Can a New York lawyer take an advance payment retainer into the firm's own account and keep the interest, and require it to cover final fees?

Plain-English summary

Revisiting N.Y. State 570 (1985) after substantial amendments to DR 9-102, the committee was asked whether a lawyer may accept an advance payment retainer, place it in the lawyer's own account, and keep the interest, and whether the lawyer may require such a retainer to cover final fees while billing interim fees as the work is done. An advance payment retainer is money the client provides to cover fees expected to be earned, with the lawyer agreeing to return any portion not earned; it differs from a general retainer (paid for availability and earned on receipt).

The committee reaffirms N.Y. State 570: advance fee payments are not necessarily client funds and need not go into a client trust account, so the lawyer may retain interest earned on them. If the parties agree to treat the advance as the lawyer's own, the lawyer may not deposit it in a client trust account, because that would be impermissible commingling; alternatively, the parties may agree to treat the advance as client funds in a trust account, in which case interest earned belongs to the client. The 1985 amendments to DR 9-102 do not change this reasoning: DR 2-110(A)(3) requires refund of any unearned advance on withdrawal but does not require the advance to be held in trust, and DR 2-110(A) still separately classifies fee advances and client property.

The committee adds conditions. The agreement, like any fee agreement, must be fair, reasonable, and fully understood by the client, and must comply with the rest of the Code. The lawyer must keep complete records of the retainer and account to the client; although the advance is not client property, the client retains an interest in the unearned portion, which must be promptly returned at the end of the representation. A nonrefundable advance payment retainer is improper. These arrangements should be confirmed in writing in the engagement letter where one is required. The committee also concludes a lawyer may require an advance retainer for final fees, with interim fees billed as performed, subject to the same standards.

In practice

The opinion holds, under the former Code as it stood at the time, that an advance payment retainer is not necessarily client property, so it may be held in the lawyer's own account (and must not be commingled in a trust account if treated as the lawyer's), with interest going to the lawyer. The committee conditions this on the agreement being fair and understood, the lawyer keeping records and accounting to the client, the unearned portion being promptly refundable (no nonrefundable advance retainers), and written confirmation in the engagement letter where required.

Common questions

Q: Can a lawyer keep an advance payment retainer in the firm's own account and retain the interest?

A: Yes. The committee reaffirms that advance fee payments are not necessarily client funds, so the lawyer may hold them in the lawyer's own account and keep interest earned, provided any unearned portion is returned to the client.

Q: Can an advance payment retainer be nonrefundable?

A: No. The committee states it would be inappropriate to negotiate a nonrefundable advance payment retainer; the client retains an interest in the unearned portion, which must be promptly refunded at the conclusion of the representation.

Q: Can a lawyer require an advance retainer to cover final fees?

A: Yes. The committee concludes a lawyer may require an advance payment retainer for final fees that accrue at the end of the relationship, with interim fees billed as performed, subject to the same fairness, recordkeeping, and refund standards.

Background and rules framework

The opinion interprets DR 9-102(A) and (C) (preserving client property, recordkeeping, and accounting, the analogue of ABA Model Rule 1.15), DR 2-106(C) (fees), and DR 2-110(A)(2) and (3) (on withdrawal, delivering client property and refunding unearned advances, the analogue of ABA Model Rule 1.16), building on N.Y. State 570 (1985).

Citations and references

Rules of Professional Conduct:

• MR 1.15 (safekeeping property); MR 1.5 (fees); MR 1.16 (declining or terminating representation)
• Former Code DR 9-102(A), (C); DR 2-106(C); DR 2-110(A)(2), (3)

Other opinions cited:

• N.Y. State 570 (1985): advance fee payments need not be held in a client trust account and the lawyer may retain interest

See also

• NY State Bar Op. 825: EAP third-party payor legal services by phone
• NY State Bar Op. 827: Paying a client's billing auditor a percentage of billings

Source

• Landing page: https://nysba.org/ethics-opinion-816/