Must a lawyer hold advanced, retainer, flat, and prepaid fees in trust, and can a retainer be nonrefundable?

Plain-English summary

The opinion addressed the fiduciary duties attaching to the various fee structures lawyers use: retainer fees, advanced fees, advanced costs and expenses, flat fees, prepaid fees, and nonrefundable retainer fees. It began with EC 2-19, which encourages a clear, preferably written, fee agreement, and with DR 9-102, the trust-account rule requiring client funds (including advances for costs and expenses) to be held in identifiable insured accounts and barring deposit of the lawyer's own funds except as the rule allows.

From those provisions the opinion drew its central rule: all unearned attorney fees of any kind, including retainer, advanced, general, special, flat, and prepaid fees, together with advanced costs and expenses, are funds belonging in part to the client and must be deposited in a trust account, to be withdrawn only when due (earned); if the client disputes the lawyer's right to a portion, that disputed portion may not be withdrawn until the dispute is finally resolved. The same fiduciary duties apply to non-monetary property delivered as security for unearned fees, which must be placed in trust and safekeeping.

The opinion recognized a limited category of advanced earned fees. A lawyer may receive an advanced earned fee in the nature of a nonrefundable retainer designed to compensate the lawyer for being available to represent the client, for committing time that precludes accepting other employment, or for being precluded from taking an adverse interest because of conflicting interests or receipt of privileged information. Such earned fees need not be placed in trust, but they remain subject to the strict reasonable-fee limits of DR 2-106(A) and (B) and, under DR 2-110(A)(3) and (B)(4) and other authorities, may be subject to accountability and refunding in certain circumstances. The opinion concluded that all prepaid, advanced, or retainer fees are deemed refundable in the absence of a clear understanding by the client to the contrary, preferably in writing, and a footnote questioned whether a labeled "nonrefundable" retainer would even be valid, citing authorities including In re Cooperman-era analysis and Jacobson v. Sassower.

Currency note

This opinion was issued in 1992, before Tennessee's adoption of the 2003 Rules of Professional Conduct, which replaced the former Code of Professional Responsibility (including DR 9-102, DR 2-106, and DR 2-110(A)(3)) on which it relied, and before the ABA's 2002 Ethics 2000 revisions. The modern analogs are RPC 1.5 (fees), RPC 1.15 (safekeeping property and trust accounts), and RPC 1.16(d) (refunding unearned fees on termination). This opinion was refined by 92-F-128(a) and reaffirmed on reconsideration by 92-F-128(b). Treat this page as historical context, not current guidance, and verify against the current rules before relying on any specific requirement mentioned here.

Common questions

Q: Did a Tennessee lawyer have to deposit an advance or retainer in a trust account?

A: Per the opinion, yes, to the extent it was unearned. All unearned fees of any kind belonged in part to the client and had to be held in trust under DR 9-102, to be withdrawn only when earned.

Q: Could a lawyer keep a fee labeled "nonrefundable"?

A: Only in limited situations. The opinion allowed an advanced earned fee in the nature of a nonrefundable retainer to compensate for availability, for committing time, or for being precluded from adverse representation, but it deemed all prepaid, advanced, or retainer fees refundable absent a clear understanding otherwise (preferably in writing) and questioned the validity of a labeled "nonrefundable" retainer.

Q: What happened if the client disputed the lawyer's right to part of an advance?

A: The opinion concluded that the disputed portion could not be withdrawn from trust until the dispute was finally resolved.

Background and rules framework

The opinion interpreted EC 2-19 (clear fee agreements), DR 9-102 (preserving the identity of client funds; trust accounts), DR 2-106 (reasonable fees), and DR 2-110(A)(3) (refunding unearned fees on withdrawal). The modern analogs are Model Rule 1.5 / Tennessee RPC 1.5 (fees), Model Rule 1.15 / Tennessee RPC 1.15 (safekeeping property), and Model Rule 1.16(d) / Tennessee RPC 1.16(d) (refunding unearned fees).

Citations and references

Rules of Professional Conduct (former Code):

• DR 9-102 (trust accounts; identity of client funds). Modern analog: Model Rule 1.15 / Tennessee RPC 1.15
• DR 2-106 (reasonable fees); EC 2-19 (clear fee agreements). Modern analog: Model Rule 1.5 / Tennessee RPC 1.5
• DR 2-110(A)(3) (refunding unearned fees on withdrawal). Modern analog: Model Rule 1.16(d) / Tennessee RPC 1.16(d)

Cases:

• Jacobson v. Sassower, 122 Misc. 2d 863, 474 N.Y.S.2d 167 (1983), aff'd, 107 A.D.2d 603, 483 N.Y.S.2d 711 (1985), validity of a nonrefundable-fee clause

See also

• Tenn. Ethics Op. 92-F-128(a): Earned vs. Unearned Advanced and Flat Fees
• Tenn. Ethics Op. 92-F-128(b): Reconsideration, Nonrefundable Fees
• ABA Formal Op. 505: Fees Paid in Advance
• AZ Ethics Op. 99-02: Non-Refundable Fees

Source

• Landing page: https://www.tbpr.org/ethic_opinions/92-f-128

Original opinion text

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

92-F-128 - Retainer fees, flat fees, advanced fees, Advanced costs and expenses, pre-paid fees, nonrefundable retainer fees

BOARD OF PROFESSIONAL RESPONSIBILITY OF THE SUPREME COURT OF TENNESSEE

FORMAL ETHICS OPINION 92-F-128

Inquiry is made concerning the ethical/fiduciary responsibilities relating to retainer fees, advanced fees, advanced costs and expenses, flat fees, pre-paid fees, and nonrefundable retainer fees.

Ethical Consideration 2-19 of the Code of Professional Responsibility states:

EC 2-19

As soon as feasible after a lawyer has been employed, it is desirable that he reach a clear agreement with his client as to the basis of the fee charges to be made. Such a course will not only prevent later misunderstanding but will also work for good relations between the lawyer and the client. It is usually beneficial to reduce to writing the understanding of the parties regarding the fee, particularly when it is contingent. A lawyer should be mindful that many persons who desire to employ him may have had little or no experience with fee charges of lawyers, and for this reason he should explain fully to such persons the reasons for the particular fee arrangement he proposes.

Disciplinary Rule 9-102(A) of the Code states, in part;

DR 9-102. Preserving Identity of Funds and Property of a Client.

(A) All funds of clients paid to a lawyer or law firm, including advances for costs and expenses, shall be deposited in one or more identifiable insured depository institutions maintained in the state in which the law office is situated.

...No funds belonging to the lawyer or law firm shall be deposited therein except as follows:

• Funds reasonably sufficient to pay service charges may be deposited therein;

• Funds belonging in part to a client and in partpresently or potentially to the lawyer or law firmmust be deposited therein, but the portion belonging to the lawyer or law firm may be withdrawn when due unless the right of the lawyer or law firm to receive it is disputed by the client, in which event the disputed portion shall not be withdrawn until the dispute is finally resolved.

(B) A lawyer shall:

• Promptly notify a client of the receipt of ...funds, securities, or other properties.

• Identify and label securities and properties of a client promptly upon receipt and place them in a safe deposit box or other place of safekeeping as soon as practicable.

• Maintain complete records of all funds, securities and other properties of a client coming into the possession of the lawyer and render appropriate accounts to (the) client regarding them.

• Promptly pay or deliver to the client as requested by a client the funds, securities or other properties in the possession of the lawyer which the client is entitled to receive.

All unearned attorney fees of any kind or nature paid by or on behalf of a client to an attorney, including retainer fees, advanced fees, general retainers, special retainers, flat fees, pre-paid fees, etc.; including advanced costs and expenses; are funds which belong in part to the client and must be deposited in a trust account to be withdrawn only when due, unless the right of the attorney or other payee to receive funds is disputed by the client, in which event the disputed portion shall not be withdrawn until the dispute is finally resolved.

The same fiduciary duties described above are applicable to non-monetary property delivered to an attorney as security for unearned fees. Such security deposits are required to be placed in trust and safekeeping.

In limited instances an attorney may receive an advanced earned fee in the nature of an unrefundable retainer fee designed to compensate the attorney for being available to represent a client, or to compensate the attorney for committing time for representation precluding acceptance of other employment, or to compensate the attorney for being precluded from taking an adversary interest or position because of conflicting interests or for having received privileged information. Earned fees of this kind and nature do not have to be placed in trust accounts and are subject to the strict limitations of Disciplinary Rules 2-106(A) and (B) of the Code; and, pursuant to DR 2-110(A)(3), 2-110(B)(4) and other applicable legal authorities may be subject to accountability and refunding in certain circumstances. 1

All pre-paid, advanced or retainer fees are ethically deemed to be refundable in the absence of a clear understanding by the client to the contrary, preferably in writing.

This 11th day of June, 1992.

ETHICS COMMITTEE:

Harris A. Gilbert

Donna Simpson Massa

Barbara J. Moss

APPROVED AND ADOPTED BY THE BOARD

1 It is not clear, however, whether a nonrefundable retainer would be valid. A client who hasjust paid a lawyer $50,000 to perform all occupational health and safety work for a factory that burns down the next day, obviating the need for any legal work, can probably recover the retainereven if it was solemnly called "nonrefundable" in the agreement. Moreover, because the nonrefundable feature chills the client's right to discharge the lawyer ..., it has been held that such a clause is invalid and the lawyer is only entitled to the reasonable value of his or her services after discharge. See Modern Legal Ethics, Wolfram p. 506; Jacobson v. Sassower, 122 Misc.2d 863, 474 N.Y.S.2d 167 (1983), affirmed 107 A.D.2d 603; 483 N.Y.S.2d 711 (1985).