Rules 1.5, 1.5.1 and 1.15 – Changes to How Attorneys Hold Funds and Charge Fees

In the newest version of the California Rules of Professional Conduct (“Rules”), the Commission has made several changes relating to how attorneys hold funds and charge (and divide) fees.

Rules 1.5 (“Fees for Legal Services”) and 1.15 (“Safekeeping of Funds”) are the two rules that present the most significant changes concerning how attorneys charge their clients and handle client’s and “non-client” money. Together, these two new rules provide three major changes from former Rules 4-100 and 4-200:

(1) The new rules set forth guidelines for charging flat fees, including what constitutes a flat fee, how you must charge a flat fee and where you must deposit those funds;

(2) The new rules expressly cover duties relating to funds of non-clients held pursuant to an agreement/contract, statute or other legal duty (e.g. lienholders); and

(3) The new rules now require that all funds, including advanced fees and deposits must be placed into client trust accounts. They provide for very limited exceptions to this, including an exception for flat fees paid in advance with client consent.

Additionally, Rule 1.5.1 (“Fee Divisions Among Lawyers”) sets forth new requirements on the timing and disclosure requirements when sharing fees with another lawyer.  Most importantly, the new rules require attorneys to promptly disclose in writing any agreement to divide fees immediately (or as soon as reasonably practical) and to get their client’s written consent to that agreement.

These rules as highlighted below remind us that there are limitations in the amount and ways attorneys can charge their clients and failure to adhere to these limitations may result in a civil action or State Bar discipline.

Rule 1.5-Fees for Legal Services

http://www.calbar.ca.gov/Portals/0/documents/rules/Rule_1.5-Exec_Summary-Redline.pdf

What didn’t change?

In proposing new Rule 1.5 (which replaced Rule 4-200) the Commission considered and rejected the ABA Model Rule 1.5 “unreasonable” standard for a prohibited fee and instead affirmatively decided to keep California’s 83 year old “unconscionable” fee standard for a prohibited fee, thus allowing the continuation of all previous case law and interpretation of this standard.^[1]

In 1935 the California Supreme Court in Herrscher v. State Bar (1935) 4 Cal. 2d 399, 402-03 first announced the public policy rationale against charging an “unconscionable” fee. They reasoned that discipline should be imposed on the attorney where the “elements of fraud or overreaching on the attorney’s part or failure on the attorney’s part to disclose the true facts so that the fee charged, under the circumstances constituted a practical appropriation of the client’s funds under the guise of retaining them as fees.” This language from Herrscher has been incorporated into Rule 1.5, which now sets forth the 13 factors which must be analyzed in determining whether an attorney’s fee is “unconscionable.”^[2]

What did change?

Rule 1.5 added three new paragraphs. First, paragraph (c) prohibits charging a contingent fee in certain family law matters and in criminal cases. Second, paragraph (d) prohibits charging a client a non-refundable fee except in cases where it is a true retainer fee and is paid to the attorney solely to ensure the attorney’s availability for a specified period of time.  In those cases, the attorney must disclose- and the client must agree in writing- that the client will not be entitled to any refund of all or part of the amount charged. The concept of a true retainer dates back to a time when the profession had fewer attorneys to serve clients and it was necessary to ensure that the attorney was “available” when needed and not representing an opposing party. In today’s practice many attorneys still try to describe their fee as “non-refundable” and will violate this rule if their fee agreement, billing and deposit of the fee show it was not paid for “availability” for service but was instead tied in some way to compensation for legal services performed or to be performed. Finally, paragraph (e) was added to explicitly permit attorneys to charge a flat fee, defined as a “fixed amount,” which is complete payment for performance of services regardless of the work ultimately performed.  The new requirements for charging a client a “flat fee” are now outlined in Rule 1.15.

Rule 1.15-Safekeeping Funds and Property of Clients and Other Persons

http://www.calbar.ca.gov/Portals/0/documents/rules/Rule_1.15-Exec_Summary-Redline.pdf

What didn’t change?

The Rule retains all of the record keeping requirements of Rule 4-100 that are part of an attorney’s obligation to account for all monies deposited into trust. The State Bar Client Trust Accounting Handbook has recently been updated and should be reviewed in light of these significant changes to the Rules of Professional Conduct.  The most recent version of this document has been published electronically and can be found at: http://www.calbar.ca.gov/Portals/0/documents/ethics/Publications/Portals0documentsethicsPublicationsCTA-Handbook.pdf

What did change?

Flat Fees and Advance Deposits Must Be Deposited into Trust Accounts

This Rule was changed to accommodate the practice of a large number of attorneys, including attorneys who practice criminal law and who prepare estate planning or transactional documents, who charge their client flat fees.

Rule 1.15 replaces Rule 4-100 and makes explicit in paragraphs (a) and (b) that advanced unearned fees must be placed in a client trust account until they are earned. The only way an attorney may deposit a flat fee into an operating account is if the attorney discloses to the client in writing 1) the client’s right to have the flat fee deposited into trust until the fee is earned, and 2) that the client is entitled to the unearned portion of the fee if the representation is terminated or the services are not completed. In addition the rule specifies that if the flat fee is more than $1,000, the client must waive in writing their right to have the fees deposited into trust.  Therefore, you should either be prepared to deposit all funds into a trust account, or revise your fee agreements to include the new requirements, disclosures and written consent from your clients.  Additionally, you may want to specify exactly how and when advance fees are considered “earned” in your fee agreements.

Attorneys Must Promptly Distribute Funds Held for Non-Clients

The other major change to the rule involves how attorneys hold the property of “other persons” typically called “non-clients.” These non-clients may include lienholders found in personal injury cases and in transactions where the attorney agrees to serve as an escrow holder. Rule 1.15(d) now specifies that the attorney has a duty to promptly distribute funds on request of the non-client who also has an interest in the funds.

Rule 1.5.1 Fee Divisions Among Lawyers

http://www.calbar.ca.gov/Portals/0/documents/rules/Rule_1.5.1-Exec_Summary-Redline.pdf

Finally, the Commission made one other big change with regard to fees.  In new Rule 1.5.1, the Commission addressed the issue of dividing fees among lawyers.  The new rule now requires the following:

1) The lawyers must enter into a written agreement to divide the fees;

2) Client consent must be obtained in writing at the time the lawyers enter into that agreement or as soon as reasonably practical thereafter. Previously, the rule required client consent to the fee splitting, but allowed that consent to be obtained at any time prior to the actual splitting of the fees; and

3) The lawyers must make the following disclosures in writing to the client prior to obtaining their consent:

•  The fact of the division of fees;
• The identity of the lawyers dividing fees; and
• The terms of the division of fees.

Finally, the total amount of fees being charged may not be increased as a result of the agreement to divide fees.

^[1]California is one of five states that have decided not to adopt this Model Rule standard. Unlike many states, California has a unique Mandatory Fee Arbitration program which is codified in Business and Professions Code Section 6200 et. seq. that handles disputes over the “reasonableness” of fees and costs an attorney may charge a client.

^[2] In addition to the language from Herrscher, which can be seen in paragraphs (b)(1) and (b)(2) of Rule 1.5, the other 11 factors from  Rule 4-200 have now been renumbered (b)(3) through (13).