An “advance fee” is money your client gives you upfront to pay the cost of legal representation. Typically, such payments are called “retainers.” However, unlike true retainers, which are paid to ensure your availability to a
client and are therefore earned in full at the time you receive them, advance fees don’t belong to you until you perform services for that client. And if you don’t perform all the services, you have to refund the unearned money.
Not Required to be Held in Trust
Surprisingly, Rule 4-100(A) does not cover advance fees. Rather, Rule 4-100(A) says you have to put “all funds received or held for the benefit of a client . . . including advances for costs and expenses” into your client trust bank account before you pay them out. The rule is that when you receive any money that your client has an interest in, it must be deposited into the client trust bank account and cleared before it can be paid out.
Money “received or held for the benefit of a client” includes:
- Money that belongs to the client outright (e.g., funds from the sale of the client’s property);
- Money in which you and your client have a joint interest (e.g., settlement proceeds that include your contingency fee);
- Money in which your client and a third party have a joint interest (e.g., money you hold for a partnership of which your client is a partner or funds from the sale of community property); and
- Money that doesn’t belong to your client at all but which you are holding as part of carrying out your representation of the client (e.g., when your client has commenced an action for interpleader).
As you can see, the list does not include advanced fees. Rather, under rule 4-100, as it has been construed by the courts, an attorney is ethically permitted, but not required, to deposit fees not yet earned into a client trust account. However, you can’t keep any money belonging to you or your law firm in any of your client trust bank accounts. That means that when you’re holding client money that includes your advanced fees, you have to take those fees out of the client trust bank account as soon as you earn them. It’s not a matter of your convenience; you are ethically required to withdraw your money from that account as soon as you reasonably can.
Accounting for Advance Fees
But while you aren’t clearly required to, the simplest and safest thing to do is to hold advance fees in your client trust bank account and draw them out as you earn them. In fact, it would be a good idea for you
to withdraw your fees on a regular basis, perhaps when you do your monthly reconciliation. That is because although advanced fees are not required to be maintained in a client trust account, case law has recognized a duty to account for such fees.
In the Matter of Fonte (Review Dept. 1994) 2 Cal. State Bar Ct. Rptr. 752, 756-758, the State Bar Court Review Department found that a lawyer violated rule 4-100(B)(3) requiring a lawyer “to maintain complete records of all funds, securities, and other properties of a client coming into the possession of the [lawyer] or law firm and render appropriate accounts to the client regarding them . .. . ”. In Fonte, the lawyer had taken a “minimum” fee payment from the client, allegedly paid solely to secure the lawyer’s availability for the client’s matter. The lawyer argued that he had no duty to account to the client because the minimum fee was a true retainer fee, earned upon receipt, and was not placed in the lawyer’s client trust account. The lawyer argued that the duty to account found in rule 4-100(B)(3) applied only to fees placed in the lawyer’s client trust account. The court disagreed, upholding the trial judge’s finding that “minimum” fee paid for more than just the lawyer’s availability and, therefore, was not a true retainer fee but simply an advance fee payment for service. The court then held that the lawyer had a duty to account for lawyer’s fees taken out of the client’s advance fee payment, regardless of the fact that such fees were not deposited in the lawyer’s client trust account.
The lesson of Fonte is that, except in the case of a true retainer fee which is paid solely to secure the lawyer’s availability and which is thereafter treated as such by the lawyer, lawyers have a duty to account to clients for advance fee payments, regardless of whether such fee payments are designated as “nonrefundable” in the attorney-client fee agreement or whether such fee payments are deposited in the lawyer’s client trust account. While such duty to account may appear onerous to some lawyers, an accounting effectively protects a lawyer, allowing the lawyer to show what services were performed for the client and that the advance fees were in fact earned. A proper accounting can be the best defense against a client’s claim, in a court action or fee arbitration, that a refund of advance fees is due to the client.