By Daniel J. Siegel
Consider this scenario. You have a new client and want to be paid up front, in one non-refundable lump sum for representing her. There will be no hourly billing or retainers. Can you represent the client under these terms and deposit the fee payment in your business account rather than in your IOLTA/trust account?
The answer is “yes.” But to do so, attorneys must comply with specific requirements under the Pennsylvania Rules of Professional Conduct. Fortunately for Pennsylvania lawyers, the question has been addressed at length in Joint Formal Opinion 2022-300, which was issued recently by the Philadelphia Bar Association Professional Guidance Committee and the Pennsylvania Bar Association Committee on Legal Ethics and Professional Responsibility.
In the Opinion, “Ethical Considerations in the Handling of Flat, Earned Upon Receipt and Non-Refundable Fees,” the Committees address whether, and under what conditions, attorneys may deposit non-refundable fees into their operating accounts. Specifically, the Committees concluded in the Opinion that, “if the fee is not only simply a ‘flat fee’ but a fee deemed ‘earned upon receipt,’ attorneys may deposit these fees into an operating account rather than a Rule 1.15 IOLTA account or other trust account. Any fee not ‘earned upon receipt’ is deemed an ‘advance’ fee which may only be deposited into the operating account if the client provides informed consent, confirmed in writing in accordance with Rule 1.15(i).”
The Opinion arose from inquiries to hotlines operated by both the Philadelphia and Pennsylvania Bar Committees. Members of the Associations may call these hotlines and receive ethical guidance. Attorney Robert Tintner oversees the Philadelphia Bar’s Ethics Hotline.
At times, when the Committees receive many questions about one topic, it will issue a Formal Opinion, which is intended to pro- vide global advice to the Bar rather than specific advice relevant to one member’s question. Because the Committees have received many questions about flat and non-refundable fees, they worked together and issued Joint Opinion 2022-300 to help lawyers draft their fee agreements and engagement letters properly under the Rules.
The Opinion addresses the various Rules that apply to these types of fees, focusing on Pa. Rules 1.5 and 1.15. Rule 1.5(b) requires that “[w]hen the lawyer has not regularly represented the client, the basis or rate of the fees shall be communicated to the client in writing before or within a reasonable time after commencing the representation.” The Rule does not require a formal engagement letter or fee agreement. Rather, it requires a “writing” that memorializes the agreement between the lawyer and the client on payment.
Central to the Committees’ analysis is the fact that Rule 1.5 contains no requirement that a fee agreement stipulate whether a fee is to be maintained in an IOLTA or other trust account or may be deposited into an operating account. However, Rule 1.15 states that when there is a “flat fee” arrangement, the lawyer should specifically state whether the fee is intended to be non-refundable and earned upon receipt.
Next, the Opinion explains that Rule 1.15(i) requires a lawyer to deposit fees “paid in advance” into an IOLTA account. A “non-refundable” and “earned upon receipt” fee should not be considered a fee “paid in advance,” however, and in that circumstance a lawyer is not required to deposit the fee into an IOLTA or other Trust account.
The Committee also cites Rule 1.4(b), which addresses communications between lawyers and clients, noting that the best practice is for lawyers to prepare formal letters that clients co-sign or otherwise formally acknowledge at the inception of the attorney-client relationship specifying the nature of the engagement and how a one-time non-refundable fee will be handled by the lawyers.
To assist lawyers further, and to assure that there is no misunderstanding, the Opinion recommends that lawyers should specifically state in their fee agreements that the lawyers are not depositing the fees into an IOLTA or other trust account. Although a client’s written confirmation is not required, having the client do so would reduce the likelihood of confusion.
The Opinion also offers an example of a disclosure that would meet these requirements:
“Lawyer and client agree that the fee in this matter (1) is a flat, non-refundable fee which is earned upon receipt and covers the following work (insert scope of the engagement), (2) will not be deposited into an attorney IOLTA or other Trust account to be billed against, and (3) will be deposited in the lawyer’s operating account.”
The Opinion cautions that the phrase “earned upon receipt” is still subject to the limitations of Rule of Professional Con- duct 1.5 and does not, by itself, justify retention of a fee where commensurate legal services have not been rendered. Finally, the Committees note that, when the engagement has concluded, lawyers must still determine whether to refund any portion of the fee because law- yers must always be certain that a fee is not illegal or clearly excessive.
Daniel J. Siegel, a member of the Editorial Board of The Philadelphia Lawyer, is the principal of the Law Offices of Daniel J. Siegel, LLC, and chair of the Pennsylvania Bar Association Legal Ethics Committee. He provides ethical and disciplinary guidance to other attorneys. He can be reached at dan@danieljsiegel.com.
