Payment of Legal Fees By Third Parties
Adopted: January 20, 2006
Opinion explores a lawyer's obligation to return legal fees when a third party is the payor.
Inquiry #1:
Lawyer receives a $5,000 advance fee from Client in a domestic case. After Lawyer expended $2,000 in fees, Lawyer receives a telephone call from "Ronnie," who says Client stole the $5,000 from him and he wants it back. Lawyer confronts Client, who denies having stolen the money or even knowing Ronnie.
What is Lawyer's ethical obligation with respect to the $5,000?
Opinion #1:
A lawyer may not accept funds the lawyer knows to be obtained illegally or fraudulently. See Rule 8.4. In the above inquiry, however, Lawyer has no actual knowledge that the funds were stolen. Ronnie could be an interloper. Without knowledge to the contrary, Lawyer owes no duty to a third party claiming an interest in the funds. Furthermore, Lawyer has an obligation to follow the client's directive with respect to funds belonging to the client. Rule 1.15-2(m).
Inquiry #2:
Lawyer receives a $5,000 advance fee from domestic Client. At the time Lawyer receives the funds, Client says that the $5,000 was a gift from her boyfriend. After Lawyer has expended $2,000 of the fee, Boyfriend and Client break up. Boyfriend calls Lawyer and demands the unused portion of the fee back. Prior to this telephone call, Lawyer has never had any contact with Boyfriend. Client maintains that the $5,000 was a gift to her, with no strings attached, and directs the Lawyer not to return the funds.
What is Lawyer's ethical obligation with respect to the $5,000?
Opinion #2:
Lawyer again has no duty to the ex-boyfriend under these facts. Lawyer may rely upon Client's representation that the $5,000 was a gift and follow Client's directive as to how to use those funds. Lawyer may also need to advise Client about any legal obligations she may have to the ex-boyfriend if the $5,000 was a loan rather than a gift.
Inquiry #3:
Lawyer receives a $5,000 advance fee from domestic Client. Client says the $5,000 is a general loan from her mother. After Lawyer expends $2,000, Mom calls Lawyer and says she didn't know Client would use the funds for legal fees, and she doesn't support her daughter's case. Mom asks that the unused portion of the funds be returned to her. Client does not consent and demands that Lawyer retain the money and pursue her case. Prior to this telephone call, Lawyer has never had any contact with Mom.
Must lawyer return the unused portion of the fee to Mom?
Opinion #3:
No. Again, Mom is a third party claiming an interest in the $5,000. Client agrees that the funds were a loan from Mom, but it is unclear whether there were any restrictions placed upon the loan. This is a dispute between Client and Mom, inasmuch as Lawyer was never involved in the original loan from Mom to Client. Lawyer should follow Client's directive as to the use of these funds and advise Client of any legal obligations she may have to Mom.
Inquiry #4:
Adult Client and her mother come to Lawyer's office together. Mother agrees to pay a $5,000 advance fee for representation of Client in her domestic case. Pursuant to Rule 1.8, Lawyer makes sure Mother understands that Lawyer represents only Client's interests, not Mother's, and that information received from Client during the course of the representation remains confidential. Client consents to the payment of her fees by Mother, and Mother agrees to pay under these terms. Lawyer deposits the $5,000 in his trust account and begins billing against it.
Shortly thereafter, Mother and Client having a falling out, and Mother demands the unused portion of the $5,000 back. Client wants Lawyer to keep the funds and continue with the representation.
Must Lawyer return the unearned portion of the fees to Mother?
Opinion #4:
Yes. Under these facts, Lawyer understands that the legal fees were paid by a third party for the purpose of Client's representation. See Rule 1.8(f). The unearned funds held in trust belong to the third party, not the client. In the event the payor wants the funds returned, Lawyer is obliged to do so. Lawyer should explain to both Client and the third-party payor, at the outset, that the funds belong to the third party, that the funds will remain in trust until earned, and that if the third-party payor demands return of the unearned funds, Lawyer must return the funds to the payor. In addition, Lawyer may continue representation and seek payment from Client. If Client is unable to pay, Lawyer must decide whether withdrawal from representation is appropriate under Rule 1.16(b)(6).
Inquiry #5:
Assume the same facts as in Inquiry #4, except that Lawyer received a $5,000 flat fee from Mother to represent Client in her domestic matter. Lawyer explained to Client and Mother that the fee is earned immediately and will be placed in Lawyer's operating account. Lawyer also explained that the flat fee would not vary based upon the amount of time expended and assured them that this was the only legal fee owed to him. After Lawyer has begun work on the case, Mother demands the fee back. Client does not consent.
What should Lawyer do?
Opinion #5:
If the flat fee is earned immediately and it is not "clearly excessive" under the circumstances, then the fee will ordinarily belong to the lawyer. See Rule 1.5(a). Lawyer need not return any portion of the fee to Mother. If, upon conclusion of the representation, however, Mother disputes the amount of fee charged, Lawyer must notify Mother of the State Bar's program of fee dispute resolution. Lawyer should place the disputed portion of the funds back in his trust account and must participate in good faith in the fee dispute process if Mother submits a proper request to the State Bar. See Rule 1.5(f).