Watch Those Fees

Despite the favorable press, value billing schemes (be they flat fees, fixed fees, minimum fees with change orders) may run into Rule 1.5(b) issues if not properly handled. The thing to remember is that not all forms of lump sum payments can be classified as non-refundable.

Non-refundable retainers (or engagement fees) are “paid, apart from any other compensation to ensure that a lawyer will be available for the client if required” (see: Restatement 3rd, The Law Governing Lawyers, sec. 34, Comment e). According to the Restatement, a fee can be non-refundable if and only if the attorney is to be additionally compensated for the actual work performed. The typical engagement fee should be designed to cover the reasonable costs needed to set up a client file and prepare for the particular matter. Basically an engagement fee is reasonable if it bears a reasonable relationship to the income sacrificed or expense incurred by the attorney’s accepting the client/client’s matter (e.g. cost of turning away other clients, hiring new associates, keeping up with the relevant law).

However, if the advanced payment is to cover the lawyer’s services to the client, making that payment non-refundable will be contrary to public policy because it will compromise the client’s ability to discharge the attorney and secure other counsel. Remember, the client can discharge an attorney at any time for any reason and the attorney is entitled only to the reasonable value of services performed.

When working with fixed fees, good practice would suggest that (a) the retainer agreement list landmarks and the portion of the fee that will be considered earned at those points in the matter and (b) the fee is deposited into the attorney’s trust account until it is earned.

IOLTA ABCs

OK, strictly speaking, you don’t need to have a trust account. If you never receive settlements on behalf of clients, never receive advance fee or cost payments from clients, and never hold other funds on behalf of clients – you might not (at least in MN) need a trust account. However, the Lawyers Professional Responsibility Board’s recommended practice is to maintain a trust account just in case. Think of it as cheap CYA insurance.

Opening an IOLTA (lawyer’s trust account) in Minnesota is a simple process – find an approved bank, download and complete a Notice to Financial Institution form (see the Lawyer Trust Account Board), and then take the form with you to the bank when you open the account. After spending 30 minutes with a banker and making a nominal deposit you’ll walk away with an IOLTA account.

While the Lawyers Board and the Minnesota Bar Association have a number of helpful materials on managing your trust account, they do omit some very practical hints like:

  • Use different color checks for your operating and trust accounts (green for your operating account – its your money & red for your trust account – stop its your client’s money)
  • Color code your deposit slips so that they match the check color of the account (green stripe for operating, red stripe for trust)
  • Keep your trust account & operating account at different banks
  • When choosing a bank for your trust account, ask what interest rate the bank pays on the funds – pick a bank that offers the best interest rate. It costs you nothing while helping others.