On Retainers, Flat Fees, and Commingling

• Publication year: 1997
• Pages: 83

26 Colo.Law. 83 Colorado Lawyer 1997.

1997, November, Pg. 83. On Retainers, Flat Fees, and Commingling

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83

Vol.26, No. 11, Pg. 83

The Colorado Lawyer
November 1997
Vol. 26, No. 11 [Page 83]

Specialty Law Columns
The Ethics Column
On Retainers, Flat Fees, and Commingling
by Alec Rothrock

One of the most confusing and potentially dangerous subjects in attorney ethics is the handling of monies paid by clients in advance of the representation to secure the rendition of legal services. The terminology alone is confusing "advance fee," "retainer," "nonrefundable retainer," "flat fee." Handling such funds can be difficult, and mishandling them may have serious attorney disciplinary consequences particularly the violation of ethical rules prohibiting the commingling of funds. Indeed, many lawyers may be routinely violating the Colorado Rules of Professional Conduct ("Rules") by charging so-called nonrefundable retainers and by failing to deposit them as well as flat fees in the lawyer's trust account

This article attempts to explain both what is clear and what is unclear about advance fees, and provides guidance on how to handle advance fees both before and after they are earned.

Ethical Rules Governing Commingling

The starting point of any discussion about commingling is Rule 1.15. In relevant part, it provides as follows:

In connection with a representation, a lawyer shall hold property of clients or third persons that is in a lawyer's possession separate from the lawyer's own property. Funds shall be kept in a separate account maintained in the state where the lawyer's office is situated, or elsewhere with the consent of the client or third person. . . .1

The "separate account" must consist of an "identifiable interest-bearing, insured depository" account, including but not limited to a COLTAF account.2 Such accounts are generally referred to as "trust accounts," in contrast to business accounts maintained by the law firm, which are generally known as "operating accounts."

Maintaining client funds in trust accounts and law firm funds in operating accounts seems simple enough. The difficulty arises in determining whether the funds belong to the client or to the lawyer. This, in turn, depends largely on whether the funds are deemed to be "earned," regardless of the term applied to them.3

Commingling of client and law firm funds can result in serious ethical problems because commingling potentially subjects client funds to the claims of the lawyer's creditors.4 The rules against commingling also seek to "preserve the client's property from possible misappropriation by the lawyer" and "enable the client to realistically dispute a fee where the funds are already in the lawyer's possession by disallowing a self-help resolution by the lawyer and instead preserving the disputed funds intact until the dispute is resolved."5 In addition, whether and when funds belong to client or lawyer may have federal income tax implications.6

Advance Fee Terminology

The Colorado Supreme Court appears to regard any fee paid by the client to the lawyer in advance of the rendition of services as an "advance fee," whether it is classified as a "retainer," "flat fee," or otherwise.7 Retainers come in different forms. The traditional retainer, known as a "general retainer," was a fixed sum paid by a client to secure the availability of the lawyer's services in the future, separate from the fees charged for legal services actually rendered.8 The far more common type of retainer is a "specific" or "special" retainer (hereinafter "special retainer"), which is a fixed amount paid in advance of an hourly fee representation to secure the lawyer's services in a particular matter. This amount is then either reduced by the amount of hourly fees charged or held by the lawyer to ensure payment of charges paid for separately by the client.9

Then there are...