Roy M. Sobelson, professor of law

ETHICAL HYPOTHETICAL: Nonrefundable Fees and Reporting Friends

Here’s a hypothetical about fees. Given its lack of complexity, commonality and lawyers’ need for a clear answer, it ought to be simple. If only …

You and law school classmate Bess share office space in a Georgia town. You handle divorces, and Bess caters to small businesses. Over lunch, Bess tells you that five days ago she signed on a new client, NC. NC’s work had several subparts to be done in order, but nothing could be done until Bess received some critical information. That was supposed to take about a week. The written contract provided for a $50,000 retainer applied against hourly billings, $15,000 of which was “nonrefundable, earned upon payment.” NC gave Bess two checks, one for $15,000 and one for $35,000. Two days later, before Bess received any information or did any work, NC backed out, demanding all his money back. Bess says to you, without a hint she’s seeking advice, “Forget that! I’m keeping the $15,000. It was nonrefundable.”

6-27-16-ethics-iconYou’re probably thinking that I’m going to ask you whether Bess may charge a nonrefundable fee here. Interesting question, answered somewhat ambiguously by Formal Advisory Opinion 03-1. We’ll circle back to that issue. Before we do, let me ask my real questions. There are two. First, did Bess have to put that $15,000 check in her trust account, or could she put it in her operating account? If it were immediately earned, then it was Bess’ money the minute NC gave it to her, right? No need to put one’s own money into a trust account; that’s not what it’s for. But if not, then it was NC’s money until Bess “earned” it. In that case, it should go into Bess’ trust account, where there is no risk that her own problems might jeopardize NC’s money. That is what a trust account is for. Since trust account violations are the quickest route to disbarment, we need to get this right.

The answer to the trust account question is surprising, but before we tackle it, let’s mention the second question. This one is harder, because it’s not just a legal question. It’s also about friendship and living in the real world, as opposed to the law school world where we met. The second question is: Should you report Bess to bar disciplinary authorities if she violated the rules by entering into this contract, insisting on keeping the money or (maybe) putting the check directly into her operating account?

Let’s start with reporting Bess. After all, if you’d never report her for anything, the particular offenses she might have committed don’t really matter. So let’s stipulate that keeping money you’re not entitled to, or committing a trust account violation, are each serious enough to warrant a careful consideration of your reporting obligations.

Should you report your friend? 

So, ask yourself honestly. Assuming that one or more of Bess’ actions were improper, should you report her? If history is any indication, the answer for most of us is “maybe so, but I wouldn’t.” Why? First, this may have just been an “error in judgment.” That’s easy enough to fix here, so let’s move on.

Second, Bess is your longtime friend and business colleague. That all goes out the window the minute you report her. The same would be true with almost every lawyer you know. You’d worry about becoming a pariah among your fellow professionals.

Third, you could easily find yourself in a position like Bess’ someday. Do you really want your colleagues reporting you? And finally, there are the rules you’re sworn to follow. Unlike 47 other states, which require you to report serious misconduct, Georgia’s Rule of Professional Conduct 8.3 says you should report. Lest there be any doubt about the significance of that word, the rule goes on to say “There is no disciplinary penalty for violation of this rule.” So that means you don’t have to report it — but that wasn’t my question.

My question is whether you should. Are there any reasons you should report? Three stand out here. First, it’s damaging to NC, who paid $15,000 for nothing. (Yes, he got Bess’ “loyalty” for two days, but is that really worth $15,000? At a minimum, shouldn’t Bess be asking that question?)

Second, putting it in the operating account could mean that it’s now gone, leaving Bess with no way to repay it. And third, nonreporting makes it easy for violators to harm current and future clients. In the end, the best reason not to report is your concern for your relationship, isn’t it? That’s not easy to ignore, but it’s hardly a sufficient basis for potentially undermining the strength of our entire disciplinary system. (And let’s be honest. Would your answer really change if it were someone you didn’t know all that well?)

So, let’s just say while you’ll consider reporting, you’re leaning against it, wondering just how serious any violations might be. That requires us to circle back to the questions about nonrefundable fees and trust accounts.

Nonrefundable fees — what are the rules? 

As to whether you can charge a nonrefundable fee, Formal Advisory Opinion 03-1 rules it permissible so long as it “is not a contract to violate the attorney’s obligation … to refund any advance payment that has not been earned.” It acknowledges that there may be some value to taking the case and conflicting out other cases, but the lawyer still must refund what has not yet been “earned.”

In other words, unless Bess’ mere acceptance of the case was worth the full $15,000, she’ll have to refund the rest. Really? If you have to refund the part you haven’t “earned” just by signing on, then it’s not really nonrefundable, is it? As unsatisfying as the opinion’s logic is, at least it gives us an answer.

So, Bess has to figure out the value of taking the case and refund the rest. Let’s move to the trust account issue. If part of what you hold may end up not being yours to keep, then you should have to put the retainer (or at least part of it) in your trust account, right? Formal Advisory Opinion 91-2 says that a lawyer “need not place any fees in a trust account absent special circumstances that may be necessary to protect the interest of the client.” In fact, while discussing several different types of fees (fixed, flat, retainer, prepaid, etc.), the opinion never once says that any sort of arrangement actually requires the lawyer to place the advance payment in a trust account.

So, even though you might not ultimately get to keep some or all of the money, you still don’t have to put it in your trust account. That pretty much defeats the point of a trust account, doesn’t it? Once again an unsatisfying answer, but at least we have one.

So, let’s wrap up. You can charge a nonrefundable retainer, but you might have to give some of it back. In my book, that’s not truly nonrefundable. Nevertheless, the idea of attributing, thus immediately earning, some amount just for being “on retainer” makes sense if the lawyer is thereby precluded from taking other work, because of conflicts or because the lawyer’s time is monopolized. But if the work is just drafting documents, it’s possible that neither applies, making a blanket “I’ve earned it all at signing” inappropriate.

Now, when it comes to putting that check somewhere, you needn’t put it in a trust account, absent special circumstances. Despite the opinion, it seems foolish not to put the money in one’s trust account. After all, this hypothetical demonstrates how easy it is for a client to make an unexpected demand for its immediate return; once it’s in your operating account, it’s all too easy for it to disappear or be put at risk. And finally, about reporting. If I were to explain all this to Bess, and she still insisted on keeping the entire $15,000, should I report her? Luckily, the above discussion makes it clear that Bess has not done anything sanctionable, making it moot. And educating her may change her mind, or at least her future practice.

Frankly, though, I think Georgia ought to just mandate that lawyers report all known serious violations. That would still save me here, as there’s not a clear violation. But if there had been, such a rule would eliminate any reporting dilemma, and treat all offenders the same. It would also ensure that lawyers take that one last look at their behavior before doing something that might be improper. That’s really the point of the rules, right?

Professor Roy Sobelson teaches Professional Responsibility and writes widely on ethics and professionalism. He served on the Georgia Chief Justice’s Commission on Professionalism and acted as reporter for the Commission on the Evaluation of Disciplinary Enforcement. 

Return to the Spring 2016 Magazine 

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