Things Have Changed!
What You Need to Know About Flat Fees, Nonrefundable Retainers and Trust Accounts
By Joe Balkenbush
Oklahoma attorneys have often used fee agreements which provided for a flat fee, nonrefundable retainer stating that the fee was earned upon receipt. Upon execution of the fee agreement and payment of the retainer, the attorney would deposit the funds in his/her operating account. If a portion of the retainer needed to be refunded, the attorney would pay the refund out of their operating account.
Per the Supreme Court of Oklahoma in State ex rel. Oklahoma Bar Association v. Weigel,1 that practice is clearly no longer appropriate. In Weigel, the court stated in its ruling that “The use of the term ‘nonrefundable retainer’ to represent an advance payment of fees for legal services the attorney will perform in the future is impermissible. Such fees may be designated as fixed fees but cannot impair a client’s rights under Rule 1.16(d). The fees are not ‘nonrefundable’ because if the attorney withdraws or is terminated before completing the work, the attorney must refund the unearned portion of the advance.”
The facts of the case relevant to this article are that Mr. Weigel had entered into a flat fee nonrefundable retainer agreement with a number of his clients. He then deposited the retainers in his operating account. Subsequently, he disbursed all or some of the funds from the operating account for personal and business expenses prior to “earning” the amounts he disbursed.
Let’s take a look at the applicable Oklahoma Rules of Professional Conduct (ORPC) when considering flat fees, nonrefundable retainers and trust accounts. They are:
• Rule 1.5 titled “Fees”
• Rule 1.15 titled “Safekeeping Property” and
• Rule 1.16 titled “Declining or Terminating Representation.”
Rule 1.5 provides in pertinent part:
a) A lawyer shall not make an agreement for, charge or collect an unreasonable fee or an unreasonable amount for expenses. The factors to be considered in determining the reasonableness of a fee include the following:
1) the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly;
2) the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;
3) the fee customarily charged in the locality for similar legal services;
4) the amount involved and the results obtained;
5) the time limitations imposed by the client or by the circumstances;
6) the nature and length of the professional relationship with the client;
7) the experience, reputation, and ability of the lawyer or lawyers performing the services; and
8) whether the fee is fixed or contingent.
b) The scope of the representation and the basis or rate of the fee and expenses for which the client will be responsible shall be communicated to the client, preferably in writing, before or within a reasonable time after commencing the representation, except when the lawyer will charge a regularly represented client on the same basis or rate. Any changes in the basis or rate of the fee or expenses shall also be communicated to the client.
Rule 1.15 provides in pertinent part:
a) A lawyer shall hold property of clients or third persons that is in a lawyer’s possession in connection with a representation 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 written consent of the client or third person. Other 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.
Rule 1.16 provides in pertinent part:
d) Upon termination of representation, a lawyer shall take steps to the extent reasonably practicable to protect a client’s interests, such as giving reasonable notice to the client, allowing time for employment of other counsel, surrendering papers and property to which the client is entitled and refunding any advance payment of fee or expenses that has not been earned or incurred. The lawyer may retain papers relating to the client to the extent permitted by other law.
When Rules 1.5, 1.15 and 1.16 are read in conjunction with the court’s ruling in Weigel, it is clear that attorneys who use fee agreements that provide for payment of a flat fee must deposit the retainer into their trust account. The word “nonrefundable” should not be used. Last, the funds may only be withdrawn when the fees are earned.
I used the “thesaurus” tab on my computer to try to find another word for nonrefundable. Even the computer does not have another word. If the Supreme Court ruling in Weigel isn’t enough for you, surely the fact that the thesaurus couldn’t find a replacement is a good reason not to use the word!
FLAT FEES/FIXED FEES
Flat fees (fixed fees) have been used by attorneys and clients for centuries. Essentially, they are fees paid by a client at the outset of a matter intended to be the entire fee attributable to a specific task. Fees paid in advance for this purpose are intended to cover a specified amount of work by the attorney for a particular matter. The attorney usually does not receive any additional fee even if more work is required, unless specifically agreed to by the client. Clients often prefer fees to be a specified sum because it allows them to know the total cost for legal services in advance, permitting them to budget based on a fixed sum, rather than face potentially unlimited hourly fees that may exceed their ability to pay.
The next question is when are the fees earned? Fees are earned when work is performed. The retainer may be withdrawn in stages, but there must be work that is done to justify the withdrawal.
Here are a couple of examples:
• In a criminal case, the attorney agrees to represent a client up to the preliminary hearing for a flat fee. Assume there are four separate “stages” — the client meeting, initial court appearance, investigation and entry of a plea. It would be reasonable to withdraw 25 percent of the retainer at the end of each stage.
• In a bankruptcy case, there might be five stages. The initial client meeting, preparation of the appropriate pleadings, review and execution of the pleadings by the client, appearance at a Section 341 meeting of creditors and the discharge in bankruptcy. Therefore, 20 percent of the retainer could be withdrawn at each stage.
The point is to develop a reasonable procedure/plan to withdraw the retainer as work is performed and fees are earned. Both the Office of the General Counsel and I strongly advise you to include the procedure/plan to withdraw the retainer in your fee agreement. That way the client has been informed and has agreed to the procedure/plan in writing. They won’t be able to later successfully object to how the retainer was withdrawn.
Again, the attorney and client can agree to use any reasonable method to withdraw the retainer. It does not need to be tied to hours worked, but it must be reasonable. So long as there is a written agreement between the attorney and client and the method of withdrawal is reasonable, you will not run afoul of the ORPC.
It all goes back to the fact that fees must be earned to be taken. If no work has been done, then the fees have not been earned.2 Regarding Rule 1.15 titled Safekeeping Property (generically known as the rule regarding trust accounts), the safe and simple interpretation is that all unearned legal fees must be deposited in your trust account, including but not limited to all retainers, whether they are flat fees or hourly fees. Only money that has been earned may be removed from your trust account and deposited into your operating account.
TERMINATION OF REPRESENTATION BEFORE THE CASE IS CONCLUDED
Seems pretty uncomplicated so far, right? The problem arises if representation is terminated before the case is concluded. That situation invokes application of Rule 1.16 (d). In the criminal case scenario above, per the flat fee agreement, the attorney agreed to represent the client up to preliminary hearing. If representation is terminated after the initial court appearance (two stages completed), the attorney has only performed 50 percent of the work he/she agreed to perform. Therefore, 50 percent of the retainer should be refunded. If the attorney has followed the above procedure, there would still be 50 percent of the retainer in a trust account.
Regarding the bankruptcy case example above, assume that the client won the lottery after the Section 341 hearing. Obviously, the case would have to be dismissed. Therefore, the attorney has earned 80 percent (four stages completed) of the retainer fee, and 20 percent of the retainer should be refunded.
Rules 1.16 and 1.15(b) require a lawyer to refund the unearned retainer and to do so in a timely manner.
On Dec. 13, 2002, OBA Ethics Opinion No. 317 was issued. The opinion dealt with (among other things) the issue of flat fee nonrefundable retainers. Ethics Opinion 317 stated in relevant part that “the LEC (Legal Ethics Commission) does not offer an opinion regarding the enforceable nature of fee contracts containing nonrefundable ‘engagement fee’ or ‘fixed fee’ provisions.” The opinion went on to provide that “the likelihood of enforcement of these types of nonrefundable retainers is enhanced by implementing certain safeguards.” Essentially, per Ethics Opinion 317, flat fee nonrefundable retainer agreements would be acceptable (not an ORPC violation) so long as “certain safeguards” were used.
The Supreme Court’s ruling in Weigel at least clarifies Ethics Opinion No. 317. As set out above, the Supreme Court ruled that “the use of the term ‘nonrefundable retainer’ to represent an advance payment of fees for hours of legal services that the attorney will perform in the future is impermissible. Such fees may be designated as fixed fees, but cannot impair a client’s rights under Rule 1.16(d). The fees are not ‘nonrefundable’ because if the attorney withdraws or is terminated before completing the work, the attorney must refund the unearned portion of the advance.”
The defendant attorney in Weigel attempted to rely upon Ethics Opinion 317 as support for his actions, arguing that opinion addressed “availability fees, fixed fees and hourly fees” that were designated as a nonrefundable retainer in the fee agreement. As is evident from the above, even if it was previously acceptable, it is no longer.
BE SURE TO:
• Delete the word “nonrefundable” from your fee agreements.
• Include language in your fee agreement regarding the procedure/plan concerning how the retainer will be withdrawn.
• Deposit all retainers in your trust account.
• Only take funds from your trust account after the work has been performed.
• If representation is terminated for whatever reason, refund any unearned portion of the retainer to the client promptly.
Mr. Balkenbush is OBA Ethics Counsel. Have an ethics question? It’s a member benefit and all inquiries are confidential and priviledged. Contact Mr. Balkenbush at email@example.com or 405-416-7055; 800-522-8065.
Originally published in the Oklahoma Bar Journal -- Aug. 15, 2015 -- Volume 86, No. 21.
1. 2014 OK 4, 321 P.3d 168 (Okla. 2014).
2. See ORPC 1.5 and the comments to the rule.