By Anne Rudolph
Rule 1.15, titled “Safekeeping Funds and Property of Clients and Other Persons” directs in paragraph (a) that all funds received or held by a lawyer or law firm for the benefit of a client … including advances for fees, costs and expenses, shall be deposited in a client trust account.
Rule 1.15 permits an attorney to charge a flat fee for legal services. Rule 1.5(e) provides that “A flat fee is a fixed amount that constitutes complete payment for the performance of described services regardless of the amount of work ultimately involved, and which may be paid in whole or in part in advance of the lawyer providing those services.”
Under rule 1.15(b), “… a flat fee paid in advance for legal services may be deposited in a lawyer’s or law firm’s operating account, provided:
- the lawyer or law firm discloses to the client in writing (i) that the client has a right under [1.15(a)] to require that the flat fee be deposited in an identified trust account until the fee is earned, and (ii) that the client is entitled to a refund of any amount of the fee that has not been earned in the event the representation is terminated or the services for which the fee has been paid are not completed…” (Asterisks omitted.)
Rule 1.15 does not contain specific guidance for determining when a flat fee is “earned,” i.e. when the funds no longer belong to the client and become the property of the attorney. The Court of Appeal has now provided that guidance in Dickson v. Higgs Fletcher & Mack, LLP (July 16, 2024, D081851) _______Cal.App.5th _____.
The Dickson case involved a dispute between a law firm and a creditor of the firm’s client who had served a notice of levy on the firm covering all client’s funds being held by the firm.
The client had signed a flat fee agreement a couple of weeks before the notice of levy was served wherein the client agreed to pay a flat fee for future legal services which provided that the fee was “earned on receipt.” The firm had already been representing the client in related litigation and was holding client’s funds in its client trust account.
Based upon the terms of the flat fee agreement, the firm asserted that though the funds were held in a client trust account, the funds actually belonged to the firm and were not subject to the levy. The firm asserted that upon the signing of the flat fee agreement, the funds became property of the firm, and it had planned to transfer the funds into its operating account at the end of the month in accordance with its normal business practices.
Rule 1.15(c) describes limited circumstances in which an attorney’s own funds may be held in a client trust account:
“(c) Funds belonging to the lawyer or law firm shall not be deposited or otherwise commingled with funds held in in a trust account except:
- funds reasonably sufficient to pay bank charges; and
- funds belonging in part to a client or other person and in part presently or potentially to the lawyer or law firm, in which case the portion belonging to the lawyer or law firm must be withdrawn at the earliest reasonable time after the lawyer or law firm’s interest in that portion becomes fixed. However, if a client or other person disputes the lawyer or law firm’s right to receive a portion of trust funds, the disputed portion shall not be withdrawn until the dispute is finally resolved.” (Asterisks omitted.)
The creditor argued that the location of the funds in the client trust account meant ipso facto that the funds still belonged to the firm’s client. The court did not agree that the mere location of the funds was dispositive of ownership, and referenced rule 1.15(c).
The court focused instead on whether the flat fee had been earned by the firm at the time the notice of levy was served.
The court noted that rule 1.15(b)(1) provides that a client is entitled to a refund of any amount of a flat fee that has not been earned in the event the representation is terminated or the services are not completed.
The court also noted that a flat fee agreement may not denominate the fee as “earned on receipt” or “non-refundable” unless it is a “true retainer,” i.e., a fee paid to ensure a lawyer’s availability for a certain period of time or for a specified matter, and the client agrees to that in writing. Fees that are compensation for legal services performed or to be performed are not a “true retainer.”
The court found there was no evidence that the firm had performed any legal services for the client prior to being served with the notice of levy, therefore, the flat fee being held by the firm was not earned and still belonged to the client. The court affirmed the trial court order requiring the firm to turn over the funds to the client’s creditor.
Dickson has clarified that a flat fee paid in advance by a client for future legal services does not belong to the attorney until the fee is earned through the actual provision of legal services, regardless of where the funds are held – in a client trust account or an operating account.