General Practice, Solo & Small Firm DivisionSolo NewsletterSolo, Vol. 5, No2.
Winter 1998 © American Bar Association. All rights reserved.
More on Fee Agreements
BY ROBIN PAGE WEST
Robin Page West is a sole practitioner in Baltimore, Maryland. She is editor-in-chief of SOLO.
A flurry of letters from around the country descended on SOLO after this suggestion for escrowing retainers appeared in the last issue. "Read the ethical and professional rules that apply to fee agreements in your jurisdiction and then consider... collecting an advance retainer from the client and placing it in your escrow...account. Pay yourself from the escrow account the day you send the bill...."
Missouri lawyer David P. Weiss wrote, "Under Missouri ethical rules, one must give the client a reasonable opportunity to apprise themselves of the scope of the services rendered and the cost relative thereto before withdrawing funds which were placed in the required Missouri IOLTA account."
Mel Hirshman, Bar Counsel to the Attorney Grievance Commission of Maryland, echoed that sentiment, writing, "I believe the better, and more ethical practice, is to send the client a bill and give the client some reasonable time to dispute the amount you intend to withdraw from escrow....Funds in escrow should not be disbursed if there is a dispute."
These procedures occupy the ethical high ground and protect the client from paying an improper bill. But how would the IRS or the attorney grievance commission treat fees already earned by the lawyer sitting in his or her escrow account?
Consider this scenario. The client pays you an advance retainer of $20,000 on June 1, 1998, as an agreed flat rate payment for you to conduct an internal corporate investigation and prepare a report by December 15. On December 15, you deliver your report and bill to the client, and give him 45 days to dispute the bill before withdrawing the funds from escrow. You file your taxes on a calendar year basis.
The client disputes the bill on January 1, 1999, and by April 15, 1999, the dispute has not been resolved and the funds are still in escrow. Query: is the $20,000 taxable income for 1998 tax purposes?
Consider a second scenario. The client never disputes the bill. From December 15 until January 30 (the arbitrary 45-day dispute period), the funds you earned, which you were paid, regarding which there was no dispute, sat in your escrow account. To be safe with the IRS, you reported them as income in 1998. Query: does keeping the funds in escrow violate the anti-commingling rules? In Attorney Grievance Commission v. Webster, filed February 17, 1998, Maryland's highest court held that "the purpose of the anti-commingling rules is to protect client funds from the claims of creditors of the attorney." When an attorney's own funds are maintained in an escrow account, it "constitutes a holding out to the public that the monies contained therein are not subject to attachment and improperly suggests that the moneys are beyond the reach of creditors of the attorney." Webster (whose facts were distinguishable from the ones in this scenario) was suspended from practice for 30 days.
Something to think about.
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