Concept
Advance Fees and Expenses
Establishing and maintaining client trust accounts
Advance Fees and Expenses
A client who pays before the work begins hands the lawyer money the lawyer has not yet earned. Rule 1.15(c) of the Model Rules of Professional Conduct answers that situation with two commands: the lawyer must deposit legal fees and expenses paid in advance into a client trust account, and may withdraw them only as fees are earned or expenses incurred.1 The deposit command fixes where the money waits, and the withdrawal command fixes when it may leave.
Both commands rest on ownership. A fee paid in advance is a deposit not yet earned, so it belongs in trust, separate from the lawyer’s personal or firm account, until the lawyer performs.2 The lawyer’s claim is only a prospect that ripens as the work gets done, and the trust account keeps the client’s money identifiable until it does. An advance may be a lump sum at the start of a divorce or a criminal defense, or it may be money for filing fees and expert costs the lawyer has yet to incur.
The rule also sits on the far side of the line drawn in the preceding section. Rule 1.15(b) lets the lawyer deposit the lawyer’s own money in the account only to pay bank service charges, and only in the amount necessary for that purpose;3 Rule 1.15(c) requires the deposit of money that is not yet the lawyer’s. The first subsection below follows an advance from deposit to withdrawal. The second asks which payments count as advances at all, because a payment for finished work, or for the lawyer’s mere availability, raises a different question.
Deposit and Withdraw as Earned
Rule 1.15(c) controls two moments: the arrival of the money and every later withdrawal. Hourly billing, the traditional charge for legal services, shows both. The fee under hourly billing is the hours the lawyer reasonably spends multiplied by a reasonable hourly rate, so the client pays an advance, the lawyer deposits it in trust, and the lawyer then withdraws from the account periodically, in direct connection to the hours worked at the rate charged.4 Expenses follow the same path, because a filing fee or a court reporter’s charge leaves the account only after the lawyer has incurred it.
The Oregon Supreme Court described the standard arrangement in the same terms. The client pays a retainer that is held in trust, the lawyer works on an hourly or other agreed basis and reduces the retainer, usually monthly, and the critical point is that the retainer remains the client’s money until the lawyer performs the services the client agreed to pay for.5 Each hour worked converts a slice of the client’s money into the lawyer’s, and the rule lets the lawyer take that slice and nothing more.
A withdrawal ahead of the work spends the client’s money as though it were the lawyer’s. The law treats that as misappropriation, which is theft of client funds, and typically punishes it with severe sanctions such as revocation of the license, not as a dispute over a bill.6 An intention to restore the money gains the lawyer little: when a lawyer takes unearned funds from the trust account, even meaning to replenish it, the disciplinary authority invariably imposes one of the more severe sanctions, presumptively disbarment.7 The conversion discussion later in this chapter returns to that “loan” defense.
The last step in Ortega’s story completes the rule. An advance for work that is never performed must be refunded, whether the lawyer withdraws or the client discharges the lawyer.8 The unearned balance was never the lawyer’s, so the end of the representation does not transfer it, and a lawyer who kept it in trust can return it without hunting for cash elsewhere.
The usual exam error measures compliance by the lawyer’s intentions instead of by the timing of the withdrawal. A lawyer who means to perform the work, and later does it, still violates the rule if the money left the account before the work was done.9 The facts answer one question only: was each dollar earned or incurred at the moment it came out?
Notice and accounting duties ride along with the money. When the lawyer withdraws earned fees or incurred expenses, the lawyer must at the same time tell the client in writing the time, amount, and purpose of the withdrawal and provide a complete accounting.10 The safekeeping rule adds that a lawyer who receives funds in which a client has an interest must promptly notify the client, must promptly deliver what the client is entitled to receive, and must render a full accounting on request.11 Every state also layers its own detail on top of Rule 1.15, such as approved financial institutions, interest-bearing accounts, record keeping, and audits.12 On an exam, keep deposit-and-withdraw-as-earned at the center of the answer and treat local procedure as an add-on.
The same Oregon decision marks the edge of the rule. The lawyer there received $300 from a client, deposited none of it in trust, and gave no accounting, and it was undisputed that the money did not pay for services already performed and billed. Whether he violated the trust rules turned on whether the client had signed an agreement making the fees nonrefundable and earned on receipt.13 That question opens the next subsection.
Earned-on-Receipt Payments
Rule 1.15(c) reaches only fees and expenses “paid in advance,”15 so the first question about any payment is what it buys. A payment is an advance when it pays for services the lawyer has not yet performed or expenses the lawyer has not yet incurred, because only then does the client still have money to recover. Money that fits neither description is the lawyer’s own on arrival, and the rule that admits the lawyer’s funds to the trust account only for bank service charges keeps it out.16 Three kinds of payment test that line: payment of a bill for finished work, a general retainer for availability, and a fee the lawyer claims to have earned on receipt.
Payment of a bill for completed work is the cleanest case. The Oregon court contrasted the standard retainer with the practice of doing the work first and billing afterward, and it explained that when a client pays a bill for work already performed, the payment is the lawyer’s money, not “client funds,” and the lawyer need not deposit it in trust or account to the client for it.17 The trust rules hold unearned money apart until the lawyer’s claim ripens, and a payment made after the work arrives with the claim already ripe. Nothing is left for the client to recover, and holding the payment apart would only mix the lawyer’s money with the client’s.
A true general retainer sits outside the rule for a different reason. It pays for the lawyer’s promise of availability and not for the performance of services, so the lawyer earns it when it is paid, and it should not go into a client trust account.18 Professor Lester Brickman calls it “an option contract”: the lawyer is entitled to the money “regardless of whether he actually performs any services for the client.”19 Because the retainer is not an advance deposit against future legal services, any work the client later requests is separately calculated and charged.20 General retainers are also quite rare, since few lawyers have the reputation or the specialized practice that lets them charge one,21 so a payment labeled “retainer” is more likely an advance than a true general retainer.
The two manufacturers show that the word on the check decides nothing. A payment to be drawn down by hourly bills is an advance, whatever it is called, and the ordinary retainer remains the client’s money until the lawyer performs the services the client agreed to pay for.22 A general retainer, by contrast, is not an advance against future services at all.23
The third kind of payment is contested: a fee for work not yet done that the lawyer claims to have earned on receipt. The Oregon decisions show one way to handle it. The court asked whether the client had signed an agreement providing that the fees were nonrefundable and deemed earned upon receipt, and it quoted its earlier decision in In re Biggs for the rule that “[w]ithout a clear written agreement . . . that fees paid in advance constitute a non-refundable retainer earned upon receipt, such funds must be considered client property.”24 The writing matters because it settles ownership at the moment of payment instead of leaving it to be inferred later. Compare the attorney-client relationship itself, which begins when a person seeks legal advice or assistance and the lawyer agrees to provide it or does, and which may be implied from conduct, with no formal contract and not even a paid fee.25 The relationship can arise by implication, but the exception that makes advance money the lawyer’s on arrival cannot; in Oregon it needs the clear writing.
Other authority is stricter. The secondary source behind this chapter says that any advance payment for contemplated legal services must be refunded if the work is not performed, whether the lawyer withdraws or the client discharges the lawyer, and it calls the “nonrefundable special retainer” illegitimate.26 A lawyer in a jurisdiction that takes that view cannot rescue an advance by relabeling it. Which rule governs depends on the jurisdiction, so the sorting should begin with what the money buys and end with the local rule on fees earned on receipt.
The fifth step does most of the work on exam facts, because the same engagement letter can produce opposite answers in different jurisdictions. A clause calling the fee nonrefundable matters only where the jurisdiction permits fees earned on receipt, and even there the writing must be clear. Where the jurisdiction rejects the nonrefundable special retainer, the clause changes nothing, and the payment stays an advance that the client may recover to the extent unearned.
When the facts leave doubt about what a payment buys, or about whether the agreement is clear enough to make the fee earned on receipt, treat the money as the client’s. The risk runs one way: withdrawing advance funds before they are earned is misappropriation of client money and draws severe discipline, up to revocation of the license.27