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Figuring out flat fees

November 4, 2015

Flat fees are designed to be simple. An attorney charges a client a set price for a defined, limited piece of legal work. If only accounting for flat fees were as straightforward.

A recent Indiana State Bar Association Legal Ethics Committee opinion says lawyers who charge clients flat fees considered earned on receipt shouldn’t deposit the fees in their Interest on Lawyer Trust Account, but should put the money in the firm’s operating account. Some lawyers aren’t convinced this makes sense.

Noe Noe

Richmond attorney Amy Noe, who serves on the committee that drafted the advisory opinion, said she won’t change her practice of putting at least a portion of flat fees into her firm’s IOLTA, the account containing property the firm holds that is owned by clients.

“There’s not really ever a true flat fee that is earned upon receipt,” Noe said, despite agreements that may use those terms. While flat fees are treated as earned on receipt and considered the lawyer’s property under the Rules of Professional Conduct, that doesn’t mean the lawyer might not have to give some of it back to the client in the future.

“At any time it could happen that the lawyer has a circumstance that causes the representation not to go to completion,” Noe said. Likewise, a client who paid a flat fee “would always have the right to tell a lawyer, ‘I don’t want you to take this matter to completion’ … I can’t imagine an attorney saying, ‘You can’t get a refund.’”

Indeed, the Indiana Supreme Court ruled in Matter of Kendall, 804 N.E.2d 1152 (2004), that fees paid in advance cannot generally be considered nonrefundable. The court held such language in a representation agreement would violate Professional Rule of Conduct 1.5(a) stating a lawyer’s fee shall be reasonable.

Through Indiana Supreme Court spokeswoman Kathryn Dolan, Discip-linary Commission Executive Secretary G. Michael Witte said there is no requirement under the Rules of Professional Conduct that any portion of a flat fee be held in trust, even though at some point there may be cause to refund part of that money.

Flat fees can create a balancing act for lawyers. The Rules of Professional Conduct say unearned fees are to be held in trust. The rules also say an attorney should transfer money from IOLTA to an operating account promptly when a fee is earned. Because flat fees are considered earned on receipt, the ethics opinion advises placing the funds in an operating account, even though a client may still be entitled to a refund if the representation isn’t completed.

In the event of a refund to a client, where the money comes from is important. “If the flat fee was deposited in the operating account, the refund must come from the operating account. If the flat fee was deposited in the trust account, the refund must come from the trust account,” according to Witte.

ISBA Legal Ethics Committee Opinion No. 3 of 2015 cites Kendall but says flat fees should not be placed in IOLTAs if the agreement for representation explicitly states that a flat fee is earned on receipt. A flat fee lacking that express understanding with the client should be placed at least in part in IOLTA, the opinion says.

“The corollary to these rules is that lawyers should clearly define the terms upon which they accept a fee from a client so there is no ambiguity about who owns what portion of funds paid to the lawyer by the client at any point in the representation,” the opinion states.

McGoff Kevin McGoff

“I see pretty bright lines, personally,” said Kevin McGoff, general counsel and professional liability team leader at Bingham Greenebaum Doll LLP. McGoff, who’s also on the ISBA Legal Ethics Committee, said the Supreme Court has encouraged flat fee arrangements between lawyers and clients as a way to bring certainty to legal costs. The ethics opinion stresses the crucial role of clear communication about the fee agreement.

“The simplest way to look at it in my view is if you’re charging a flat fee to a client for services, you need to state that in a consent letter,” McGoff said, in which case the fee should be deposited in the firm’s operating account.

This is contrary to the handling of retainer fees paid in advance, which must be deposited in IOLTA and transferred to operating accounts after they are earned and billed to the client.

South Bend attorney Ann Carol Nash said she typically will charge flat fees for preparing wills, power of attorney documents, land contracts, uncontested divorces and other work where she has a good idea of how long it should take. Nash also is a member of the ISBA Legal Ethics Committee.

In dealing with clients, Nash said, “Fees always have to be explained and sometimes re-explained.” Attorneys likewise sometimes must ask themselves, “Is the fee earned yet, or should it stay in trust?”

Noe said treating flat fees as earned on receipt puts lawyers in a difficult position of telling a client they’ve earned their fee before any actual work has been completed. “I would question it if I were a client, and then I would go down the road,” she said.

Noe and Nash said a relatively small percentage of their work is billed on a flat-fee basis, but they agreed the terms of the representation agreement between attorney and client are paramount, and those terms must be explicit.

Nash said in some cases where she’s charged a flat fee, she and the client agreed on half of the fee paid upfront and the balance upon completion.

McGoff said there are instances in which a lawyer may charge a flat fee for a matter but also reserve some funds. For example, there could be a scenario in which a client in a criminal case agrees to pay a lawyer $10,000 if a case goes to trial, but agrees to a $5,000 flat fee if the case is resolved with a plea. In that instance, if the client paid $10,000 upfront, $5,000 would be held in IOLTA and refunded to the client if a plea was accepted. The key is clarifying the terms in the contract for services.

“It can be a good narrative with the client,” McGoff said of clarifying the details of fee agreements.

The narrative and contract for services was key in a 2013 disciplinary case involving flat fees that was decided in favor of an Evansville attorney.

Robert Canada faced disciplinary charges in a case involving a client who paid a flat fee of $10,000 for representation in a meth-dealing case. The client wanted a plea deal but hired a different lawyer when he thought he could get a better plea agreement than Canada had worked out, reducing a Class A felony count to a Class B felony. The client eventually hired another lawyer but ended up accepting a Class B felony plea deal anyway. The trial court released $10,000 of the cash bond to Canada as had been agreed, concluding he’d earned his fee.

In Matter of Canada, 986 N.E.2d 254 (Ind. 2013), justices noted the language in the contract for legal services that said, “The fee is non-refundable unless there is a failure to perform the agreed legal services.” While the court found the agreement did contain language more suitable to a retainer, justices held Canada violated no rules.

The court ruled Canada spent considerable time on the case and his fee was reasonable. In its opinion in favor of Canada, the court wrote, “The only question is whether any part of Respondent’s fee was unearned. ... Under these circumstances, we conclude that the Commission has not proven by clear and convincing evidence that Respondent did not fully earn his flat fee.”•

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