Handling of Advance Fees and IOLTA Accounts - PowerPoint Presentation

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Handling of Advance Fees and IOLTA AccountsAILA Seminar – October 9, 2015

Donald M. Scheetz

Assistant Disciplinary Counsel

The Supreme Court of Ohio

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PROPER HANDLING OF FLAT,ADVANCED, AND NON-REFUNDABLE FEESSlide3

Board Advisory Opinion 96-4In Advisory Opinion 96-4, the Board of Commissioners on Grievances and Discipline stated that a flat fee, paid in advance, could be deposited into the attorney’s business account and that it did not need to be placed in the attorney’s client trust account.Slide4

However, the opinion further stated that, just because the flat fee was deposited into the business account doesn’t mean that it is non-refundable.Slide5

Board Advisory Opinion 96-4 was issued during the period of time that Ohio was governed by the former Code of Professional Responsibility.Effective February 1, 2007, the Supreme Court of Ohio adopted the Rules of Professional Conduct, which are modeled on the American Bar Association’s Model Rules of Professional Conduct.Slide6

Although the Board has not withdrawn Advisory Opinion 96-4, its continued viability after the adoption of the Rules of Professional Conduct is questionable.Slide7

Rule 1.15(c) of the Ohio Rules of Professional Conduct“A lawyer shall deposit into a trust account legal fees and expenses that have been paid in advance, to be withdrawn by the lawyer only as fees are earned or expense incurred.”Slide8

Unless there is an applicable exception to Rule 1.15(c), any fees that are paid to the lawyer in advance that have not yet been earned must be deposited into the lawyer’s client trust account.Is there an exception for “flat fees” or “non-refundable” fees?The answer is “YES” – but only in two situations.Slide9

Types of Advance Fee Payments“True” or “Classic” RetainerAdvance Fee or Retainer“Flat Fee”“Earned Upon Receipt Fee”Comment [6A] to Rule 1.5 of the Ohio Rules of Professional ConductSlide10

“True” or “Classic” RetainerThe “true” or “classic” retainer is a fee paid in advance solely to ensure the lawyer’s availability to represent the client and precludes the lawyer from taking adverse representation.Slide11

Advance Fee Payment or RetainerWhat is often called a “retainer” is, in fact, an advance payment to ensure that fees are paid when they are subsequently earned, on either a flat fee or hourly fee basis.Slide12

Flat FeeA flat fee is a fee of a set amount for performance of agreed work, which may or may not be paid in advance but is not deemed earned until the work is performed.Slide13

Earned Upon Receipt FeeAn “earned upon receipt” fee is a flat fee paid in advance that is deemed earned upon payment regardless of the amount of future work performed.Slide14

“When a fee is earned affects whether it must be placed in the attorney’s trust account.”Comment [6A] to Prof. Cond. R. 1.5Thus, the only two situations in which the attorney is NOT required to deposit the fees into his or her client trust account are (1) a “true” or “classic” retainer; and (2) an “earned upon receipt” fee.Slide15

Limitations on Charging or Collecting an“Earned Upon Receipt” or “Non-Refundable Fee”

Prof. Cond. R. 1.5(d)(3) provides, in pertinent part, as follows:

“A lawyer shall not enter into an arrangement for, charge, or collect any of the following:Slide16

(3) a fee denominated as ‘earned upon receipt,’ ‘nonrefundable’ or in any similar terms, unless the client is simultaneously advised in writing that if the lawyer does not complete the representation, the client may be entitled to a refund of all or part of the fee based upon the value of the representation pursuant to division (a) of this rule.”Slide17

Disciplinary Counsel v. Summers,131 Ohio St.3d 467, 2012-Ohio-1144“When a lawyer agrees to represent a client through the conclusion of the case for a flat fee, and that lawyer withdraws from representation without cause before the work is completed, he cannot retain the entire flat fee by resorting to a mathematical calculation of his billable hours.Slide18

To hold otherwise would leave clients at the mercy of lawyers who charge significant flat fees to provide complete representatoin only to withdraw when the demands of the case become too onerous.”Slide19

Cleveland Metropolitan Bar Assn. v. Gruttadario,136 Ohio St.3d 283, 2013-Ohio-3662

The lawyer charged a flat fee of $4,000 to represent

grievant’s

son in a criminal proceeding but failed to perform the agreed-upon services and refused to refund any portion of the fees, claiming that he had expended more than 70 hours on the case.Slide20

The Supreme Court of Ohio rejected the lawyer’s claim, stating in part as follows:“But the key flaw in Gruttadario’s position is that he did not accept representation on an hourly fee basis – he agreed to a flat fee for the work and then he did not complete it. Therefore, he could not have been entitled to retain the entire flat fee.”Slide21

TRUST ACCOUNTGUIDELINESSlide22

Trust Account RequirementsRule 1.15, Rules of Professional ConductLawyer shall hold client or third person property:In connection with a representationSeparate from lawyer’s propertyDuty to safeguardSlide23

Prompt notificationPrompt deliveryFull accounting upon requestIdentify and labelMaintain complete recordsSlide24

What Funds belong in Trust AccountFunds belonging to client Funds belonging partly to client and partly or potentially to lawyer (i.e. settlement proceeds)Funds belonging to 3rd party, related to handling of case (medical bills payment)Slide25

Funds in which a third party has an interestRule 1.15 (d)Board of Commissioner Opinion # 2007-7Slide26

Funds claimed by two or more personsRule 1.15(e) Slide27

What Does NOT belong in Trust AccountFunds belonging totally to the lawyerFunds not related to the representation of a clientSlide28

Safeguarding OTHER propertyFor property other than funds, lawyer is required to maintain for seven years a record:That identifies the property;The date received;The person on whose behalf the property was held;The date of distribution.Slide29

Rule 1.15: Safekeeping PropertyA lawyer may deposit his/her own funds in a client trust account for the sole purpose of:Paying bank service charges ORObtaining a waiver of bank service charges but only in the amount necessary for that purpose.Slide30

Common Violations in Maintenance of Trust Account RecordsFailure to maintain individual client records or equivalentFailure to maintain duplicate deposit slipsFailure to reconcile individual client records to bank statements and the general trust account recordFailure to maintain records after completion of the lawyer’s fiduciary dutySlide31

Common Violations in the Use of Trust AccountsImproper transaction processed through the trust accountUsing the trust account as an operating accountUsing the trust account for family and non-client related transactionsDepositing earned fees into the trust accountSlide32

Assuming bank’s decision to grant immediate credit on deposited item is the equivalent of the funds actually being collectedFailing to withdraw earned fees from the trust accountMaintaining a large balance of lawyer or law firm funds in the trust accountSlide33

When do I deposit fundsAs quickly as possible, since you have a duty to safeguard themSlide34

When do I transfer feesWithin a reasonable time after they are earnedOnce earned, fees do not belong in a trust accountYou can’t spend your money UNTIL it is moved from trust account to operating accountSlide35

Staff AssistanceStaff may assist – employees must be competent and properly supervisedInternal controls must be adequate to safeguard client funds and propertyODC v. Ball, 67 Ohio St.3d 401; Rule 5.3Slide36

The Lawyer MUSTTrain and supervise staff; andRegularly review records.Slide37

Regular Review of RecordsLawyer most familiar with client matters:Most likely to spot errorsi.e.: wrong amount recorded to wrong clientKnows to safeguard amounts that need special attention – those involving unresolved disputesSlide38

Can non-lawyers be signers on trust accountTechnically yes; management considerations:Since attorney is responsible is it worth the risk?It is necessary?