Can a lawyer put a clause in the fee agreement saying that if a client never cashes a refund check from the trust account, the leftover funds become the lawyer's?

Plain-English summary

The inquiring lawyer found that some clients had never cashed checks she had drawn for them from her trust account. She proposed amending her future representation agreements to provide that, if a refund check went uncashed, she would make a diligent search for the client, but if that search failed, the leftover trust funds would become hers. She asked whether such a clause was permissible, whether the answer changed with the amount involved, and whether it changed for a client who refused a refund out of a desire for anonymity.

The committee concluded the proposed clause would violate RPC 1.15A, 1.5, and 1.8. Client funds must stay in trust until withdrawn for earned fees or costs or returned to the client (RPC 1.15A), so the clause runs afoul of the requirement of reasonable notice before deducting fees or costs (RPC 1.15A(h)(5)) and the bar on using client funds for anyone else, including the lawyer (RPC 1.15A(h)(8)). RPC 1.15A, Comment 6 requires that, when a diligent search fails, unclaimed funds be turned over to the state as unclaimed property under RCW Chapter 63.29; whether a contract term could defeat the state's claim is a legal question the committee declined to decide. The committee added that transferring the funds to the lawyer would violate RPC 1.8(c) if treated as a gift, or RPC 1.5 (reasonableness, with its nine factors) if treated as a fee, and that a windfall from a client's failure to cash a check is neither a reasonable fee nor a fair and reasonable adverse transaction under RPC 1.8(a). The committee held the same rules apply regardless of the amount (Question 2) and regardless of a client's insistence on anonymity (Question 3).

In practice

Under the Washington rules as they stood at the time of the opinion, the committee treated uncashed client refunds as still belonging to the client: a lawyer cannot contract around RPC 1.15A to convert them into the lawyer's own funds. The opinion holds that after a diligent but unsuccessful search, RPC 1.15A Comment 6 directs the funds to the state as unclaimed property under RCW 63.29, and that recharacterizing the transfer as a gift or fee does not save it, because RPC 1.8(c) bars the gift and RPC 1.5(a)'s reasonableness factors do not reach a fee tied to a client's failure to cash a check. The committee applied the same analysis to small balances and to clients who refuse a refund for anonymity, declining only the separate legal question of whether such a clause could ever defeat the state's unclaimed-property claim.

Common questions

Q: Can a fee agreement say that uncashed trust-account refunds become the lawyer's money?

A: No. The committee concluded such a provision violates RPC 1.15A, 1.5, and 1.8, because client funds must be returned to the client or, if unclaimed after a diligent search, turned over to the state under RCW 63.29.

Q: What is a lawyer supposed to do with funds a client never cashes?

A: Per RPC 1.15A, Comment 6, take reasonable steps to locate the client; if that fails, treat the funds as unclaimed property and turn them over to the state under RCW Chapter 63.29.

Q: Does it matter if the amount is tiny, or if the client wants to stay anonymous?

A: No. The committee held the same rules apply regardless of the amount and regardless of a client's insistence on anonymity; intentionally abandoned property is handled the same as accidentally abandoned property.

Background and rules framework

The opinion interpreted Washington RPC 1.15A (Model Rule 1.15, safekeeping client property), including the reasonable-notice requirement before deducting fees or costs (1.15A(h)(5)), the bar on using client funds for others (1.15A(h)(8)), and Comment 6 (unclaimed-funds procedure); RPC 1.5 (Model Rule 1.5, reasonable fees and the nine reasonableness factors); and RPC 1.8(a) and (c) (Model Rule 1.8, business transactions adverse to a client and gifts to the lawyer). It also referenced Washington's Uniform Unclaimed Property Act, RCW Chapter 63.29, including the three-year abandonment period in RCW 63.29.120(1) and the state's custody of abandoned property under RCW 63.29.030.

Citations and references

Rules of Professional Conduct:

• Model Rule 1.15 / Washington RPC 1.15A, 1.15A(h)(5), 1.15A(h)(8), Comment 6 (safekeeping; trust accounts; unclaimed funds)
• Model Rule 1.5 / Washington RPC 1.5(a) (reasonable fees)
• Model Rule 1.8 / Washington RPC 1.8(a), 1.8(c) (adverse transactions; gifts to lawyer)

Statutes:

• RCW Chapter 63.29 (Uniform Unclaimed Property Act), including RCW 63.29.030 and RCW 63.29.120(1)

See also

• AL Ethics Op. 1988-92: unclaimed client trust funds escheat to the state
• WA Ethics Op. 1029: trust funds held where the lawyer cannot obtain client instructions

Source

• Landing page: https://ao.wsba.org/print.aspx?ID=1639

Original opinion text

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

Advisory Opinion: 2176
Year Issued: 2009
RPC(s): RPC 1.15A, 1.5, 1.8, RCW 63.29
Subject: representation agreement provision on uncashed IOLTA checks

I. Facts In a review of her trust account, the inquiring lawyer has found some clients who had not negotiated checks drawn for them. She would like to change her representation agreements with future clients to provide that if a check to the client is not negotiated, the lawyer will make a diligent search for the client, but if the diligent search is not successful, the funds in the trust account upon which the check was to be drawn will become hers.

II. Questions

1. May a lawyer insert a condition in the representation agreement with a client that gives the lawyer funds in the lawyer’s trust account that belong to the client if the client fails to negotiate a check from the lawyer for those funds?

2. Would the answer to this question vary depending upon the amount of funds involved?

3. Would the answer be different for a client so concerned about anonymity that the client refused to have funds returned to him?

III. Response

1. The proposed provision for the lawyer’s representation agreement would violate RPC 1.15, 1.5, and 1.8.

2. The same rules apply regardless of the amount of the funds involved. 3. The circumstance of a client insisting on anonymity would not provide an exception to the rule.

IV. Analysis The inquiring lawyer wants to put a condition in her representation agreement with clients that would give her ownership of a client’s funds in her trust account when the check she has issued to the client for those funds goes uncashed. Adding such a condition to a representation agreement would violate the Rules of Professional Conduct.

Client funds must be held in trust until they are withdrawn by the lawyer to pay costs or the lawyer’s earned fee, or until they are returned to the client. RPC 1.15A. The inquiring lawyer’s proposal would violate this basic rule for trust accounts. The proposal runs afoul of the specific rule requiring reasonable notice to the client before the deduction of costs or fees [RPC 1.15A(h)(5)] and the rule that provides that client funds never be used on behalf of anyone else, including the lawyer [RPC 1.15A(h)(8)].

The inquiring lawyer is willing to accept her duty to make a diligent search for rightful recipient of the checks that go uncashed. However, RPC 1.15A, Comment 6, which discusses this circumstance, requires not only that the lawyer conduct such a search, but also that upon failing to find the rightful owner, the funds are to be treated as unclaimed property pursuant to the Unclaimed Property Act, RCW Chapter 63.29.

The inquiring lawyer is well aware of the Unclaimed Property Act. She recently disposed of some funds from her trust account in accord with its rules. It is her hope that the proposed terms for her representation agreement will allow her to avoid having to turn the unclaimed funds over to the state in the future. RCW 63.29.120(1) provides that property held in a fiduciary capacity which has been unclaimed for three years is deemed to be abandoned. Such property becomes subject to the custody of the state as unclaimed property pursuant to RCW 63.29.030. Whether the condition she proposes for her representation agreement could avoid the state’s claim upon the funds under the Unclaimed Property Act is a legal question which is beyond the purview of this committee.

The inquiring lawyer’s proposal conflicts with rules other than those governing trust accounts. The transfer of ownership of unclaimed client funds to the lawyer would violate RPC 1.8(c) if the transfer were considered as a gift to the lawyer. Considered as a fee or expense, it would have to satisfy RPC 1.5. RPC 1.5(a) provides that fees and expenses must be reasonable and lays out nine considerations to be used in determining whether a fee or expense is reasonable. While these factors are not exclusive, they give a good picture of the factors that can be considered in determining whether a fee is reasonable. None of the factors approaches authorizing a fee based upon the fortuitous circumstance that a client fails to negotiate a lawyer’s refund from trust. What the lawyer is proposing does not satisfy the requirements for a reasonable fee or expense.

Under the proposed representation agreement, the lawyer stands to gain financially at the expense of the client upon the client’s failure to cash the lawyer’s check. This creates a pecuniary interest for the lawyer adverse to the client. A lawyer may not acquire an interest adverse to the client unless the transaction and terms are fair and reasonable. RPC 1.8(a)(1) A windfall for the lawyer at the expense of the client is not fair and reasonable. These considerations apply regardless of the amount of the unclaimed funds (Question 2). The fact that a perspective client may be willing to abandon small amounts that might be left over in the trust account does not change to ethical obligations of the lawyer. The same rules apply to funds refused by the client insistent upon anonymity (Question 3). The provisions of the Unclaimed Property Act apply as well to property intentionally abandoned as they do to property that is accidentally abandoned.

RPC 1.15A, Comment 6, tells the lawyer what to do when the lawyer is having difficulty finding a client to disburse to the client funds that had been held in trust. The lawyer is to take reasonable steps to locate the client. If those steps do not result in locating the client or in the client’s negotiating the check, then the funds are to be turned over to the state as unclaimed property.