SC Lawyer, January 2006, #1. Money Issues Under the New Rules.

• Author: By John Freeman

South Carolina Lawyer

Ethics Columns.

SC Lawyer, January 2006, #1.

Money Issues Under the New Rules

South Carolina LawyerJanuary 2006Money Issues Under the New RulesBy John FreemanThe Supreme Court's latest amendments to the Rules of Professional Conduct took effect October 1, 2005. They're available on the Web at www.judicial.state.sc.us/courtReg/newrules/NewRules.cfm. The Rules and Comments basic content has not changed much, but some changes are significant. This month's column discusses changes affecting how lawyers deal with money-related issues.

Fee splitting approval

In re Hart, 1 S.C. 392, 605 S.E.2d 532 (2004), drove home lawyers' obligations to put their agreement in writing when fee-splitting under Rule 1.5(e). In Hart, the lawyer was publicly disciplined for not doing so (and other failings), even though no client had complained, all clients consented and the ethics error was self-reported. To Hart's get-it-in-writing message, the new amendments add the requirement that the client consent be "confirmed in writing" after the client has given "informed consent" to the arrangement, including approval of each lawyer's share.

Costs must be reasonable

Lawyers always have been required to charge reasonable fees. Now, under Rule 1.5(a) as amended, unreasonably high expense charges are now specifically a basis for discipline. This is not a change in the law, for charging clients for excessive expenses is simply a form of theft. For a case disbarring a lawyer who marked up expense items and charged clients for overhead items, see Matter of Jennings, 321 S.C. 440, 468 S.E.2d 869 (1996).

Contingent fee pitfalls

The writing requirement for contingent fee contracts has been tightened in two key respects. First, the fee agreement must now actually be signed by the client. Secondly, "[t]he agreement must clearly notify the client of any expenses the client will be expected to pay." Obviously, not every single expense item will be foreseeable in most cases, but the categories of expenses should be listed with as much precision as possible. Relying on the new language in Rule 1.5(c) requiring specific references to expense items for which the client must pay, the Illinois Court of Appeals held, in Guerrant v. Roth, 334 Ill. App. 3d 259 (2002), that if a lawyer wants to recover computeraided research expenses in a contingent fee agreement, that specific expense needs to be set out in writing.

In Guerrant, the law firm's contract included a provision calling for the client to pay "all customary costs and reasonable outofpocket expenses incurred by the Firm in its pursuit of the claims covered by this Agreement." It went on to recite that "These expenses include court reporting services, expert witness fees, reasonable travel expenses, if any, fees paid to trial witnesses and the costs to create trial exhibits." Not mentioned was the cost of computer-assisted research. The court held that the law firm had to bear that cost since it was unlisted, and the contract had been drafted by the firm and would be construed against it. A word to the wise: if you don't want to pay for it yourself, spell out the client's obligation to pay the expense in your fee contract.

Trust account regulation

Under amended Rule 1.15(b), the amount of personal funds left in the trust account to defray bank charges must be limited "only [to] an amount necessary for that purpose." An excessive overage in the trust account is viewed as improper commingling. Under the old rule, funds needed to be deposited and collected in the trust account before the funds could be disbursed. Under new Rule 1.15(f), deposits into a trust account holding various clients' funds can be treated as collected funds upon deposit if the items deposited are "cash, verified and documented electronic fund transfers, or other deposits treated by the depository bank as equivalent to cash, properly endorsed government checks, certified checks, cashiers checks or other checks drawn by a bank, [or] any other instrument payable at or through a bank, if the amount of such other instrument does not exceed $5,000 and the lawyer has reasonable and prudent belief that the deposit of such other instrument will be collected promptly." Suppose you cut trust account checks under one of the collected funds exceptions, and the funds are somehow not collected? You must make the checks good by depositing "replacement funds" (ouch!) in the account within five working days.

Under Rule 1.15(h), all South Carolina lawyers must write the banks where their trust accounts are located, advising them to report any NSF checks drawn on the account to the Commission on Lawyer Conduct. If you have not yet done so and would like a form to use, e-mail me at johnf@law.law.sc.edu, and I'll send you a form letter.

Pledging client property

New Rule 1.15(g) provides, "A lawyer shall not use or pledge any entrusted property to obtain credit or other personal benefit for the lawyer or any person other than the legal or beneficial owner of that property."