If you're a lawyer who accepts upfront fees from clients, be careful how you handle those fees, the D.C. Court of Appeals said in an opinion handed down today. They are not yours immediately.
The court's ruling marks the first time it has interpreted the guidelines under the D.C. Rules of Professional Conduct dealing with flat fee payments.
Today's opinion stems from a disciplinary matter filed against Robert Mance III, a Washington-based solo practitioner, in 2004. Mance was hired to represent William Saunders' son, who was a suspect in a homicide case. The son is not named in the ruling.
According to the opinion, Mance and Saunders agreed that Mance would handle the case for a flat fee of $15,000, with an initial payment of $7,500. Mance would receive the balance when Saunders' son turned himself in to the police. Mance took the initial payment, deposited $6,010 into a client escrow account, and put the rest into his operating account.
Saunders' son did not turn himself in for another month, and in that time, Mance did not take any action on behalf of his client. When Saunders fired him in January 2004, Mance said he would pay back the initial $7,500 but didn't do so for several months, allegedly because he didn't have the funds immediately available.
The case was turned over to the D.C. Bar Counsel, which eventually hit Mance with a number of charges, including commingling funds, failing to maintain complete records, failing to treat an advance as client funds, failing to take timely steps to surrender client funds, and failing to deposit client funds in an escrow account.
The issue that arose when the Board of Professional Responsibility heard the case was whether upfront flat fees should be treated as the lawyer’s property or should be held as the client's property until they are earned.
Over the bar counsel's objections, the board, with one member dissenting, determined that upfront fees should be treated as the property of the lawyer, but the board recommended that Mance be censured for commingling funds. (Interestingly, as the court notes in its opinion, the commingling of funds that Mance acknowledges involved taking some of the funds he believed belonged to him and putting them into a client escrow account. Typically, commingling involves lawyers taking client fees and depositing them into their own operating account.)
The bar counsel had called for stiffer penalties that included a 60-day suspension with 30 days stayed in favor of a one-year probation.
Today's opinion, penned by Judge Vanessa Ruiz and joined by Judge Anna Blackburne-Rigsby and Judge Phyllis Thompson, split the difference. Ruiz wrote that upfront fees should be considered the property of the client and held in escrow until they are earned. But because the court had not ruled on the issue before and because "the rule's application to flat fees is not clear on its face," the court only censured Mance instead of giving him harsher punishment.
Ruiz noted that today's ruling will likely have the most impact on solo practitioners and small-firm lawyers. "We are not unaware that our holding today could impose a financial hardship on solo practitioners who rely on flat fees to maintain their practice. But we also note that, consistent with the general requirement that a lawyer must entrust flat fees in a trust or escrow account until earned, the client may consent otherwise (if properly informed), and the fee arrangement may specify how and when the attorney is deemed to earn the flat fee or specified portions of the fee," Ruiz wrote.
She added as a warning, "Simply labeling a fee as something other than a flat fee or extreme 'front loading' of payment milestones in the context of the anticipated length and complexity of the representation will not excuse the lawyer from safekeeping the client's funds until it can be reasonably be said that they have been earned in light of the scope of the representation."
D.C. Bar Counsel Wallace Shipp Jr. said the court’s decision in the Mance case was a “wonderful” one that clears up a fuzzy area of the law. His office was represented by Deputy Bar Counsel Elizabeth Herman, who argued the case in October, 2007.
“There are not many decisions that deal with this exact issue in the country,” Shipp said. “This decision notes that the lawyer is the one who went to law school and they need to be the one to be clear with the client on how these fee arrangements are set up. Precision is really necessary in these situations.”
Shipp added, “When you are writing these fee agreements, they need to be done with care. People who are using standard boilerplate agreements are really putting their license at risk.”
Reached by phone this afternoon, Mance declined to comment. His lawyer Jacob Stein of Stein, Mitchell & Muse did not immediately return calls for comment.