What the State Bar Thinks About Flat Fees

 Posted on January 15, 2011 in Uncategorized

In its concerted effort to sell lawyers the bill of goods that is the amendments to the Texas Disciplinary Rules of Professional Conduct, the State Bar and its mouthpieces keep saying things like this:

YOU MAY HAVE HEARD/READ: "The proposed rules will turn fee collection in the criminal defense world on its head."CLARIFICATION: This concern may be a reference to proposed Rule 1.15 (regarding safekeeping of property). Comment 12 to that rule says, "Applicable law, not these Rules, determines when a fee is earned." Criminal defense counsel should review the law on commingling client and lawyer funds when the lawyer has possession of unearned fees. The proposed rule does not (and could not) change this law, and it does not change how the existing rule handles a flat fee.

What is "applicable law"? Here's what the State Bar of Texas wishes applicable law to be:

During the court conference in March 2008, the committee continued to suggest that the issue that the ABA was targeting be handled in the comments. (The committee actually suggested this comment during the conference: "When a lawyer receives from a client moneys that constitute a prepayment of a fee, the lawyer shall handle that fee in accordance with this rule until the lawyer has earned the fee.") Part of the committee's concern was that some readers wouldn't know an "advance fee" (the rule contains "advance") from a "flat fee," causing the rule language to be unclear. However, given reasoning from the Court, the committee ultimately agreed to the inclusion in the rule, as long as comments made clear that there were many kinds of fee agreements, implying that a flat fee agreement was certainly a possibility, but that it should be clear (to the lawyer, as well as to the client) and agreed to by the client. Thus, no one in the conference was anticipating making a flat fee (or even advance fee) arrangement go away. However, the goal was to make lawyers think about any differences between those two types of fee agreements (and Texas case law may suggest they're the same, such that criminal defense lawyers should find some other term to use or not use a term and simply be descriptive in a written fee agreement with the client).The criminal bar should understand that (except for the problem of commingling, which is a violation of this rule) its problem would be with applicable law, not this rule, as indicted in the proposed comment: "Paragraph (d) addresses unearned fees. Fee agreements sometimes state that the fee is a flat fee, advance fee, nonrefundable retainer, or some other kind of fee. But without regard to the label, if the fee is a prepayment for services, paragraph (d) requires a lawyer to deposit the fee into a trust account until it is earned. Applicable law, not these Rules, determines when a fee is earned." If a criminal defense lawyer takes money that applicable law says belongs to the client, the lawyer has violated a number of the Rules.

Much of this appears to be mumbo-jumbo (the portion I've bolded, for example, says "the rule contains ‘advance,'" which it doesn't), but in other words, while the committee didn't want to make flat fees go away-and while the State Bar is weaselly and will not come out in the current debate and say that flat fees paid in criminal cases are not "earned" until the work is done-it is the position of the State Bar that payment for services that have not yet been rendered must, even if the parties have agreed that the fee is earned upon receipt, be placed in trust until the service has been performed.

Here's what the State Bar wrote in June 2010 (in anticipation of this controversy?) in the booklet A Lawyer's Guide to Client Trust Accounts (PDF, at pages 3-4, emphasis in original):

Unearned Fees, True Retainers and Advanced Payments of ExpensesAny unearned fee or advance payment of expenses should be deposited into a trust account. Use of a trust account is appropriate whether it involves an hourly fee, flat fee, contingent fee or prepayment of an expense.Examples of unearned fees include:

1. Advance deposit or retainer for lawyer‘s fees which will be depleted as the lawyer bills the client on an hourly basis.

2. Flat fees that have not been earned, regardless of whether the fee is deemed "nonrefundable" in the fee agreement.

3. Settlement funds which have not been distributed in accordance with the contingent fee requirements in Rule 1.04 (d).The types of fee arrangements between lawyers and their clients continue to change for a variety of reasons. For example, "value billing" is based on the results delivered to the client. Regardless of the name tag placed on the billing arrangement, the rule is simple: until the fee is earned, it must be segregated from the lawyer‘s own funds in a trust account. This rule applies to any practice area, whether it is criminal, family, or corporate law.Unearned fees are always subject to refund until earned and cannot be deemed nonrefundable by agreement. As such they belong in the lawyer‘s trust account. Distinguishable are fully earned fees. For example, when a client pays the exact amount on the lawyer‘s invoice for work already performed, that money is earned and should not be deposited into the trust account.A common problem that arises in the context of flat fees is the question of when the fee is earned. Labeling a flat fee as nonrefundable or earned upon receipt does not make it so. Therefore a flat fee should be deposited into the lawyer‘s trust account. Without contract terms that specifically define at what rate a flat fee is earned, lawyers should operate under the premise that none of the fee is earned until the end of the representation when all work has been completed to meet the client‘s objective. Since in many cases a lawyer cannot complete the representation, either due to termination by the client or from voluntary withdrawal, the lawyer will often face a situation where some work, but not all has been completed. In these cases the lawyer faces the problem of determining what portion of the flat fee is earned. A lawyer can avoid this problem by stating in the fee agreement at what rate the fee is earned. This is often done at an hourly rate or by setting a schedule of work to be completed, prorating the fee and designating at each step what portion of the fee has been earned.

For the legal propositions in that section of the booklet, the State Bar cites exactly three authorities: Ethics Opinion 431, Ethics Opinion 481, and Cluck v. Commission for Lawyer Discipline, 214 S.W.3d 376 (Tex. App.-Austin 2007, no pet.).

Opinion 431 is about whether nonrefundable retainers (as opposed to flat fees) are ethical-they are, but "must be utilized with caution." Opinion 431 also notes that "A fee is not earned simply because it is designated as non-refundable," but approves placing an earned retainer fee in a lawyer's general operating account even though circumstances might later require a partial refund. So not only does it not support the State Bar's contention that no fee is earned if it might be refundable, but it specifically refutes it.

The booklet cites Opinion 481 for the proposition that "[f]lat fees that have not been earned, regardless of whether the fee is deemed "nonrefundable" in the fee agreement," must be placed in a trust account. Opinion 481 is about lawyers splitting fees with a finance corporation, which is hunky-dory, but the opinion notes in dicta that "the law firm must comply with Rule 1.14 with respect to safeguarding, in a ‘trust' or ‘escrow' account, amounts that are received from the finance corporation and that have not yet been earned by the law firm."

In Cluck the lawyer tried to call an advance fee, $15,000 to be billed against at $150 per hour, "nonrefundable." She took another "nonrefundable" $5,000, to be billed against at $200 per hour. He later claimed that she had done 28.5 hours of work on the case-at most $5,700 worth. Cluck is about advance fees, and has precious little to do with flat fees. It's about a lawyer trying to have things both ways-a nonrefundable fee and an hourly rate-and then, when the earned portion was easily calculated under the contract, not having the good sense to refund the unearned portion.

The State Bar has, through its Commission for Lawyer Discipline, has litigated this issue and lost. In Commission for Lawyer Discipline v. Looney, in the 133rd District Court (No. 2004-67710), the State Bar of Texas argued that upon termination of representation a lawyer who had been paid a flat fee in a criminal case had to, under Texas Disciplinary Rule 1.15(d), refund money. Current Rule 1.15(d) requires the refund of "any advance payments of fee that has not been earned" when representation is terminated; the court concluded as a matter of law that "The language of Rule 1.15(d) fails to clearly state that its mandates apply to a nonrefundable flat fee contract in a criminal case." In other words, no portion of a contractual flat fee in a criminal case is an "advance payment of fee that has not been earned." The fight wasn't over placement of fees in a trust account, but the ultimate issue is the same, and the State Bar was unable to convince a District Court of the position that it now asserts is "applicable law."

The Commission for Lawyer Discipline did not appeal Looney, so it's not precedential, but we have the decision here.Findings and Conclusions OCR

Next: what's really going on here?