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Earned when paid retainers violate Rule 1.15(c) of the Maryland Lawyers’ Rules of Professional Conduct

When you hire an attorney, it is common that you will pay a retainer.  The attorney is obligated to deposit the entire retainer into the law firm’s Attorney Trust Account (also called an IOLTA Account).  The attorney may only withdraw fees as they are earned.

I have encountered several Maryland law firms with Engagement Agreements that state a portion of the initial retainer is “earned when paid”.    This means that a portion of the initial retainer will be deposited into the Attorney Trust Account, but that the balance will be deposited into the law firm’s operating account.

There is no reason for a law firm’s Retainer Agreement or Engagement Agreement to state that a portion of your retainer is “deemed earned when paid”, except to deceive you into believing that you will forfeit part of your retainer if you were to terminate the attorney.

It is also a violation of Rule 1.15(c) of the Maryland Lawyers’ Rules of Professional Conduct for an attorney not to deposit a client’s retainer into the law firm’s Attorney Trust Account without the informed, written consent of the client.

Rule 1.15(c) of the Maryland Lawyers’ Rules of Professional Conduct states: “Unless the client gives informed consent, confirmed in writing, to a different arrangement, a lawyer shall deposit legal fees and expenses that have been paid in advance into a client trust account and withdraw those funds for the lawyer’s own benefit only as fees are earned or expenses incurred”.

“Informed consent” is defined in Rule 1.0(f) as “the agreement by a person to a proposed course of conduct after the lawyer has communicated adequate information and explanation about the material risks of and reasonably available alternatives to the proposed course of conduct”.   An attorney “must make reasonable efforts to ensure that the client or other person possesses information reasonably adequate to make an informed decision”, including “any explanation reasonably necessary to inform the client or other person of the material advantages and disadvantages of the proposed course of conduct and a discussion of the client’s or other person’s options and alternatives”.  Note 6 to Rule 1.0.

In the recent case of Attorney Grievance Commission of Maryland v. Chapman, 430 Md. 238 (2013), the Court of Appeals held that an attorney had violated Rule 1.15(c) by failing to explain to the client in writing the disadvantages of a non-refundable “engagement fee” and the advantages of depositing the retainer amount into the attorney’s Trust Account: “The retainer agreement in the instant case purported to justify the fee being “earned upon receipt” because Chapman was precluded from, or limited in, representing other clients by virtue of undertaking representation and because of the need to engage consultants. There is no evidence, however, that the retainer agreement explained the risks associated with paying a fee that would not be held in trust—namely that the fee would be considered earned upon receipt, no matter the level of effort undertaken by the lawyer, and that return of any portion of the fee, thus, could be precluded.  Although we have not decided a case involving whether a writing was sufficient to constitute informed consent, the definition in Rule 1.0(f) makes clear that an attorney must communicate the risks associated with a fee arrangement that varies from the standard escrow arrangement.  As the hearing judge noted, the retainer agreement only contained a small section informing the client that the fee was earned upon receipt.  Neither the retainer agreement, nor Chapman personally, explained the material risks associated with entering into an “earned upon receipt” fee agreement, in violation of Rule 1.15(c)”. Id. at 276-77 (emphasis added)

With respect to “earned when paid” retainers, “the burden falls on the attorney to prove that the client not only consented to the arrangement but that he or she was properly informed of the risks associated with the arrangement and that the consent of the client was confirmed in writing”.   Maryland Bar Journal, “Attorney Grievance Commission: Does a Retainer Have to be Deposited in Trust?”, July 2013, p. 54.

In addition to the risks outlined by the Court, it seems reasonable that an attorney should also advise a client of the benefit of depositing the client funds in trust which include, inter alia, [a] the funds cannot be removed from the trust account until earned by the attorney which guarantees that any unearned funds will remain available to immediately refund the client at the termination of the representation; [b] records of receipt, deposit, and maintenance of the funds will be created and maintained for 5 years; [c] the funds deposited in a trust account will not be subject to attachment by the attorney’s creditors; and [d] the funds cannot be used by the attorney or the law firm as collateral for loans, to pay expenses unrelated to the representation or for the attorney’s personal benefit. Id.

An attorney’s failure to disclose in writing to a client the disadvantages and risks of a non-refundable “engagement fee” is a serious ethical transgression.  Mr. Chapman received an indefinite suspension for violating Rule 1.15(c) and other rules. Attorney Grievance Commission of Maryland v. Chapman, 430 Md. 238, 278 (2013).

In the past two years, numerous attorneys have been disciplined for not obtaining their clients’ informed written consent to withdraw fees from the Attorney Trust Account before they were earned.   Attorney Grievance Commission of Maryland v. Zimmerman 428 Md. 119, 130 (2012) (“Rule 1.15(c) requires that a lawyer deposit advance payments of legal fees and expenses in an escrow account and prohibits the lawyer from withdrawing the funds for her own benefit until earned, absent the client’s informed consent confirmed in writing”); Attorney Grievance Commission of Maryland v. Tanko 427 Md. 15, 32-33 (2012) (holding that provision that “clients consents to the deposit of any funds paid hereunder into the personal account of the attorney, rather than a Client Trust Account, pursuant to Rule 1.15 of the Maryland Rules of Professional Conduct” did not constitute “informed consent” due to the attorney’s failure to “include the necessary explanation of the material risks or alternatives”); Attorney Grievance Commission of Maryland v. Stinson, 428 Md. 147, 164 (2012)  (“Respondent asserts that because the contract was clear and unambiguous, the $5,000.00 fee did not have to placed in an attorney client trust fund since the payment was non-refundable and therefore did not belong to the client. This court rejects Respondent’s contention”); Attorney Grievance Commission of Maryland v. Lewis 437 Md. 308 (2014) (“Respondent violated Rule 1.15(a) when he failed to deposit and maintain Ms. Slosser’s retainer fee in trust until earned without receiving informed consent, confirmed in writing, to a different arrangement from Ms. Slosser”).

 

 

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