Does a lawyer have to deposit a flat or fixed fee in the client trust account until it is earned?

Plain-English summary

The Committee addressed how a lawyer should treat a flat or fixed fee (also called a prepaid or advance fee retainer) during a representation. It concludes that all such fees should be placed in a client trust account until earned, unless, after consultation, the lawyer and client agree in writing to a list of conditions: that the funds become the lawyer's property when paid, that they will not be held in trust, that both acknowledge the special purpose of the arrangement, that the client has been advised of the potential consequences, and that the fee becomes earned for refund purposes on a specified, reasonable basis that will not produce an unreasonably high fee for the work actually done.

The opinion explains the competing dangers. If flat fees are the lawyer's property on payment, the funds could be dissipated or lost to the lawyer's creditors, and a client who later discharges the lawyer or whose lawyer becomes incapacitated may find a refund right worth little. Keeping the funds in trust protects against those risks. The opinion acknowledges the Alaska rules give no direct answer: Rule 1.15(a) requires holding client funds separately but does not define which funds are the client's, and Rule 1.16(d) requires returning unearned advance payments without saying they must be held in trust.

Reading Rules 1.15(a), 1.16(d), and 1.5 (reasonableness) together, the opinion finds their policy is to protect the client's economic interests, which trust accounts achieve. But it recognizes that in some situations, such as funding resistance to creditors or government forfeiture, the client's interest is best served by conveying ownership of the funds to the lawyer at payment, and that a flat-trust rule could impair the ability to hire counsel. Balancing these, the Committee adopts the default-plus-written-exception rule, requiring that any non-trust flat-fee arrangement be in writing after thorough consultation covering the reasons for the arrangement, its consequences, and the client's options.

In practice

Under this opinion, as the Alaska rules stood at the time, a lawyer should deposit flat or fixed fees in the client trust account and draw them down as earned, unless the lawyer and client have agreed in writing, after consultation, to treat the funds as the lawyer's property on payment. The opinion conditions any such written exception on five elements: the funds become the lawyer's on payment, they are not held in trust, both acknowledge the special purpose, the client is advised of the consequences, and the fee becomes earned for refund purposes on a specified, reasonable basis that avoids an unreasonably high fee for the work actually performed. The consultation, the opinion says, should cover the reasons for the arrangement, its potential consequences, and the client's options.

Common questions

Q: Do flat fees have to go in the trust account?

A: Generally yes. The opinion concludes flat or fixed fees should be placed in the client trust account until earned, unless a qualifying written agreement provides otherwise.

Q: When can a lawyer keep a flat fee out of trust?

A: Only by written agreement after consultation that satisfies the opinion's five conditions, including that the funds become the lawyer's on payment and that the fee becomes earned on a specified, reasonable, refund-protective basis.

Q: Why does it matter where the flat fee is held?

A: The opinion explains that if the funds are the lawyer's on payment they could be dissipated or lost to the lawyer's creditors, leaving a discharged or unable-to-be-served client with a refund right of little value.

Q: When might a non-trust flat fee be in the client's interest?

A: The opinion gives examples like funding legal resistance to creditors or government forfeiture, where conveying ownership to the lawyer at payment can serve the client and a strict trust rule could impair hiring counsel.

Background and rules framework

The opinion interprets Alaska Rules of Professional Conduct 1.15(a) (safekeeping client funds, analog of Model Rule 1.15), 1.16(d) (returning unearned advance fees on termination), and 1.5 / 1.5(a) (reasonableness of fees), read together to protect the client's economic interests. It distinguishes flat or advance fees from security retainers and builds on the Committee's Opinion 87-1.

Citations and references

Rules of Professional Conduct:

• Alaska RPC 1.15(a) (safekeeping client funds)
• Alaska RPC 1.16(d) (returning unearned advance fees)
• Alaska RPC 1.5, 1.5(a), 1.5(a)(2) (reasonableness of fees)

Cases:

• Dowling v. Chicago Options Assocs., Inc., 875 N.E.2d 1012 (Ill. 2007)
• Compton v. Kittleson, 171 P.3d 172 (Alaska 2007)

Other opinions cited:

• Alaska Ethics Opinion 87-1 (non-refundable retainers)

See also

• ABA Formal Op. 505: Fees Paid in Advance
• AL Bar Op. 2008-03: Trust Account Obligations for Retainers
• AK Bar Ethics Op. 2025-2: Safeguarding Trust Funds From Fraud

Source

• Landing page: https://alaskabar.org/ethics-discipline/ethics-opinions/adopted-ethics-opinions-chronological/
• Original PDF: https://alaskabar.org/wp-content/uploads/2012-2-corr.pdf

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

ALASKA BAR ASSOCIATION
ETHICS OPINION NO. 2012-2
Deposit of Advanced Fee Retainers in Client Trust Account

Question Presented
How Should a Flat or Fixed Fee be Treated by a Lawyer during the
Representation of a Client?
Conclusion
All “flat fees”, “fixed fees” or similar fee arrangements, however
denominated, should be placed into a client trust account until earned, unless
after consultation, the lawyer and client agree in writing: (1) that the funds will
become the property of the lawyer when paid, (2) that they will not be held in a
client trust account; (3) that the lawyer and client acknowledge the special
purpose of the retainer arrangement; (4) that the client has been advised of the
potential consequences of the retainer agreement; and (5) that the fees become
earned for purposes of a potential refund on a specified and reasonable basis
that will not result in an unreasonably high fee for legal services actually
rendered.
Applicable Rules and Analysis
Alaska Bar Association Ethics Opinion 87-1 approved the use of “nonrefundable fee deposit or retainer agreements” so long as the “nature of the
retainer as non-refundable is fully and clearly explained to the client, orally
and in the written fee agreement, and if the fee is not excessive….” Fee
agreements of this type, also denominated “prepaid fees” or “advance fee
retainers” typically provide that the client pays the attorney in advance for
some or all of the legal services which the attorney is expected to provide on
behalf of the client.1 These arrangements are different from “security retainers”

1

In this opinion, the term “flat fees”, shall refer to all “fixed fee”, “prepaid fee“ and
“advance fee retainer” arrangements.

-1-

in which the attorney holds client funds solely to secure the ability of the client
to pay for the attorney’s expected services.2
Alaska Bar Association Ethics Opinion 2009-1 adopted the conclusion of
Ethics Opinion 87-1 that flat fees and similar arrangements are permissible,
but further concluded that a lawyer may not characterize them as “nonrefundable, because a lawyer must refund the unearned portion of such a
retainer if the representation is terminated prematurely. See, ARPC 1.16(d)
(“Upon termination of the representation, a lawyer shall take steps to the
extent reasonably practicable to protect a client’s interest, such as … refunding
any advance payment of fee or expense that has not been earned or incurred.”)
The issue before the Committee is how funds paid as a flat fee are to be treated
by the lawyer during the representation.
In the case of a security retainer, without question the funds must be
deposited in the client trust account pursuant to ARPC 1.15(a). 3 It is likewise
clear that classic retainers, in which the client has agreed to pay to secure the
lawyer’s availability over a specified period of time, whether or not legal services
are actually rendered, may not be deposited in the trust account because the
funds are the property of the lawyer when paid and may not be commingled
with the client’s funds. Dowling, 875 N.E. 2d at 1018; ARPC 1.15(b).
The answer is not so obvious in the case of a flat fee. Whether the flat
fee is treated as client funds or the property of the lawyer upon payment could
have substantial consequences for the client. If the funds remain the client’s
property – and are thus required by ARPC 1.15(a) to be segregated in a trust
account – they will be subject to claims of the client’s creditors. A client facing
determined creditors may need to ensure that she has the wherewithal to resist
the creditors’ claims by funding her legal defense in advance. Once the defense
funds become the lawyer’s property they are often beyond the reach of creditors

2

For a general discussion of the types of retainers, see, In re Montgomery Drilling
Co., 121 Bankr. 32, 37-38 (Bankr. E. Dist. Cal. 1990); Dowling v. Chicago Options
Associates, Inc., 875 NE2d 1012, 1018 (Ill. 2007).

3

ARPC 1.15(a) provides: “A lawyer shall hold property of clients or third persons
that is in a 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 the third person. Other property shall be identified as the client's or
the third person's and appropriately safeguarded. Complete records of these
account funds and other property shall be kept by the lawyer and shall be
preserved for a period of five years after termination of the representation..”

-2-

and the lawyer is under an obligation to provide the legal services required to
resist the creditor’s claims.
The client faces a different danger if the funds become the property of the
lawyer upon payment: the funds could be dissipated by the lawyer or lost to
the lawyer’s creditors. If the client wishes to discharge the lawyer or the lawyer
becomes incapacitated, the client’s right to a refund may be of little value if the
funds are no longer available. In such a case, the client will have been best
served by an agreement in which flat fees are denominated to be the property of
the client, and thus, kept in a client trust account.
The ARPC provides no direct answer to the question of whether and for
how long flat fees must be kept in a client trust account. ARPC 1.15(a)
requires a lawyer to hold a client’s funds in a separate account but does
nothing to assist in identifying what are client funds. ARPC 1.16(d) requires a
lawyer to return the unearned portion of an advanced payment of fees upon
termination of the representation, but it neither characterizes the advanced
payment as property of the client nor addresses whether it should be kept in a
client trust account.
Nevertheless, the unmistakable policy behind ARPC 1.15(a) and 1.16(d),
together with ARPC 1.5 (all fees must be reasonable), is to ensure that the
economic interests of the client are protected. Client trust accounts achieve
this by keeping the client’s funds from the reach of the lawyer’s creditors and
from dissipation of unearned fees by the lawyer. The rule requiring return of
unearned advanced payment fees protects the client’s economic interest in
being charged only a reasonable fee, and it also preserves the client’s control of
settlement and right to end the attorney-client relationship. 4
Nonetheless, in certain circumstances the client’s interests would best be
served by being able to prepay for legal services in a manner that allows the
client to convey ownership of some or all the funds to the lawyer at the time of
the payment, most commonly when the client is funding legal resistance to
creditors or government entities seeking forfeiture. In those circumstances a
rule requiring prepaid fees to be placed in a client trust account would be
contrary to the client’s economic interest. Such a rule may also impinge on the
client’s ability to hire legal counsel and on the willingness of lawyers to
undertake such representation. See, Dowling at 1017, 1022. For example, a
lawyer taking on a client’s case may be required to forego other representations
4

See, Compton v. Kittleson, 171 P.3d 172, 176-177 (Alaska 2007)(fee agreement
construed to ensure client retains control of settlement in attorney-client
relationship).

-3-

because of potential conflicts or time constraints, so it may be reasonable for a
lawyer to require some or all of an advance payment to be denominated as
earned (and thus the property of the lawyer on payment) to account for those
eventualities. See, ARPC 1.5(a)(2).
The ARPC’s lack of specific direction on the question of how flat fees are
to be handled indicates some flexibility in allowing for a client’s specific needs,
so long as the basic policy of client protection is maintained. However,
representation in those matters in which it is in the client’s interest for flat fees
to immediately become the property of the lawyer is only one subset of the
many types of cases in which flat fee arrangements are proposed, and the
dangers to the client’s interests inherent in such arrangements must be
minimized consistent with the client protection policies of the ARPC. To ensure
the client’s interests are protected, flat fee arrangements should be in writing
and a client should not be presented with a flat fee arrangement without
thorough consultation, which should include the specific reasons for the
arrangement, the potential consequences of the arrangement and the client’s
options.
The Committee concludes that these considerations can be
accommodated by requiring that all flat fees be placed into a client trust
account to be drawn down when earned, unless after consultation, the lawyer
and client agree in writing: (1) that some or all the funds will become the
property of the lawyer when paid, (2) that those funds will not be held in a
client trust account; (3) that the lawyer and client acknowledge the special
purpose of the retainer arrangement; (4) that the client has been advised of the
potential consequences of the retainer agreement; and (5) that fees become
earned for purposes of a potential refund on some specified basis that will not
result in an unreasonably high fee for legal services actually rendered.
Approved by the Alaska Bar Association Ethics Committee on April 5,
2012.
Adopted by the Board of Governors on April 30, 2012.

-4-