In the months leading up to the proposed rules referendum in 2011, I was exposed to a lot of misinformation about the purported impact of the proposed rules upon my ability to contract for a “non-refundable flat fee.” I even attended a CLE luncheon where the topic was why I should vote against the proposed rules because they would have supposedly banned such “non-refundable” fee agreements.
After the overwhelming defeat of the proposed rules, I felt that this was a dead issue into the foreseeable future, probably extending to the end of my own professional career. I believed then, and now, that the proposed rules were defeated largely due to the widespread popular belief—really, superstition—that the proposed rules would have drastically affected our ability to enter into “non-refundable” fee agreements that would protect us from wrongful discharge by a client with a case of “buyer’s remorse” following a great deal of work in a bad case.
Along came Ethics Opinion 611, prohibiting “non-refundable flat fees” outright. Tex. Comm. On Prof’l Ethics, Op. 611, 74 Tex. B.J. 944 (2011). Like many of you, I had the immediate first impression that we, being primarily criminal and family lawyers, were being punished for defeating the proposed rules. I perceived this as an attempt to “back-door” the defeated rules into existence by an undemocratic process.
I became involved in State Bar politics almost entirely due to my desire to get to the bottom of this perceived problem and, if possible, to reverse it. When I was asked to speak at the TCDLA “Jolly Roger” seminar on December 14, 2012, I agreed to speak on the condition that I could speak on the subject of “non-refundable flat fees.” This would finally give me the chance to fully research the subject. At the same time, my fellow State Bar Director, Larry McDougal, also appeared in a Webinar entitled “Ethics of Flat Fee Contracts in Criminal Law,” sponsored by the State Bar, which aired on September 27, 2012. I urge each of you to watch this archived Webinar if you have any further interest in this topic. Larry McDougal and I agree nearly 100 percent on all aspects of this issue. Ethics Opinion 611 really didn’t effectuate much of a change, if any, from the previous body of rules and case law as it related to the concept of a non-refundable flat fee.
One of the most common misconceptions about this entire issue is that Ethics Opinion 611 supposedly banned “flat” (also known as “fixed”) fees. It’s more accurate to refer to a “flat” fee as a “fee cap.” Such a fee agreement does nothing more than limit the amount of the attorney’s fee for a service, which is still perfectly ethical.
After reading Cluck, infra, and Ethics Opinion 431, and discussing this matter with other lawyers, it became clear to me that the proposed rules, if passed, wouldn’t have effectuated much of a change, if any, in the status of either “flat” fees or so-called “non-refundable” fees.
I had heard for years at seminars that I could contract with a client for a “non-refundable flat fee, by using those magic words, that I could then immediately place the entire fee into my operating account, and that I could keep that fee even after termination by a client. Fortunately for me, I never entirely bought into that concept because it was a shaky concept between 1978 and 1986; starting in 1986, it was completely wrong.
Hate to tell you, but we didn’t do a very good job of educating our fellow lawyers about this issue. We haven’t been able to contract for a non-refundable flat fee since 1986. We were all living in a “Fool’s Paradise.” Fortunately for me, my attitude was that, in the rare instance when I had a client with “buyer’s remorse” who didn’t act perfectly delighted to have me as his lawyer, I gave him his money back and told him not to let my door hit him in the posterior. I would rather see a difficult client in my rear-view mirror than at the grievance committee.
My research led me to conclude that this issue evolved in stages and that Ethics Opinion 611 was only—perhaps—the final nail in the coffin of non-refundable flat fees. The original authority allowing such fees was Ethics Opinion 391.
Ethics Opinion 391: Tex. Comm. On Prof’l Ethics, Op. 391 (February, 1978). This opinion was decided under Former DR 9-102. As far as I can tell, this opinion was the original source of an attorney’s contractual ability to contract for a “non-refundable retainer” and to place at least the truly non-refundable portion of the fee into his or her operating account at the very outset of the representation. To the extent that this became standard operating procedure in the criminal practice, it was fairly shaky authority.
Indeed, Ethics Opinion 391 seemed to authorize this practice but then veered off into now-familiar treacherous terrain:
A non-refundable retainer belongs entirely to the attorney at the time it is received in that the fee is earned at the time the fee is received; therefore, it may be placed into the attorney’s general operating account. However, that portion of the advance fee which represents payment for services not yet rendered and which is refundable belongs in part to the client at the time the funds come into the possession of the attorney and, therefore, must be deposited into a separate, “trust” account. When a client produces one check which represents a non-refundable retainer and a refundable advance payment, the entire check should be deposited into the . . . [attorney’s] trust account. Because the attorney may withdraw those funds which are due and owing to the attorney pursuant to 9-102 (A)(2), the attorney may then transfer the funds which represent the non-refundable retainer into his general operating account.
Tex. Comm. On Prof’l Ethics, Op. 391 (February, 1978).
So, a careful analysis of Ethics Opinion 391 shows that even in 1978, the ethics committee was making a distinction between a “non-refundable retainer” and an advanced payment for services to be rendered by an attorney. Ethics Opinion 391 goes on to provide some guidelines for language to be included in a flat fee agreement:
The attorney in such a situation as this should have a thorough understanding with his client as to the ownership of the flat fee paid and whether any part would be refundable in event of discharge. Some attorneys do not have a clear understanding with their client regarding the ownership of a flat fee payable in advance and whether any part would be refundable in event of discharge of the attorney and this should be avoided by a proper understanding and agreement between the attorney and client.
Id.
The above-quoted language provided the underpinnings for flat fee agreements in criminal cases from 1978 until the publication of Ethics Opinion 431 in June 1986. However, even Ethics Opinion 391 went on to state that:
In response to this specific fact situation, the attorney is not entitled to the full use of the fee until that fee has been earned. DR 2-110 (A)(3). There might be some question as to whether the attorney can be required to return an unearned portion of a fee when the client has discharged the attorney without sufficient cause [citations omitted]. Regardless of the resolution of the legal question concerning the ownership of the full fee in such a situation, the fact remains that DR 2-110(A)(3) would require the return of an unearned fee in certain situations and, thus, creates a continuing obligation on the part of an attorney to insure that any unearned portion of a fee be protected and available for recovery by the client.
At the time the advance fee is paid to the attorney in the fact situation, there is no guarantee that the attorney will be entitled to the full amount. Therefore, the attorney must place those funds into the 9-102 trust account and may withdraw portions of those funds pursuant to DR 9-102(A)(2) when that portion of the fee is due (earned) and not before.
Id.
Therefore, it was my conclusion that even Ethics Opinion 391 did not create a blanket right for attorneys to contract for a truly non-refundable flat fee that could immediately be placed into that attorney’s operating account and exempt that attorney from having to account to a client for the “unearned” portion of the fee following termination of employment. Since Ethics Opinion 391 was decided under the old “D.R.s,” the shaky authority provided by 391 was only quicksand until a very recent article in the October 2012 Texas Bar Journal. See Hamilton, “Is Any Retainer Truly Non-Refundable?,” 75 Texas Bar Journal, No. 9, at pp. 694–696 (2012).
Ethics Opinion 431: Ethics Opinion 431 tightened the screws even further on non-refundable flat fees. Tex. Comm. On Prof’l Ethics, Op. 431 (June 1986). Noting the lack of case law regarding “non-refundable retainers,” this later opinion states:
While a non-refundable retainer is not unethical per se, an attorney may be disciplined for refusing to refund an unearned fee (DR 2-110(A)(3)) or for charging a clearly excessive fee (DR 2-106). This seems to present an ethical dilemma which resolves itself into a question of whether a fee is earned and is it excessive?
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[A] non-refundable retainer agreement which allows an attorney to keep the fee despite his withdrawal or discharge from the case may contravene the requirements of DR 2-110. Such an agreement would appear to deny the client’s right to discharge the attorney if the client believes the retainer is non-refundable even if he discharges the attorney for cause. [¶] If the “retainer” fee is actually an advance payment for services to be performed, the amount of the fee should be related to the services to be performed. If it is not, the fee may be found excessive. An agreement which is actually an advance payment might provide, for example: “Responsibility to provide legal services will be accepted and work begun when attorney receives $___ as an advance retainer against the fees and expenses. [citation omitted]. In such a case, if the client discharges the attorney for cause, that part of the fee which has not been earned must be refunded.
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A true retainer, however, is not a payment for services. It is an advance fee to secure a lawyer’s services, and remunerate him for loss of the opportunity to accept other employment [citation omitted]. If the lawyer can substantiate that other employment will probably be lost by obligating himself to represent the client, then the retainer fee should be deemed earned at the moment it is received. If, however, the client discharges the attorney for cause before any opportunities have been lost, or if the attorney withdraws voluntarily, then the attorney should refund an equitable portion of the retainer. . . .
Texas Ethics Opinion 391 is still viable, but is overruled to the extent that it states that every retainer designated as non-refundable is earned at the time it is received. A fee is not earned simply because it is designated as non-refundable. If the (true) retainer is not excessive, it will be deemed earned at the time it is received, and may be deposited in the attorney’s account. However, if the attorney is discharged for cause, or voluntarily withdraws before opportunities have been lost, DR 2-110 imposes a duty upon the attorney to promptly refund an equitable portion of the retainer.
Ethics Opinion 431 reflected the Bar’s growing concern that attorneys were contracting for “non-refundable flat fees” or “retainers,” and then neglecting the client’s matter or, e.g., failing to communicate with the client after representation commenced, getting fired, and then using the “non-refundable” language as an excuse to refuse a demand for a refund or for an accounting.
Opinion 431 also gave rise to the typical language found in many fee agreements, where the agreement stated that, e.g., “the parties recognize that the attorney is foregoing further employment opportunities by agreeing to represent the client,” without any regard to whether this language bore any semblance to reality in the attorney’s practice. Ethics Opinion 431 imposed a duty on a discharged attorney to render an accounting to the discharging client and to refund an “equitable portion of the retainer.”
Ethics Opinion 611: Many attorneys who I know and respect opposed the proposed disciplinary rules on the basis that they appeared to prohibit non-refundable flat fees. One ethics professor opined that this was the chief misconception among the Bar that doomed the proposed rules. I personally attended at least one ethics seminar where the presenter opined that the proposed rules would abolish non-refundable flat fees altogether. After the proposed rules were soundly defeated by 80-plus percent of the State Bar membership, many thought that they could resume practicing law with their existing fee agreements intact without becoming further involved in State Bar politics or rule-making efforts.
Like many others, when I received my November 2011 Texas Bar Journal, I flipped through the magazine without much interest, going directly to the Disciplinary Actions and expecting the usual esoterica, when I stumbled upon Ethics Opinion 611. 611 seemed to many of us to be an end-run around the defeat of the proposed rules, perhaps even a form of “punishment” to those who rejected those rules so soundly.
I and many others wondered, “Who are those guys who wrote this opinion?” Texas Gov’t. Code § 81.091 (State Bar Act) provides that the Texas Supreme Court appoints nine members of the State Bar to serve on the Committee on Professional Ethics to serve three-year rotating terms. According to Larry McDougal, the current committee as chosen by the Supreme Court contains not one single criminal defense or family law attorney.
Anyone can request a professional ethics opinion by presenting a question to the State Bar, which will forward the request to the committee chairperson. A minimum of three committee members are required to consider and write the opinion. The opinions are not binding on the Supreme Court. See § 81.092(b). Ethics Opinion 611 bears inclusion herein verbatim because it creates an absolute prohibition of non-refundable flat fees.
THE PROFESSIONAL ETHICS COMMITTEE
FOR THE STATE BAR OF TEXAS
Opinion No. 611
September 2011
QUESTION PRESENTED
Is it permissible under the Texas Disciplinary Rules of Professional Conduct for a lawyer to include in an employment contract an agreement that the amount initially paid by a client with respect to a matter is a “non-refundable retainer” that includes payment for all the lawyer’s services on the matter up to the time of trial?
STATEMENT OF FACTS
A lawyer proposes to enter into an employment agreement with a client providing that the client will pay at the outset an amount denominated a “non-refundable retainer” that will cover all services of the lawyer on the matter up to the time of any trial in the matter. The proposed agreement also states that, if a trial is necessary in the matter, the client will be required to pay additional legal fees for services at and after trial. The lawyer proposes to deposit the client’s initial payment in the lawyer’s operating account.
DISCUSSION
Rule 1.04(a) of the Texas Disciplinary Rules of Professional Conduct provides that a lawyer shall not enter an arrangement for an illegal or unconscionable fee and that a fee is unconscionable “if a competent lawyer could not form a reasonable belief that the fee is reasonable.” Rule 1.04(b) sets forth certain factors that may be considered, along with any other relevant factors not specifically listed, in determining the reasonableness of a fee for legal services. In the case of a non-refundable retainer, the factor specified in Rule 1.04(b)(2) is of particular relevance: “the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer. . . .”
Rule 1.14 deals in part with a lawyer’s handling of funds belonging in whole or in part to the client and requires that such funds when held by a lawyer be kept in a “trust” or “escrow” account separate from the lawyer’s operating account.
Two prior opinions of this Committee have addressed the relationship between the rules now embodied in Rules 1.04 and 1.14.
In Professional Ethics Committee Opinion 391 (February 1978), this Committee concluded that an advance fee denominated a “non-refundable retainer” belongs entirely to the lawyer at the time it is received because the fee is earned at the time the fee is received and therefore the non-refundable retainer may be placed in the lawyer’s operating account. Opinion 391 also concluded that an advance fee that represents payment for services not yet rendered and that is therefore refundable belongs at least in part to the client at the time the funds come into the possession of the lawyer and, therefore, the amount paid must be deposited into a separate trust account to comply with the requirements of what is now Rule 1.14(a). Opinion 391 concluded further that, when a client provides to a lawyer one check that represents both a non-refundable retainer and a refundable advance payment, the entire check should be deposited into a trust account and the funds that represent the non-refundable retainer may then be transferred immediately into the lawyer’s operating account.
This Committee addressed non-refundable retainers again in Opinion 431 (June 1986). Opinion 431 concluded that Opinion 391 remained viable and that non-refundable retainers are not inherently unethical “but must be utilized with caution.” Opinion 431 additionally concluded that Opinion 391 was overruled “to the extent that it states that every retainer designated as non-refundable is earned at the time it is received.” Opinion 431 described a non-refundable retainer (sometimes referred to in Opinion 431 as a “true retainer”) in the following terms:
“A true [non-refundable] retainer, however, is not a payment for services. It is an advance fee to secure a lawyer’s services, and remunerate him for loss of the opportunity to accept other employment. . . . If the lawyer can substantiate that other employment will probably be lost by obligating himself to represent the client, then the retainer fee should be deemed earned at the moment it is received. If, however, the client discharges the attorney for cause before any opportunities have been lost, or if the attorney withdraws voluntarily, then the attorney should refund an equitable portion of the retainer.”
Thus a non-refundable retainer (as that term is used in this opinion) is not a payment for services but is rather a payment to secure a lawyer’s services and to compensate him for the loss of opportunities for other employment. See also Cluck v. Commission for Lawyer Discipline, 214 S.W.3d 736 (Tex. App.—Austin 2007, no pet.).
It is important to note that the Texas Disciplinary Rules of Professional Conduct do not prohibit a lawyer from entering into an agreement with a client that requires the payment of a fixed fee at the beginning of the representation. The Committee also notes that the term “non-refundable retainer,” as commonly used to refer, as in this opinion, to an initial payment solely to secure a lawyer’s availability for future services, may be misleading in some circumstances. Opinion 431 recognized in the excerpt quoted above that a retainer solely to secure a lawyer’s future availability, which is fully earned at the time received, would nonetheless have to be refunded at least in part if the lawyer were discharged for cause after receiving the retainer but before he had lost opportunities for other employment or if the lawyer withdrew voluntarily. However, the fact that an amount received by a lawyer as a true non-refundable retainer may later in certain unusual circumstances have to be at least partially refunded does not negate the facts that such amount has been earned and under the Texas Disciplinary Rules may be deposited in the lawyer’s operating account rather than being subject to a requirement that the amount must be held in a trust or escrow account.
In view of Opinions 391 and 431, the result in this case is clear. A legal fee relating to future services is a non-refundable retainer at the time received only if the fee in its entirety is a reasonable fee to secure the availability of a lawyer’s future services and compensate the lawyer for the preclusion of other employment that results from the acceptance of employment for the client. A non-refundable retainer meeting this standard and agreed to by the client is earned at the time it is received and may be deposited in the lawyer’s operating account. However, any payment for services not yet completed does not meet the strict requirements for a non-refundable retainer (as that term is used in this opinion) and must be deposited in the lawyer’s trust or escrow account. Consequently, it is a violation of the Texas Disciplinary Rules of Professional Conduct for a lawyer to agree with a client that a fee is non-refundable upon receipt, whether or not it is designated a “non-refundable retainer,” if that fee is not in its entirety a reasonable fee solely for the lawyer’s agreement to accept employment in the matter. A lawyer is not permitted to enter into an agreement with a client for a payment that is denominated a “non-refundable retainer” but that includes payment for the provision of future legal services rather than solely for the availability of future services. Such a fee arrangement would not be reasonable under Rule 1.04(a) and (b), and placing the entire payment, which has not been fully earned, in a lawyer’s operating account would violate the requirements of Rule 1.14 to keep funds in a separate trust or escrow account when funds have been received from a client but have not yet been earned. Any advance payment amount not meeting the requirements for a non-refundable retainer must be deposited in a trust or escrow account from which amounts may be transferred to the lawyer’s operating account only when earned under the terms of the agreement with the client.
CONCLUSION
It is not permissible under the Texas Disciplinary Rules of Professional Conduct for a lawyer to include in an employment contract an agreement that the amount paid by a client with respect to a matter is a “non-refundable retainer” if that amount includes payment for the lawyer’s services on the matter up to the time of trial.
Appellate Opinions Regarding Non-Refundable Flat Fees & Opinions by Fellow Commentators:
a. Pre-611 Opinion Regarding “Non-Refundable” Fee Agreements: In Cluck, the attorney agreed to represent a client in a divorce case. The fee agreement provided that the client would pay a “non-refundable retainer” against which fees would be billed. The attorney deposited the funds into his operating account. The client subsequently terminated the attorney because she was allegedly dissatisfied with the lack of progress on her case. The attorney did not refund any portion of the collected fees to the client. The court concluded that the attorney violated Tex. Disciplinary R. Prof. Conduct 1.14(a) because he deposited an advance payment for services, which belonged at least in part to the client, directly into his operating account. The designation of the funds as a “non-refundable retainer” did not relieve the attorney of the duty to hold the funds in a trust account until they were earned. Cluck v. Comm’n for Lawyer Discipline, 214 S.W.3d 736 (Tex. App.—Austin 2007, no pet.).
In Cluck, the fee agreement provided that, “in consideration of the legal services rendered on my behalf in the above matter I agree to pay . . . [Attorney] a non-refundable retainer in the amount of $ 15,000.” Following that sentence, a handwritten provision explained, “Lawyer fees are to be billed at $150 per hour, first against non-refundable fee and then monthly thereafter. Additional non-refundable retainers as requested.” The contract states that “no part of the legal fee is to be refunded should the case be discontinued, or settled in any other matter.” Id.
Quoting from Ethics Opinion 431, the Cluck opinion explains that a true retainer “is not a payment for services. It is an advance fee to secure a lawyer’s services, and remunerate him for loss of the opportunity to accept other employment.” Again quoting 431, the Cluck opinion goes on to state that “[i]f the lawyer can substantiate that other employment will probably be lost by obligating himself to represent the client, then the retainer fee should be deemed earned at the moment it is received.” Id.
However, Cluck goes on to say that, if a fee is not paid to secure the lawyer’s availability and to compensate him for lost opportunities, then it is a prepayment for services and not a true retainer.” If the (true) retainer is not excessive, it will be deemed earned at the time it is received, and may be deposited in the attorney’s account.” Id. However, money that constitutes the prepayment of a fee belongs to the client until the services are rendered and must be held in a trust account. Tex. Disciplinary R. Prof’l Conduct 1.14.
“A fee is not earned simply because it is designated as non-refundable.” Ethics Opinion 431. Advance fee payments must be held in a trust account until they are earned. Tex. Disciplinary R. Prof’l Conduct 1.14 cmt. 2 (providing that trust account must be utilized “[w]hen a lawyer receives from a client monies that constitute a prepayment of a fee and that belongs to the client until the services are rendered” and that “[a]fter advising the client that the service has been rendered and the fee earned, and in the absence of a dispute, the lawyer may withdraw the fund from the separate account”); Ethics Opinion 431; see also Tex. Disciplinary R. Prof’l Conduct 1.15(d) (“Upon termination of representation, a lawyer shall take steps to the extent reasonably practicable to protect a client’s interests, such as . . . refunding any advance payments of fee that has not been earned”). Cluck, id.
b. Rights of Third Parties to “Non-Refundable Retainer”: C.H.C. revolves around an interesting attempt by a third party to “pierce the veil” [Comment: my words] between the attorney and client in order to disgorge a “non-refundable retainer” from the attorney.
In the C.H.C. opinion, the wife attempted to collect over $400,000.00 in judgments against the husband. She subpoenaed records from the husband’s attorney which showed that the attorney had received a retainer of $15,000 to represent the husband from the husband’s sister. The wife attempted to obtain a turnover order requiring the attorney to turn over to her all funds held in trust by the attorney on behalf of the husband. In The Interest of C.H.C., 290 S.W.3d 929 (Tex. App.—Dallas 2009). The attorney testified that the fee was a non-refundable retainer and he placed it into his operating account. Therefore, the Court held that the husband did not own the funds paid to the attorney and did not have possession or control over the funds.
Relying on Cluck, the wife contended that the retainer paid to the husband’s attorney was not a retainer but an advance payment for fees. She further asserted that the unearned portion of the fee belonged to neither the husband’s attorney nor the husband but remained under the husband’s control as a matter of law.
In C.H.C., the trial court heard conflicting evidence regarding the fee agreement and the ownership and control of the funds paid to the attorney. The wife’s attorney testified that, in his opinion, the “retainer” was an advance payment on fees. The fee agreement stated that the payment was a non-refundable retainer and that one purpose of the retainer was to compensate the husband’s attorney for lost opportunities. The husband’s attorney testified that the fee was a non-refundable retainer and that he had placed it into his operating account. The husband’s sister who paid the funds testified that it was her understanding that the $15,000.00 fee was non-refundable, but that if any money was refunded, it would be refunded to her. She further testified that her brother, the husband, did not own the funds and had no right to possess or control the funds. The trial court determined that the husband did not own the funds paid to his attorney and did not have possession or control over the funds. Id.
c. Suing to Collect a “Non-Refundable” Fee: In Wright, the attorney sued the client’s father, who had agreed to be responsible for the client’s legal fees in an agreement that referred to the fee as a “non-refundable retainer.” The attorney undertook the representation of the client in the federal criminal proceeding without receiving any advance payments, so there were no issues related to depositing client funds in the attorney’s trust account. Gutierrez v. Wright Lawfirm, PLLC, 2012 Tex. App. LEXIS 3353 (Tex. App.—Dallas, Apr. 27, 2012).
Discussing Cluck, the 5th District Court of Appeals held that Cluck did not involve the validity of a fee agreement, but whether the lawyer violated his ethical duty to hold client funds in his trust account. Cluck did not apply because the attorney never received any amount in advance of performing legal services. Thus, the attorney was never called upon to hold any funds in his trust account. Id.
Although the agreement called the fee to be paid a “non-refundable retainer,” the fee agreement made it clear that the flat fee was to be paid for services to be performed in investigating and trying to plea bargain the criminal case. Other than using the word “retainer,” nothing in the agreement indicated that the parties intended the fee to be an “advanced fee to secure a lawyer’s services” as opposed to a set fee for services to be performed. To the extent that the client’s father argued that the attorney couldn’t recover the fee because it was never deposited in advance of the work to be performed, the Court rejected that argument. On the facts of Gutierrez, the contract didn’t fail because the fee was described as a retainer rather than a flat fee. Id.
The 5th Court of Appeals expressed its irritation at the use of the term, “retainer,” as follows:
The word “retainer” has a variety of meanings, including a client’s authorization for the attorney to act in matter, a fee paid simply to have the attorney available when the client needs legal help, a lump-sum fee paid to engage the lawyer at the outset of the matter, and an advance payment for work to be performed in the future. Black’s Law Dictionary 1341-42 (8th ed. 2004). Indeed, over the years, attorneys have used the term “retainer” in so many conflicting senses that it should be banished from the legal vocabulary. . . . If some primordial urge drives you to use the term “retainer,” at least explain what you mean in terms that both you and the client will understand.
Id. (quoting Mortimer D. Schwartz & Richard C. Wydick, Problems in Legal Ethics 100, 101 (2d ed. 1988)).
d. Anyone Can File a Grievance: Neeley is instructive principally because no client was aggrieved by the attorney’s misconduct. The grievance alleging numerous trust account violations was filed by his disgruntled former secretary. Neely v. Comm’n for Lawyer Discipline, 302 S.W.3d 331 (Tex. App.—Houston [14th Dist.] 2009). The former employee alleged that the attorney commingled his client trust funds with his personal funds and paid personal bills from the account.
Advisory & Commentator Opinions:
a. Informal Advisory Letter from Chief Disciplinary Counsel: After Ethics Opinion 611 was published, many attorneys were concerned that the Bar would launch a broad fishing expedition in order to gratuitously investigate lawyers fee agreements and trust accounts and bring grievances against attorneys who didn’t even have an unhappy client. State Bar Director Steve Fischer asked the Chief Disciplinary Counsel, Linda Acevedo, to weigh in on how the Bar would treat violations of 611. Ms. Acevedo responded to Steve’s request on Tuesday, March 27, 2012, as follows:
Dear Mr. Fischer:I trust all is well with you. As you probably know, the entity that issues these ethics opinions is the Professional Ethics Committee, an independent committee appointed by the Supreme Court. With that said, actually, neither Opinion 611 nor this office take the position that flat fees are prohibited. The thrust of the opinion is a further fleshing out of what constitutes a true non-refundable retainer (which is earned upon receipt and may be placed in the operating account). The opinion goes on to state that any fee “that includes payment for the provision of future legal services rather than solely for the availability of future services” must be placed in a trust account, which has been interpreted to include a flat or fixed fee. This office does not initiate action against any lawyer for the sole purpose of determining how fees are being handled. In a typical case, we receive a grievance that a lawyer has charged a fee for the representation of a matter, but subsequently does no work or otherwise neglects the case and then takes the position that no part of the fee is subject to refund because the fee was “non-refundable” or was a flat fee. In these cases, our office generally pursues an allegation of neglect and failure to return an unearned fee and decisions regarding any particular case are directed by our client, the Commission for Lawyer Discipline. Regards, Linda A. Acevedo, Chief Disciplinary Counsel, State Bar of Texas
b. Recent Article in Texas Bar Journal: The State Bar of Texas devoted nearly the entire October 2012 journal to the issue of attorney’s fees in response to the great outcry over 611. One writer gave her perspective on when a retainer might be considered to be truly “non-refundable.” Hamilton, “When is a Retainer Truly Non-Refundable?” 75 Texas Bar Journal, No. 9, at 694–695 (October 2012). Ms. Hamilton starts off by explaining that a “non-refundable retainer” is a payment to secure that attorney’s availability and to compensate that attorney for loss of other employment opportunities. [Comment: It helps me to try to understand this concept to use the metaphor of the rich Texas oilman who provides a retainer to every hot-shot divorce attorney in town to prevent his current wife from being able to hire any of them when he divorces her in order to wed his latest “trophy” wife-in-waiting.]
611 distinguishes between “true retainers” and a payment to an attorney for services to be rendered, which is what nearly all criminal attorneys appear to be doing, in reality. 611 opines that, even a true “non-refundable retainer” might have to be refunded in the event of discharge for cause and before the attorney actually loses any further employment opportunities. 611 clearly prohibits an attorney from entering into an agreement for a client to pay a “non-refundable retainer” when the Client is actually providing an advance payment for services to be rendered, e.g., up to the time of trial.
611 discusses the only appellate opinion that directly addressed the issue of “non-refundable retainers” in the context of an actual disciplinary action, Cluck v. Commission for Lawyer Discipline, supra. According to Hamilton’s article, both Cluck and 611 mandate that a two-part analysis shall be utilized in determining the ethics of a “non-refundable retainer.” First, does the representation contemplate that the attorney is to provide future services under the agreement? Second, does the fee agreement clearly communicate that the fee will be fully earned and payable to the attorney (i.e., become truly “non-refundable”) at some specific benchmark of the project? [Comment: I want to emphasize here again that the Cluck opinion preceded the publication of 611 by several years.]
Cluck held that “a fee is not earned simply because it is designated as non-refundable.” Although Cluck had already ruled that a client must agree to a “non-refundable retainer,” making a written fee agreement essential to that purpose, the circumstances of the attorney-client relationship dictate whether it is ethical to include that language in the contract in the first place. Ms. Hamilton’s article concludes:
If the attorney determines that an advance fee would be reasonable compensation for the likelihood of lost employment opportunities, the attorney may charge a non-refundable retainer. But the attorney must take care to communicate clearly with the client regarding the retainer and ensure that the client understands and unambiguously agrees to the fee’s non-refundable nature.”
Hamilton, id.
Texas Rules of Professional Conduct:
a. Reasonable Fees: 1.04 Fees (Effective March 1, 2005) (a) A lawyer shall not enter into an arrangement for, charge, or collect an illegal fee or unconscionable fee. A fee is unconscionable if a competent lawyer could not form a reasonable belief that the fee is reasonable.
[Now-Defeated Proposed Rule: Rule 1.04. Fees (a) A lawyer shall not enter into an arrangement for, charge, or collect an illegal fee or clearly excessive fee. A fee is clearly excessive when, after a review of the facts, a reasonable lawyer would be left with a firm belief or conviction that the fee is in excess of a reasonable fee.]
b. Safekeeping Property: Rule 1.14 Safekeeping Property. (a) A lawyer shall hold funds and other property belonging in whole or in part to clients or third persons that are in a lawyer’s possession in connection with a representation separate from the lawyer’s own property. Such funds shall be kept in a separate account, designated as a trust or escrow account, maintained in the state where the lawyers office is situated, or elsewhere with the consent of the client or third person. Other client property shall be identified as such and appropriately safeguarded. Complete records of such account funds and other property shall be kept by the lawyer and shall be preserved for a period of five years after termination of the representation.
[Now-defeated Proposed Rule: Rule 1.15. Safekeeping Property. (a) When, in connection with a representation, a lawyer receives property that belongs in whole or in part to a client or third person, the lawyer shall safeguard the property and hold it in trust separately from the lawyer’s own property. In addition, the lawyer shall:
(1) deposit any funds into one or more accounts designated as trust accounts, maintained in the state where the lawyer’s office is situated, or elsewhere with the informed consent of the client or third person.
(2) identify any other property as such and safeguard it appropriately; and
(3) create and maintain complete records of all trust-account funds and other property and preserve those records for five years after termination of the representation.}
Conclusions from Recent Developments Regarding “Non-Refundable Flat Fees”:
a. Set Up a Trust Account According to the Rules: I am amazed as to how many attorneys don’t even have a trust account. If you don’t have such an account, then set one up. You can’t possibly comply with 611 if you don’t even have a trust (“IOLTA”) account.
b. Have a Written Fee Agreement: You obviously cannot have an understanding with a client about when a fee is fully earned, your sole property, or otherwise available for you to spend unless you have a written fee agreement.
c. Don’t Use the Term “Non-Refundable” in Your Fee Agreement at All: This language is itself offensive to Ethics Opinion 611. It is a red flag to the Professional Ethics Committee. Use terms such as, “this portion of the fee shall be fully earned by, and become the sole property of the Attorney, upon the occurrence of the following benchmark: ______.” In some circumstances, I believe that it is appropriate to designate an amount of the fee that will become “fully earned and the sole property of the attorney” when “The Work” contemplated by the agreement has commenced and, e.g., the attorney has appeared before a tribunal that would have to approve his or her withdrawal from representation (“Signing Bonus”?).
In the instance of a “true retainer,” the attorney must have actually incurred “lost opportunities” by taking the employment by the client. A provision in a fee agreement that purports to create an express agreement between the attorney and the client that the attorney is “losing other employment opportunities” by taking the case exalts form over substance and will be disregarded unless the attorney can actually demonstrate that such “lost opportunities” existed.
If you can actually demonstrate that both you and the client understood in advance that you were going to have to pull an “all-nighter,” or a weekend, to get ready for some part of the project—e.g., forcing you to give away your Super Bowl tickets—make specific note of that and you might be able to truthfully say to some future grievance committee that some portion of your fee attributable to that project was “fully earned” upon commencement of “The Work” on the project.
d. Deposit the Entire Fee Into Your Trust Account: I urge that you should place the entire fee into your trust account and only transfer those portions of the fee into your operating account when they become “fully earned and the sole property of the Attorney,” which may be done proportionally, when the agreed “benchmarks of the work” on the project have been reached.
e. Keep records: On my bigger cases, I have always kept time records. It just makes sense. I have never even considered going to a “paperless” office because those “pass slips” from the courts provide evidence of the services that you performed for the client. My files contain abundant documentation of the ALR hearing demand, discovery requests, discovery reviewed, copious notes pertaining to my DWI video evaluation, witness interviews, and copies of file-marked motions.
The triggering event for my “pretrial” fee becoming “fully earned and my sole property” is my “final plea” letter, which explains “The Work” performed up to that point in time and how we’ve come to that point where the client either has to accept the plea bargain offer or pay the “Trial Fee” in order to set the case for trial. You should probably also have a “close-out/end of representation/thanks for hiring me” letter in the file, as well. The most conservative lecturers agree that a proper close-out letter always provides a sound basis for you to transfer the balance held in trust to your operating account—assuming no complaints.
f. The Disgruntled Client: If your client fires you and then demands a refund, you should strongly consider refunding at least a portion of the fee. In the couple of instances when I have signed up a client who later decided that (s)he wanted to hire that other lawyer who was bragging about his or her exploits on Facebook, I asked the client what they thought was fair. I found that what the client thought was fair was also fair to me. A “fee dispute” is always better than a grievance. If the client wants the whole fee back, but you have already provided substantial performance, and passed certain benchmarks in “The Work,” then prepare a legitimate bill to show what you believe that you are reasonably entitled to, and send the client a bill together with a check for the balance.
A PROPOSED FORM “STAIR-STEPPED” FEE AGREEMENT: One thing that my fellow Director, Larry McDougal, avoided was the temptation to provide a form fee agreement. The State Bar steadfastly refused Larry’s requests to provide such a “model” fee agreement. I am providing the following suggested example of what I personally (i.e., not the State Bar of Texas or TCDLA, or anyone else) think might comply with the dictates of Ethics Opinion 611. Remember that you are in a fiduciary relationship with the client. The rules contemplate that a fee agreement between an attorney and client is not an “arm’s length” transaction between two parties with equal bargaining power in spite of the fact that internet search engines and attorney advertising have done much to level the playing field.
This is not a model fee agreement. For one thing, it contains nothing about the “Attorney’s Creed,” which I have heard is supposed to be included in every fee agreement. I confess that I have devoted no research time to that important matter, and you should educate yourself as to that requirement. I urge one of you to submit an article to Voice on that very subject immediately.
I advise you to draft your own fee agreement. As to my fee agreement, feel free to use it, or not, at your own risk. My hope is that this sample fee agreement might provoke some much-needed discussion in this area and that the TCDLA listserve will stimulate other practitioners to provide both constructive criticism and suggestions for additional and revised provisions.
My fellow State Bar Director, Larry McDougal, spent countless hours researching this topic, speaking to State Bar staff, and investigating to discover the reality of how Ethics Opinion 611 came into being and how it will be enforced. Larry was the presenter and co-producer of the 2012 webinar by the State Bar on this topic. He has spoken several times around the state on this topic. Larry and I have compared notes at every stage of our efforts to get to the bottom of this subject, and we are in complete agreement about these conclusions. I also want to thank Brent Mayr. His presentation on this subject at the 2012 DWI Defense Project in Arlington, Texas, provided many useful practice pointers for ethically charging fees in the post-611 environment that I have utilized in the preparation of this article.
Lawrence Boyd’s contract for legal services in criminal cases is available online in the members-only section of the website, www.tcdla.com
