Should Retainer Funds be Held in Escrow?The American Bar Association’s Standing Committee on Ethics and Professional Responsibility recently published Formal Opinion 505, clarifying attorneys’ obligations with respect to their handling of retainer funds.
When a flat rate for legal services or a security deposit for future hourly billing, this is considered an “advance fee.” This is also sometimes referred to as a “special retainer” or “security retainer.”
What type of bank account must be used?
According to ABA Model Rule 1.15(c), “a lawyer shall deposit into a client trust account legal fees and expenses that have been paid in advance, to be withdrawn by the lawyer only as fees are earned or expenses incurred.”
Under this rule, hourly fees can—and must—be withdrawn from the client trust account into the attorney’s operating or personal account as the work is performed, and thus the fees are “earned.” Flat rates for projects are not deemed to be “earned,” and cannot be withdrawn until the project is completed; however, it is permissible to agree to earn step-wise payments based on achieving incremental client goals.
New York’s Rules of Professional Conduct contain no analogous provision and are silent on whether advance fee payments must be held in trust. The New York State Bar Association has taken the opinion that New York attorneys may choose treat unearned retainer payments as either client funds by placing them in an escrow account, or as attorney property and placing the funds in an operating account. See NYSBA Ethics Opinion 983 (2013); NYSBA Ethics Opinion 816 (2007).
Despite the fact that New York retainers are not required to kept in escrow, attorneys cannot avoid their obligation to return to clients any fees that are unearned and are still bound the rule that all fees must be reasonable.
Nonrefundable Retainers and Minimum Fees
Both the ABA Model Rules and the New York Rules prohibit nonrefundable retainers. The ABA’s new opinion deems any nonrefundable to be unreasonable, as prohibited by ABA Model Rule 1.5(a). On the other hand, New York Rule 1.5(d) explicitly prohibits nonrefundable retainer fees.
Although nonrefundable retainer fees are prohibited, New York does permit attorneys to charge a “reasonable minimum fee” if they define the fee in plain language and explain how the fee may be incurred and calculated. The ABA Rules do not discuss minimum fees, and have not yet opined on their permissibility.
The ABA Model Rules permit nonrefundable fees that are earned on payment if they are not compensation for services but are instead securing an attorney’s availability and thereby restricting the attorney from representing adverse interests. This is known as a general retainer.
However, bear in mind that the ABA narrowly construes such agreements and views them as worthy of scrutiny. A special retainer cannot be converted into a general retainer by using magic language; it must actually fulfill the purpose of a general retainer.
General retainers are also acceptable under the New York Rules. See NYSBA Ethics Opinion 816 (2007).
Although the American Bar Association’s Model Rules of Professional Conduct are influential, each state has enacted its own requirements. As shown here, New York’s requirements differ significantly from the ABA Model Rules in some regards.
The attorneys at Tesser, Ryan & Rochman, LLP are experienced in advising attorneys with respect to their ethical duties. Call us today at (212) 754-9000.