Opinion ID: 1816925
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Heading Rank: 3

Heading: Failure to Place Fee in Client Trust Account and Misappropriation of Client Funds.

Text: DR 9-102(A) pertinently provides: All funds of clients paid to a lawyer ... including advances for costs and expenses, except retainer fees paid on a regular and continuing basis, shall be deposited in one or more identifiable interest-bearing trust accounts .... No funds belonging to the lawyer ... shall be deposited in trust accounts except as follows: .... (2) Funds belonging in part to a client and in part presently or potentially to the lawyer.... Read literally, lawyers are required to deposit all advance payment of fees in a client trust account. The only exception are retainer fees paid on a regular and continuing basis. Such a fee is commonly referred to as a general retainer, which is a fee for agreeing to make legal services available when needed during a specified time period. In form it is an option contract; the fee is earned by the attorney when paid since the attorney is entitled to the money regardless of whether he actually performs any services for the client. Lester Brickman, The Advance Fee Payment Dilemma: Should Payments Be Deposited to the Client Trust Account or to the General Office Account, 10 Cardozo L.Rev. 647, 649 n. 13 (1989) (citing Baranowski v. State Bar, 24 Cal.3d 153, 164 n. 4, 593 P.2d 613, 618 n. 4, 154 Cal.Rptr. 752, 757 n. 4 (1979) and Blair v. Columbian Fireproofing Co., 191 Mass. 333, 77 N.E. 762 (1906)) [hereinafter Brickman, The Advance Fee Payment Dilemma ]. We will have more to say about general retainers in connection with nonrefundable fees. In contrast to a general retainer is a special retainer. A special retainer covers payment of funds for a specific service. Id. at 649. If the client and attorney agree that the attorney shall receive the special retainer payment in advance of performing the services, then the payment is commonly referred to as an advance fee payment. Id. Such a fee is a payment made by a client to the attorney prior to the performance of contemplated services. The attorney depletes the prepayment as he renders services. If the matter is completed or the attorney's work on the case otherwise ends, the attorney is obligated to refund the balance of the advance payment to the client. Id. at 649 n. 15 (citing D.C. Bar, Op. 113, at 1 (1982); Washington State Bar Ass'n Code of Professional Responsibility Comm., Formal Op. 173, reprinted in Washington State Bar News 50 (Oct.1980); Model Code of Professional Responsibility DR 2-110(A)(3); Model Rules of Professional Conduct 1.15 (1983) [corresponding to DR 9-102]; Model Rules of Professional Conduct 1.5 cmt. C (A lawyer may require advance payment of a fee, but is obliged to return any unearned portion.)). One commentator writes that by an almost two to one margin, authorities require deposit of advance fee payments in a client trust account. Id. at 650 (collecting authorities). The commission thought the rule did not apply to a flat fee, which the commission found the parties had agreed to. A fixed or flat fee means the fee embraces all work to be done, whether it be relatively simple and of short duration, or complex and protracted. ABA Comm. on Ethics and Professional Responsibility, Informal Op. 1389 (1977). Such fees are commonplace for fairly routine and standardized legal services, such as drafting a simple will or real estate document, or representing a party in an uncontested divorce proceeding. ABA/BNA Lawyers' Manual on Professional Conduct 41:306 (1993) [hereinafter Lawyers' Manual ]. Flat fees have their place. By our discussion we do not intend to discourage their use. As to whether attorneys need to deposit flat fees in a client trust account, an opinion of the American Bar Association had this to say: While conceptually straightforward enough, the rule that lawyers must keep money in trust accounts when it is not their money becomes more complicated when applied to certain kinds of advance fee payments. The questionable ethical viability of non-refundable fee advances has inspired some imaginative terminology designed to characterize the advance payments in a manner that eludes the issue: retainers, non-refundable retainers, fee advances, or advanced fees, prepaid fees, flat fees, and minimum fees. The basic question is Whose money is it? If it's the client's money, in whole or in part, it is subject to the trust account requirements. If it is the lawyer's money, placing it into a trust account would violate the anti-commingling rule. In general, analysis turns on when the money is deemed earned, for once money is earned it is the lawyer's. The majority of courts and ethics committees addressing the problem have looked beyond the terminology by which the fee is characterized, and have determined that fee advances are not earned when paid, and therefore must be deposited into the trust account. Id. at 45:109 (emphasis added). We see the flat fee as nothing more than an advance fee payment which a majority of authorities now agree must be deposited in a client trust account. This position is consistent with our case law. Funds remain the property of the client until the attorney earns them. See, e.g., Committee on Prof'l Ethics & Conduct v. Glenn, 390 N.W.2d 131, 132-33 (Iowa 1986) (holding that attorney misappropriates client funds when attorney keeps that which attorney has not earned). Requiring lawyers to deposit all advance fee payments in a client trust account provides a safe harbor approach for lawyers, which we adopt. We hold that lawyers must deposit all advance fee payments into a client trust account. Strong policy considerations support our position that lawyers must deposit all advance fee payments in a client trust account. This approach (1) preserve[s] the client's property from the reach of the lawyer's creditors, (2) preserve[s] the client's property from possible misappropriation by the lawyer, and (3) enable[s] the client to realistically dispute a fee where the funds are already in the lawyer's possession by disallowing a self-help resolution by the lawyer and instead preserving the disputed funds intact until the dispute is resolved. Brickman, The Advance Fee Payment Dilemma, 10 Cardozo L.Rev. at 667. All three policy considerations place the client's interest paramount thereby emphasizing the fact that the relationship between the client and the attorney is a fiduciary one. Requiring lawyers to deposit all advance fee payments into a client trust account is also consistent with DR 2-110(A)(3). This rule provides that a lawyer who withdraws from employment shall refund promptly any part of a fee paid in advance that has not been earned. The rule recognizes that advance fees are client funds until the attorney earns them. As one commentator notes, two additional arguments support the rule requiring deposit of all advance fee payments into a client trust account: First, empirical data on the causes of lawyer defalcation indicates that the failure to return unearned advance fees constitutes a major disciplinary problem and generates substantial claims by clients against client protection funds. Clients often are unable to obtain the return of unearned advanced fee payments because their lawyers have either spent the money or otherwise made it unavailable to the client. A rule mandating that advance fees be deposited to the client trust account would reduce both the volume of litigation that clients pursue against lawyers for refunds of advance fee payments as well as the number of client claims against lawyers that are paid through client protection funds, in each case saving substantial sums of money. Second, such a rule would effectuate the intent of DR 9-102(A)(2), which allows the client to contest the amount of the lawyer's fee when funds deposited to the security account include fees claimed by the attorney. Once the client exercises her right to contest the fee, the funds may not be withdrawn until the dispute is resolved. Lester Brickman & Lawrence A. Cunningham, Nonrefundable Retainers Revisited, 72 N.C. L.Rev. 1, 42 (1993) [hereinafter Brickman & Cunningham, Nonrefundable Retainers Revisited ]. Like the commission, we find that Apland charged Vonnahme a flat fee. The fee, however, was not a general retainer. Rather it was a special retainer. Vonnahme paid the fee for specific services. Because Vonnahme paid the $5000 special retainer in advance of Apland's performing the services, the fee was an advance fee payment. At the time he received the fee, Apland had not performed any services he had agreed to perform for the fee. The money still belonged to the client. For that reason, DR 9-102(A) required Apland to deposit the fee in a client trust account. His failure to do so constituted a violation of the rule. Because Apland took the fee before it was earned, he misappropriated the client's funds in violation of DR 1-102(A)(3), (4), (5), and (6). See Iowa Supreme Ct. Bd. of Prof'l Ethics & Conduct v. Gottschalk, 553 N.W.2d 322, 323-24 (Iowa 1996). The misappropriation, however, was not intentional given the uncertainty at the time about whether such fees were subject to trust account requirements.