New York State Bar Association
Committee on Professional Ethics
Topic: Unpaid Client Fees
Digest: Lawyer may not remove amounts from client’s
trust account if in dispute. Lawyer may only
charge reasonable interest if provided for in the engagement letter.
inquirer, a New York lawyer, was retained nine years ago to represent a client
in numerous litigations arising out of an estate matter. The client is executor of the estate and sole
beneficiary of various annuity contracts of the decedent that the Surrogate’s
Court ruled, in response to interpleader litigation, were the client’s property
and not part of the estate. A sum of money was received into the inquirer’s escrow
account while the interpleader litigation regarding the annuity contracts was
pending. The Surrogate’s Court has now authorized
the distribution of those funds to inquirer’s client.
inquirer had previously sent the client invoices for legal fees and expenses while
the litigation was ongoing, but the inquirer agreed at the client’s request to
defer payment until the end of the litigation.
The client raised no objection to the invoices at the time. The principal balance of the bill is now an amount
greater than $50,000, which the inquirer observes is the ceiling set forth for
mandatory fee arbitration under 22 N.Y.C.R.R. § 137.1. The client refuses to pay the bill, demanding
that the inquirer cut the bill by approximately 20%. The inquirer claims that the inquirer has
repeatedly and voluntarily reduced the amount of the bill over the years, and has
recently evinced a willingness further to negotiate, but now wants the client
to pay the outstanding amount. The
inquirer asserts that a “written formal fee agreement” exists. The inquirer wants to withhold payment of the
escrowed funds in an amount equal to the fees the inquirer says are due and
owing, as well interest on those fees and an amount to cover fees and expenses
should litigation arise over the amount the inquirer says is due and owing,
which the inquirer proposes to seek by litigation after what the inquirer
asserts is some statute of limitations.
the inquirer remove from the trust account the sums equal to what the inquirer
believes are due and owing, and, if so, may this amount include payment of
interest due on the unpaid bill?
May the inquirer also withhold from
distribution to the client an amount the inquirer depicts as a “cushion” to
cover fees and expenses in the event that the fee dispute results in
answer to each question is no.
1.15(b)(4) of the New York Rules of Professional Conduct (the “Rules”) states
that a lawyer may withdraw funds from a trust account “when due, unless the
right of the lawyer to receive it is disputed by the client . . . in which
event the disputed portion shall not be withdrawn until the dispute is finally
resolved.” The client’s insistence on
the discount is a dispute for purposes of the Rule and so the inquirer may retain
but must not remove from the trust account those sums that the client questions
until the dispute is resolved, whether by settlement or through some dispute
resolution process. Insofar as the
client concedes that some of the amounts in the account are properly the
lawyer’s property, the lawyer may distribute the same to the lawyer’s account;
to the extent the client disputes any portion of those sums, the lawyer must
retain them in escrow.
a prior written agreement, the lawyer may not unilaterally charge interest on a
delinquent client account. “[I]n order
to charge interest on delinquent accounts, a lawyer must advise the client
prior to performing services of the fact that interest will be so charged, the
definition (time period) of delinquency, and must obtain the client’s consent thereto.” N.Y. State 399 (1975). “A law firm may seek its clients’ agreement
to modify its retainer agreement with the clients during the pendency of a
current matter to secure payment, by confessions of judgment and collateral
mortgages, of fully earned but unpaid legal fees and expenses in an amount on
which the parties agree, if the law firm complies with the rules governing
business transactions with clients and is mindful of ongoing obligations to
avoid general conflicts of interest.” N.Y.
State 1139 (2017). See N.Y. State 910 (2012) (“A lawyer may
request a client to amend a retainer agreement. Whether such an amendment must
meet the requirements for fee agreements under Rule 1.5 or for business
transactions between the lawyer and client under Rule 1.8(i) depends on the
circumstances in which the amendment is requested and the nature of the
amendment.”); N.Y. State 783 (2005) (“If a client deliberately disregards an
agreement to pay legal fees and expenses, and the letter of engagement or retainer
agreement is silent as to interest charges on the delinquent accounts, a lawyer
may condition continued representation on the client’s agreement to
prospectively pay interest on any past balance due for services previously
rendered or to be rendered in the future”).
Accordingly, absent a prior written agreement, the inquirer may not
charge interest on the amounts the inquirer believes are due and owing.
may the inquirer decide to withhold from the escrowed funds an amount that the
inquirer deems apt to indemnify the inquirer for fees and expenses that the
inquirer may incur in the event that litigation arises from the dispute with
the client over the appropriate amount of fees for services rendered. In our view, the inquirer is ethically
obligated to pay to the client those sums that are not part of the fee dispute
– that is, the amount the client agrees the lawyer is due, without reference to
interest or other holdbacks unless the client explicitly agrees. See Rule
1.15(c)(4) (lawyer must promptly pay to the client as requested by the client
funds the client is entitled to receive).
Absent some agreement, no authority exists for a lawyer to use disputed
funds for self-help in the event that a dispute arises between a lawyer and a
client over legal fees.
lawyer may not remove any amounts from the client’s trust account if the client
disputes the lawyer’s entitlement to them.
The lawyer may charge only a reasonable rate of interest on any unpaid
bills if provided for in the written fee agreement.