In connection with a representation, if a lawyer handles funds that belong to a client or third person, those funds must be held in a separate “trust” or “escrow” account, regardless of whether the funds belong in whole or in part to the client or third person. A lawyer may accept many methods of payment, including cash, check, or credit card.
Funds that must be deposited in a trust account:
Examples include:
Funds that must not be deposited in a trust account:
Examples include:
Unearned Fees
Any unearned fee or advance payment of expenses must be deposited into a trust account. Unearned fees are subject to refund until earned and cannot be deemed nonrefundable, even by agreement.
Examples of unearned fees include:
Rule 1.14 applies regardless of the type of fee agreement between lawyers and their clients, whether it involves an hourly fee, flat fee, contingent fee, or prepayment of an expense, and regardless of what the billing arrangement is called. For example, “value billing” is based on the results delivered to the client. The rule also applies to any practice area, whether it is criminal, family, personal injury, corporate law, etc. A trust account must be used in these circumstances because the rule is clear and straightforward: until the fee is earned, it must be segregated from the lawyer’s own funds in a trust account.
Questions often arise about flat fees and when they are earned. Simply stating that a flat fee is nonrefundable or earned upon receipt does not make it so. Unless the fee agreement states specific benchmarks at which the flat fee is earned, lawyers should operate under the premise that none of the fee is earned until the representation ends and all work has been completed to meet the client’s objective.
If a lawyer does not complete the representation due to termination by the client or voluntary withdrawal, the lawyer may face a situation where only some work has been completed, making it difficult to determine what portion of the flat fee has been earned. A lawyer can avoid this problem by stating the benchmarks at which the fee is earned in the fee agreement. For example, the lawyer could include their hourly rate or a schedule of work to be completed that designates at each step what portion of the fee has been earned.
A true nonrefundable retainer is a fee to secure a lawyer's services and remunerate him for the lost opportunity of accepting other employment. It is not a payment for services. Only a true retainer may be nonrefundable. If the lawyer can substantiate that other employment will probably be lost by obligating himself to represent the client, the retainer fee should be deemed earned when it is received. As an earned fee, a true nonrefundable retainer should be placed in the lawyer’s operational account and not in a trust account.
A true nonrefundable retainer is distinguishable from an advanced deposit or prepayment retainer. If the lawyer will perform services for the fee, the fee is classified as an advanced deposit or prepayment for services, which is always refundable until it has been earned through the performance of legal services.
As with a flat fee, a lawyer cannot transform an advance deposit or prepayment into a nonrefundable retainer simply by declaring that it is nonrefundable or stating that the fee is to remunerate the attorney for lost opportunity of other employment. Because it remains the client’s property, it must be placed in the lawyer’s trust account. Fee agreements stating that the retainer is nonrefundable are a common cause of fee disputes and grievances.
It is much easier to identify what constitutes an advance payment of expenses than an unearned fee. For example, court costs, such as filing fees, are often paid as part of an advance payment of fees. Until the court costs are paid, they belong in a trust account. The same is true of anticipated travel expenses. Until the lawyer buys the plane ticket or reimburses himself, the money for this expense remains in the trust account. Once the expense is reimbursed, the funds are transferred to the lawyer’s operational account.