SC Lawyer, September 2006, #5. Understanding retainer fees.

• Author: By John Freeman

South Carolina Lawyer

Ethics Columns.

SC Lawyer, September 2006, #5.

Understanding retainer fees

South Carolina LawyerSeptember 2006Understanding retainer feesBy John FreemanMoney is tight these days. Adjusted for inflation, the average South Carolina wage-earner's income dropped last year. The ever-present need for legal fee charges to be fair, fully disclosed and properly recorded takes on added importance when times are not flush and bills receive extra scrutiny. This issue's ethics column presents a tune-up lesson on fees received in advance from clients.

Lawyers receive advances for different reasons. Often clients are asked to advance money to pay costs. These advances need to be deposited in the lawyer's trust account with disbursements made as expenses come in. Likewise, if the advance payment is intended to cover, in whole or in part, future payments for the lawyer's fees, the money must be deposited into the lawyer's trust account, to be disbursed as services are performed and fees are earned. This type of advance payment from a law client is sometimes called a "special retainer." If the fee ultimately earned turns out to be less than the special retainer, the excess must be refunded to the client. See Rule of Professional Conduct 1.15.

Another form of fee advance is the so-called "general retainer." General retainers commonly arise in one of two ways: the lawyer agrees to work on a case, or the lawyer agrees to be available to handle legal matters for the client for a specific period of time. General retainers are more hazardous to your professional health, for they present more ways for lawyers to get into trouble.

One way a lawyer can get into trouble over general retainers is to fail to clearly spell out with the client the nature of their agreement. Guess who gets the benefit of the doubt if there is a dispute? The client, of course: "A fee payment that does not cover services already rendered and that is not otherwise identified is presumed to be a deposit against future services." Restatement (Third) of the Law Governing Lawyers§ 38, cmt. g (2000). "Clients who pay a fee without receiving an explanation ordinarily will assume they are paying for services, not readiness." Id.

Another problem area arises where, as the general retainer functions as a form of "nonrefundable retainer," it must be reasonable. Comment 4 to Rule 1.5 provides

A lawyer may require advance payment of a fee, but is obliged to return any unearned portion. Note further, however, that in certain circumstances in which a legitimate interest is served, the client and lawyer may enter into an arrangement under which there is a nonrefundable retainer fee. This nonrefundable retainer fee may be retained if it is reasonable under the factors listed in Rule 1.5. The lawyer may deposit the nonrefundable fee immediately into the law firm's operating account. However, if, at the end of the representation, it would be unreasonable for the lawyer to retain the entire fee, the lawyer must then refund that portion of the fee that is unreasonable. See Rule 1.16(d). The message is clear: there is no such thing as a "nonrefundable" fee stemming from a general retainer. If the amount or terms are unreasonable to the client, an ethics violation looms. Indeed, North Carolina's Ethics Advisory Committee has ruled that the possibility that the lawyer will need to refund some or all of a retainer

means that no fee is truly "nonrefundable." To call such a payment a "nonrefundable fee" is false and misleading in violation of Rule 7.1. Moreover, the designation of the fee as "nonrefundable" in the fee agreement has a chilling effect on the client's right to terminate the representation at anytime. 2000 North Carolina Eth. Op. 5.

To be distinguished from the general retainer is the fixed or "flat fee," commonly used to compensate lawyers for "all work to be done, whether it be relatively simple and of short duration, or complex and protracted." ABA Comm. on Ethics and Professional Responsibility, Informal Op. 1389 (1977). According to Iowa's Supreme Court, "We see the flat fee as nothing more than an advance fee payment which a majority of authorities now agree must be deposited in a client trust account. ...The funds remain the property of the client until the attorney earns them." Iowa Supreme Court Board of Prof. Ethics & Conduct v. Apland, 577 N.W.2d 50, 55 (1998). The court in Apland explained that the flat fee paid to the respondent lawyer was not a general retainer paid to "ensure an attorney's availability," but was a special retainer, that is, "a fee paid for specific services." Id. at 56.

A further fee handling requirement that may seem self-evident, but should not be overlooked, is this: as fees covered by special retainers are earned, they need to be disbursed out of the trust account. Otherwise, the trust account ends up holding funds belonging to the lawyer and belonging to others, and there is a taboo word for this occurrence: commingling.