ETHICS OPINION 690-1992 RETAINER FEES; ADVANCE PAYMENT OF FEES; PAYMENT OF FEES BY CREDIT CARD; CLIENT TRUST ACCOUNTS.

NEW YORK COUNTY LAWYERS’ ASSOCIATION

Committee on Professional Ethics

 

QUESTION NO. 690

TOPIC: RETAINER FEES; ADVANCE PAYMENT OF FEES; PAYMENT OF FEES BY CREDIT CARD; CLIENT TRUST ACCOUNTS.

 

DIGEST: FEES PAID TO LAWYER BY CREDIT CARD AS RETAINER OR IN ADVANCE OF SERVICES ARE NOT CLIENT FUNDS AND NEED NOT BE DEPOSITED IN ESCROW ACCOUNT UNLESS LAWYER AND CLIENT AGREE THAT RETAINER IS TO BE HELD TO SECURE PAYMENT OF FEES FOR FUTURE SERVICES.

 

CODE: DR 4-101, 9-102(A); EC 2-23, 4-1, 4-2, 4-3, 9-5.

 

QUESTIONS:

 

A Law firm has decided to accept credit cards as a form of payment for initial retainer fees and for monthly payment of legal fees thereafter. The credit card company automatically deposits the fees charged (as authorized by the clients) into a commercial checking account which it has established at Bank B for the law firm.

 

The law firm maintains its regular business checking account and a separate IOLA account at Bank A.

 

The following questions are posed:

 

(l) May the credit card company deposit both the initial retainer fees and the legal fees earned thereafter into the same checking account at Bank B?

 

  1. May the retainer fees (before they are earned) be transferred from the checking account at Bank B to the IOLA account at Bank A?

 

  1. May the checking account at Bank B be used as a de facto escrow account by removing only those funds that have been earned each month?

 

OPINION:

 

  1. Commingling of Retainer Fee

 

DR 9-102(A) of the Lawyer’s Code of Professional Responsibility (the “Code”) prohibits a lawyer from commingling funds belonging to a client with other funds:

 

[a] lawyer who is in possession of funds belonging to another person incident to the lawyer’s practice of law, shall maintain in a bank or trust company . . . a special account or accounts, separate from any business or personal accounts of the lawyer or lawyer’s firm . . . into which special account or accounts all funds held in escrow or otherwise entrusted to the lawyer or firm shall be deposited.

 

See EC 9-5.

 

The question whether DR 9-102(A) requires initial retainer fees to be held in a special account, separate and apart from other funds, turns on whether retainer fees become assets of the lawyer upon payment or upon completion of the representation.

 

Three types of retainers are recognized at common law. The first type is the “classic” retainer. This type of retainer is given to a lawyer to secure the lawyer’s availability for a given period of time. In re McDonald Bros. Const., Inc., 114 B.R. 989, 997-98 (Bankr. N.D. Ill. 1990); In re James Contracting Group, Inc., 120 B.R. 868, 871 (Bankr N.D. Ohio 1990); In re Montgomery Drilling Co., 121 B.R. 32, 37-38 (Bankr. E.D. Calif. 1990]; Jacobson v. Sassower, 113 Misc. 2d 279, 283, 452 N.Y.S.2d 981, 984 (Civ. Ct. 1982), aff’d, 107 A.D.2d 603, 483 N.Y.S.2d 711 (1985); N.Y. State 599 (1989); N.Y. State 570 n.1 (1985). This type of retainer is entirely earned by the lawyer upon payment, with the client retaining no interest in the funds. Id. Thus, if the retainer to be collected is a classic retainer, it may properly be deposited by the credit card company, together with other funds belonging to the lawyer, into the checking account at Bank B.

 

The second type of retainer is an “advance payment” retainer. In this type of retainer arrangement, the client pays in advance for certain services to be rendered by the lawyer. McDonald, 114 B.R. at 1000-01; James, 120 B.R. at 871; Montgomery Drilling, 121 B.R. at 38; N.Y. State 599; N.Y. State 570; c.f., Jacobson, 113 Misc. 2d at 282, 452 N.Y.S.2d at 983 (proscribing “nonrefundable” advance payment retainers). As with the classic retainer, ownership passes to the lawyer upon payment. Id. Thus, if the retainer to be collected is an advance payment retainer, it may properly be deposited into the checking account at Bank B.

 

The third type of retainer is a “security” retainer, which is held by a lawyer to secure payment of fees for future services. McDonald, 114 B.R. at 999; James, 120 B.R. at 871; Montgomery Drilling, 121 B.R. at 38. The client retains an interest in the retainer until the funds are applied to charges for services actually rendered. Id. Thus, if the retainer to be collected is a security retainer, it may not be deposited into the checking account at Bank B, but rather must be held in a separate, client trust account.

 

This Committee cannot opine as to which type of retainer has been employed in a particular case. Such a determination rests on various factors, including the nature of the attorney-client relationship, any past retainer arrangements between the lawyer and his or her client, and any explicit or tacit agreements between the lawyer and his or her client in respect of legal fees.

 

It should be noted that, in N.Y. County 601 (1972), this Committee opined that a proposed credit card arrangement for financing legal fees was improper. We stated, however, that “[t]his is not to say that every plan for financing of attorneys’ fees necessarily would violate the provisions of the Code”. It is the responsibility of the lawyer to ensure compliance with the applicable Code provisions. N.Y. County 601.

 

The acceptance of credit cards as a form of payment of legal fees is permissible so long as various safeguards are built into the credit card arrangement between the lawyer and the card issuer. Such safeguards include, without limitation, the following:

 

  1. Arbitration before a Bar Committee must be permitted in order to protect the client against an improper fee. N.Y. State 117 (1969); see EC 2-23 (“a lawyer should ‘attempt to resolve amicably’ any differences over fees”).

 

  1. The client must retain the right to take his or her case to court if the client chooses not to arbitrate. N.Y. State 117.

 

  1. The lawyer must agree to be bound to make good the award if a client is successful in court. Id.

 

  1. The card issuer and the lawyer must agree that the client may raise against the card issuer or a subsequent holder in an action to collect an obligation all defenses which the client might have had against the lawyer. Id.

 

  1. The lawyer must reserve the right to recapture the credit card obligation in the event that the client fails to pay the obligation before the card issuer brings suit thereon, thereby entitling the lawyer to determine whether or not to proceed to sue. Id.; N.Y. County 602 (1972); see EC 2-23 (“a lawyer should be zealous in efforts to avoid controversies over fees with clients”).

 

  1. Neither the lawyer nor the client may be compelled to divulge the nature of the legal services rendered. ABA 338 (1974); N.Y. County 602; N.Y. State 117; see DR 4-101; EC 4-1, 4-2 and 4-3.

 

  1. If interest on unpaid balances will be charged, the client must be expressly advised prior to the execution of any credit arrangement the rate of interest that will be charged and after what period of time it will be charged if the account remains unpaid, N.Y. State 399 (1975).

 

See also N.Y. State 362 (1974).

 

  1. Transfer of Retainer to IOLA Account

 

As explained above, classic and advance payment retainers are considered to be assets of the lawyer. Thus, absent an agreement between the lawyer and the client to the contrary, the transfer of the assets into an IOLA account would constitute improper commingling under DR 9-102(A).

 

On the other hand, since retainers received as security for the payment of legal fees are considered to be assets of the client, such retainers must be transferred into an IOLA, or client trust, account. See DR 9-102(A). In addition, a lawyer in possession of a security retainer must comply with all accounting and other requirements of DR 9-102. See N.Y. State 570.

 

  1. “De Facto” Escrow Account

 

With the exception of security retainers, which must be held in a client trust account, retainer fees may be held in the checking account at Bank B. In addition, the lawyer may treat this account as a de facto escrow account by removing only those funds that have been earned each month. However, since classic and advanced payment retainers are considered to be the lawyer’s assets, the lawyer does not have an affirmative duty under the Code to hold such fees in an escrow or other type of special account.

 

CONCLUSION

 

A lawyer may accept payment of legal fees by credit card. Subject to the caveats set forth above, the credit card company may deposit both the initial retainer fees and the legal fees earned thereafter into the same checking account established by the card issuer for the lawyer if the retainers are classic and advance payment retainers, but not if they are security retainers. Retainer fees may not be transferred from the checking account established by the card issuer to the lawyer’s IOLA account if the fees are classic and advance retainers, but may be so transferred if they are security retainers. Finally, a checking account established by the card issuer may be used as a de facto escrow account by removing only those funds that have been earned each month, except in the case of security retainers, which must be held in a separate, client trust account.

 

January 15 , 1992