In Alabama, can a lawyer treat a flat fee as earned on receipt, or must the unearned flat fee go into the IOLTA trust account?

Plain-English summary

The Disciplinary Commission answered a single question: whether a flat fee received before the representation ends is earned on receipt or must be held in trust. The opinion concludes that in Alabama the flat fee is unearned until the services are performed and must be deposited in the lawyer's IOLTA account until earned.

The opinion grounds this in two earlier opinions, RO 1992-17 and RO 1993-21, which establish that a client may discharge a lawyer at any time and that a lawyer may not label a fee "non-refundable." Because all fees paid in advance are refundable to the extent not yet earned, treating a flat fee as earned on receipt would contradict that principle. The opinion recognizes one exception: a true availability-only retainer, paid solely to secure the lawyer's future availability and to restrict the lawyer from representing others, is earned on receipt, but it must be in writing and approved by the client in advance, and a lawyer may not mischaracterize an advance fee for future services as an availability-only retainer.

Applying Rule 1.15(a), the opinion holds that the unearned flat fee is held in trust but need not stay there in full until the matter ends; the lawyer may withdraw portions as they are earned. How much is earned at a given point is a question of reasonableness, with time spent as the first measure (citing Peebles v. Miley). The lawyer may withdraw earned amounts based on time at the normal hourly rate and should notify the client with a statement or invoice on each withdrawal. Alternatively, the lawyer and client may agree in writing on milestones (for example, $2,500 of a $5,000 criminal-defense fee after arraignment or the preliminary hearing) that entitle the lawyer to specified portions, preferably set out at the outset of the representation.

In practice

The opinion holds that, under the Alabama rule as it stood at the time of the opinion, a flat fee paid before the work is performed is unearned attorney fees under Rule 1.15(a) and must be held in the IOLTA account until earned. It permits the lawyer to draw down earned portions as work is done, measured by reasonableness (time spent at the lawyer's normal rate) or by written milestone agreements, with notice to the client on each withdrawal. The opinion treats availability-only retainers as the sole category earned on receipt, and only when they are genuine, written, and pre-approved by the client.

Common questions

Q: Can I call a flat fee "non-refundable" and keep it on receipt?

A: No. The opinion concludes, following RO 1993-21, that a lawyer may not characterize a fee as non-refundable; all fees paid in advance remain refundable to the extent not yet earned, so a flat fee for future services must be held in trust until earned.

Q: Where does an advance flat fee go?

A: Into the lawyer's IOLTA account. The opinion holds that under Rule 1.15(a) the unearned flat fee is client property held in trust until the lawyer earns it.

Q: When can I take the money out of trust?

A: As the fee is earned. The opinion concludes the lawyer may withdraw earned portions based on time spent at the normal hourly rate or on written milestones agreed with the client, and should notify the client of each withdrawal by statement or invoice.

Q: Is there any flat-type fee I can treat as earned immediately?

A: Only a true availability-only retainer, paid solely to secure the lawyer's future availability and restrict the lawyer from taking other clients. The opinion requires it to be in writing and approved by the client in advance, and warns that mislabeling an advance fee for services as an availability-only retainer is an ethics violation.

Background and rules framework

The opinion interprets Rule 1.15 (safekeeping property, Model Rule 1.15), which requires a lawyer to hold client property separate from the lawyer's own and bars depositing personal funds in trust except unearned fees held until earned and small amounts to cover account charges. The opinion reads an advance flat fee as unearned fees within Rule 1.15(a), so it must be held in trust. It relies on the refundability principle of the bar's earlier opinions RO 1992-17 and RO 1993-21 and the reasonableness standard for fees reflected in Peebles v. Miley.

Citations and references

Rules of Professional Conduct:

• Model Rule 1.15 / Ala. R. Prof. C. 1.15(a) (safekeeping property; unearned fees held in trust)

Cases:

• Peebles v. Miley, 439 So. 2d 137 (Ala. 1983), reasonableness of attorney fees; time as a measure
• Gaines, Gaines and Gaines v. Hare, Wynn, 554 So. 2d 445 (Ala. Civ. App. 1989), discharged lawyer compensated only for services rendered

Other opinions cited:

• Alabama RO 1992-17 and RO 1993-21: advance fees are refundable; "non-refundable" fee language is improper

See also

• ABA Ethics Op. 505: Fees Paid in Advance
• ABA Ethics Op. 475: Safeguarding Fees Subject to Division
• CA COPRAC Op. 2026-210: Flat Fees and the Trust Account

Source

• Landing page: https://www.alabar.org/office-of-general-counsel/formal-opinions/2008-03/
• Original PDF: https://www.alabar.org/assets/2019/02/2008-03-1.pdf

Original opinion text

ETHICS OPINION RO 2008-03

Lawyers' Trust Account Obligations With Regard to Retainers and Set Fees

QUESTION:

Should a flat fee that is received prior to the conclusion of representation be deposited into an attorney's IOLTA account or is it earned at the time of receipt?

ANSWER:

In Alabama, a flat fee that is received prior to the conclusion of the representation or prior to the performance of services must be deposited in the attorney's IOLTA account until the fee is actually earned.

DISCUSSION:

In RO 1992-17, the Disciplinary Commission previously stated that:

[T]he client has the absolute right to terminate the services of his or her lawyer, with or without cause, and to retain another lawyer of their choice. This right would be substantially limited if the client was required to pay the full amount of the agreed on fee without the services being performed. In Gaines, Gaines and Gaines v. Hare, Wynn, 554 So.2d 445 (Ala. Civ. App. 1989), the Alabama Court of Civil Appeals stated: "The rule in Alabama is that an attorney discharged without cause or otherwise prevented from full performance, is entitled to be reasonably compensated only for services rendered before such discharge. Mall v. Gunter, 157 Ala. 375, 47 So.2d 144 (1908)."

Likewise, in RO 1993-21, the Disciplinary Commission held that an attorney "may not characterize a fee as non-refundable or use other language in a fee agreement that suggests that any fee paid before services are rendered is not subject to refund or adjustment."

As in RO 1993-21, the Commission noted that "non-refundable fee language is objectionable because it may chill a client from exercising his or her right to discharge his or her lawyer and, thus, force the client to proceed with a lawyer that the client no longer has confidence in." As such, the overriding principle of RO 1992-17 and RO 1993-21 is that a non-refundable fee would impinge on the right of the client to change lawyers at any time. Allowing an attorney to keep a fee, regardless of whether any service has been performed for the client, would certainly restrict the ability of a client to terminate the attorney and seek new counsel. In reaching this conclusion, the Commission also made clear that the rule applied to all arrangements where fees are paid in advance of legal services being rendered. As such, all retainers and fees are refundable to the extent that they have not yet been earned. To conclude that a flat fee is earned at the time of receipt, where the contemplated services have yet to be performed or completed, would be in direct contradiction of this long standing principle.

The only exception to the rule that all fees are refundable would be a true availability-only retainer. An availability-only retainer is a payment that is made by a client solely to secure an attorney's future availability and would necessarily restrict the ability of the attorney to represent other clients. A true availability-only retainer is earned at the time of receipt, must be in writing, and must be approved by the client in advance of the payment. To be clear, an attorney may not characterize a flat fee or other type fee that is being paid for future services as an availability-only retainer fee. Any attempt by an attorney to circumvent the rule that all retainers and fees are refundable by mischaracterizing a fee as an availability-only retainer would be an ethics violation.

Because a flat fee paid in advance of services is subject to being refunded, Rule 1.15(a), Ala. R. Prof. C., requires that the flat fee be deposited into an attorney's IOLTA account. Rule 1.15, Ala. R. Prof. C., provides in pertinent part, as follows:

RULE 1.15 SAFEKEEPING PROPERTY. (a) A lawyer shall hold the property of clients or third persons that is in the lawyer's possession in connection with a representation separate from the lawyer's own property. Funds shall be kept in a separate account maintained in the state where the lawyer's office is situated, or elsewhere with the consent of the client or third person. No personal funds of a lawyer shall ever be deposited in such a trust account, except (1) unearned attorney fees that are being held until earned, and (2) funds sufficient to cover maintenance fees, such as service charges, on the account. Interest, if any, on funds, less fees charged to the account, other than overdraft and returned item charges, shall belong to the client or third person, except as provided in Rule 1.15(g), and the lawyer shall have no right or claim to the interest. Other property shall be identified as such and appropriately safeguarded. Complete records of such account funds and other property shall be kept by the lawyer and shall be preserved for six (6) years after termination of the representation.

Because flat fees are not earned at the time of receipt, they are unearned attorney fees that must be held in the attorney's IOLTA account until earned in accordance with Rule 1.15.

However, the entire flat fee is not required to be held in trust until the conclusion of the representation. Rather, an attorney may withdraw portions of the fee from the trust account as the fee is earned. Exactly when and what amount of the fee is earned during the representation is a question of reasonableness. It is generally recognized that the first yardstick used in assessing the reasonableness of an attorney fee is the time consumed. Peebles v. Miley, 439 So.2d 137 (Ala. 1983). For example, an attorney may withdraw portions of the flat fee that have been earned based on the time the attorney has spent on the matter and his normal hourly rate. In doing so, the attorney should notify the client when portions of the fee are withdrawn from the trust account by sending a statement or invoice to the client stating the date and the amount of the withdrawal.

An attorney may also enter into a written agreement with the client setting forth milestones in the representation that entitle the attorney to receive a specified portion of the fee. The fee agreement may explicitly state that an attorney is entitled to specific portions of the fee after certain stages in the representation have been completed. For example, assume an attorney is representing a client in a criminal matter for a flat fee of $5,000.00. The fee agreement may provide that the attorney is entitled to $2,500.00 of the fee after arraignment or after the preliminary hearing has been held. Any such agreement between the attorney and the client should be set out, preferably in writing, at the outset of the representation.

JWM/s 12-5-08