Years ago when I was working at a small law office in South Carolina, my boss came running into the office all excited a few days before Christmas.
He waved a check in the air. Santa had come early. The check was a Big Fat Nonrefundable Retainer Fee from a new family law client.
He was so happy he gave us all the rest of December off.
But by the time we returned to work in January, the thrill was gone – and so was the Big Fat Nonrefundable Retainer Fee. It had been deposited in the general operating account, where it was quickly swallowed up by the gaping black hole of short-term debt, negative cash flow, past-due bills and general financial mismanagement that characterized the firm’s fiscal operations.
Meanwhile, we had barely begun work on the case, for which the client would be billed hourly. And now there was no Big Fat Nonrefundable Retainer Fee to bill against.
By way of disclaimer, I should point out that this was long ago in a land far away, and that from everything I saw my boss was an honest man and a competent lawyer, albeit more Jimmy Buffett than Warren Buffett.
The problem was that he considered the Big Fat Nonrefundable Retainer Fee to be found money. His thinking went like this: it had appeared unexpectedly, it was now in his hands, and he had every right to spend it. Immediately. Which was what he did.
Not to mention the fact that the money was nonrefundable. It said so right there in the fee contract. The client had even signed and dated the agreement.
Rule 1.5 and Advance Fees
Needless to say, this is tricky ethical turf.
Lawyers in private practice are advised again and again to get paid up front. But it can be difficult to determine exactly to do with that money once it is received.
Does it go in the general account? The trust account? The office Final Four pool?
The answer depends partly on what the fee agreement says. But mostly it depends on the nature of the payment – is it a minimum fee, advance deposit, true retainer, or a prepaid flat fee – and on the N.C. Rules of Professional Conduct.
The starting point for analyzing any particular fee is RPC 1.5.
If you read Rule 1.5 and relevant ethics opinions, you will quickly see that many payments we routinely call retainer fees are actually not true retainers at all.
And you will also realize there is likely no such thing as a truly “nonrefundable” fee – no matter how many times we include the word in our fee contracts.
Following are Three Key Ethics Opinions on advance fees:
- 2000 Formal Ethics Opinion 5. A lawyer may not tell a client that any fee paid prior to the rendition of legal services is nonrefundable although, by agreement, a lawyer may collect a flat fee for legal services to be rendered in the future and treat the fee as earned immediately upon receipt subject to certain conditions. Designating a fee as nonrefundable has a chilling effect on the client’s right to terminate the representation at anytime. A lawyer may refer to such a fee as a “prepaid flat fee.”
- 2005 Formal Ethics Opinion 13. A minimum fee that will be billed against at an hourly rate and is collected at the beginning of representation belongs to the client and must be deposited into the trust account until earned and, upon termination of representation, the unearned portion of the fee must be returned to the client.
- 97 Formal Ethics Opinion 4. The better approach is not to characterize any fee as nonrefundable. Flat fees may be collected at the beginning of representation, treated as presently owed to the lawyer, and deposited into the lawyer’s general operating account or paid to the lawyer. But if a collected fee is clearly excessive under the circumstances of the representation, a refund to the client of some or all of the fee is required.
Be sure to read the opinions in full. Look also at the comments to Rule 1.5.
If you are in doubt about how to handle a fee, call the State Bar (919-828-4620) for ethics advice.
And the next time a Big Fat Nonrefundable Retainer Fee comes into your office, make sure the work is completed before the Happy Dance begins.
Jay Reeves a/k/a The Risk Man is an attorney licensed in North Carolina and South Carolina. Formerly he was Legal Editor at Lawyers Weekly and Risk Manager at Lawyers Mutual. He believes he once spotted a rare nonrefundable retainer while searching for Bigfoot. Contact email@example.com, phone 919-619-2441.