UPON THE REQUEST OF A MEMBER OF THE SOUTH CAROLINA BAR, THE ETHICS ADVISORY COMMITTEE HAS RENDERED THIS OPINION ON THE ETHICAL PROPRIETY OF THE INQUIRER’S CONTEMPLATED CONDUCT. THIS COMMITTEE HAS NO DISCIPLINARY AUTHORITY. LAWYER DISCIPLINE IS ADMINISTERED SOLELY BY THE SOUTH CAROLINA SUPREME COURT THROUGH ITS COMMISSION ON LAWYER CONDUCT.
Ethics Advisory Opinion 02-07
A man and his brother walk into Lawyer's office on a Monday afternoon. The man is looking for an attorney to represent him on two criminal charges and to go with him to a court hearing the next morning in another county. Lawyer quotes a flat fee to represent the man on the charges. Lawyer explains that half the fee is due in advance and, given the shortness of time, it must be in cash. The man states that he wants to hire Lawyer and asks brother if he has the money to pay the half due up front. Brother indicates he has the money in his bank account and will go get it. Client and brother leave. Brother comes back alone later in the day with cash. Lawyer accepts the cash and gives brother a receipt. Lawyer goes to hearing with client, files necessary motions and begins work on the case. A couple of weeks later, client comes to Lawyer's office and signs written contract documenting the fee agreement. A few weeks later, client fires attorney and demands a refund. Lawyer agrees that a partial refund is due.
Question
1. To whom should the lawyer refund the fee?
Summary
A lawyer who is required to reimburse unearned fees under Rule 1.16(d) must not unilaterally attempt to resolve a conflict between a paying third party and the lawyer's client. The lawyer should retain the disputed fees in trust until the parties reach an agreement resolving the dispute or the appropriate court determines the rights of the parties.
Opinion
This is a case of first impression that does not appear to have been addressed by any court or advisory committee. Under the present facts, brother has paid Lawyer to represent Client. This arrangement is ethically proper when Lawyer complies with Rules 1.8(f) and 5.4(c). The advanced retainer at issue becomes the property of another when it is determined that the funds are unearned and must be returned. See, Freeman, Nonrefundable [sic] Retainers, S.C. Law., May-June 2002.
Rule 1.16(d) applies to the reimbursement of advance fees. It requires a lawyer to, upon termination of representation, refund any advance payment of fee that has not been earned. See, S.C. Bar Ethics Adv. Op. #81-15; Rule 1.5, cmt. Here, Lawyer acknowledges that a portion of the advanced fee is refundable to the client.
The receipt of funds by a lawyer from a client or a third party is governed by Rule 1.15.
Upon receiving funds or other property in which a client or third person has an interest, a lawyer shall promptly notify the client or third person. Except as stated in this rule or otherwise permitted by law or by agreement with the client, a lawyer shall promptly deliver to the client or third person any funds or other property that the client or third person is entitled to receive and, upon request by the client or third person, shall promptly render a full accounting regarding such property. Rule 1.15(b).
The present case may be reduced to the question of which individual is "entitled to receive" the funds at issue - client or his brother, the third party payor.
The comments to Rule 1.15 acknowledge that a third party may have just claims against property in a lawyer's custody. "A lawyer may have a duty under applicable law to protect such third-party claims against wrongful interference by the client, and accordingly may refuse to surrender the property to the client. However, a lawyer should not unilaterally assume to arbitrate a dispute between the client and a third party." Rule 1.15, cmt. In addition, a lawyer must balance this duty to third parties with the duty of loyalty owed to his client.
The comments to Rule 1.15 also provide that the lawyer may suggest means to resolve the dispute. Therefore, an analysis of the relationships between the parties is necessary to aid in determining the appropriate recipient of the reimbursable funds. There is obviously an attorney-client relationship between Lawyer and Client. However, there is also a contractual relationship between Lawyer and the brother of Client. While this is a not an attorney-client relationship, it is a relationship that affords the brother some legal protections. A contractual relationship is likely formed between the brother and Lawyer. The brother agrees to pay Lawyer for the client's legal fees and therefore arguably retains the rights to those fees should they be refunded. This type of contractual relationship can be likened to that of an insurer and insured. While the insured is the beneficiary of the contract between the insurer and a lawyer, the insured certainly retains no interest in the fees paid on his/her behalf. Likewise, if this case were one where the fee was paid by a third party pre-paid legal services provider, rather than brother, Client would be hard- pressed to claim an interest in an unearned fee refund.
The nature of the fee payment is also integral to this matter. The brother may have intended that his payment be a gift to the client. If this were the case, the brother would retain no interest in the fees if they were later refunded. However, if the brother intended the payment as a loan, then he would retain an interest in any reimbursed funds. This type of situation may be analogous to the application of a lien by a health care provider to the proceeds of a suit. In previous Advisory Opinions involving disputed healthcare provider liens, the Committee has opined that the prudent course for the lawyer would be to retain the disputed funds in trust and seek either declaratory judgment allowing the lawyer to release the funds, or pursue mediation or arbitration. See Adv. Op. 95-29.
The comments to Rule 1.15 also state that there may be instances where a lawyer will receive funds from third parties from which a fee will be paid. Rule 1.15 places a duty upon the lawyer to ensure that the client does not misuse funds appropriated by a third party. "If there is risk that the client may divert the funds without paying the fee, the lawyer is not required to remit the portion from which the fee is to be paid." SCRPC 1.15, cmt. "The disputed portion of the funds should be kept in trust and the lawyer should suggest means for prompt resolution of the dispute, such as arbitration." Id. While this comment seems to implicate the initial payment of fees to the lawyer, it may also apply to a situation, much like the present one, where the refunded monies will have to be paid to the lawyer that replaces the discharged lawyer so as to comply with the intent of the third party payor, which is to pay the client's legal fees.
Because Lawyer "should not unilaterally assume to arbitrate a dispute between the client and the third party," Rule 1.15, cmt, Lawyer should retain the funds in trust, and suggest an appropriate means or resolving the dispute, or submit the dispute to the court for resolution.