NONREFUNDABLE
RETAINERS & OTHER OXYMORONS
By
Kent A. Gernander, Chair
Lawyers Professional Responsibility Board
Reprinted
from Bench & Bar of Minnesota (February
2009)
A
lawyer’s fee may be fixed or based on time charges; it may be paid in advance
or billed as earned. However, an
unearned fee, if paid in advance, must be held in a trust account until earned,
and must be refunded upon termination of the representation. Calling an unearned fee nonrefundable does
not make it so.
These seem
straightforward propositions, supported by ethics rules and a growing number of
rulings and opinions. However, a number
of lawyers continue to stretch the rules by attempting to retain unearned fees. Disciplinary authorities have responded by
clarifying and enforcing the rules.
Rule 1.5(b) of the Minnesota Rules of Professional Conduct addresses “agreements for the advance payment of nonrefundable fees to secure a lawyer’s availability for a specific period of time or a specific service.” Such fees are sometimes called engagement fees or general retainers. They are “paid, apart from any other compensation, to ensure that a lawyer will be available for the client if required.”Ftn 1 Common examples are situations in which “a client might wish to prevent anyone else from retaining the lawyer in connection with a particular matter. Or a client might anticipate needing legal services in the future and wish to insure the lawyer’s availability at the time, in effect ‘taking an option’ on the lawyer’s services.”Ftn 2 The attorney, by committing to an engagement, may forgo other opportunities for representation of clients, because of time constraints or conflicts of interest. Under such circumstances, the lawyer may treat a reasonable engagement fee as earned upon receipt.Ftn 3
Such engagement fees must be
“reasonable in amount.”Ftn 4 An engagement fee satisfies this requirement
“if it bears a reasonable relationship to the income the lawyer sacrifices or
expense the lawyer incurs by accepting it, including such costs as turning away
other clients (for reasons of time or due to conflicts of interest), hiring new
associates so as to be able to take the client’s matter, keeping up with the
relevant field, and the like.”Ftn
5 An engagement fee
must also be “clearly communicated in a writing signed by the client.”Ftn 6
Because such
engagement fees are considered earned upon receipt, they are not considered
client property and are not to be held in a lawyer’s trust account.Ftn 7
Payments for Services
Distinguished
An engagement
retainer “must be distinguished from a lump-sum fee constituting the entire
payment for a lawyer’s service in a matter and from an advance payment from
which fees will be subtracted. A fee is
an engagement retainer only if the lawyer is to be additionally compensated for
actual work, if any, performed.”Ftn 8 If a fee is
intended as compensation for services to be performed it is not earned until
the agreed services have been performed.
This is true whether the fee is a fixed amount or based on time charges,
and whether it is paid in advance or paid as earned. Fees paid in advance for services to be
performed are sometimes referred to as special retainers. Lump-sum fees are sometimes referred to as
fixed fees or minimum fees. Regardless of
terminology, they are not engagement fees and are treated differently.
Upon
termination of an engagement, a lawyer is required to refund to the client “any
advance payment of fees or expenses that has not been earned or incurred.”Ftn 9 This obligation to refund unearned fees is not
dependent upon the circumstances of termination, and applies whether the lawyer
fails to perform the agreed services or the lawyer is discharged.
A client is
entitled to discharge a lawyer at any time, with or without cause; the
discharged lawyer is not entitled to contracted compensation or damages, but is
limited to recovering the reasonable value of services performed.Ftn 10 It is
contrary to public policy to permit a lawyer to treat as nonrefundable a
client’s advance payment for legal services to be performed (as opposed to an
engagement fee), because it compromises the client’s ability to discharge the
lawyer and secure other counsel to complete the representation, thereby holding
the client hostage to an unwanted fiduciary relationship.Ftn 11
A lawyer is
required to “deposit all fees in advance of the legal services being performed
into a trust account and withdraw the fees as earned.”Ftn 12 The rule excludes only availability retainers.Ftn 13
If a lump sum fee is paid in advance,
good practice would suggest that progress points be specified, permitting
portions of the fee to be considered earned at those points in the engagement.
In several
states, rules comparable to Minnesota’s have been held to prohibit
nonrefundable retainers, except availability fees.Ftn 14 In others, discipline opinions and rulings
have similarly construed comparable rules.Ftn 15 In at
least one state, a rule of professional conduct defines and clarifies
obligations concerning retainers and flat fees.Ftn 16
Lochow & Opinion 15
In Minnesota,
the issue may have been clouded for a time by interpretations of the ruling in In re Lochow, supra n. 3. In that case the Supreme Court held that
“attorney fees for payment of services to be performed in the future must be
placed in a trust account.” An exception
was recognized for availability retainers, reasonable in amount, which could be
immediately earned if the purpose were stated and approved in writing by the
client. This holding was incorporated in
Opinion No. 15, adopted by the Lawyers Professional Responsibility Board on
September 13, 1991. It defined
“Availability or Nonrefundable Retainers” as “Funds paid by a client or a
prospective client to secure a lawyer’s general availability to, or
representation of, that client over a specified period of time or for a
specific legal matter;” and opined that such retainers “are not required to be
deposited into a trust account or held in trust” provided a written retainer
agreement is signed by the client, with a specific disclosure above the
signature that the funds will not be held in trust and may not be refunded if
the client terminates the lawyer’s services.
This opinion could have been read to permit a lawyer, with the required
disclosures and signature, to collect an advance fee payment for a service
without obligation to hold it in trust.Ftn 17
Opinion No.
15 was repealed January 26, 2006. Some
of its provisions were incorporated in Rules 1.5(b) and 1.15(c), Minn. R. Prof.
Conduct. Those rules now require a lawyer
to deposit all advance fees into a trust account, except fees paid pursuant to
an availability retainer.
Perhaps
encouraged by the language of Lochow
and Opinion 15, some lawyers have collected advance fees for legal services to
be performed, treating the fees as nonrefundable and not holding them in trust. Discipline has not yet been imposed for
treating an advance fee payment as nonrefundable, although lawyers have been
disciplined for failing to communicate the fee in a writing signed by the client
and for failing to deposit unearned fees in a trust account. The Office of Lawyers Professional
Responsibility has previously expressed its interpretation of the rule,Ftn 18 and intends to continue educational efforts. Consideration may be given to seeking a
formal opinion of the Lawyers Board, and discipline may be sought for egregious
violations of the Rules.
Lawyers with
questions about these and other matters may consult the Advisory Opinion
Service of the Office of Lawyers Professional Responsibility. Advisory opinions may be obtained by phone
(651-296-3952 or toll-free 1-800-657-3601) or by an email link on the Office
website: http://www.mncourts.gov/lprb/mailform/AOService.aspx.
Notes
1 Restatement, Third, The Law Governing Lawyers, sec.34, Comment (e).
3 In re Lochow, 469 N.W.2d 91, 98 (Minn. 1991).
4 Minn. R. Prof. Conduct, Rule 1.5(b).
5 Restatement, Third, The Law Governing Lawyers, sec.34, Comment (e).
8 Restatement, Third, The Law Governing Lawyers, sec.34, Comment (e).
11 In re Cooperman, 633 N.E.2d
1069, 1072 (N.Y. 1994).
12 Rule 1.15, Minn. R. Prof. Conduct.
13 Rule 1.15(c)(5), Minn. R. Prof. Conduct.
16 Washington RPC 1.5(f). See also Chapter 45, Iowa Court
Rules.
17 See W. Wernz, “Opinion 15: Retainer Fees,” 48 Bench
& Bar of Minnesota 10 (Nov. 1991), pp. 11-13.