At real estate closings, the buyer's attorney is adding disbursement, discharge-tracking, wire, and courier fees to the settlement statement that my seller client must pay. Do those fee practices violate the ethics rules?

Plain-English summary

The inquiring attorney handles real estate matters and reported that attorneys representing buyers at closings had begun adding new so-called "seller" fees to the settlement statements they prepare, including a disbursement fee, a discharge-tracking fee, a wire fee, and courier fees. The wire fee, the attorney noted, was charged for transferring funds out of the attorney's IOLTA account, even though financial institutions do not normally charge fees to transfer funds from IOLTA accounts. When the attorney represents a seller in a matter where these fees appear, the attorney objects and seeks to have them removed or reduced; where they are not, the seller pays them to complete the closing. In none of these matters did the buyer's attorney provide any legal services or advice to the sellers.

The panel concluded the fee practices violate the Rules of Professional Conduct, and opened by expressing disappointment that attorneys had used their professional position to enrich themselves at the expense of others who lack serious recourse. It analyzed the fees under Rule 1.5. Rule 1.5(a) requires that fees and expense charges be reasonable; a lawyer may seek reimbursement for a service or expense either by charging a reasonable amount the client agreed to in advance or by charging an amount that reasonably reflects the cost the lawyer incurred (Comment [1]). The panel found the disbursement, discharge-tracking, wire, and courier charges met neither condition: the sellers received no advance notice, and the charges did not clearly reflect costs actually incurred, the wire fee being the clearest example since no institution charges to transfer funds out of an IOLTA account. Such nonexistent expenses cannot be passed on, making the fees unreasonable ipso facto. The panel contrasted Opinion 2023-12, which permitted passing on credit-card processing fees because those reflected no more than costs actually incurred.

The panel further found the practices independently violate Rule 1.5(b), which requires that fee and expense information be conveyed to clients in writing prior to or as near as possible to the start of the representation. Because the buyers' attorneys gave the sellers no notice before the closing, there was no prior understanding as to fees and expenses, leaving the seller to try to reduce or eliminate the charges during the transaction itself, which limits negotiating options and risks undermining the sale. The panel quoted North Carolina Formal Ethics Opinion 2021-3 for the point that nothing in the Rules permits a lawyer to charge an opposing party for legal services performed for the lawyer's own client without that party's consent, and concluded the conduct violates Rule 1.5.

In practice

Under this opinion, a lawyer preparing a settlement statement may not charge the opposing party (here, the seller) expense fees that do not reflect costs the lawyer actually incurred and that the party never agreed to in advance. The panel treated a wire fee for an IOLTA transfer, where the bank charges nothing, as a paradigmatic unreasonable charge. It also treated the absence of advance written notice as an independent Rule 1.5(b) violation, because it denies the paying party any prior understanding of the fees and forces objection at the closing table.

Common questions

Q: Can a buyer's attorney charge the seller disbursement, wire, and courier fees on the settlement statement?

A: On these facts, no. The panel held such charges violate Rule 1.5 because they do not reflect costs actually incurred and the seller never agreed to them in advance, making them unreasonable.

Q: Why did the panel single out the wire fee?

A: Because financial institutions do not charge fees to transfer funds out of an attorney IOLTA account, so the buyer's attorney was passing on a nonexistent expense, which the panel called unreasonable ipso facto.

Q: Is passing costs on to a client ever permissible?

A: The panel contrasted Opinion 2023-12, which allowed passing on credit-card processing fees because they reflected no more than the costs the attorney actually incurred. The problem here was charges untethered from real costs and imposed without advance notice.

Q: What does Rule 1.5(b) require about fee notice?

A: It requires fee and expense information be given in writing prior to or as near as possible to the start of the representation. The panel found no such prior understanding existed, so the practice violated Rule 1.5(b) even apart from reasonableness.

Background and rules framework

The opinion applies Rule 1.5 of the Rhode Island Rules of Professional Conduct (Model Rule 1.5). Rule 1.5(a) requires fees and expense charges to be reasonable under the circumstances, determined case by case, and Comment [1] permits reimbursement of an expense either at an amount the client agreed to in advance or one that reasonably reflects the cost incurred. Rule 1.5(b), with Comment [2], requires that fee and expense terms be conveyed in writing at or near the start of the representation so an understanding is promptly established.

Citations and references

Rules of Professional Conduct:

• MR 1.5 (fees)
• RI RPC 1.5(a), 1.5(b)

Statutes:

• None cited.

Cases:

• None cited.

Other opinions cited:

• RI EAP Op. 2023-12 (credit-card processing fees may be passed to clients because they reflect no more than costs actually incurred)
• North Carolina State Bar 2021 Formal Ethics Opinion 3 (nothing in the Rules permits a lawyer to charge an opposing party for services performed for the lawyer's client without that party's consent)

See also

• RI EAP Op. 2023-12: Passing Credit-Card Processing Fees to Clients
• RI EAP Op. 2007-05: Charging Interest on an Advanced Expert Fee

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-2024-02.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. 2024-02
Issued April 11, 2024

FACTS

The inquiring attorney represents clients in real estate matters as part of his or her practice. He or she reports that recently, attorneys representing buyers in real estate closings have added certain new so-called "seller" fees to the settlement statements they prepare including, but not limited to, a disbursement fee, a discharge tracking fee, a wire fee, and courier fees. The inquiring attorney elaborates that the wire fee pertains to the transfer of fees from his or her IOLTA account, even though financial institutions do not normally charge fees to transfer funds from IOLTA accounts.

Whenever the inquiring attorney represents a seller in a matter in which these fees appear, the inquiring attorney states, he or she objects to the fees and seeks to have them removed or reduced. In matters in which the fees are not removed or reduced, the inquiring attorney's clients pay the fees in order to complete the closing transactions. The inquiring attorney represents that in none of the matters in which these fees appear does the buyer's attorney provide any legal services or advice to the sellers.

ISSUE PRESENTED

The inquiring attorney asks whether these fee practices violate the Rules of Professional Conduct?

OPINION

It is the Panel's opinion that the fee practices as described by the inquiring attorney violate the Rules of Professional Conduct.

REASONING

Before delving into its analysis of the instant inquiry, the Panel pauses to express its disappointment with the fee practices as described by the inquiring attorney. Rarely has the Panel encountered a situation in which Rhode Island attorneys have leveraged their unique professional knowledge and experience to enrich themselves at the expense of others who are without serious recourse. It is the Panel's opinion that these practices violate the Rules of Professional Conduct.

Matters pertaining to attorney's fees and expenses are governed by Rule 1.5 of the Rules of Professional Conduct.

Rule 1.5(a) commands that attorney's fees and charges for expenses must be "reasonable under the circumstances." Rule 1.5, Comment [1]. The reasonableness of a fee is determined on a case-by-case basis. See id. With regard to expenses, "[a] lawyer may seek reimbursement for the cost of services performed in-house, such as copying, or for other expenses incurred in-house, such as telephone charges, either by charging a reasonable amount to which the client has agreed in advance or by charging an amount that reasonably reflects the cost incurred by the lawyer." Id.

In addition, Rule 1.5(b) requires that lawyers convey fee and expense information to new clients in writing prior to or as near as possible to the beginning of the representation. See also Rule 1.5, Comment [2] (encouraging "an understanding as to fees and expenses" to be "promptly established" between attorney and client). The written notice should set forth, at a minimum, "the general nature of the legal services to be provided, the basis, rate or total amount of the fee and whether and to what extent the client will be responsible for any costs, expenses or disbursements in the course of the representation." Id.

From its review of the closing documents submitted by the inquiring attorney with his or her inquiry, it is clear to the Panel that these fees all constitute charges for expenses ostensibly related to the distribution of the funds necessary to complete the real estate transaction in question—"disbursement," "discharge tracking," "wire," and "courier" charges. To be reasonable, these charges must either reflect "a reasonable amount to which the client has agreed in advance" or "the cost incurred by the lawyer." Neither condition is met here. As will be discussed in greater detail below, the inquiring attorney's clients do not receive advance notice of these expenses. Nor is it clear that these charges reflect costs actually incurred by the buyers' attorneys. For example, as the inquiring attorney notes in his or her inquiry, financial institutions do not charge wire fees to transfer funds out of attorney IOLTA accounts. Therefore, the buyers' attorneys cannot properly pass on such a nonexistent expense to the inquiring attorney's clients. See Rule 1.5, Comment [1]. Accordingly, fees of this type are ipso facto unreasonable. Cf. Rhode Island Supreme Court Ethics Advisory Opinion No. 2023-12 (determining that the inquiring attorney could pass credit card processing fees to his or her clients in both flat fee and hourly billing matters, as well as in situations when the client has paid fees to the inquiring attorney in connection with issuance of payment to a third party, because they reflected no more than the costs actually incurred by the inquiring attorney during the representation).

The Panel further finds that these fee practices also violate Rule 1.5(b) because the buyers' attorneys fail to provide the inquiring attorney's clients with notice of their intention to charge these expenses prior to the real estate closing transactions at which the clients are expected to pay them. Thus, there is no prior "understanding as to fees and expenses" between the parties as required under the Rule. See Rule 1.5, Comment [2]. This leaves the inquiring attorney in the disadvantaged position of attempting to reduce or eliminate the fees immediately before or during the transactions themselves, circumstances which both limit the inquiring attorney's negotiating options and create the risk of undermining the sale, thereby increasing the likelihood that the fees are paid. It follows, then, that these fee practices would violate Rule 1.5 even if the fee themselves were deemed reasonable under the circumstances. See North Carolina State Bar Formal Ethics Opinion 2021-3 (noting that "[n]othing in the Rules of Professional Conduct permits or empowers a lawyer to charge a third or opposing party for legal services performed for the benefit of her client without that party's consent").

The Panel concludes by reminding those Rhode Island attorneys and law firms that "a lawyer should further the public's understanding of and confidence in the rule of law and the justice system because legal institutions in a constitutional democracy depend on popular participation and support to maintain their authority." Preamble to the Rules of Professional Conduct, Paragraph [6].

The fee practices cited in this inquiry constitute unprofessional conduct. They manifest a goal of self-enrichment at the expense of others. Those adversely affected by this conduct have limited recourse, at best, other than to acquiesce to these practices or risk jeopardizing the purchase and sale of a home. Therefore, the Panel finds that the conduct identified by the inquiring attorney violates Rule 1.5.