What to do with unearned fees at the end of the representation
By Sylvia Stevens
Payments by someone other than the client comprise a considerable part of compensation received by lawyers. For instance, insurance carriers, non-profit and prepaid legal plans and indigent defense programs all compensate lawyers for providing services to others. Payment by third parties is also not uncommon in private situations where a parent or an employer pays the legal fees for representation of a child or an employee.
When someone other than the client pays, there is a risk that the lawyer's duty of loyalty to the client will be compromised by the fee payer's interests. Accordingly, the disciplinary rules require client consent to the arrangement and prohibit the lawyer from allowing the fee payer to influence the exercise of the lawyer's judgment.1 A client's consent to the payment of fees is not consent to disclosure of confidential information,2 and the lawyer's duty to preserve the client's confidences and secrets3 is not affected by the fact that someone other than the client is paying the fee.4
General Counsel's Office receives few inquiries about the ethical considerations of accepting payment from someone other than the client. On the other hand, it seems that we receive an increasing number of questions about the practical problems such arrangements generate when the lawyer is holding unearned fees at the end of the representation. This may occur because a fixed-fee representation was terminated before all of the contemplated services were completed or because the services performed on an hourly basis did not exhaust the retainer deposited. Lawyers in these situations often find themselves caught between competing claims of the client and the person who paid the fees, both demanding delivery of the refund.
There does not appear to be any authority on point to provide guidance.5 DR 9-101(C)(4) states the obvious: 'A lawyer shall … promptly pay … to a client as requested by the client the funds … in the possession of the lawyer which the client is entitled to receive.' The problem in the scenario posed is that the client's entitlement to the funds in the lawyer's possession may not be at all clear. Was the payment by the other person intended as a loan? A gift? Was it intended only to provide the services of this lawyer? Or any other lawyer the client might chose to have handle the matter? Lawyers are understandably reluctant to deliver funds to the wrong person and subject themselves to a disciplinary complaint or civil claims.
Some situations lend themselves to obvious solutions. For instance, if the client brings the cash directly to the lawyer or pays with the client's own check, it is reasonable to conclude that any refund belongs to the client.
In that case, the lawyer should not be responsible to a third party who contacts the lawyer after the fact claiming to have made a loan for legal fees and claiming a right to the refund.
More typically, however, the third party delivers the fees to the lawyer. Confusion results from the failure of the parties (lawyer, client, fee payer) to clarify the nature of the fee payment or to make any provisions for a refund. Prudence would suggest that whenever a lawyer accepts payment from someone other than the client, the written engagement letter should clearly address who will receive any refund.
In the absence of such written direction, however, lawyers must proceed carefully. One option would be to hold the funds in trust pending resolution of the dispute between the client and the fee payer.6 Another would be to interplead the funds into court. A third possibility is for the lawyer to issue a check payable jointly to the client and the fee payer. This is risky, however, if there is any chance that either payee might attempt to negotiate the check without proper endorsement by the other. The lawyer might be subject to a claim that the lawyer facilitated a conversion or complicated the receipt of the refund by its rightful owner.
In a perfect world there would be a perfect solution to this sort of problem. Since we practice in a less-than-perfect world, lawyers wishing to avoid the problem will have carefully written agreements clarifying that fees have been paid by someone other than the client and specifying who is entitled to any refund. Of course, the agreement should also include the full disclosure required by DR 5-108 to validate the client's consent to the payment of fees by the other person. +
1. DR 5-108(A) provides that '[e]xcept with the consent of the lawyer's client after full disclosure, a lawyer shall not…accept compensation for the lawyer's legal services from one other than the lawyer's client…' Subsection (B) cautions that '[a] lawyer shall not permit a person who…pays the lawyer to render legal services for another to direct or regulate the lawyer's professional judgment in rendering such legal services.'
2. See, e.g. ABA Model Rule 1.8(f)(3) and Restatement of the Law Governing Lawyers §215, Comment e.
3. DR 4-101 requires generally that a lawyer not knowingly reveal a confidence or secret of the lawyer's client except with consent of the client.
4. See OSB Formal Opinion No. 1999-157 for a discussion of this concept in the context of insurance defense representations.
5. My research was admittedly not exhaustive and I would be interested in any citations others can offer.
6. This is analogous to the situation where a third-party creditor of the client claims a right to settlement proceeds. See this author's column on that subject in the August/September 2000 issue of the Bulletin. +
Sylvia Stevens is assistant general counsel of the Oregon State Bar. She can be reached at (503) 620-0222 in the Portland area or toll-free in Oregon at (800) 452-8260, ext. 359 or by e-mail at firstname.lastname@example.org.