When a relative pays a lawyer's flat fee for a client who then fires the lawyer and demands a refund, who gets the unearned portion, the client or the relative who paid?

Plain-English summary

A man and his brother came to a lawyer; the man hired the lawyer for two criminal charges, and the lawyer quoted a flat fee with half due in advance, in cash given the short timeline. The brother returned with the cash and got a receipt. The lawyer appeared at a hearing, filed motions, and began work; the client later signed a written fee agreement and then, a few weeks afterward, fired the lawyer and demanded a refund. The lawyer agreed a partial refund was due and asked to whom it should be paid.

The committee, calling this a case of first impression, concluded the lawyer should not unilaterally resolve the competing claims. A third party paying a lawyer to represent a client is proper under Rules 1.8(f) and 5.4(c). Rule 1.16(d) requires refunding the unearned portion of an advance fee on termination, and Rule 1.15(b) governs funds in which a client or third person has an interest, requiring the lawyer to deliver property to whoever is "entitled to receive" it. The question reduced to who that is, the client or the brother who paid.

The committee explained that the comment to Rule 1.15 recognizes a third party may have just claims, that a lawyer may have a duty to protect such claims, but that the lawyer should not unilaterally arbitrate a dispute between the client and a third party while balancing the duty of loyalty to the client. It observed that the brother likely had a contractual relationship with the lawyer giving him some protections (analogizing to an insurer that pays for a defense), and that the nature of the payment mattered: a gift would leave the brother no interest in a refund, while a loan would. Following its approach to disputed healthcare-provider liens in Opinion 95-29, the committee concluded the prudent course is to hold the disputed funds in trust and suggest a means of resolution (such as a declaratory judgment, mediation, or arbitration) or submit the dispute to the court.

In practice

Under the South Carolina rules as they stood at the time of the opinion, the committee held that a third party may properly pay a lawyer to represent a client (Rules 1.8(f), 5.4(c)), that an unearned advance fee must be refunded on termination under Rule 1.16(d), and that where the client and the third-party payor both claim the refund, the lawyer must not unilaterally decide between them but should hold the disputed funds in trust under Rule 1.15 and suggest a resolution or let a court decide, with the gift-versus-loan character of the payment driving who is ultimately entitled. South Carolina revised its Rules of Professional Conduct effective 2005; verify the current text of Rules 1.15, 1.16(d), and 1.8(f) before relying on the specific subsections cited.

Common questions

Q: A relative paid my client's flat fee and now the client wants a refund. Who gets the unearned part?

A: The committee concluded the lawyer should not decide unilaterally; either the client or the payor may be entitled depending on the facts, so the lawyer holds the disputed funds in trust and seeks a resolution or a court ruling.

Q: Is it proper for a third party to pay the fee in the first place?

A: The committee concluded yes, when the lawyer complies with Rules 1.8(f) and 5.4(c), which protect the lawyer's independent judgment and the client relationship.

Q: Does it matter whether the relative meant the payment as a gift or a loan?

A: The committee concluded it matters: a gift would leave the payor no interest in a refund, while a loan would give the payor an interest in the reimbursed funds.

Q: What should the lawyer do with the disputed money in the meantime?

A: The committee concluded the lawyer should keep the disputed funds in trust under Rule 1.15 and suggest a means of resolution, such as a declaratory judgment, mediation, or arbitration, rather than arbitrate the dispute alone.

Background and rules framework

The opinion interprets South Carolina RPC 1.15(b) (safekeeping and delivering property in which a client or third person has an interest), 1.16(d) (refunding unearned advance fees), 1.8(f) (third-party compensation), and 5.4(c) (independent judgment), corresponding to the like-numbered Model Rules, drawing on the comment to Rule 1.15. The committee relied on its Opinions 81-15 and 95-29.

Citations and references

Rules of Professional Conduct:

• South Carolina RPC 1.15(b) / Model Rule 1.15: holding and delivering property in which a client or third party has an interest.
• South Carolina RPC 1.16(d) / Model Rule 1.16(d): refunding unearned advance fees on termination.
• South Carolina RPC 1.8(f), 5.4(c) / Model Rules 1.8(f), 5.4(c): third-party compensation and independent judgment.

Other opinions cited:

• S.C. Bar Ethics Advisory Ops. 81-15 (advance fees) and 95-29 (disputed healthcare-provider liens; hold funds in trust).

See also

• SC Bar Ethics Op. 03-05: A disputed fee split after the client discharges one lawyer
• SC Bar Ethics Op. 02-14: Client files when a lawyer winds down a practice
• ABA Formal Op. 474: Referral fees and conflicts of interest

Source

• Landing page: https://www.scbar.org/for-lawyers/quicklinks/legal-resources/ethics-advisory-opinions/ethics-advisory-opinion-02-07/

Original opinion text

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

UPON THE REQUEST OF A MEMBER OF THE SOUTH CAROLINA BAR, THE ETHICS ADVISORY COMMITTEE HAS RENDERED THIS OPINION ON THE ETHICAL PROPRIETY OF THE INQUIRER’S CONTEMPLATED CONDUCT. THIS COMMITTEE HAS NO DISCIPLINARY AUTHORITY. LAWYER DISCIPLINE IS ADMINISTERED SOLELY BY THE SOUTH CAROLINA SUPREME COURT THROUGH ITS COMMISSION ON LAWYER CONDUCT.

Ethics Advisory Opinion 02-07

A man and his brother walk into Lawyer's office on a Monday afternoon. The man is looking for an attorney to represent him on two criminal charges and to go with him to a court hearing the next morning in another county. Lawyer quotes a flat fee to represent the man on the charges. Lawyer explains that half the fee is due in advance and, given the shortness of time, it must be in cash. The man states that he wants to hire Lawyer and asks brother if he has the money to pay the half due up front. Brother indicates he has the money in his bank account and will go get it. Client and brother leave. Brother comes back alone later in the day with cash. Lawyer accepts the cash and gives brother a receipt. Lawyer goes to hearing with client, files necessary motions and begins work on the case. A couple of weeks later, client comes to Lawyer's office and signs written contract documenting the fee agreement. A few weeks later, client fires attorney and demands a refund. Lawyer agrees that a partial refund is due.

Question
1. To whom should the lawyer refund the fee?

Summary
A lawyer who is required to reimburse unearned fees under Rule 1.16(d) must not unilaterally attempt to resolve a conflict between a paying third party and the lawyer's client. The lawyer should retain the disputed fees in trust until the parties reach an agreement resolving the dispute or the appropriate court determines the rights of the parties.

Opinion
This is a case of first impression that does not appear to have been addressed by any court or advisory committee. Under the present facts, brother has paid Lawyer to represent Client. This arrangement is ethically proper when Lawyer complies with Rules 1.8(f) and 5.4(c). The advanced retainer at issue becomes the property of another when it is determined that the funds are unearned and must be returned. See, Freeman, Nonrefundable [sic] Retainers, S.C. Law., May-June 2002.

Rule 1.16(d) applies to the reimbursement of advance fees. It requires a lawyer to, upon termination of representation, refund any advance payment of fee that has not been earned. See, S.C. Bar Ethics Adv. Op. #81-15; Rule 1.5, cmt. Here, Lawyer acknowledges that a portion of the advanced fee is refundable to the client.

The receipt of funds by a lawyer from a client or a third party is governed by Rule 1.15.

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. Rule 1.15(b).

The present case may be reduced to the question of which individual is "entitled to receive" the funds at issue - client or his brother, the third party payor.

The comments to Rule 1.15 acknowledge that a third party may have just claims against property in a lawyer's custody. "A lawyer may have a duty under applicable law to protect such third-party claims against wrongful interference by the client, and accordingly may refuse to surrender the property to the client. However, a lawyer should not unilaterally assume to arbitrate a dispute between the client and a third party." Rule 1.15, cmt. In addition, a lawyer must balance this duty to third parties with the duty of loyalty owed to his client.

The comments to Rule 1.15 also provide that the lawyer may suggest means to resolve the dispute. Therefore, an analysis of the relationships between the parties is necessary to aid in determining the appropriate recipient of the reimbursable funds. There is obviously an attorney-client relationship between Lawyer and Client. However, there is also a contractual relationship between Lawyer and the brother of Client. While this is a not an attorney-client relationship, it is a relationship that affords the brother some legal protections. A contractual relationship is likely formed between the brother and Lawyer. The brother agrees to pay Lawyer for the client's legal fees and therefore arguably retains the rights to those fees should they be refunded. This type of contractual relationship can be likened to that of an insurer and insured. While the insured is the beneficiary of the contract between the insurer and a lawyer, the insured certainly retains no interest in the fees paid on his/her behalf. Likewise, if this case were one where the fee was paid by a third party pre-paid legal services provider, rather than brother, Client would be hard- pressed to claim an interest in an unearned fee refund.

The nature of the fee payment is also integral to this matter. The brother may have intended that his payment be a gift to the client. If this were the case, the brother would retain no interest in the fees if they were later refunded. However, if the brother intended the payment as a loan, then he would retain an interest in any reimbursed funds. This type of situation may be analogous to the application of a lien by a health care provider to the proceeds of a suit. In previous Advisory Opinions involving disputed healthcare provider liens, the Committee has opined that the prudent course for the lawyer would be to retain the disputed funds in trust and seek either declaratory judgment allowing the lawyer to release the funds, or pursue mediation or arbitration. See Adv. Op. 95-29.

The comments to Rule 1.15 also state that there may be instances where a lawyer will receive funds from third parties from which a fee will be paid. Rule 1.15 places a duty upon the lawyer to ensure that the client does not misuse funds appropriated by a third party. "If there is risk that the client may divert the funds without paying the fee, the lawyer is not required to remit the portion from which the fee is to be paid." SCRPC 1.15, cmt. "The disputed portion of the funds should be kept in trust and the lawyer should suggest means for prompt resolution of the dispute, such as arbitration." Id. While this comment seems to implicate the initial payment of fees to the lawyer, it may also apply to a situation, much like the present one, where the refunded monies will have to be paid to the lawyer that replaces the discharged lawyer so as to comply with the intent of the third party payor, which is to pay the client's legal fees.

Because Lawyer "should not unilaterally assume to arbitrate a dispute between the client and the third party," Rule 1.15, cmt, Lawyer should retain the funds in trust, and suggest an appropriate means or resolving the dispute, or submit the dispute to the court for resolution.