March 17, 2017 Top Story

Splitting a Referral Fee? Now, You Must Hold It in Trust

New formal opinion enhances protection to referring attorneys

By Andrew J. Kennedy

Lawyers who split their fees with outside lawyers now have more protection, thanks to a new opinion issued by the ABA Standing Committee on Ethics and Professional Responsibility. The opinion requires that referral fees must be held in a trust account and that the lawyer receiving the funds may be required to provide an accounting. Section leaders suggest that while these new obligations may not alter practice for many personal injury attorneys, who typically deposit personal injury settlements into trust accounts, it may affect lawyers who split flat fees. Model Rule 1.5(3).

Attorneys may split fees with attorneys outside the same firm, as long as they abide by Model Rule 1.5(e). That rule requires the division of the attorney fee be "in proportion to the services performed by each lawyer or each lawyer assumes joint responsibility for the representation." The rule also requires client consent and that the arrangement be confirmed in writing.

The rule does not address, however, how lawyers must treat those earned fees when they are received. That question arises when the attorney receives funds from a third person, perhaps by a settlement, and the other lawyer also has an interest in these funds.

Holding in Trust Accounts and Accounting

The opinion provides that a lawyer holding funds in which both have an interest "must, under Rule 1.15(a), deposit the funds in which co-counsel holds an interest in an account (typically a trust account) separate from the lawyer's own property." The opinion also states that the lawyer who receives the funds must "promptly deliver to the other lawyer the agreed upon portion of the fee, and, if requested by the other lawyer, provide a full accounting." Last, the opinion requires that if there is a dispute over the funds, the receiving lawyer must "keep the disputed funds separate from the lawyer's own property until the dispute is resolved."

Elevating the Status of the Referring Lawyer

"It seems to me that what the opinion is doing here is elevating the status of the referring lawyer into a third person who is entitled to be protected," observes Joseph A. Frank, St. Louis, MO, cochair of the ABA Section of Litigation's Solo & Small Firms Committee. "It transforms a referral fee from being an agreement between two lawyers into being a protected interest." Frank, who practices medical malpractice law, does not see this changing the practice of the personal injury bar. He notes that it is already standard practice for personal injury lawyers to deposit settlement checks into their trust accounts and then pay all interested persons from that account, including fees to other attorneys.

Frank does not believe that the new requirement of keeping disputed funds in trust is controversial. "The objective is to prevent the lawyer from receiving the fee from spending the money to prevent the wasting of disputed fees by the receiving lawyer," he observes. Nor is the new requirement to provide an accounting on request controversial. "If you are entitled to a portion of a fee, it seems reasonable that you may ask for an accounting," says Susan K. McIntosh, Seattle, WA, cochair of the Section of Litigation's Attorneys' Liability Subcommittee of the Professional Services Liability Litigation Committee.

Advice for Lawyers

Section leaders suggest there are areas where the opinion may catch unwary lawyers. The opinion also applies "where the funds are just legal fees," notes Frank. He questions whether attorneys who split flat fees always put the funds into trust accounts, pointing out that if a check from a client is supposed to be split between two lawyers, some lawyers may just deposit it into their operating accounts. The opinion would bar attorneys from depositing those funds into their operating accounts, even though there are no client funds. As a result, "this opinion might change the practice of those attorneys, observes Frank.

McIntosh agrees with this observation, noting "This opinion is best suited to contingency fee cases, where the fee is paid at the end of the case." "It seems like it would be more cumbersome if lawyers from different firms are working on an hourly basis," she adds.

This opinion also may spur lawyers to document their referral fee relationships in more detail. McIntosh notes that some lawyers may not formalize their referral relationships in writing. This opinion "might have the effect to encourage lawyers to treat these kinds of relationships formally and to document them. Documenting your relationships is the key to preventing disputes along the way," she adds.

Still, the largest impact of this opinion is on the referring lawyer, especially if there is a dispute. "This opinion provides more ammunition and protection if you are the stiffed lawyer. Failure to pay could be an ethics violation as well as a contractual one," reasons Frank.

 

Andrew J. Kennedy is an associate editor for Litigation News.

Keywords: referral fee, attorney fees, ethics, model rules

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