an opportunity to review the amount of the withdrawal, question the lawyer and perhaps contest it. See Rothrock, The Forgotten Flat Fee at 323 (citing authority requiring “written notice of the time, amount and the purpose of the withdrawal”). 

D. Informed Consent Under Rule 1.15(e) to Hold Unearned Fees in an Operating Account.
Rule 1.15(e) allows a lawyer, with informed consent from the client, to deposit unearned funds in an operating account. A flat fee which otherwise must be deposited in an trust account and remain in such account until earned may be deposited at the outset of an engagement in an operating account if the client provides informed consent.

Mance addressed the disclosures necessary to secure such informed consent. “Informed consent” is a defined term in the Rules, and the definition states that the lawyer must “communicat[e] adequate information and explanation about the material risks and reasonably available alternatives to the proposed course of conduct.” Rule 1.0(e). In this context, “informed consent” requires that “the client…be informed that, unless there is an agreement otherwise, the attorney must…hold the flat fee in escrow until it is earned by the lawyer’s provision of legal services.” 980 A.2d at 1207. The bare mention of “the escrow account option” will usually be insufficient unless accompanied by some explanation of the features that distinguish a trust account from an operating account: i.e., that trust funds are generally protected from a lawyer’s creditors and that trust funds cannot be spent until earned and thus are more readily available for refund to the client.[9] The lawyer must explain that, in contrast to a trust account, funds in an operating account are “lawyer’s property upon receipt,” with the caveat that they can be retained only by providing the agreed upon services. In addition, “‘the client must be aware of the attorney’s obligation to refund any amount of advance funds to the extent that they are unreasonable or unearned if the representation is terminated by the client.’” Id. at 1207, quoting Sather, 3 P.3d at 413. These disclosures should, as a matter of prudence, be in writing, but a writing is not required. See Rule 1.15(e)(containing no writing requirement).[10]

Conclusion
Absent a contrary agreement, a lawyer must deposit a flat or fixed fee paid in advance of legal services in the lawyer’s trust account. Such funds must remain in the lawyer’s trust account until earned. The lawyer and client may agree concerning how and when the attorney is deemed to have earned some, or all, of the flat fee. Such an agreement must bear a reasonable relationship to the anticipated course of the representation and must avoid excessive “front-loading.” A written agreement or a writing evidencing the agreement is strongly recommended but not mandatory. In the absence of any agreement with the client regarding milestones by which the lawyer will have earned portions of the fixed fee, the lawyer will have the burden to establish that whatever funds that have been transferred to the lawyer’s operating account have been earned.

Alternatively, a lawyer may place unearned funds in an operating account if the lawyer obtains informed consent from the client as provided in Rule 1.15(e). In order to obtain such consent, the lawyer must explain to the client that the funds may also be placed and kept in a trust account until earned and that placement in an operating account does not affect a lawyer’s obligation to refund unearned funds if the client terminates the representation. The lawyer should also explain the additional protection offered by a trust account. Although the Rules do not mandate a writing, these disclosures should be in writing, as a matter of prudence for both the lawyer’s and client’s protection.

[1] Effective August 1, 2010, the District of Columbia Court of Appeals amended Rule 1.15 and what was formerly Rule 1.15(d) is now Rule 1.15(e). The discussion in Mance concerning Rule 1.15(d) refers to the same provision that we reference as Rule 1.15(e) in this Opinion. The language of the former Rule 1.15(d) and the current Rule 1.15(e) are identical.

[2] For purposes of clarity, the references in this Opinion to the “conclusion of the representation” means when the lawyer has completed the entire engagement and does not include situations where the lawyer is terminated by the client before the engagement is otherwise over. 

[3] The Court recognized “the benefits of a flat fee arrangement for both the client and the attorney.” A flat fee “reward[s] efficiency” by the lawyer and “eliminate[s] the uncertainty, anxiety and surprise” of hourly rates for the client. Id. at 1204 (internal quotations omitted). The Court explicitly stated that it did not “intend by our holding to discourage attorneys from charging flat fees.” Id. 

[4] The Court of Appeals contrasted flat fees with “engagement retainers” which are fees paid “‘apart from any other compensation, to ensure that a lawyer will be available for the client if required.’” Id. at 1202. Engagement retainers are “earned when received,” subject to refund if the lawyer withdraws or is discharged prematurely. Id. Engagement retainers may not be deposited in a lawyer’s trust account. Doing so would constitute commingling.

[5] Id., quoting Alec Rothrock, The Forgotten Flat Fee: Whose Money is it and Where Should it be Deposited?, 1 Fla. Coastal. L. J. 293, 323 (1999) (hereafter “Rothrock, The Forgotten Flat Fee”). 

[6] Mance did not discuss a lawyer’s obligations with respect to funds received under pre-paid legal services plans. We similarly do not address such issues here.

[7] See Geoffrey C. Hazard, Jr., W. William Hodes, Peter R. Jarvis, 1 The Law of Lawyering §8.11 (2010 Supp.) (agreements or modifications after the commencement of the attorney client relationship “have to bear an extra burden of justification”); Restatement of the Law Governing Lawyers §18 (ALI 2000) (modifications of terms of representation “are subject to special scrutiny”); see also D.C. Legal Ethics Op. 310(2001) (“[a] change in a fee arrangement in an ongoing representation is subject to strict scrutiny for overreaching by the lawyer”).

[8] A writing signed by the client is, of course, preferable. Under Rule 1.0(o), a “signed” writing includes consent expressed electronically, e.g., an e–mail. If a “signed” writing through “an affirmative response by the client” cannot be obtained, “consent may be inferred…from the conduct of the client…who has reasonably adequate information about the matter.” Comment [3] to Rule 1.0. In practical terms, this means that if a client consents to an agreement concerning the handling of flat fee but does not “sign” a writing to that effect, the lawyer should nevertheless memorialize the terms of the agreement and the client’s consent to it in writing and send such memorialization to the client.

[9] Clients who are “experienced in legal matters generally and in making decisions of the type involved” or are represented by independent legal counsel may require “less information and explanation than others.” Comment [3] to Rule 1.0.

[10] Some language in Mance arguably could be read to impose a writing requirement. The Court quotes, with agreement, a paragraph from Sather outlining a number of requirements for client consent imposed by the Supreme Court of Colorado. Among the requirements set by the Colorado court is the obligation to communicate with the client “in writing.” See 980 A.2d at 1206-07. However, the Court in Mance then goes on to analyze the disclosures made by the respondent and reviews the contents of the “conversation” between the respondent and the complainant. See id. at 1207. The result, in our view, is an ambiguity that does not overcome the Rules drafters’ decision not to include a writing requirement in Rule 1.15(e).

June 2010