Proposed Opinions
Proposed 2006 Formal Ethics Opinion 3 Representation in Purchase of Foreclosed Property Inquiry #1: Seller (a financial institution) acquires property as a result of the foreclosure by execution of the power of sale contained in a deed of trust securing its own note or a note that it was servicing. Client X entered into a contract with Seller to buy the property that was repossessed via foreclosure. Attorney A regularly handles foreclosure proceedings for Seller either serving as the trustee or as the lawyer for the trustee (both roles are referred to herein as the "foreclosure lawyer"). In the current proceeding Attorney A served as the foreclosure lawyer. Client X would like Attorney A to close the sale. May Attorney A represent both Client X and Seller on the closing of the transaction, including examining title and giving an opinion as to title to Client X? Opinion #1: Yes, provided there is full disclosure to Client X of all potential risks and Client X gives informed consent. Multiple representation of parties to a real estate closing is allowed in RPC 210 and in 97 FEO 8. The latter opinion holds that a lawyer who regularly represents a real estate developer may represent the buyer and the developer in the closing of residential real estate. Rule 1.7 permits multiple representation notwithstanding the existence of a concurrent conflict of interest if the lawyer concludes that he or she can provide competent and diligent representation to each affected client and the clients give informed consent which is confirmed in writing. If Attorney A concludes that, under the circumstances, he can still exercise independent professional judgment on behalf of all of the parties to the closing, he may seek the informed consent of Client X. Obtaining the informed consent of the buyer in this situation means that the buyer must be advised of the potential risks to a purchaser of property that was previously foreclosed including the distinctions between marketable and insurable title and between a non‑warranty and a warranty deed. The buyer must also be advised of his potential liability for homeowners' association dues. Most importantly, the lawyer must disclose his prior participation in the foreclosure and explain that the lawyer must examine his own work on the foreclosure to certify title to the property. Attorney A may represent all of the parties to the closing even if Client X procures financing to purchase the property (including financing provided by Seller). Attorney A must be able fully to explain, without objection from the lender/seller, the loan documents, setting forth the terms of repayment (and potentially including a balloon payment and/or prepayment penalty), and the status of title including any material exceptions between the lender's and owner's title insurance policies. If Client X consents to the representation, Attorney A may proceed unless and until it becomes apparent that he cannot manage the potential conflict between the interests of the lender/seller and the buyer. If the lawyer determines that he can no longer exercise his independent professional judgment on behalf of both clients, he must withdraw from the representation of both clients. Inquiry #2: Under the facts of Inquiry #1, the contract signed by Client X provides that Seller will select the title and closing agent. However, the contract specifies that the buyer is also entitled to legal representation at the buyer's own expense. Seller names Attorney A as the "title/closing agent" for the sale to Client X. May Attorney A represent both Client X and Seller on the closing of the transaction, including examining title and giving an opinion as to title to Client X? Opinion #2: No. Under these circumstances, it is apparent that it is in Attorney A's personal financial interest to preserve and protect his relationship with Seller. This self‑interest will impair Attorney A's independent professional judgment and his ability to be objective and impartial when making the disclosures necessary to obtain informed consent from Client X. Therefore, Attorney A may not seek the informed consent of Client X and may not represent Client X in the closing. Inquiry #3: Under the facts of Inquiry #2, Attorney B regularly represents Seller on various matters but did not represent the trustee on the foreclosure of the subject property and did not act as trustee. May Attorney B represent both Client X and Seller on the closing of the transaction, including examining title and giving an opinion as to title to Client X? Opinion #3: Yes, Attorney B may represent both parties to the transaction but only upon satisfaction of the following conditions: Attorney B reasonably believes that the common representation will not be adverse to the interests of either client; there is full disclosure of Attorney B's prior representation and relationship with Seller; Attorney B reasonably believes that he can exercise independent professional judgment on behalf of Client X including explaining to Client X the provisions of the purchase contract and the distinction between a lawyer's opinion on title and title insurance; and Client X consents to the representation. Rule 1.7; 97 FEO 8. Inquiry #4: Under the facts of Inquiry #2, Attorney A intends to represent only the interests of Seller and does not intend to represent Client X in closing the transaction. May Attorney A limit his representation in this manner? Opinion #4: Yes, Attorney A may limit his representation to Seller. However, if he does so, in light of the provisions of the purchase contract, it is possible that Client X will be misled about Attorney A's role. Therefore, Attorney A must fully disclose to Client X that Seller is his sole client, he does not represent the interests of Client X, the closing documents will be prepared consistent with the specifications in the contract to purchase, and, in the absence of such specifications, he will prepare the documents in a manner that will protect the interests of his client, Seller, and, therefore, Client X may wish to obtain his own lawyer. See, e.g., RPC 40 (disclosure must be far enough in advance of the closing that the buyer can procure his own counsel), RPC 210, 04 FEO 10, and Rule 4.3(a). Because of the strong potential for Client X to be misled, the disclosure must be thorough and robust. Inquiry #5: Under the facts of Inquiry #4, if Attorney A limits his representation to Seller, but closes the transaction, does he have any duty to disclose or discuss any of the following with Client X: defects of title; the difference between insurable title and marketable title; the exceptions contained in the title policy and the need for exception documents at closing; and the terms of the sales contract? Opinion #5: If Attorney A explicitly limits his representation to Seller, he cannot give any legal advice to Client X except the advice to secure counsel. Rule 4.3(a). In light of the significant issues involved for Client X, Attorney A should advise Client X to obtain his own lawyer. Inquiry #6: Under the facts of Inquiry #4, Attorney A closes the transaction. The contract required the buyer to pay the closing agent's "customary closing fee," therefore, Client X pays a fee to Attorney A as the title/closing agent. Subsequently, a defect of title caused by Seller is discovered. May Attorney A be held liable to Client X for malpractice? Opinion #6: This is a legal question that is outside the purview of the Ethics Committee. Inquiry #7: Under the facts of Inquiry #1, the contract to buy the property signed by Client X contains the following conditions: Seller will select the title and closing agent; Seller will pay the title examination fee and the premium for the owner's title insurance policy; the buyer will pay the title/closing agent's "customary closing fee;" and all closing transactions will be held at the title/closing agent's office. The contract specifies that the buyer is entitled to legal representation at the buyer's own expense. Seller names Attorney A as the "title/closing agent" for the sale to Client X. May Attorney A represent both Client X and Seller on the closing of the transaction, including examining title and giving an opinion as to title to Client X? Inquiry #7: No, see Opinion #2 above. Inquiry # 8: Under the facts of Inquiries #2, 3, and 4, Client X asks Attorney Y to represent him on the closing of the purchase of the property. Client X wants Attorney Y to examine the title to the property, give his opinion as to title, and act as Client X's agent at the closing. Attorney A insists that the contract requires Client X to accept him as the closing agent for the transaction even if he only represents Seller. May Attorney A refuse to allow Attorney Y to participate in the closing as Client X's lawyer? Opinion #8: No. Clients are entitled to legal counsel of their choice. See, e.g., RPC 48. A lawyer may not participate in any scheme or contract that states or implies that a party to the transaction does not have the right to obtain independent legal counsel to represent his interests. Drafting such a provision for a client or agreeing to provide representation pursuant to such a provision is unethical because the provision will chill the buyer's right to independent legal counsel even if the enforceability of the provision is doubtful. Attorney A may, by the terms of the purchase agreement, be the designated closing agent for the sale. However, if Client X hires a lawyer to represent his interests by examining and giving him an opinion on title and participating in the closing on his behalf, the other lawyer may not interfere with this representation. See, e.g., Rule 4.2. In addition, Attorney A must comply with the prohibition in Rule 4.2(a) on direct communications with a represented person without the consent of the lawyer for the represented person. If Client X chooses to obtain his own lawyer, Attorney A may not interfere with Client X's representation by his chosen lawyer or needlessly complicate the ability of that lawyer to represent Client X. Both lawyers shall cooperate to insure that closing responsibilities are completed expeditiously and in compliance with RPC 191 and the Good Funds Settlement Act (if applicable). Specifically, Attorney A shall cooperate with Client X's lawyer on the provision and review of draft documents, the resolution of title issues subject to the terms of the contract, delivery of the executed documents, updating of title, and disbursement of the closing funds. Inquiry #9: Under the facts of Inquiries #2, 3, and 4, Attorney A agrees that Attorney Y will represent Client X's interests at the closing. However, Attorney A claims that he is still entitled to a fee from Client X because the terms of the contract. May the legal fee for Attorney A's representation of Seller be charged to Client X? Opinion #9: Whether the contract to purchase the property requires Client X to pay Attorney A's fee for representation of Seller is a legal question outside the purview of the Ethics Committee. However, a lawyer may be paid by a third party, including an opposing party, provided the lawyer complies with Rule 1.8(f) and the fee is not illegal or clearly excessive in violation of Rule 1.5(a). See RPC 196. Attorney A's time and labor relative to the closing may be reduced because of the legal services performed by Attorney Y on behalf of Client X. If so, this fact should be taken into account in determining whether the "customary fee" for closing the transaction is excessive and an appropriate reduction in the fee should be made. Rule 1.5(a). Because Client X is represented by Attorney Y, Attorney A may not charge or collect any money for representing Client X. Inquiry #10: A realtor prepared the purchase contract. It alters the usual closing arrangements, waives many "normal" rights of a buyer, and favors the seller by allowing the seller to terminate the contract for any reason and return the deposit without further liability. Is the realtor engaged in the unauthorized practice of law when preparing the contract? Does it matter whether the realtor is a buyer's agent, a seller's agent, or a dual agent? Does it matter whether the seller and the buyer have different realtors? Is consumer protection legislation needed? Opinion #10: These questions do not relate to the professional responsibilities of lawyers and cannot be answered by the Ethics Committee.
April 24, 2008
Proposed opinion provides guidelines for when a lawyer who represented the trustee or served as the trustee in a foreclosure proceeding at which the lender acquired the subject property may represent all parties on the closing of the sale of the property by the lender.
Proposed 2008 Formal Ethics Opinion 3
April 24, 2008
Assisting a Pro Se Litigant
Proposed opinion rules a lawyer may assist a pro se litigant by drafting pleadings and giving advice without making an appearance in the proceeding and without disclosing or ensuring the disclosure of his assistance to the court unless required to do so by law or court order.
Inquiry:
Without appearing in a proceeding or otherwise disclosing or ensuring the disclosure of his assistance to the court, may a lawyer assist a pro se litigant by giving advice on the content and format of documents to be filed with the court including pleadings, by drafting those documents for the litigant, or by giving advice about what to do in court including which witnesses to call, what evidence to present, and how to make opening and closing arguments?
Opinion:
Yes, a lawyer may assist a pro se litigant without disclosing his participation or ensuring that the litigant discloses his assistance unless the lawyer is required to do so by law or court order. Allowing such assistance is consistent with the duty of confidentiality in Rule 1.6, the authority to limit the scope of representation in Rule 1.2, and the duty to assist individuals who cannot afford legal representation as expressed in the Preamble and Rule 6.5. Remaining undisclosed does not violate the duty of honesty set forth in Rules 1.2(d), 4.1, or 8.4(c), or the duty of candor to the tribunal set forth in Rule 3.3(b) unless there is a court order or a law that requires the lawyer to make or ensure the disclosure.
In ABA Comm. on Ethics and Prof'l Responsibility, Formal Op. 07‑446 (2007), the ABA Standing Committee on Ethics and Professional Responsibility held that a lawyer may provide legal assistance to a pro se litigant without disclosing or ensuring the disclosure of the nature or extent of the assistance. With regard to whether it is dishonest or a violation of the duty of candor to the tribunal for the lawyer's assistance to remain undisclosed, the committee wrote that the answer to the question depends on
whether the failure to disclose that fact would constitute fraudulent or otherwise dishonest conduct on the part of the client, thereby involving the lawyer in conduct violative of [Model] Rules 1.2(d), 3.3(b), 4.1(b), or 8.4(c). In our opinion, the fact that a litigant submitting papers to a tribunal on a pro se basis has received legal assistance behind the scenes is not material to the merits of the litigation. Litigants ordinarily have the right to proceed without representation and may do so without revealing that they have received legal assistance in the absence of a law or rule requiring disclosure. Id.
The ABA committee added the following on whether it is dishonest for the lawyer's assistance to be undisclosed:
[the question] turns on whether the court would be misled by failure to disclose such assistance. The lawyer is making no statement at all to the forum regarding the nature or scope of the representation¼.Absent an affirmative statement by the client, that can be attributed to the lawyer, that the documents were prepared without legal assistance, the lawyer has not been dishonest within the meaning of Rule 8.4(c). For the same reason, we reject the contention that a lawyer who does not appear in the action circumvents court rules requiring the assumption of responsibility for their pleadings. Such rules apply only if a lawyer signs the pleading and thereby makes an affirmative statement to the tribunal concerning the matter. Where a pro se litigant is assisted, no such duty is assumed. Id.
The conclusion that the Model Rules of Professional Conduct do not compel disclosure of a lawyer's background assistance to a pro se litigant is sound and equally applicable to the North Carolina Rules of Professional Conduct.
In response to the decision of a federal magistrate judge in Delso v. Trustees for the Retirement Plan for the Hourly Employees of Merck & Co., Inc., 2007 WL 766349 (D.N.J. 2007), holding that a lawyer violated New Jersey Rule of Professional Conduct 3.3 by "ghostwriting" pleadings for a pro se litigant, the New Jersey Supreme Court Advisory Committee on Professional Ethics issued an ethics opinion that holds that a lawyer who provides drafting assistance to a pro se litigant is not required to notify the court of his role unless "such assistance is a tactic by a lawyer or party to gain advantage in litigation by invoking traditional judicial leniency toward pro se litigants." New Jersey Supreme Court Advisory Committee on Professional Ethics, Op. 713 (2008). However, judicial leniency can not make up for the substantial disadvantage a nonlawyer who appears pro se experiences when the opposing party is represented in court by legal counsel. A lawyer who recommends that a client appear pro se for the sole purpose of gaining the tactical advantage of judicial leniency is providing incompetent legal advice in violation of Rule 1.1 and such conduct is prohibited on this basis regardless of whether there is disclosure to the court of the lawyer's assistance.1
A pro se litigant who seeks a lawyer's advice or assistance outside the courtroom is a client of the lawyer although the representation is limited in scope and the individual may not pay for the advice or assistance. The duty of confidentiality in Rule 1.6(a) is, therefore, applicable and prohibits the lawyer from revealing information acquired in the professional relationship with the client unless the client gives informed consent, the disclosure is impliedly authorized to carry out the representation, or one of the exceptions to the duty of confidentiality in Rule 1.6(b) applies. The only applicable exception allowing disclosure of the lawyer's assistance to a pro se litigant is found in Rule 1.6(b)(1). It allows disclosure of confidential information to comply with the Rules of Professional Conduct, law, or court order. As noted above, the Rules of Professional Conduct do not compel disclosure.
Rule 1.2(c) allows a lawyer to limit the scope of a representation if the limitation is reasonable under the circumstances. As noted in comment [6] to the rule, "[t]he scope of services to be provided by a lawyer may be limited by agreement with the client or by the terms under which the lawyer's services are made available to the client." Limiting the lawyer's representation to extrajudicial advice and assistance is reasonable when an individual cannot afford to be represented in court. In 2005 FEO 10, the utility of unbundled legal services, or "legal services that are limited in scope and presented as a menu of legal service options from which the client may choose," to clients of limited means was acknowledged. The opinion holds that an internet‑based law practice may offer unbundled legal services to pro se litigants provided the client gives informed consent to the limited representation and the lawyer makes an independent judgment as to the limited services that can be competently provided under the circumstances. The opinion permits the lawyer to provide assistance to a pro se litigant without entering an appearance in the client's case and without requiring disclosure of the lawyer's behind the scenes assistance.
The Rules of Professional Conduct and prior ethics opinions recognize the importance of providing assistance to individuals who cannot afford representation. The Preamble, Rule 0.1, states that "[t]he basic responsibility for providing legal services for those unable to pay ultimately rests upon the individual lawyer." Rule 6.5, Limited Legal Services Programs, permits a lawyer operating under the auspices of a program sponsored by a non‑profit organization or court to provide short‑term limited legal services to a client without expectation that the lawyer will provide continuing representation to client. These short term services frequently include advice about the nature and content of pleadings the client should file and advice about what to expect and what to do in court. The rule does not require a participating lawyer to disclose his assistance to the court in which pleadings are filed or to ensure that the client makes the disclosure. The importance of encouraging lawyers to participate in such programs is manifested by the relaxation of the rules on conflicts authorized by Rule 6.5(a)(1) and (b).
Similarly, RPC 114 fosters legal assistance to individuals who cannot afford representation but fall outside the economic or subject matter eligibility requirements of legal services organizations. The opinion confirms that it is ethical for a legal services lawyer to draft a complaint for a pro se litigant's signature, explain how to file the complaint, and review courtroom procedure, including advice about strategy, tactics, or litigation techniques, without listing herself as the attorney of record. There should be no distinction between what a legal services lawyer and a lawyer in private practice may ethically do behind the scene to assist those who cannot afford full representation.
For the public policy reasons set forth above and because disclosure of the lawyer's assistance is not compelled by the Rules of Professional Conduct, a lawyer may assist a pro se litigant without disclosing his assistance to the court and without ensuring that the client discloses the assistance to the court unless the lawyer is compelled to make the disclosure by law or by a court order.
Endnote
1. Accord ABA Formal Opinion 07‑446 (2007)(undisclosed assistance "will not secure unwarranted 'special treatment' for that litigant or otherwise unfairly prejudice other parties to the proceeding. Indeed, many authorities studying ghostwriting in this context have concluded that if the undisclosed lawyer has provided effective assistance, the fact that a lawyer was involved will be evident to the tribunal. If the assistance has been ineffective, the pro se litigant will not have secured an unfair advantage.").Proposed 2008 Formal Ethics Opinion 8
July 17, 2008
Division of Fees in Departure Provision of Law Firm's Employment Agreement
Proposed opinion rules that a provision in a law firm employment agreement for dividing legal fees received after a lawyer's departure from a firm must be reasonable and may not penalize or deter the withdrawing lawyer from taking clients with her.
Background:
Rule 5.6(a) of the Rules of Professional Conduct prohibits a lawyer from participating in, offering, or making "a partnership, shareholders, operating, employment, or other similar type of agreement that restricts the right of a lawyer to practice after termination of the relationship except an agreement concerning benefits upon retirement." This prohibition on restrictive covenants protects the freedom of clients to choose a lawyer and promotes lawyer mobility and professional autonomy. Rule 5.6, cmt. [1]; 2001 FEO 10 (agreement reducing the amount of deferred compensation lawyer receives if the lawyer leaves the firm and engages in private practice within a 50 mile radius of the lawyer's former firm violates Rule 5.6(a)); 2007 FEO 6.
Many law firms include provisions in a partnership, shareholders, or employment agreement (referred to collectively herein as "employment agreement") that address the division of legal fees received by a lawyer after she withdraws from the law firm for the representation of clients who followed the departing lawyer to her new firm. The provisions do not directly prohibit the withdrawing lawyer from engaging in competition with the firm, but may create financial disincentives for the lawyer's continued representation of former clients of the firm. These provisions frequently appear in employment agreements for personal injury law firms that regularly represent clients on a contingent fee basis. The provisions typically require the withdrawing lawyer to pay her former firm a percentage of any contingent fee that she subsequently receives for the representation of a client who left the law firm with her. The provisions may also include a requirement that the withdrawing lawyer reimburse the firm prior to the resolution of the case for costs advanced on behalf of a departing client.
Example provisions from three employment agreements appear below.
Employment Agreement No. 1
Attorney acknowledges that Law Firm will expend a considerable amount of time and money to assist in his education in the assigned practice areas. Additionally, Attorney acknowledges that Law Firm will transfer to him/her current cases which have a significant amount of current work in process and that the firm is NOT prorating or penalizing his bonus program for this work in process. Further, the firm will transfer to Attorney considerable technological information both substantive and operational. Finally, Attorney acknowledges that Law Firm has and will spend considerable sums of money in marketing and advertising the Medico-Legal practice areas. Attorney also acknowledges that under the North Carolina State Bar Rules, a client is free to choose, in the event a lawyer shall leave the employment of a firm, whether the client will stay with the firm or go with the departing lawyer. Attorney specifically agrees to the following should he leave the firm for any reason:
A. Upon a client choosing to have Attorney represent them in the future, Attorney shall, within 30 days, pay to the firm any funds the firm has advanced to the client.
B. Attorney agrees to pay to the firm 70% of the fees he may receive from his continued representation of the client in the matter for which the firm was representing the client at the time of his departure. If this amount is greater than the amount of money that the firm could obtain as a legal fee, then the balance of the monies paid by Attorney to the firm under this provision shall be considered as compensation to the firm for the marketing, advertising, technological, and other information and knowledge provided by the firm to Attorney during his employment at the firm and as consideration for the work in process provided to Attorney on the cases he was assigned to at the beginning of his employment.
Employment Agreement Number 2
Costs and Escrows. At or as soon as is practicable on or after the Transfer Date [date file is transferred], the Firm shall provide departing Associate with a statement of costs for each Transferring Client (which may be in the form of one or more ledgers) showing expenses the Firm has advanced on the matter. Within five (5) days of receipt of such statement of costs, Associate shall pay the Firm the full amount of the costs advanced as reflected in such statement.
Compensation for Services Rendered to a Transferring Client. The parties acknowledge that in a typical Transferring Client matter, the Firm makes a substantial investment of initiative, goodwill, time, money, risk, and effort which the Firm will not ordinarily have been compensated at the time of the Transfer Date. That investment includes, but is not limited to: building the Firm's reputation for skillful, energetic, competent, effective, prompt, and dedicated service on behalf of clients; attracting clients to engage the services of the Firm; fostering the respect of other parties and tribunals for the legal services performed by the Firm and its attorneys; serving the needs of the Firm's clients; utilizing time, skill, and resources in investigation, client and witness interviews, collection and organization of medical and other records; factual and legal research; drafting of pleadings and correspondence; preparation for hearings; and many other tasks, too numerous and varied to mention, relating to a client's particular legal matter. Associate acknowledges that he/she has received or will receive compensation in the form of salary, benefits, and/or other Associate compensation for any work done or services performed by Associate on behalf of a Transferring Client prior to the Transfer Date; Associate understands and agrees that he/she has no right, claim, or interest in remuneration for work performed by Associate and/or the Firm prior to the Transfer Date on behalf of a Transferring Client or a Remaining Client. The parties agree that Associate should receive fair compensation, but no windfall, for work performed by the Associate subsequent to the Transfer Date on behalf of a Transferring Client. Furthermore, the Firm and Associate acknowledge that, with respect to a Transferring Client, any attempt to apportion fair compensation between the Firm and the Associate on a case-by-case basis, and to place a fair value on the Firm's investment (as referred to above), would be extremely complex, time-consuming, difficult, imprecise, uncertain, and debatable. In order to avoid uncertainty and litigation that might arise in connection with fee allocations performed on a case-by-case basis, and to insure that the Firm and Associate will each receive fair and equitable compensation for the value of their contributions and investments, the parties have developed the simple and easily-applied formulas set forth in the following paragraph in order to apportion the relative shares of compensation to which they would be respectively entitled upon consummation of an award, judgment, or settlement in a Transferring Client's case.
Compensation Formulas. For purposes of the formulas below, compensation for services rendered to a Transferring Client shall be allocated between the Firm and Associate as of the date the attorneys' fees or other remuneration or consideration in the matter are fixed (the "Fee Determination Date"). The Fee Determination Date shall be the earlier of (1) the date that payment of such fees, remuneration, or consideration is received or receivable; or (2) the date upon which a final and binding award of attorneys' fees is determined (as, for example, in the case of a fee award from a court or other tribunal) or can readily and positively be determined (e.g., as by applying a contractual contingency fee factor such as one-third to a final and binding award on behalf of the client). In the event that Associate has caused or allowed, or suffered the Fee Determination Date with respect to a matter concerning a Transferring Client to be unnecessarily and unjustifiably delayed, the Fee Determination Date shall be deemed to be the day before the Associate's Termination Date. The Firm and Associate hereby irrevocably agree that such compensation shall in each case concerning a Transferring Client be apportioned between the Firm and Associate in accordance with the formulas below:
Fee Determination
Date Firm Associate
On or Before Transfer
Date 100% 0%
On or Before First
Anniversary of
Transfer Date 80% 20%
On or Before Second
Anniversary of
Transfer Date 60% 40%
After Second Anniversary
of Transfer Date 50% 50%
Employment Agreement Number 3
Post Termination Fees. In the event that Employee's employment is terminated for any reason, voluntarily or involuntarily, or the Employee resigns, and a client requests that Employee, rather than Corporation, represent the client after Employee's employment is terminated, Employee shall pay to Corporation immediately out of any settlement, award, or verdict a portion of the attorney fee based on the following formula:
.20 x attorney fee
((a - b) ÷ a) x attorney fee =
amount due to Corporation
· Where .20 or 20% of any such attorney fee shall be paid to Corporation representing the advertising and marketing costs of acquiring the client's case.
· Where "a" represents the total number of months or portion thereof Employee represented the client both before and after Employee's departure up to the date of the settlement, award, or verdict.
· Where "b" represents the number of months or portion thereof Employee represented the client after Employee's departure up to the date of the settlement, award or verdict.
As an example: If the client was represented a total of ten months, two of which were before departure and eight months after departure and the attorneys fee was $10,000, then Corporation would be entitled to 20% of 10,000 (representing market costs) plus 2/10 or 20% of $10,000 (representing time spent while working for Corporation on client's matter) for a total of $4,000.
In the event that clients of Corporation request that Employee continue to represent them after Employee's departure, Employee shall immediately reimburse Corporation for any outstanding expenses which Corporation has incurred as an expense or advanced as a disbursement in its representation of such clients. In the event that Employee is unable to immediately reimburse Corporation for such outstanding expenses, Employee shall give to Corporation a promissory note in the amount of such outstanding expenses payable in ninety (90) days from the date thereof with interest at [bank's] prime rate on the date of said note plus 2%.
Inquiry #1: May a lawyer participate in the offering or making of an employment or other similar agreement that includes provisions, like those above, requiring a withdrawing or departing lawyer to pay her former firm some portion of any legal fee that she receives for the subsequent representation of a client who leaves the firm with the lawyer?
Opinion #1:
Yes, a lawyer may participate in the offering or making of an employment or other similar agreement that includes a provision for dividing fees following a lawyer's departure from a firm provided the formula or procedure for dividing fees is, at the time the agreement is made, reasonably calculated to compensate the firm for the resources expended by the firm on the representation as of the date of the lawyer's departure and will not discourage a departing lawyer from taking a case and thereby deny the client access to the lawyer of his choice.
In most jurisdictions, a contractual provision that imposes a financial disincentive on a withdrawing lawyer if the lawyer competes with the firm is prohibited because it may have the same effect as a restrictive covenant and prevent or discourage the departing lawyer from the representation of firm clients that want to follow the departing lawyer. ABA/BNA Lawyers' Manual on Professional Conduct, 51:1201- 1214, Restrictions On Right To Practice (51:1205). For example, Ohio (Supreme Court) Ethics Opinion 91-3 (1991), holds that an employment agreement that contains a provision requiring a departing associate to pay the law firm a percentage of fees earned from former firm clients who follow the departing associate is an unethical restriction on the lawyer's right to practice.
Whether a provision in a shareholders agreement constitutes a prohibited financial disincentive on competition after a lawyer leaves a firm was considered in 2007 FEO 6. This opinion examined a provision in shareholders agreement that reduced the repurchase value of a withdrawing lawyer's shares in the event the lawyer took clients with him. In the opinion, it was observed that the provision was
not like the typical covenant not to compete in that it does not have geographical or temporal restrictions; [however] it does tie the decrease in share value to the fact that the departed lawyer represents former clients of the firm. By so doing, the provision provides a disincentive for the departing lawyer to represent clients with whom the lawyer has a prior relationship, penalizes the departing lawyer for representing former clients of the firm, and restricts the lawyer's right to practice. Although the opinion prohibits financial disincentives on the continued representation of clients, it does not prohibit an agreement for repurchasing the shares of a withdrawing lawyer if the agreement "represents a fair assessment of the forecasted devaluation in the ownership interest in the firm engendered by a lawyer's departure and does not penalize the lawyer for taking clients with him."
Similarly, an agreement on the division of fees after a lawyer's departure from a firm may not be a prohibited restrictive covenant if the agreement seeks merely to compensate the firm for the loss of firm resources invested in the representation of a client who leaves the firm prior to the realization of the fee. As favorably noted in Ethics Decision 2000-6, agreements that resolve the division of contingent fees received after a lawyer leaves a law firm "prevent clients from being put in the middle of a dispute between lawyers." For this reason, lawyers are encouraged to enter into agreements that will resolve such potential disputes fairly and without rancor. Nevertheless, such agreements may not be so financially onerous or punitive as to deter a withdrawing lawyer from continuing to represent a client if the client chooses to be represented by the lawyer after the lawyer's departure from the firm. Any financial disincentive in an employment agreement that deters a lawyer from continuing to represent a client restricts the lawyer's right to practice in violation of Rule 5.6(a); 2007 FEO 6.
Each employment agreement must be analyzed individually to determine whether it violates Rule 5.6(a); however, some general principles can be articulated. The procedure or formula for dividing a fee must be reasonably calculated to protect the economic interests of the law firm while not restricting the right to practice law. It should fairly reflect the firm's investment of resources in the client's representation as of the time of the lawyer's departure and the investment of resources that will be required for the departing lawyer to complete the representation. See Maryland State Bar Ass'n., Op. 89-29 (1989) (approving employment agreement "sliding chart" for dividing fees based upon the time that the law firm worked on the case and the time required for the departed lawyer to resolve the case and collect the fee). The formula may take into account the work performed on the representation prior to the lawyer's departure, non-lawyer resources that the firm allocated to the representation not including costs advanced for the client, firm overhead that can be fairly allocated to the client's representation prior to departure, and the legal work, non-lawyer resources, and overhead that will be required of the withdrawing lawyer to complete the representation. The provision in Employment Agreement No. 1 above, for example, does not satisfy the reasonableness standard. It requires the departing lawyer to pay 70% of any fee received from the continued representation of a client regardless of whether the departing lawyer provides the majority of the legal representation of the client after the lawyer's departure from the firm. Because it applies a "one size fits all" formula for the allocation of the fees and fails to take into account the amount of work performed and the resources expended on the representation before and after the lawyer's departure, the provision is likely to discourage a lawyer from taking any case that requires substantial additional legal work.
The formula for fee divisions in Employment Agreement No. 2 attempts to take into consideration the resources devoted to the representation of a client by allocating the fee according to the amount of time between the date the lawyer departs taking a case and the date on which the legal fee for the case is "determined" or realized. However, the formula relies on an arbitrary timeframe unrelated to the actual legal work performed within this timeframe and is likely to create a substantial financial disincentive for a lawyer to continue to represent clients. Accord Maryland Ethics Opinion 93-21 (1993) (prohibiting employment agreement requiring lawyer to divide fee with former firm according to arbitrary percentages based on number of days elapsed since client retained firm before leaving with lawyer).
With the exception noted below, the formula for fee division in Employment Agreement No. 3 is the best attempt at allocating the fee based upon the resources that the firm expended on the representation prior to the lawyer's departure. The formula allocates to the firm a percentage of the fee equivalent to the amount of time that the lawyer represented the client while the lawyer was employed by the firm and receiving compensation from the firm. Thus, the departed lawyer will be fully compensated for any work that he performs on a case after he leaves the firm and will not be discouraged from the continued representation of clients who desire her services.
With regard to compensating the law firm for overhead and non-lawyer resources devoted to a case (apart from costs advanced), a reasonable amount of the legal fee may be allocated to the firm for its overhead and non-lawyer expenses including the firm's investment in legal advertising and marketing. However, any such allocation must be reasonably related to the actual cost of such resources or expenses for the particular client. If it is not, the firm will receive a windfall that will deter the departing lawyer from taking cases. For example, the formula in Employment Agreement No. 3 above, which allocates 20% of every fee to the law firm to recover advertising and marketing costs, is not reasonable.
Inquiry #2:
Will any ethical infirmities in an employment agreement be cured by a provision in the agreement that guarantees that the departing lawyer will receive, at a minimum, hourly compensation for the time the lawyer expends on a case after the lawyer leaves the firm? An example of such a minimum compensation provision appears below:
No Effect in Restricting the Practice of Law. Law Firm and Associate recognize that the client's right to choose counsel takes precedence over the fee division arrangement set forth in this section. The parties agree these provisions do not have the effect of restricting the practice of law or restricting any client's right to choose counsel so long as, for work performed for a Transferring Client, Associate receives hourly compensation at a rate of $150 per hour. To the extent that Associate does not receive compensation for his/her time on any Transferring Client's matter at a rate of at least $150 per hour, the Firm's allocation of fees calculated under paragraph 2.12 will be reduced (but not below zero) in order to increase Associate's compensation to the rate of $150 per hour; provided, however, that Associate shall be required to substantiate his/her time expended on each such matter by verified, contemporaneously maintained time records. In light of this arrangement, Associate will not decline to represent any Transferring Client for any financial reason.
Opinion #2:
Such a provision, by providing a floor below which the departing lawyer's compensation may not fall, may lessen the possibility that the formula or procedure for dividing fees will discourage the lawyer from taking a case after the lawyer leaves the firm. Therefore, such a provision is beneficial but it will not rectify a fee division provision that fails to take into consideration the factors set forth in Opinion #1 above. Moreover, the hourly rate set forth in a minimum compensation provision must be determined in a manner that is reasonable and fair under the circumstances. This means that it must take into consideration the skill, knowledge, and experience of the lawyer at the time that the lawyer leaves the firm, the difficulty of the work to be performed, and the hourly rates paid to lawyers of similar experience in the relevant geographic area.
Inquiry #3:
May the agreement for allocating legal fees include compensation to the law firm for the goodwill that initially induced the client to seek the legal services of the law firm?
Opinion #3:
Yes, if goodwill is valued fairly and reasonably and is not such a significant proportion of the fee that it creates a financial disincentive for the departing lawyer to continue the representation of clients who desire her services.
Inquiry #4:
May the agreement require the departing lawyer to reimburse the firm for the costs advanced (e.g., costs for depositions, expert witnesses, medical records, etc.) on behalf of a client immediately upon the departure of the lawyer or soon thereafter? May the agreement require the departing lawyer to sign a promissory note for the costs advanced?
Opinion #4:
No. The costs advanced for a client are the client's financial responsibility and the departing lawyer may not be made liable for this debt. Such a provision would have a chilling effect on the departing lawyer's willingness to continue the representation of a client. See Ethics Decision 2000-6 (by conditioning departing lawyer's ability to represent client on the satisfaction of client's financial obligation to former firm, provision imposes financial penalty that will discourage continued representation of clients). However, the firm may pursue any legal claim that it has against the client and the employment agreement may require the departing lawyer to protect the firm's interest in receiving reimbursement for costs advanced from any final settlement or judgment received by the client.
Inquiry #5:
Is an employment agreement that divides legal fees between a former law firm and a departed lawyer a violation of the prohibition in Rule 1.5(e) on the division of fees between lawyers who are not in the same firm?
Opinion #5:
No, comment [9] to Rule 1.5 provides that the prohibition on fee divisions in paragraph (e) of the rule does not prohibit or regulate division of fees to be received in the future for work done when lawyers were previously associated in a law firm.
Inquiry #6:
May an employment agreement include a mandatory arbitration or alternative dispute resolution provision in the event the departing lawyer and the former firm cannot amiably resolve disputes over the division of legal fees?
Opinion #6:
Yes. Lawyers are urged to include such provisions in employment agreements to foster early resolution of disputes without litigation and without drawing clients into the disputes. As observed in RPC 107, which approves of a mandatory alternative dispute provision in a fee agreement with a client, "[a]s a matter of professionalism, lawyers should avoid litigation to collect fees wherever possible. In that regard lawyers are encouraged to employ reasonably available alternative forms of dispute resolution." See also RPC 48 (clients should not be drawn into disputes upon dissolution of firm).
Proposed 2008 Formal Ethics Opinion 9
July 17, 2008
Frivolous Claims of Prosecutorial Misconduct
Proposed opinion rules that a lawyer may not make a claim of prosecutorial misconduct unless the lawyer has a reasonable belief that there is a basis in law and in fact for doing so.
Inquiry #1:
When may a lawyer who is representing a defendant in a criminal proceeding make a claim of prosecutorial misconduct either in a filed motion or orally in a court proceeding?
Opinion #1:
Claims of prosecutorial misconduct are subject to the general prohibitions on frivolous claims in Rule 3.1 and on false statements in Rule 3.3(a)(1). Rule 3.1 prohibits a lawyer from asserting an issue "unless there is a basis in law and fact for doing so that is not frivolous, which includes a good faith argument for an extension, modification, or reversal of existing law." The rule contains a special provision relative to the defense of a criminal defendant which provides, "A lawyer for the defendant in a criminal proceeding…may nevertheless so defend the proceeding as to require that every element of the case be established." Rule 3.3(a)(1) prohibits a lawyer from knowingly making a false statement of material fact or law to a tribunal.
A criminal defense lawyer may make a claim of prosecutorial misconduct in a motion or in court when the lawyer has a reasonable belief that there is a basis for doing so that is founded in law and fact. The lawyer must be able to articulate the basis for the allegation either in the motion itself or in court. The special provision in Rule 3.1 permitting a criminal defense lawyer to defend the proceeding so as to require the prosecution to establish every element of the case does not permit frivolous allegations of prosecutorial misconduct.
Inquiry #2:
May a lawyer assert a claim of prosecutorial misconduct at the request of a client in an attempt to change the prosecutor assigned to the case or to obtain some other strategic advantage?
Opinion #2:
No, unless the lawyer has a reasonable belief that there is a basis for the claim that is founded in law and fact. A client's desire to assert such a claim or the possibility of obtaining a strategic advantage in a proceeding are never sufficient to justify making the claim in the absence of a legal and factual basis for doing so.1 Decisions relative to how a client's objectives are to be achieved are, generally speaking, the lawyer's prerogative and the lawyer's conduct in achieving those objectives must comply with the Rules of Professional Conduct. Rule 1.2, cmt. [1]-[2].
Endnote
1. This opinion does not affect or limit a lawyer's duty to file an "Anders brief" in the appropriate appellate case. In Anders v. California, 386 U.S. 738 (1967), the Supreme Court held that the constitutional guarantees of due process and the right to effective assistance of legal counsel require a court-appointed lawyer to proceed with an appeal unless the lawyer has a good faith belief that the appeal is frivolous. In that situation, the lawyer must file a motion to withdraw together with a brief (an "Anders brief") that addresses anything in the record that "arguably supports" the appeal. Id. at 744.
Proposed 2008 Formal Ethics Opinion 10
July 17, 2008
Guidelines for Fees Paid in Advance
Proposed opinion surveys prior ethics opinions on legal fees, sets forth the ethical requirements for the different types of fees paid in advance, authorizes minimum fees earned upon payment, and provides model fee provisions.
Background:
Although there are several ethics opinions on the ethical requirements relative to the different types of legal fees that are charged and collected at the beginning of the representation of a client, the information in these opinions is not gathered in one place and the opinions appear to provide contradictory or inconsistent advice. In addition, the confusion among lawyers as to the ethical requirements for legal fees paid prior to representation has lead to poorly crafted fee agreements. In response to these concerns, this opinion sets forth the key ethical obligations when charging and collecting legal fees, surveys the opinions on legal fees, reconciles the holdings in the opinions, and provides model provisions for fee agreements that satisfy the requirements of the Rules of Professional Conduct and the ethics opinions.
Key Ethical Obligations
Regardless of the type of fee, all legal fees must meet the following standard set forth in Rule 1.5(a) of the Rules of Professional Conduct:
A lawyer may not make an agreement for, charge, or collect an illegal or clearly excessive fee…. The factors to be considered in determining whether a fee is clearly excessive include the following:
(1) the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly;
(2) the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;
(3) the fee customarily charged in the locality for similar legal services;
(4) the amount involved and the results obtained;
(5) the time limitations imposed by the client or by the circumstances;
(6) the nature and length of the professional relationship with the client;
(7) the experience, reputation, and ability of the lawyer or lawyers performing the services; and
(8) whether the fee is fixed or contingent.
It may be difficult to determine whether a legal fee is clearly excessive until the representation is concluded and all of the relevant factors are taken into consideration. At that point, a lawyer may be required to disgorge some portion of a fee that he or she has already collected to insure that the total fee is not clearly excessive. 2000 FEO 5. If the client's funds were deposited in the lawyer's trust account, the money is available to return to the client. If, because of the nature of the fee (see discussion below) the client funds were paid to the lawyer, the lawyer may be required to make a refund to the client using his or her own funds.
In addition to avoiding clearly excessive fees, a lawyer must deposit any funds that belong to a client in the lawyer's trust account. Rule 1.15-2(a). This means that any payment that remains the property of the client until earned, usually by the performance of legal services, must be deposited into the lawyer's trust account and may not be withdrawn without the client's consent until earned. When the lawyer is discharged, any money that remains on deposit in the trust account must be paid back to the client.
Finally, a lawyer must deal honestly and fairly with his or her clients and should give a client sufficient information to make reasonable decisions about the representation including decisions about the fee arrangement. See Rule 1.4 and Rule 8.4(c).
Survey of the Opinions
RPC 50 holds that a lawyer may charge and collect a general retainer as consideration for the exclusive use of the lawyer's services in a particular matter. Such retainers are sometimes referred to as "true retainers" because the money is paid for nothing more than the reservation of the lawyer's time; the legal services provided by the lawyer are separately compensated. The opinion distinguishes the general retainer from an advance payment as follows:
In its truest sense, a retainer is money to which an attorney is immediately entitled and should not be placed in the attorney's trust account. A "retainer" which is actually a deposit by the client of an advance payment of a fee to be billed on an hourly basis is not a payment to which the attorney is immediately entitled. It is really a security deposit and should be placed in the trust account. As the attorney earns the fee, the funds should be withdrawn from the account.
RPC 158 holds that an advance payment to a lawyer for services to be rendered in the future, in the absence of an agreement with the client that the payment is earned immediately, is a deposit securing the payment of a fee which is yet to be earned. As such, it remains the property of the client and must be deposited in the lawyer's trust account. See also 2005 FEO 13 (minimum fee that is collected at the beginning of a representation and will be billed against at a lawyer's regular hourly rate is neither a general retainer nor a flat fee; therefore, minimum fee remains the client's money until earned by the provision of legal services and must remain on deposit in the trust account until earned).
RPC 158 also holds that a lawyer may charge and collect a flat fee for representation on a specific, discrete legal task such as resolution of a traffic infraction. If the client agrees that the money represents a flat fee to which the lawyer is immediately entitled, the lawyer may pay the money to himself or herself or deposit the money in the firm's general operating account rather than the firm trust account. The agreement of the client that the flat fee is earned upon payment is critical. The opinion warns, however,
[w]hether the fee portion is deposited in the trust account or paid over to the operating account, any portion of the fee which is clearly excessive may be refundable to the client either at the conclusion of the representation or earlier if [the lawyer's] services are terminated before the end of the engagement.
97 FEO 4 amplifies the definitions for the general retainer and the flat fee. Both types of fees may be charged and collected at the beginning of a representation and are considered "presently owed" to the lawyer. The general retainer is "a payment 'for the reservation of the exclusive services of the lawyer which is not used to pay for the legal services provided by the lawyer.'" [Citing and quoting Rule 1.15-1, cmt.[4].] "The true general retainer finds general application in those instances where corporate clients, merchants or businessmen have a specific need to consult the lawyer on a regular or recurring basis." The opinion admonishes that a general retainer, like all other fees, must not be clearly excessive and "[w]hat is customarily charged in similar situations may determine whether a specific true general retainer is clearly excessive."
A flat fee may be earned at the beginning of the representation and is payment "for specified legal services to be completed within a reasonable period of time." "[T]his type of fee provides economic value to the client and the lawyer alike because it enables the client to know, in advance, the expense of the representation and it rewards the lawyer for efficiently handling the matter." A flat fee arrangement is "customarily identified with isolated transactions such as representations on traffic citations, domestic actions, criminal charges, and commercial transactions." The flat fee is collected at the beginning of the representation, treated as money to which the lawyer is immediately entitled, and paid to the lawyer or deposited in the lawyer's general operating account.
The opinion recognizes that a lawyer may charge a client hybrid fees. Such hybrid fees include a payment that is part general retainer or flat fee and part advance to secure the payment of fees yet to be earned. With hybrid fees, one portion of the fee is earned immediately and the other portion remains the client's property and must be deposited in the trust account to be withdrawn as earned. "There should be a clear agreement between the lawyer and the client as to which portion of the payment is a true general retainer, or a flat fee, and which portion of the payment is an advance. Absent such an agreement, the entire payment must be deposited into the trust account and will be considered client funds until earned."
With regard to an advance payment, the opinion reiterates that
[t]he funds advanced by the client and deposited in the trust account may be withdrawn by the lawyer when earned by the performance of legal services on behalf of the client pursuant to the representation agreement with the client. Revised Rule 1.15-1(d). Should the client terminate the relationship, that portion of the advance fee deposited in the lawyer's trust account which is unearned must be refunded to the client.
2000 FEO 5 prohibits the use of the term "nonrefundable fee" in fee agreements while further elucidating the differences between fees earned at the beginning of a representation and payments that are security for a fee which is yet to be earned. The opinion emphasizes that a lawyer may treat an advance payment as an earned fee (and deposit the money in the firm's operating account) "only if the client agrees that [the] payment may be treated as earned by the lawyer when it is paid." The opinion's most important paragraphs emphasize that there is a duty to refund "any portion of a fee that is clearly excessive regardless of the type of fee that was paid" and, therefore, no fee is truly nonrefundable. "To call such a payment a 'nonrefundable fee' is false and misleading in violation of Rule 7.1." However, a lawyer may agree with a client that "some or all of a fee may be forfeited under certain conditions but only if the amount so forfeited is not clearly excessive in light of the circumstances and all such conditions are reasonable and fair to the client."
Rather than calling a flat fee "nonrefundable," the opinion instructs a lawyer to refer to such a fee as a "prepaid flat fee."
The Types of Fees and Their Characteristics
Based upon the survey of the ethics opinions, these are the types of fees that are paid in advance and their characteristics:
Advance Payment: a deposit by the client of money that will be billed against, usually on an hourly basis, as legal services are provided; not earned until legal services are rendered; deposited in the trust account; unearned portion refunded upon the termination of the client-lawyer relationship.
General Retainer: consideration paid at the beginning of a representation to reserve the exclusive services of a lawyer but not used to pay for actual representation; generally used when corporate or business clients have a specific need to consult a lawyer on a regular basis; earned upon payment; paid to lawyer or deposited in firm operating account; some or all of the retainer is subject to refund if clearly excessive under the circumstances as determined upon the termination of the client-lawyer relationship.
Flat Fee or Prepaid Flat Fee: fee paid at the beginning of a representation for specified legal services on a discrete legal task or isolated transaction to be completed within a reasonable amount of time; fee pays for all legal services regardless of the amount of time the lawyer expends on the matter; if client consents, treated as earned immediately and paid to the lawyer or deposited in the firm operating account; some or all of the flat fee is subject to refund if clearly excessive under the circumstances as determined upon the termination of the client-lawyer relationship.
Hybrid Fee: fee paid at the beginning of a representation that is in part a general retainer or a flat fee and in part an advance payment to secure the payment of fees yet to be earned; one portion of the fee is earned immediately and the other remains the client's property on deposit in the trust account; client must consent and agree to the portion that is a flat fee or a general retainer and earned immediately; unearned portion of the advance payment refunded upon termination of the client-lawyer relationship; flat fee/general retainer portion subject to refund if clearly excessive under the circumstances as determined upon the termination of the client-lawyer relationship.
Reconciling the Opinions
If there is a seeming inconsistency in the ethics opinions it arises from the strict formulation of the general retainer. A lawyer is allowed to charge a general retainer as consideration for the reservation of the lawyer's services and to treat the money as earned immediately. But the client is not given a credit for future legal services up to the value of the retainer. This strikes many lawyers as detrimental to the client's interests and it has lead to the creation of hybrid fees. The strict formulation of the general retainer has been maintained by the Ethics Committee for three important reasons. It avoids the client confusion that is engendered if a client is told that a payment both reserves the lawyer's services and pays for future representation. In addition, requiring general retainers to be separate and distinct from advance fees means that, if an advance fee is charged for future legal services, there is no penalty to the client for deciding to change legal counsel before the advance fee is exhausted and, if a refund is owed to the client because expected services have not been performed, the money is readily available in the trust account.
Upon further reflection, the Ethics Committee has, nevertheless, determined that it is in the client's interest to receive legal services up to the value of a general retainer provided the client fully understands and agrees that the payment the client makes at the beginning of the representation is earned by the lawyer when paid, will not be deposited in a trust account, and is only subject to refund if the charge for reserving the lawyer's services (as opposed to the charge for the legal services performed) is clearly excessive under the circumstances. This newly acknowledged form of fee payment made by a client at the beginning of a representation will be referred to as a minimum fee and have the following characteristics:
Minimum Fee: consideration paid at the beginning of a representation to reserve the exclusive services of a lawyer; lawyer provides legal services up to the value of the minimum fee; earned upon payment; paid to lawyer or deposited in firm operating account; some or all of the minimum fee is subject to refund if clearly excessive under the circumstances as determined upon the termination of the client-lawyer relationship.
To the extent any previous ethics opinion is inconsistent with this opinion, it is overruled.
Model Fee Provisions: Introduction
The Rules of Professional Conduct do not require fee agreements to be in writing unless the fee is contingent on the outcome of the matter. Rule 1.5(c). The fees discussed in this opinion are not contingent and technically a lawyer is not required to put a client's agreement to pay such fees in writing. Nevertheless, given the propensity of clients to misunderstand the purpose of a payment made prior to the commencement of a representation (and whether such a payment will be refunded), a lawyer would be prudent to put in writing any fee agreement that requires a client to make a payment in advance.
In addition to explaining and obtaining the client's consent to charge the specified payments prior to representation, a lawyer's written fee agreement with a client should also contain provisions that fully and clearly explain how fees and expenses are charged including, but not limited to, the following: how billable hours are calculated and the rates charged per hour for the services of the lawyers or staff members who will work on the client's matter; if some other method of billing is used, such as value billing, how the fee will be determined; and the expenses for which the client will be liable and how the cost of those expenses will be determined.
Note that the following paragraphs contain suggested or recommended language. Lawyers are not required to use these model fee provisions.
Model Fee Provisions
Advance Payment
As a condition of the employment of Lawyer, Client agrees to deposit $________ in the client trust account maintained by Lawyer's firm. This money is a deposit securing payment for the legal work for Client that will be performed by Lawyer and his/her staff. Legal work will be billed on an hourly basis [or other appropriate basis] according to the schedule attached to this agreement. Client specifically authorizes Lawyer to withdraw funds from Client's deposit in the trust account when payment is earned by the performance of legal services for Client. When the deposit is exhausted, Lawyer reserves the right to require further reasonable deposits to secure payment. Lawyer will provide Client with a [monthly, quarterly, etc.] accounting [upon request] for legal services showing the legal fees earned and payment of the fees by withdrawal against Client's deposit in the trust account. Client should notify Lawyer immediately if Client retracts his/her consent to the withdrawal of money from Client's deposit in the trust account to pay for legal services. When Lawyer's representation ends, Lawyer will provide Client with a written accounting of the fees earned and costs incurred, and a refund of any unearned portion of the deposit that remains in the trust account [less expenses associated with the representation].
General Retainer
As a condition of the employment of Lawyer, Client agrees to pay $_____ to Lawyer. This money is a general retainer paid by Client to ensure that Lawyer is available to Client in the event that legal services are needed now or in the future and to insure that Lawyer will not represent anyone else relative to Client's legal matter without Client's consent.
Client understands and specifically agrees that:
· the general retainer is not payment for the legal work to be performed by Lawyer;
· Client will be billed separately for the legal work performed by Lawyer and his/her staff. Legal work will be billed on an hourly basis [or other appropriate basis] according to the schedule attached to this agreement;
· the general retainer will be earned by Lawyer immediately upon payment and will be deposited in Lawyer's business account rather than a client trust account; and
· when Lawyer's representation ends, Client will not be entitled to a refund of any portion of the general retainer unless it can be demonstrated that the general retainer is clearly excessive under the circumstances.
Flat Fee (or Prepaid Flat Fee)
As a condition of the employment of Lawyer, Client agrees to pay $_____ to Lawyer as a flat fee for the following specified legal work to be performed by Lawyer for Client: [description of legal work]
Client understands and specifically agrees that: · the flat fee is the entire payment for the specified legal work to be performed by Lawyer regardless of the amount of time that it takes Lawyer to perform the legal work;
· the flat fee will be earned by Lawyer immediately upon payment and will be deposited in Lawyer's business account rather than a client trust account; and
· when Lawyer's representation ends, Client will not be entitled to a refund of any portion of the flat fee unless (1) the legal work is not completed, in which event a proportionate refund may be owed, or (2) it can be demonstrated that the flat fee is clearly excessive under the circumstances.
Minimum Fee As a condition of the employment of Lawyer, Client agrees to pay $_____ to Lawyer. This money is a minimum fee for the reservation of Lawyer's services; to insure that Lawyer will not represent anyone else relative to Client's legal matter without Client's consent; and for legal work to be performed for Client.
Client understands and specifically agrees that:
· the minimum fee will be earned by Lawyer immediately upon payment and will be deposited in Lawyer's business account rather than a client trust account;
· Lawyer will provide legal services to Client on an hourly basis [or other appropriate basis] according to the schedule attached to this agreement until the value of those services is equivalent to the minimum fee; thereafter, Client will be billed for the legal work performed by Lawyer and his/her staff on an hourly basis [or other appropriate basis] according to the schedule attached to this agreement; and
· when Lawyer's representation ends, Client will not be entitled to a refund of any portion of the minimum fee, even if the representation ends before Lawyer has provided legal services equivalent in value to the minimum fee, unless it can be demonstrated that the minimum fee is clearly excessive fee under the circumstances.
Proposed 2008 Formal Ethics Opinion 11
July 17, 2008
Representation of Beneficiary on Other Matters While Serving as Foreclosure Trustee
Proposed opinion rules that a lawyer may not serve as the trustee in a contested foreclosure proceeding while simultaneously representing the beneficiary of the deed of trust on unrelated matters; however, the remaining lawyers in the firm may continue to represent the beneficiary on unrelated matters.
Inquiry #1:
Attorney A is employed by Law Firm. The lawyers of the firm routinely represent various bank clients including Bank Z. Bank Z is one of the firm's largest clients and all of the lawyers in the firm perform some work for the bank.
Attorney A has been asked to serve as the substitute trustee for the foreclosure of a deed of trust securing a loan (the Loan) made by Bank Z to the grantor (the Borrower) of the deed of trust. Bank Z is the named beneficiary of the deed of trust. The lawyers at the firm did not represent Bank Z on the negotiation or securitization of the Loan. The lawyers have not previously represented the Borrower.
Attorney A and the other lawyers in Law Firm want to continue to represent Bank Z on unrelated legal matters throughout the course of the foreclosure proceeding. Bank Z does not object. Borrower has not been notified that Attorney A and the other lawyers of the firm represent Bank Z on other unrelated matters.
May Attorney A continue to represent Bank Z on matters unrelated to the Loan and serve as substitute trustee for the foreclosure?
Opinion #1:
If the proceeding is contested, Attorney A may not serve as trustee and continue to represent the bank in other matters because his impartiality as trustee will be impaired by his duty of loyalty to and advocacy for the bank on the other matters.
There are a number of ethics opinions that hold that a lawyer serving as trustee in a contested foreclosure proceeding may not act as the advocate for the beneficiary or the grantor in an adversarial proceeding arising from or connected with the deed of trust because the trustee is a fiduciary and, when exercising his discretion in the foreclosure, must play a neutral, impartial role relative to both parties. RPC 3, RPC 64, RPC 82, RPC 90, 04 Formal Ethics Opinion 3. None of the ethics opinions, however, consider whether a lawyer is disqualified from serving as trustee if he continues to represent the lender on unrelated legal matters.
RPC 3, which rules that a lawyer may serve as a foreclosure trustee after representing the beneficiary of the deed of trust in the negotiation of the loan, explains the basis for prohibiting the lawyer from acting as an advocate in the foreclosure proceeding in the following passage:
[T]he Trustee owes a duty of impartiality to both parties which is inconsistent with representing one of the parties in a contested proceeding….Generally, when an attorney is required to withdraw from representation or from a fiduciary role, it is either because of concerns [for the] confidences of the client under Rule 4 [now Rule 1.6] and its predecessors or because of conflicts of interest under Rule 5.1 [now Rule 1.7] or its predecessors where the attorney would be put in the position of inconsistent roles or obligations at the same time or in the same proceeding. Since neither of those circumstances exist, and the rules do not appear to be directly relevant by their terms or with regard to their purposes, Attorney A is not ethically prohibited from continuing to serve as Trustee in a contested foreclosure matter, despite his prior representation of [beneficiary of the deed of trust], where he does not currently represent [beneficiary] in the foreclosure or related proceedings.
If Attorney A represents Bank Z in other matters and the foreclosure is contested, Attorney A's roles and obligations will be inconsistent. On the one hand, Attorney A is required to protect and advance the interests of the bank and, on the other hand, he has a duty to be neutral in a contested proceeding where a substantial interest of the bank is at stake. Attorney A must decide whether to continue to represent the bank on unrelated matters and relinquish the trustee role to someone who will not be similarly compromised or to fulfill the neutral role of trustee by withdrawing from the representation of the bank in all other matters. See also Rule 1.7(a)(1)(concurrent conflict of interest exists if representation of one or more clients may be materially limited by the lawyer's responsibilities to a third person).
Inquiry #2:
Attorney A withdraws from the representation of Bank Z on all matters. Are the other lawyers in Law Firm required to withdraw from the representation of Bank Z on matters unrelated to the Loan if Attorney A serves as the substitute trustee for the foreclosure?
Opinion #2:
No, the other lawyers in the firm may continue to represent Bank Z on unrelated matters.
Rule 1.10(a) provides that a disqualification based upon a personal interest of a lawyer that does not present a significant risk of materially limiting the representation of a client by the remaining lawyers in a firm is not imputed to the remaining lawyers in the firm. Comment [3] to Rule 1.10 specifies that "[t]he rule in paragraph (a) does not prohibit representation where neither questions of client loyalty nor protection of confidential information are presented." Serving in the role of trustee does not raise questions of client loyalty or protection of confidential information because the lawyer/trustee does not represent either party in the foreclosure. Therefore, Attorney A's disqualification from the representation of Bank Z in order to maintain his impartiality is not imputed to the other lawyers in the firm who are representing the bank on matters unrelated to the Loan and the foreclosure.
Inquiry #3:
Attorney B, another lawyer in Law Firm, intends to act as the lawyer for Bank Z in connection with the Loan including representation in the foreclosure proceeding. May Attorney B represent Bank Z on all matters related to the Loan, including the foreclosure, if another lawyer in his firm is serving as the trustee?
Opinion #3:
No, if the foreclosure is contested, Attorney B may not represent Bank Z at the foreclosure proceeding or on any matter related to the Loan. Attorney A's impartiality may be impaired if another lawyer from his firm appears in the foreclosure or related matters on behalf of the bank. To preserve the integrity of the process and the impartiality of the trustee, Attorney A's disqualification from serving as an advocate for one of the parties to a contested foreclosure in any matter related to the Loan is imputed to the other lawyers in the firm. See Rule 1.10(a).
Inquiry #4:
Should the Borrower be informed that the other lawyers in Law Firm will continue to represent Bank Z on matters unrelated to the foreclosure?
Opinion #4:
Yes. The role of the trustee in a foreclosure proceeding is similar to the neutral roles of arbitrator or mediator which are addressed in Rule 2.4. Rule 2.4(b) provides that when a lawyer serving as a third-party neutral knows or reasonably should know that a party does not understand the lawyer's role in the matter, the lawyer shall explain the difference between the lawyer's role as a third party neutral and a lawyer's role as one who represents a client. Similarly, explaining the role of the trustee and the role of the other lawyers in the firm (who continue to represent the bank) to a borrower in a foreclosure proceeding will help to avoid confusion and will allow the borrower to pursue his legal remedies to remove the trustee if he objects.
Inquiry #5:
If Borrower informally objects to Attorney A serving as the trustee because the other lawyers in the firm represent Bank Z on unrelated matters, is Attorney A required to withdraw from service as trustee?
Opinion #5:
No, Attorney A is not required to withdraw unless required to do so by a court. See opinion #2 above.
Inquiry #6:
Do the responses to any of the preceding inquiries change if Bank Z is not one of the largest clients of Law Firm?
Opinion #6:
No.
Proposed 2008 Formal Ethics Opinion 12
July 17, 2008
Prohibition on Taking a Security Interest in Marital Residence to Secure Legal Fee in Equitable Distribution Case
Proposed opinion rules that a lawyer may not take a deed of trust on the marital residence to secure the lawyer's fee when representing a client in an equitable distribution action.
Inquiry #1:
Lawyer represents Client in a domestic case. One of Client's primary objectives is to maintain possession of the marital residence in the equitable distribution action. In exchange for Lawyer's services, Client executed a promissory note, which is secured by a deed of trust on the marital residence.
Is it a conflict of interest for Lawyer to take a deed of trust on Client's marital residence?
Opinion #1:
Yes. Rule 1.8(a) provides that a lawyer shall not knowingly acquire a security or other pecuniary interest directly adverse to a client unless: (1) the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing in a manner that can be reasonably understood by the client; (2) the client is advised in writing of the desirability of seeking and is given a reasonable opportunity to seek the advice of independent legal counsel on the transaction; and (3) the client gives informed consent, in a writing signed by the client, to the essential terms of the transaction and the lawyer's role in the transaction, including whether the lawyer is representing the client in the transaction. If the marital residence was not the subject of Client's equitable distribution action, Lawyer could acquire a deed of trust on the property so long as he complied with the requirements set out in Rule 1.8(a). Because the marital residence is the subject of the litigation, Rule 1.8(i) is also implicated.
Rule 1.8(i) provides that a lawyer may not acquire a proprietary interest in the cause of action or subject matter of litigation the lawyer is conducting for a client with the exception of contingent fee agreements and liens authorized by law to secure the lawyer's fee or expenses.
The division of marital property is the principal issue in equitable distribution litigation. If a lawyer holds a security interest in real property that is a substantial asset of the marital estate, the lawyer will, of necessity, be affected by the outcome of the litigation. Taking a security interest in marital property creates an unacceptable risk that the judgment of the lawyer and the lawyer's ability to function as an advocate will be impaired by the lawyer's self interest. See Rule 1.8, cmt. [16]. In the current situation, Client may change her mind or, as the litigation evolves, it may be to her strategic or economic advantage to relinquish her quest to retain the marital residence. If so, the desire to preserve the security interest in the marital residence will cloud Lawyer's judgment and impair his ability to give unbiased advice and representation to Client.
Such an arrangement violates Rule 1.7 and Rule 1.5 as well as Rule 1.8(i). Rule 1.7(a)(2) states that a lawyer has a conflict of interest if representation of a client may be materially limited by the lawyer's personal interest. Rule 1.5 governs fee agreements. Comment [6] to Rule 1.5 states that a fee agreement may not be made whose terms might induce the lawyer improperly to curtail services for the client or perform them in a way contrary to the client's interest.
RPC 186 is overruled to the extent it is in conflict with this opinion.
Inquiry #2:
Lawyer represents Client in a domestic case. In exchange for Lawyer's services, Client executed a promissory note, which was secured by a deed of trust on property that is not involved in the domestic action. Lawyer sent Client a "Notice of Demand" regarding payment on the note. Soon thereafter, Lawyer initiated foreclosure proceedings in an effort to collect on the deed of trust. Lawyer continues to represent Client in the domestic case.
May Lawyer initiate foreclosure proceedings against Client while continuing to represent Client ?
Opinion #2:
No. Although Lawyer could acquire a deed of trust on the property if he complied with Rule 1.8(a), enforcing the security interest while currently representing the grantor of the interest, even in an unrelated matter, creates a conflict of interest in violation of Rule 1.7(a)(2). Moreover, Rule 8.4(g) provides that it is professional misconduct for a lawyer intentionally to prejudice or damage his or her client during the course of the professional relationship, except as may be required by Rule 3.3. Lawyer should not initiate foreclosure proceedings against the Client until the representation is concluded.
As a matter of procedure, comment [16] to Rule 1.8 provides that, prior to initiating a foreclosure on property subject to a lien securing a legal fee, a lawyer must notify a client of the right to require the lawyer to participate in the State Bar's mandatory fee dispute resolution program.