Can a lawyer let clients fund trust-account retainer deposits by credit card, with the lawyer covering the processor's fee so the full amount lands in trust?

Plain-English summary

A lawyer who already accepted credit cards for billed services (absorbing the roughly 3 percent processing fee) proposed to let clients fund trust-account retainer deposits by credit card. The processor would credit the net amount (after the fee) to the lawyer's credit-card account, and the lawyer would deposit the gross amount into the regular client trust account by making up the processing fee from his own funds. The committee was asked whether this comported with the New Mexico Rules of Professional Conduct, and answered no, limiting the opinion to the facts described and not the general propriety of accepting credit cards for legal services.

The committee analyzed two rules: Rule 16-115 on safekeeping the property of others, which (with the ABA comment) requires client money to be held in a trust account, meaning the credit-card account receiving deposits would itself have to be set up as a client trust account; and Rule 16-108(E) barring financial assistance to clients in connection with litigation. Its central concern was charge-backs: if one client disputes a charge after the lawyer has drawn down that client's deposit, the processor automatically charges back the amount against the account it was credited to, offsetting it against a later client's deposit, so that one client's trust funds are used to refund another's, a Rule 16-115 commingling violation. The committee walked through why the likely "fixes" create further problems, including the lawyer funding the gap with his own check (raising a Rule 16-108(E) issue and leaving client funds exposed to the lawyer's creditors), the impracticality of non-recourse agreements, and processors offsetting charge-backs against available credits even when a separate charge-back account exists.

The committee was also uncertain how to treat the lawyer's plan to supplement the net deposit with his own funds: viewing the fee as a collection cost works when the client is paying a bill already due, but in the retainer context the lawyer is supplementing the client's trust deposit with his own money, which begins to look like prohibited financial assistance under Rule 16-108, raises questions about ownership and commingling of the supplemented amount, and creates accounting issues under Rule 17-204(A). It concluded the lawyer would be ill-advised to accept direct credit-card payments for retainer deposits held in trust, its fundamental concern being the failure to maintain the required separation of the lawyer's funds from clients' funds under Rule 16-115. As alternatives, it suggested credit-card checks written to the lawyer for deposit directly into the regular trust account, or a client cash advance used to fund the deposit, each of which delivers the full retainer amount into trust and avoids the charge-back problems (with the cost borne by the client).

Currency note

This opinion was issued in 2000, under the New Mexico Rules of Professional Conduct then codified (NMRA 2000, Rules 16-115, 16-108, and 17-204). It predates the State Bar of New Mexico's November 3, 2008 revisions to those Rules (the New Mexico adoption of the ABA Ethics 2000 changes), and credit-card and trust-accounting practices have changed since. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Can a client pay a trust retainer directly by credit card in New Mexico?

A: The committee concluded the described proposal does not comport with the rules; it advised the lawyer would be ill-advised to accept direct credit-card payments for retainer deposits held in trust.

Q: What is the problem with credit-card trust deposits?

A: The committee concluded charge-backs can cause one client's trust funds to be used to refund another client's disputed charge, commingling funds in violation of Rule 16-115.

Q: Why does the lawyer covering the processing fee raise a concern?

A: The committee concluded that in the retainer context, supplementing the client's deposit with the lawyer's own funds begins to look like the financial assistance prohibited by Rule 16-108 and raises commingling and accounting problems.

Q: What alternatives did the committee suggest?

A: The committee suggested credit-card checks written to the lawyer for direct deposit into the regular client trust account, or a client cash advance used to fund the retainer, each delivering the full amount into trust.

Background and rules framework

The opinion applied the safekeeping-of-property rule (Rule 16-115, corresponding to Model Rule 1.15) and the bar on financial assistance to clients in litigation (Rule 16-108(E), corresponding to Model Rule 1.8(e)), with the trust-accounting requirements of Rule 17-204. It treated the credit-card charge-back mechanism as the source of an unavoidable commingling risk under Rule 16-115.

Citations and references

Rules of Professional Conduct:

• Rule 16-115(A) (safekeeping property; separate trust account); Rule 16-108(E) (financial assistance to clients); Rule 17-204(A) (trust-account record-keeping)

See also

• NM Ethics Op. 1990-4: Disclosing Non-Lawyer Staff Rates and Billing Non-Lawyer Time
• NM Ethics Op. 1995-2: Attorney's Fees on Termination of Contingent Fee Agreements

Source

• Landing page: https://www.sbnm.org/Leadership/Committees/Ethics-Advisory-Committee/Ethics-Advisory-Opinions
• Original PDF: https://www.sbnm.org/Portals/NMBAR/AboutUs/committees/Ethics/2000-2002/2000-1.pdf

Original opinion text

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

Advisory Opinion 2000-1
No. 2000-1; Use of Credit Cards to Fund Trust Account Retainer Deposits
Facts
The inquiring lawyer accepts payment by credit card for services rendered, including fees, expenses and tax. Creditcard lenders deduct a processing fee before crediting the balance to the lawyer's credit-card account at his bank. The
processing fee is about 3 percent of the total payment. The lawyer absorbs this fee and does not bill it back to clients.
The lawyer now proposes to accept payment by credit card to fund client retainer deposits in trust. The deposits would
be drawn down to pay future fees, expenses and tax as they came due.
The mechanics of the specific proposal are as follows. Retainer proceeds, less the processing fee, would be credited
to the lawyer's credit-card account. Upon receiving credit in the credit-card account, the lawyer would deposit to his
regular client trust account the gross amount charged, as if there were no processing fee deduction. To accomplish
that, the lawyer would make up the amount of the processing fee from his own funds. For example, if the client funded
a $1,000 retainer deposit by credit card and the credit-card lender credited the lawyer's credit-card account with a net
of $970 after deducting $30 (3 percent) as a processing fee, the lawyer would deposit $1,000 to his regular trust
account, making up the $30 processing fee out of his own funds.
Question Presented
Does the proposed use of credit cards to fund retainer deposits in trust comport with the New Mexico Rules of
Professional Conduct, Rules 16-101 to 16-805 NMRA 2000?
Summary Conclusion
No.
Limited Scope of Opinion
This opinion does not address fact situations substantially different from those described. For example, this opinion
does not address the propriety of accepting credit-card payments for legal services generally. A number of
considerations involved in an analysis of that general issue are not considered here. Conversely, considerations and
conclusions involved here are not necessarily relevant to the general issue.
Analysis
In responding to this question, the committee discussed credit-card processing and available processing options with a
knowledgeable individual from the New Mexico offices of a major national banking association which is a MasterCard
and Visa issuer.
At least two provisions of the New Mexico Rules of Professional Conduct are implicated by the specific proposal. Rule
16-108(E) prohibits a lawyer from providing financial assistance to clients in connection with pending or contemplated
litigation, with exceptions which do not appear relevant here. Rule 16-115 lays down general rules for safekeeping
property of others. As relevant here, Rule 16-115(A) requires money of others to be kept "in a separate account." We
begin with a discussion of the latter Rule.
While Rule 16-115(A) requires only that funds of clients or third persons "be kept in a separate account"--i.e., separate
from the lawyer's business and personal accounts--the ABA comment makes clear that such money is to be held "in
one or more trust accounts." Thus any money credited by a credit-card lender as a trust deposit must be credited
directly to a trust account. Accordingly, the credit-card account to which retainer deposits are credited would have to
be set up as a client trust account. If this cannot be arranged, a violation of Rule 16-115(A) would occur.

Assuming the foregoing issue can be resolved does not end the com-mittee's concerns, however. The committee is
concerned that such a credit card trust account may be accessed by third parties--specifically, credit-card lenders and
processors. The issue arises in connection with "charge-backs." For example, Client A charges a $1,000 trust deposit
to his credit card. The lawyer nets $970 (after deduction of the 3 percent processing fee). The lawyer then transfers
that $970, plus the $30 processing fee deduction from his own pocket, and deposits $1,000 in his regular client trust
account. The following month, the lawyer draws down the entire $1,000 to pay incurred fees and expenses. As a
result, none of Client A's funds remain in trust. Some time later, Client B similarly makes a credit-card trust deposit in
the amount of $1,000. The net from Client B's deposit in the credit-card trust account should thus be $970 (assuming
the same 3 percent processing fee applies). But in fact, no balance appears in that account because Client A,
dissatisfied for whatever reason, has notified his credit-card lender that he disputes the lawyer's bill. When this
happens the lender automatically charges back the $970 to the account to which it was originally credited. The result is
that the $970 debit from Client A's charge-back is offset against the $970 credit from Client B's subsequent
transaction. The net is 0. At this point, the lawyer finds himself in violation of Rule 16-115, because the lawyer's
disputed payments from Client A have become commingled with (and refunded using) Client B's trust deposit.
This problem could be viewed as a merely "technical" violation of the Rule. However, the committee foresees real
problems of exactly the types Rule 115 was intended to forestall. For example, the most likely "fix" for the situation
would probably be for the lawyer to fund Client B's trust deposit with his own check for $1,000 deposited into the
regular client trust account. The most obvious problem with this approach is that the lawyer hasn't actually received
any money from Client B, resulting in a potential violation of Rule 16-108(E)--at least if the trust deposits relate to
pending or contemplated litigation. Even if it can be argued that the lawyer has constructively received Client B's
deposit, that doesn't solve the Rule 115 commingling violation because, for at least some period of time, Client B's
trust deposit is in the lawyer's "pocket," subject to liens and other claims of the lawyer's creditors. Further, the lawyer
may lack sufficient funds to replace the trust deposit--particularly if a bankruptcy has intervened or if the amount to be
funded/reimbursed is more substantial than the lawyer's current bank balance.
One solution to charge-backs, suggested by another state's bar association, is for lawyers to negotiate non-recourse
agreements. While this would indeed solve this particular problem, we are told this solution is unrealistic. There are
hundreds if not thousands of different credit-card issuers/lenders.
Credit-card processors are fewer in number, but their function is purely ministerial. We are told that no credit-card
processor would accept the risk of non-payment. In addition, some committee members suggest that non-recourse
agreements may not be consistent with federal law governing credit cards.
We are also told that some credit-card processors will agree to deduct charge-backs from a different account from the
account to which credits are made. However, if the charge-back account has insufficient funds or is simply unavailable-e.g., in the case of the lawyer's bankruptcy--the credit-card processor (and lender) will then offset the charge-back
against any available credits. In that case, Client B's trust deposit credit will still be used to cover Client A's chargeback.
The committee is uncertain how to evaluate the inquiring lawyer's proposal to supplement the net amount credited by
the amount of the processing fee. One way to look at this is to view the processing fee as a collection cost amounting
to a normal business expense. That approach seems valid where the client is paying a bill for fees and services
already rendered. In that situation, the processing fee is clearly a collection cost, because money is due. Further, the
lawyer's own funds are not being used to supplement the client's net payment.
The collection-cost characterization is less persuasive, however, in the context of retainer deposits intended to satisfy
a client's future payment obligations. In that context, the lawyer is supplementing the client's net trust deposit with his
own funds. Here the proposal begins to look like the financial assistance prohibited by Rule 16-108--at least where a
pending or contemplated litigation is involved. In addition, a lender will only reverse the net amount of charge-backs-i.e., $970 in the foregoing example. At that point the $30 supplementation in the regular trust account now belongs to-whom? Probably the lawyer since the credit-card lender has credited the client with the full $1,000 charged to the
credit card. But since the $30 was deposited in the client's name, can the lawyer properly withdraw it? And aren't his
funds now commingled with his clients' funds in the trust account? Finally, there is an issue as to how to properly
account for the $30 supplementation under Rule 17-204(A)(1) and (2).

The committee does not think the supplementation issue, standing alone, is necessarily controlling. But in connection
with the other concerns discussed above, it lends weight to the committee's conclusion.
Committee's Consensus Conclusion/Alternative Approaches
The committee thinks the lawyer would be ill-advised to accept direct credit-card payments for retainer deposits to be
held in trust. The committee's fundamental concerns stem from the possibilities for failure to maintain the required
separation of the lawyer's funds from his clients,' in potential violation of Rule 16-115.
The committee suggests there are other, potentially less troublesome ways clients can make retainer deposits using
credit cards. One alternative is credit-card checks. Many credit-card issuers/lenders supply checks which can be
written against credit card accounts. The client can write such a check to the lawyer for deposit directly into the
lawyer's regular client trust account. Alternatively, the client can obtain a cash advance on his or her credit card, and
use the proceeds to fund the retainer deposit. Through either of these methods, the lawyer receives the full retainer
amount for deposit directly into his regular client trust account, and avoids the problems discussed above. Clients will,
of course, incur somewhat more expense because cash advances typically carry cash-advance charges; in effect, the
processing fee for cash advances is borne by credit-card holders rather than the payee lawyer.