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New York State Bar Association
Committee on Professional Ethics 

Opinion 816 (10/26/07)

Topic: Advance payment retainer; client trust account.

Digest: A lawyer may ethically accept an advance payment retainer, place such funds in the lawyer’s own account, and retain any interest earned.  The Lawyer may require the client to forward an advance payment retainer to pay for final fees that accrue at the end of the relationship.

Rules: DR 2-106(C), DR 2-110(A); DR 9-102(A), (C).

QUESTIONS

1.         May a lawyer ethically accept an advance payment retainer and place such funds in the lawyer’s own account while retaining any interest earned from such amount?

2.         If so, may a lawyer request the client to forward an advance payment retainer to pay for final fees that accrue at the very end of the relationship, with interim fees billed out as they are performed?

OPINION

3.         Recently, we have received inquiries regarding the continued validity of our opinion in N.Y. State 570 (1985), which addressed the ethical propriety of what is commonly known as an advance payment retainer.  An advance payment retainer is a sum provided by the client to the lawyer to cover payment of legal fees expected to be earned during the representation.  To the extent the fees advanced are not earned during the representation, the lawyer agrees to return them to the client.  This form of retainer should be distinguished from a general retainer, which is a sum paid to the lawyer for being available to the client.  A general retainer is earned upon receipt.[1]  The recent inquiries regarding advance payment retainers may stem from the fact that since we issued Opinion 570 in 1985, there have been several significant developments on the subject of retainer agreements and the language in DR 9-102 has been substantially amended.  Therefore, it is now appropriate to revisit the principles stated in N.Y. State 570.

4.         In N.Y. State 570 we concluded that fees paid to a lawyer in advance of services rendered are not necessarily client funds and need not be deposited in a client trust account.  Therefore, any interest earned on these fee advances may be retained by the lawyer.  The opinion cautioned, however, that the lawyer is obliged to return any portion of the fee advance that is not earned during the representation.[2]

5.         If the parties agree to treat advance payment of fees as the lawyer’s own, the lawyer may not deposit the fee advances in a client trust account, as this would constitute impermissible commingling.[3]  “On the other hand, the lawyer may agree to treat advance payment of legal fees as client funds and deposit them in a client trust account; in that event any interest earned on the funds while in the client trust account must be remitted to the client.”[4]

6.         Since 1985, we have cited N.Y. State 570 on several occasions.[5]  N.Y. State 570 has also been cited with approval by the Appellate Division, Fourth Department and the New York City Bar ethics committee.[6]  The validity of such an advance payment retainer has also been recently recognized by the Supreme Court of Illinois.[7]

7.         In opinion 570, we noted that “it appears that the drafters of the Code of Professional Responsibility did not consider advance payments of fees to be client funds necessitating their deposit in a trust account.”  Although DR 9-102 has been substantially amended since 1985, the changes do not affect the reasoning of that opinion.  DR 2-110(A)(3) requires a lawyer who withdraws from representing a client to “refund promptly any part of a fee paid in advance that has not been earned.”  As we observed in Opinion 570, this provision does not require that the advance be deposited in a client trust account until earned.  This conclusion is supported by the language in DR 2-110(A), which still separately classifies fee advances and client property.  DR 2-110(A)(2) requires a lawyer planning to withdraw from representing a client to “deliver to the client all papers and property to which the client is entitled” while DR 2-110(A)(3) separately provides for the refund of any unearned “fee paid in advance.” In sum, the standards delineated in N.Y. State 570 for advance payment retainers are still valid today.

8.         We note that advance payment retainer agreements, like any other fee agreement between a lawyer and client, must be “fair, reasonable, and fully know and understood by the client.”[8]  These agreements must also comply with other relevant provisions of the Code.  In this respect, we construe DR 9-102 to require the lawyer to maintain complete records of any advance payment retainer received and to render appropriate account to the client regarding the retainer.[9]  Although the advance payment retainer is not client property, the client retains an interest in that portion of the retainer that is not yet earned by the lawyer.  Furthermore, at the conclusion of the representation the lawyer must promptly return any portion of the advance payment retainer that is not earned.[10]  Finally, it would be inappropriate for a lawyer to negotiate a nonrefundable advance payment retainer with the client.[11]

9.         An advance payment retainer will obviously benefit the lawyer by helping to ensure that he or she will be paid for services rendered, at least to the extent of the advance.  This form of arrangement can also benefit the client, who may wish to hire counsel to defend the client from judgment creditors.  If the lawyer deposited such a retainer in a client trust account, the funds would remain the property of the client and might be subject to claims of the client’s creditors, thereby making it difficult for the client to retain counsel.[12]  Therefore, it is imperative for a lawyer at the outset of the representation to discuss the advantages and disadvantages of advance payment retainers and to reach an agreement about the treatment of any such advances.  These agreements should be confirmed in writing in the engagement letter where one is required.[13]

10.       We also conclude that an attorney may request an advance payment retainer for final fees that accrue at the very end of the relationship, with interim fees billed out as they are performed.  While such an arrangement is permissible, it must comply with the standards outlined in Jacobson and our prior opinions.  If the advance payment retainer is intended to be payable only once specific services use performed, it must describe the services that it is intended to cover.  If the services outlined in the agreement are not provided, that portion of the advance payment retainer must be promptly returned to the client.[14]

CONCLUSION

11.       A lawyer may ethically accept an advance payment retainer and need not place such funds in a client trust account.  If the advance payment retainer is placed in the lawyer’s account, the lawyer may retain any interest earned from such amount.  A lawyer may request an advance payment retainer for final fees that accrue at the very end of the relationship.

(14-07)

[1] See N.Y. State 570 n. 1.

[2] See DR 2-110(A)(3) (“A lawyer who withdraws from employment shall refund promptly any part of a fee paid in advance that has  not been earned.”).

[3]  See DR 9-102(A)(lawyer may not commingle client funds on property with his or her own).

[4] N.Y. State 570

[5] See, .e.g., N.Y. State 599 (1989)( discussing nonrefundable minimum fee provisions); N.Y. State 693 (1997); N.Y. State 764 (2003).

[6] See Matter of Aquilo, 162 A.D.2d 58, 560 N.Y.S.2d 583 (4^th Dep’t 1990) (“Moneys advanced by clients for disbursements need not, unless expressly agreed, but held in trust and may be placed in a general account.”); N.Y. City 2002-2.

[7] Dowling v. Chicago Options Associates, Inc., ___N.E.2d ___, 2007 WL 1288279, at *7 (Ill., May 3, 2007) (“we recognize advance payment retainers as one of three retainers available to lawyers and their clients”).

[8] Jacobson v. Sassower, 66 N.Y.2d 991, 993, 489 N.E.2d 1283, 1284, 499 N.Y.S.2d 381, 382  (1985); see N.Y. State 599 (“The essence of the matter is clarity”).

[9] DR 9-102(c)(3) requires a lawyer to “[m]aintain complete records of all funds, securities, and other properties of a client or third person coming into possession of the lawyer and render appropriate accounts to the client or third person regarding them.”

[10] DR 9-102(c)(4) (requiring a lawyer to “pay or deliver to the client or third person as requested by the client or third person the funds, securities or other properties in the possession of the lawyer which the client or third person is entitled to receive”).

[11] See DR 2-106(c)(2)(b) (prohibiting use of a nonrefundable fee clause in a domestic relations matter); Matter of Cooperman, 83 N.Y.2d 465, 633 N.E.2d 1069, 611 N.Y.S.2d (1994) (holding that the payment of a nonrefundable fee for specific services, in advance and irrespective of whether professional services are actually rendered, is per se violative of public policy).

[12] See, e. g., Dowling, ___N.E.2d at___, 2007 WL 1288279, at *8 (“Paying the lawyer a security retainer means the funds remain the property of the client and may therefore be subject to the claims of the client’s creditors.  This could make it difficult for the client to hire legal counsel.  Similarly, a criminal defendant whose property may be subject to forfeiture may wish to use an advance payment retainer to ensure that he or she has sufficient funds to secure legal representation.”).

[13] See 22 NYCRR Part 1215 (engagement letters are to include, among other things, an [e]xplanation of attorney’s fees to be charged, expenses and billing practices”).

[14] See DR 2-110(A)(3); DR 9-102(C)(4); N.Y. State 570.