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Money and Ethics: "Non-refundable" Fees

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By Kevin P. Mcgoff and James J. Bell
 

Bell James Bell
McGoff Kevin McGoff

It’s the beginning of a case and your client has agreed in writing to a $10,000 non-refundable retainer. You get to work. The case is messy. There are motions to prepare, witnesses to interview and your client is constantly calling for “updates.”

But your client doesn’t really want updates. Instead, he wants to feel good. He needs reassurance. This case is important to him and he is understandably worried about what lies ahead. You take time from the case to do a little hand-holding. This is part of the job. You became a lawyer to help people through their biggest problems, and you’re getting paid to hear your client.

Days go by. You’ve done everything your client has asked and have told him about each, separate step by phone and via e-mail. The client calls again and you get comfortable for next conversation.

But this call is different. Your client says he appreciates your hard work, but he “wants to go in another direction.” As it turns out, his step-brother’s barber knows a lawyer who is second cousin to the judge’s nephew. He wants someone with more of an “inside track.” In other words, you’re being dumped. He tells you “it’s not you, it’s me”. He hopes you can “still be friends.” “That’s fine,” you say to yourself. Now, you can have your life back.

Oh. And there is one more thing: He wants his money back.

You blow a fuse. No way. While you may or may not have completed $10,000 worth of work, what does this guy think “non-refundable” means? You tell your ex-client to read the fee agreement and take a hike. There will be no refund. It is a “non-refundable fee.”

Have you violated the Rules of Professional Conduct? Yes. In fact, you may have violated the Rules twice. The first time was at the outset of the case, when your fee agreement called for a “non-refundable” fee. The second time was when you refused to refund any part of the money because you said the fee was non-refundable. This and other lessons are contained in the recent decision in Matter of O’Farrell, No. 29S00-0902-DI-76, 2011 Ind. LEXIS 72 (Ind. Feb. 11, 2011).

In O’Farrell, the Supreme Court concluded that “the assertion in a fee agreement that an advance fee is nonrefundable violates [Rule 1.5(a)’s] requirement that a lawyer’s fee be reasonable.” Id. at *10. The Court also noted that “an attorney cannot treat a fee as ‘earned’ simply by labeling the fee ‘earned on receipt.’” Id. at *12 (citations omitted).

How then do you protect yourself from the above situation? The Court suggests that “[a]s an alternative, a fee agreement could designate a reasonable part of the initial payment that would be deemed earned by the attorney for opening the case and beginning the representation.” Id. at *18. “Even without such contract provisions, ‘[i]t is well settled that, where the complete performance of an attorney’s services has been rendered impossible, or otherwise prevented, by the client, the attorney may, as a rule, recover quantum meruit for the services rendered.” Id. at *19 (citations omitted). In other words, you can retain the earned portion of the fee.

In fact, in O’Farrell, our Supreme Court was “not prepared to hold that some amount of a flat fee must be returned in all cases in which the attorney-client relationship ends before the work contracted for is completed.” Id. at *20. The Court also acknowledged circumstances in which the “entire flat fee could be deemed earned if the client deals unfairly with the attorney.” Id. Finally, the Court acknowledged circumstances where a client could pay a “general retainer” which is “payment for an attorney’s availability, which is earned in full when paid before any work is done.” Id. at *6-7. However, a “general retainer” cannot be charged for “routine legal services.” Id. at *11 (Citations omitted). It can only be justified in circumstances where, for example, the attorney is “preclu[ded from] other representations.” Id. (citations omitted).

So here is what we can take away from O’Farrell: 1) Avoid fee disputes, if possible; 2) Revisit and revise your engagement letter or fee contract; 3) Remove the term “non-refundable” from your fee agreement; and 4) Never treat a fee as non-refundable. If you charge a “general retainer,” make certain that the circumstances justify this arrangement and realize there is a risk that others may not agree that a general retainer is justified. Finally, if you are terminated from a case, work with the former client to find a reasonable amount, based on the amount of work performed, to retain as your fee.•

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  1. File under the Sociology of Hoosier Discipline ... “We will be answering the complaint in due course and defending against the commission’s allegations,” said Indianapolis attorney Don Lundberg, who’s representing Hudson in her disciplinary case. FOR THOSE WHO DO NOT KNOW ... Lundberg ran the statist attorney disciplinary machinery in Indy for decades, and is now the "go to guy" for those who can afford him .... the ultimate insider for the well-to-do and/or connected who find themselves in the crosshairs. It would appear that this former prosecutor knows how the game is played in Circle City ... and is sacrificing accordingly. See more on that here ... http://www.theindianalawyer.com/supreme-court-reprimands-attorney-for-falsifying-hours-worked/PARAMS/article/43757 Legal sociologists could have a field day here ... I wonder why such things are never studied? Is a sacrifice to the well connected former regulators a de facto bribe? Such questions, if probed, could bring about a more just world, a more equal playing field, less Stalinist governance. All of the things that our preambles tell us to value could be advanced if only sunshine reached into such dark worlds. As a great jurist once wrote: "Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman." Other People's Money—and How Bankers Use It (1914). Ah, but I am certifiable, according to the Indiana authorities, according to the ISC it can be read, for believing such trite things and for advancing such unwanted thoughts. As a great albeit fictional and broken resistance leaders once wrote: "I am the dead." Winston Smith Let us all be dead to the idea of maintaining a patently unjust legal order.

  2. The Department of Education still has over $100 million of ITT Education Services money in the form of $100+ million Letters of Credit. That money was supposed to be used by The DOE to help students. The DOE did nothing to help students. The DOE essentially stole the money from ITT Tech and still has the money. The trustee should be going after the DOE to get the money back for people who are owed that money, including shareholders.

  3. Do you know who the sponsor of the last-minute amendment was?

  4. Law firms of over 50 don't deliver good value, thats what this survey really tells you. Anybody that has seen what they bill for compared to what they deliver knows that already, however.

  5. As one of the many consumers affected by this breach, I found my bank data had been lifted and used to buy over $200 of various merchandise in New York. I did a pretty good job of tracing the purchases to stores around a college campus just from the info on my bank statement. Hm. Mr. Hill, I would like my $200 back! It doesn't belong to the state, in my opinion. Give it back to the consumers affected. I had to freeze my credit and take out data protection, order a new debit card and wait until it arrived. I deserve something for my trouble!

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