Can a lawyer apply a client's unearned retainer surplus left in trust on one matter to cover the client's unpaid fees on a different matter?

Plain-English summary

A law firm was hired by one client for two matters. It received a retainer on the first matter and deposited it in a trust account; it received no retainer on the second. The firm completed both matters and expects no further work. A surplus remains in trust on the first matter, while the second matter has an unpaid balance larger than that surplus. The client stopped communicating despite the firm's attempts by email, voicemail, text, and mail. The firm asked whether it could apply the first matter's surplus to the second matter's unpaid balance and write off the difference, and if not, how to disburse the surplus.

The committee concluded the firm may not use the first matter's retainer funds to cover part of the amount due on the second. Under Rule 1.15(c), client funds advanced as payment for unearned legal fees must be deposited in a client trust account, "to be withdrawn only as fees are earned," and under Rule 1.16(d) a lawyer must refund any advance payment of fee or expense that has not been earned or incurred. The committee characterized the first matter's retainer as a refundable special retainer, advanced for a particular matter with no agreement that any portion was non-refundable, so the surplus is client funds. While it acknowledged the equitable appeal of offsetting an overpayment on one matter against an underpayment on another, it found that an unearned fee remains an unearned fee even where the lawyer has performed uncompensated work elsewhere.

The committee distinguished its earlier Opinion 88-08, which had allowed an overpayment on one invoice to be applied to another unpaid invoice for the same client (provided the client made no claim to the overpayment and the funds were promptly escrowed if disputed). There, the funds had not been deposited into a client trust account; here they had, and Rule 1.15(c) expressly requires unearned fees to remain in trust "to be withdrawn only as fees are earned." The committee observed that the current Rule 1.15(c) did not appear to be in place when Opinion 88-08 was written. It added that a fee agreement could change the result: had the agreement provided that funds remaining in trust may be applied to other matters, the lawyer could apply the remainder to those matters. As to disbursing the surplus when the client cannot be reached, the committee pointed to Opinion 02-05's methods for returning client funds.

In practice

The opinion holds that, under South Carolina Rule 1.15(c) and Rule 1.16(d), a lawyer may not withdraw a client's unearned retainer surplus from trust on one matter to offset an unpaid balance on a separate matter, because unearned fees in trust may be withdrawn only as earned on the matter for which they were advanced or refunded to the client. The opinion identifies one exception keyed to the fee agreement: if the agreement provided in advance that funds remaining in trust may be applied to other matters, the lawyer may do so. The opinion treats the surplus here as a refundable special retainer that is client property, to be returned following the methods in Opinion 02-05 when the client cannot be reached.

Common questions

Q: Can a lawyer move a client's leftover retainer to cover what the client owes on another case?

A: No, not by default. The committee said Rule 1.15(c) requires unearned fees to stay in trust and be withdrawn only as earned on that matter or refunded, so the surplus cannot be used to offset a balance on a different matter.

Q: Does it matter that the lawyer actually did unpaid work on the other matter?

A: No. The committee acknowledged the equitable appeal of an offset but concluded that an unearned fee remains an unearned fee even where the lawyer has an equitable claim from uncompensated work elsewhere.

Q: Can the fee agreement change this result?

A: Yes. The committee said that had the fee agreement provided that funds remaining in trust may be applied to other matters, the lawyer would be able to apply the remainder to those matters.

Q: How should the lawyer handle a surplus when the client has gone silent?

A: As any other return of client property. The committee said the surplus is client funds and pointed to Opinion 02-05's methods for returning client funds when the client cannot be contacted by ordinary means.

Background and rules framework

The opinion interprets South Carolina Rule 1.15(c) (advance fee payments deposited in a client trust account, to be withdrawn only as earned), Rule 1.16(d) (refund of any advance payment of fee or expense not earned or incurred on termination), and Rule 1.5(a) (reasonableness and the comment 4 distinction between general and special, refundable and non-refundable retainers), which correspond to the like-numbered Model Rules. The analysis turns on classifying the retainer as a refundable special retainer and on Rule 1.15(c)'s express limit that trust funds may be withdrawn "only as fees are earned."

Citations and references

Rules of Professional Conduct:

• MR 1.15 / SC Rule 1.15(c) (unearned fees held in trust, withdrawn only as earned)
• MR 1.16 / SC Rule 1.16(d) (refund of unearned fee or unincurred expense on termination)
• MR 1.5 / SC Rule 1.5(a), Comment 4 (reasonableness; general vs special and refundable vs non-refundable retainers)

Other opinions cited:

• SC Ethics Advisory Opinion 88-08: overpayment on one invoice applied to another for the same client (distinguished; predated current Rule 1.15(c))
• SC Ethics Advisory Opinion 02-05: methods for returning client funds when the client cannot be contacted

See also

• SC Bar Ethics Op. 06-02: Marked-Up Recording Fees at Closing
• SC Bar Ethics Op. 05-15: Trust Funds for an Unreachable Settlement Payee
• SC Bar Ethics Op. 12-02: Contingent Fee as a Property Interest

Source

• Landing page: https://www.scbar.org/for-lawyers/quicklinks/legal-resources/ethics-advisory-opinions/ethics-advisory-opinion-12-01/
• Original PDF: https://www.scbar.org/media/c01huwr2/12-01.pdf

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 12-01

Facts

Law firm is hired by one client for two matters. Law firm received retainer funds on the first matter and deposited the funds into one of its trust accounts. Law firm did not receive retainer funds on the second matter. Work was performed by law firm on both matters. Law firm does not expect to perform any further services on either matter.

There remains a surplus in the trust account on the first matter. There is an unpaid balance in the second matter. The unpaid balance is greater than the surplus. Client ceased all communication with law firm. Law firm has attempted to reach client through email messages, voice mail messages, text messages and US mail, without success.

Law firm wishes to apply the surplus funds of the first matter to the balance of the second matter and write off the difference as an uncollected fee, closing out both matters.

Questions

1. Is it permissible for the law firm to apply the trust account proceeds in the first matter to the unpaid balance in the second matter?

2. If not, how should Law Firm disburse the surplus funds to the client?

Summary of Opinion

The law firm is not authorized to use the funds received as a retainer in the first matter to cover a portion of the amount due on the second matter. The law firm should treat the additional funds held in the trust account for the first matter as it would any other client funds, taking appropriate steps to notify the client of its right to recover the surplus. If the lawyer’s fee agreement sets forth that any funds remaining in trust may be applied to other matters, then the lawyer may apply the remainder to those matters.

Opinion

Client funds that have been advanced as payment for unearned legal fees must be deposited in a client trust account, to be withdrawn only as fees are earned. Rule 1.15(c). Upon termination of representation, a lawyer must refund “any advance payment of fee or expense that has not been earned or incurred.” Rule 1.16(d). The question posed by this inquiry is whether unearned legal fees may be withdrawn to satisfy a debt to the lawyer arising from a transaction other than the matter in connection with which the funds were advanced.

Generally speaking, fee advances or retainers are either general or special, and either refundable or non-refundable. General retainers are funds advanced for payment of any fees generated in connection with work for the client; special retainers are funds advanced for use in a particular matter. Retainers are generally presumed to be refundable unless counsel and the client arrange otherwise in advance and retention of the fee is fair based on the factors set forth in Rule 1.5(a). Rule 1.5, Cmt. 4; Rule 1.16(d). Had the lawyer’s fee agreement set forth that any funds remaining in trust may be applied to other matters, then the lawyer would be able to apply the remainder to those matters.

Based on the facts set forth above, it is apparent that the retainer in the first matter is a refundable special retainer. Specifically, the inquirer states that the retainer was received in connection with a particular matter and placed in a client trust account. The inquirer does not suggest that there was any agreement that the retainer or any portion thereof was to be treated as non-refundable. Thus, it is apparent that the surplus funds left over from the first matter are client funds.

As a matter of fairness and expedience, there is some appeal to the argument that counsel should be able to offset overpayment on one matter against underpayment on another. However, review of the Rules cited above suggests that an unearned fee remains an unearned fee, even if the lawyer has an equitable claim to the funds by virtue of having performed uncompensated work on another matter.

In Opinion No. 88-08, this committee considered a somewhat similar question regarding whether the amount of overpayment of one invoice could be applied to another unpaid invoice for the same client. This committee advised that use of the overpayment amount to pay off another invoice was permissible, provided the client “makes no claim to the amount of the overpayment” and the funds are promptly moved to an escrow account in the event of a subsequent dispute. In that opinion, we cautioned that “a prudent law firm” would go a step further and get client approval in advance, but made clear that this was not required.

At first blush, Opinion No. 88-08 appears to support the view that a lawyer is not prohibited from using client funds paid for one matter to offset unpaid fees on another matter, even without advance client consent. However, the facts underlying that Opinion are distinct from the facts provided by the inquirer here.

In this case, the relevant funds have already been deposited into a client trust account. They would need to be withdrawn in order to be used. Given that Rule 1.15(c) expressly states that unearned legal fees are to remain in a client trust account, “to be withdrawn only as fees are earned,” we do not believe the Rule contemplates withdrawing the funds for any purpose other than (1) payment for services rendered in connection with the matter for which they were designated or (2) refunding unearned fees to the client. (It does not appear that the current Rule 1.15(c) was in place when Opinion No. 88-08 was written.) Thus, withdrawing funds from a client trust account to pay off a shortfall on another matter is not permissible.

As to the question how to disburse the surplus funds to the client, this matter should be handled as would any other return of client property. In Opinion No. 02-05, we addressed methods for returning client funds when the relevant clients cannot be contacted by ordinary means. We believe that discussion applies to this scenario as well.