A relative and a nonprofit paid my client's legal fees in advance. The representation ended with a surplus, and both the client and the nonprofit claim it. Who gets the refund of the excess fees?

Plain-English summary

The inquiring attorney was retained to represent a client in several matters under two fee agreements, with fees paid in advance. The advances came not from the client but from a family member and a nonprofit organization. When the representation ended, a surplus remained. The client insisted the surplus be refunded to her; the organization claimed it should be refunded to the organization. The attorney asked to whom the excess funds must be refunded.

The panel concluded the third-party payor is entitled to the refund. The fee agreements provided that any amount remaining on deposit would be refunded but did not say to whom when someone other than the client advanced the fees. The panel started from Rule 1.16(d), which requires a lawyer on termination to refund any advance payment of fee that has not been earned. It noted that a third party may permissibly pay a client's fees if the lawyer complies with Rule 1.8(f) (informed consent, no interference with professional independence, and protection of confidential information) and Rule 5.4(c) (no direction of the lawyer's professional judgment by the payor). Because the Rules do not define "refund," the panel adopted the dictionary meaning and the reasoning of California State Bar Formal Opinion 2013-187 that a refund "implies that the money be returned to its source," here the third-party payors.

Applying that principle, the panel held that because the client advanced none of the funds and the third parties advanced them solely to pay for the client's representation (a purpose that no longer exists), one or both of the payors, not the client, are entitled to the surplus, absent an agreement providing otherwise. Citing entries in the client register showing the sequence of the relative's and the organization's advances, the panel said the attorney is best positioned to calculate each payor's refund. It added that if a dispute over the surplus continues, the attorney should not decide it unilaterally but should hold the disputed amount in trust under Rule 1.15 until the parties or a court resolve it (citing Rule 1.5(e)).

In practice

Under this opinion, and under the Rhode Island rules as they stood at the time, when a third party advances a client's legal fees, surplus unearned fees are refunded to the payor rather than to the client, unless the fee agreement provides otherwise. The panel held that the Rule 1.16(d) duty to refund unearned fees returns the money to its source, and that the client, having advanced nothing, has no claim to funds she did not provide. The opinion holds that a lawyer accepting third-party payment must satisfy Rule 1.8(f) and Rule 5.4(c), and that if the entitlement is disputed the lawyer should hold the disputed sum in trust under Rule 1.15 pending resolution rather than deciding it unilaterally.

Common questions

Q: If a third party paid my client's fees, who gets the refund of the surplus?

A: The panel said the third-party payor, not the client, unless the fee agreements specify otherwise, because a refund returns unearned money to its source.

Q: Why isn't the client entitled to the surplus?

A: The panel said the client advanced none of the funds; the third parties advanced them solely to pay for the representation, so the client has no claim to money she did not provide.

Q: What if the client and the payor both claim the surplus?

A: The panel said the attorney should not decide the dispute unilaterally and should keep the disputed amount in the trust account under Rule 1.15 until the parties or a court resolve it.

Q: Is it even permissible for a third party to pay a client's fees?

A: The panel said yes, provided the lawyer complies with Rule 1.8(f) (client's informed consent, no interference with professional judgment, protection of confidential information) and Rule 5.4(c).

Background and rules framework

The opinion applies Rule 1.16(d) (Model Rule 1.16, declining or terminating representation; duty to refund unearned fees), Rule 1.15 (Model Rule 1.15, safekeeping property; notice, delivery, and segregation of disputed property), Rule 1.8(f) (Model Rule 1.8, third-party payment of fees), and Rule 5.4(c) (Model Rule 5.4, professional independence). It also cites Rule 1.5(e) regarding disputed funds held in trust. The panel drew its definition of "refund" from Merriam-Webster and from California State Bar Formal Opinion 2013-187.

Citations and references

Rules of Professional Conduct:

• MR 1.16 (declining or terminating representation; refund of unearned fees)
• MR 1.15 (safekeeping property; disputed funds)
• MR 1.8(f) (compensation from one other than the client)
• MR 5.4(c) (professional independence of a lawyer)
• RI RPC 1.16, 1.15, 1.8, 5.4, 1.5

Statutes:

• None cited.

Cases:

• None cited.

Other opinions cited:

• Cal. State Bar Formal Op. 2013-187 (2013) (a refund returns money to its source, the third-party payor)
• N.C. State Bar Formal Op. 12 (2006) (third-party payor entitled to refund of surplus fees)
• S.C. Bar Ethics Advisory Committee Op. 02-07 (2002) (same)

See also

• RI EAP Op. 2025-09: Obligations for Disputed Settlement Funds Held in IOLTA
• RI EAP Op. 2016-04: A Joint Client's Right to the File Under Rule 1.15
• RI EAP Op. 2025-11: Settling a Client's Malpractice Claim Where the Client Had Independent Counsel

Source

• Landing page: https://www.courts.ri.gov/attorney-resources/Pages/Ethics-Advisory-Panel-default.aspx
• Original PDF: https://www.courts.ri.gov/Opinions/EAP%2016-08.pdf

Original opinion text

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

Rhode Island Supreme Court
Ethics Advisory Panel Op. 2016-08
Issued August 15, 2016

FACTS

The inquiring attorney seeks the Panel's guidance about the return of excess retainer funds. The inquiring attorney was hired by a client to represent her in various matters. For one matter, the client agreed to pay the attorney a specified amount in advance, pursuant to a fee agreement. For the remaining matters, the client agreed to pay another specified amount in advance, pursuant to a second fee agreement. A family member and a nonprofit organization paid the inquiring attorney the amounts under the fee agreements.

The inquiring attorney's representation of the client has ended. After funds on account for this client were applied to attorney's fees, there remains a surplus. The client insists that the inquiring attorney should refund the surplus to her, and the organization claims that the surplus funds be refunded to it.

ISSUE PRESENTED

If a third party payor advances attorney's fees for a client, and there are excess funds at the conclusion of the representation, to whom must the inquiring attorney refund the excess funds?

OPINION

When an attorney receives funds for fees from a third-party payor, the third-party payor, and not the client, is entitled to the refund of excess fees at the conclusion of the representation, unless there are agreements specifying otherwise.

REASONING

The inquiring attorney submitted copies of the fee agreements to the Panel. Both agreements contained the following language:

Any amount remaining on deposit upon completion of this matter or termination of our services to you will be refunded, unless there is a dispute over fees, in which case it will remain until any dispute is resolved.

There are no terms in these provisions that specify to whom refunds would be made when one other than the client advances the fees.

A lawyer is required to refund unearned fees under Rule 1.16(d) of the Rules of Professional Conduct. The rule states:

(d) Upon termination of representation, a lawyer shall take steps to the extent reasonably practicable to protect a client's interests, such as giving reasonable notice to the client, allowing time for employment of other counsel, surrendering papers and property to which the client is entitled and refunding any advance payment of fee or expense that has not been earned or incurred. The lawyer may retain papers relating to the client to the extent permitted by other law. (Emphasis added.)

In the normal course, attorney's fees are typically advanced by the client. Under the facts of this inquiry, the attorney's fees were advanced by third parties, namely, the client's relative and an organization. This arrangement is ethically permissible provided the lawyer complies with Rule 1.8(f) and Rule 5.4(c).

Rule 1.8(f) states: (f) A lawyer shall not accept compensation for representing a client from one other than the client unless: (1) the client gives informed consent; (2) there is no interference with the lawyer's independence of professional judgment or with the client-lawyer relationship; and (3) information relating to representation of a client is protected as required by Rule 1.6.

Rule 5.4(c) states: (c) A lawyer shall not permit a person who recommends, employs, or pays the lawyer to render legal services for another to direct or regulate the lawyer's professional judgment in rendering such legal services.

The receipt of funds or other property from a client or a third party, and the return of such funds or property, are also addressed in Rule 1.15. In pertinent part, Rule 1.15 states:

(d) Upon receiving funds or other property in which a client or third person has an interest, a lawyer shall promptly notify the client or third person. Except as stated in this rule or otherwise permitted by law or by agreement with the client, a lawyer shall promptly deliver to the client or third person any funds or other property that the client or third person is entitled to receive and, upon request by the client or third person, shall promptly render a full accounting regarding such property.

(e) When in the course of representation a lawyer is in possession of property in which two or more persons (one of whom may be the lawyer) claim interests, the property shall be kept separate by the lawyer until the dispute is resolved. The lawyer shall promptly distribute all portions of the property as to which the interests are not in dispute.

In determining who is entitled to surplus fees advanced by a third party, the Panel looks to Rule 1.16(d). The Rule requires lawyers to refund advanced fees that have not been earned. The Rules do not define "refund." Merriam Webster's dictionary defines it as "1: to give back or put back 2: to return (money) in restitution, repayment, or balancing of accounts." "The concept of refund implies that the money be returned to its source, in this case the third party payor." Cal. State Bar Formal Op. No. 2013-187 (2013).

In the instant inquiry, no funds were advanced by the client. All funds were advanced by the client's relative and by the organization. These third-parties advanced the funds to the inquiring attorney for one purpose: the payment of legal services for the client's representation. That purpose no longer exists as the representation has ended. The Panel believes that one, or possibly both, of the third-party payors are entitled to the refund of the surplus fees in this inquiry. See Cal. State Bar Formal Op. 2013-187 (2013); N.C. State Bar Formal Op. 12 (2006); S.C. Bar Ethics Advance Committee Op. 02-07 (2002). Absent agreements which provide otherwise, the client is not entitled to a refund of surplus fees that she did not advance.

The inquiring attorney asks the Panel how the excess funds should be disbursed. He/she has submitted to the Panel entries in the client's register which show the dates of deposits from the third parties, the dates of the inquiring attorney's bills, and running balances. It appears from these entries that the client's relative advanced the agreed-upon amount for the first matter. When these funds approached depletion, the organization advanced additional funds for the first matter. At a later date, the organization advanced the agreed-upon amount for the remaining matters. With these entries and the dates of service for each matter, the inquiring attorney is in the best position to calculate the refund to one or both of the third parties.

Finally, should a dispute over the surplus fees continue notwithstanding the Panel's opinion today, the inquiring attorney should not unilaterally decide the dispute. Rather, in that instance, the Panel advises the inquiring attorney to retain the disputed amounts in his/her trust account until resolution by the interested parties or by the appropriate court. See Rule 1.5(e).

The Panel concludes that when an attorney receives funds for fees from a third-party payor, the third party payor, and not the client, is entitled to the refund of excess fees at the conclusion of the representation, unless there are agreements specifying otherwise.