By Neil J Wertlieb
A comprehensive set of new Rules of Professional Conduct was approved by the California Supreme Court last year and went into effect on November 1, 2018. The new rules can be found on the State Bar’s website under Current Rules of Professional Conduct.
One of the more important changes to our former rules can be found in new Rule 1.15 (Safekeeping Funds and Property of Clients and Other Persons), the rule relating to client trust accounts. Because a significant number of disciplinary actions against attorneys involve the misuse of client funds, it is critical that attorneys understand their obligations under Rule 1.15, especially as it pertains to advance fee retainers or deposits.
Its predecessor rule, former Rule 4-100, required that all funds received or held for the benefit of clients by a lawyer or law firm be deposited into a client trust account. Such funds included settlement payments and other funds received from third parties as well as advances for costs and expenses. While best practices may have dictated otherwise, the former rule itself did not require the lawyer or law firm to deposit into a client trust account advance fee retainers or deposits. Under the former rule, such payments were not required to be segregated from the lawyer’s or law firm’s funds and were permitted to be deposited into a law firm’s operating account.
However, by adding the word “fees,” Rule 1.15 now mandates that “advances for fees” be deposited into a client trust account. “Advances for fees” is defined under the Rule as “a payment intended by the client as an advance payment for some or all of the services that the lawyer is expected to perform on the client’s behalf.”
The permissive nature of the former rule led many lawyers and law firms to simply deposit all such advances for fees into their operating accounts. In fact, lawyers in certain practice areas did not even need to maintain a trust account due to the nature of their practices. This changed on November 1, 2018, under new Rule 1.15.
Rule 1.15 requires that the bank account into which funds are deposited be maintained in the State of California. The only exception to this requirement is when the client trust account is maintained in a jurisdiction that bears a “substantial relationship” to the client or its business, and the client gives written consent. As a result, law firms that are based outside of the State of California or otherwise maintain their banking relationships outside of the state are now required to establish banking relationships within the state in order to properly deposit advances for fees.
Rule 1.15’s requirement to deposit advances for fees into a trust account does not apply to a “true retainer,” which is defined in Rule 1.5 (Fees for Legal Services) as “a fee that a client pays to a lawyer to ensure the lawyer’s availability to the client during a specified period or on a specified matter.” Such a fee is earned upon receipt, not as compensation for legal services to be performed, and as such may be deposited directly into a firm’s operating account. It is important to note, however, that in accordance with Rule 1.5, an attorney may not charge or collect a non-refundable fee unless the fee meets the definition of a true retainer, and the client agrees in writing that the client will not be entitled to a refund of any part of the fee.
Rule 1.15 also permits a flat fee paid in advance for legal services to be deposited into an operating account, but only if the lawyer discloses to the client in writing that the client has a right to require the flat fee be deposited into a trust account until the fee is earned, and that the client is entitled to a refund of any unearned amount of the fee in the event the representation is terminated or the services for which the fee has been paid are not completed. Further, if the amount of the flat fee paid in advance exceeds $1,000, the client’s consent must be in writing.
One final cautionary point: Like its predecessor, Rule 1.15 applies to all funds “received or held” by a lawyer or law firm for the benefit of a client. This language suggests that Rule 1.15 is not just prospective (by applying to funds received following the effectiveness of this new rule), but also applies to such funds that were “held” by a lawyer or law firm on the date the new rules became effective. As a result, Rule 1.15 could be interpreted to require that advances for fees received prior to November 1, 2018, which were deposited into the law firm’s operating account as permitted under the former rule, would have to be identified, quantified and moved into a client trust account. Such an interpretation would mean that Rule 1.15 would essentially be given retroactive effect. It appears, based on the legislative history for Rule 1.15, that this was not the intent of the State Bar representatives who crafted the language of the rule. However, the State Bar itself (including its Office of Chief Trial Counsel, which investigates attorney misconduct), as well as the courts, have yet to weigh in on this issue.
As a result, the addition of a simple four-letter word (i.e., “fees”) to the rule relating to client trust accounts may cause material disruption to attorneys in the State of California.
Neil J Wertlieb is an experienced transactional lawyer, educator and ethicist, who provides expert witness services in disputes involving business transactions and corporate governance, and in cases involving attorney malpractice and attorney ethics. He is a founding member and co-chair of the California Lawyers Association Ethics Committee. The views expressed herein are his own. For additional information, please visit www.WertliebLaw.com.