An attorney who spent a client’s advance fees pursuant to an “earned on receipt” fee agreement was disbarred when he failed to complete the work and did not refund the unused fees. ABA Litigation Section leaders counsel practitioners to carefully consider the risks and inherent temptations when holding client money in an operating account before earning the fees.
Attorney Runs Out of Client Money, Violates Ethical Rules
In In re Long, the respondent attorney had limited financial resources and for that reason entered into an “earned on receipt” or “nonrefundable” fee agreement with multiple clients. That allowed him to access client funds before performing the agreed-upon work. Oregon Rule of Professional Conduct 1.5(c)(3) permits these types of fee arrangements so long as there is a signed written agreement explaining that (1) the advance fees will not be placed into a trust account, and (2) that the client can terminate the attorney at any time, and “may be entitled to a refund of all or part of the fee if the fee for which the services was paid are not completed.” Otherwise, advance fees generally must be kept separately in the lawyer’s trust account and may only be transferred to the lawyer after the promised work is performed under Rule 1.15-1(a).
In this case, the attorney used the advance fees to pay his personal and business expenses. Due to personal issues, he did not provide his clients with the agreed-upon legal services. When the attorney’s clients terminated him, he lacked the funds to return his clients’ money.
Pattern of Violations and Lack of Remorse Leads to Disbarment
On appeal, the court explained that while the fee arrangement “left respondent’s clients vulnerable” by “shift[ing] the risk of loss to the client,” the attorney’s handling of the advance fees did not violate any ethical rules. The court noted that Oregon Rule of Professional Conduct 1.5(c)(3) permits such fee arrangements, and that the attorney had complied with the rule’s requirements by entering into a written fee agreement, designating the fees as “earned on receipt”, and billing against the advance.
However, the court agreed that the attorney’s failure to return unearned fees in multiple matters violated Rule 1.5(a), which prohibits charging excessive fees, and Rule 1.16(d), which requires “refunding any advance payment of fee or expense that has not been earned or incurred” when a client terminates his or her lawyer’s representation.
To determine whether disbarment was appropriate, the court relied on the ABA’s Standards for Imposing Lawyer Sanctions “to determine a preliminary sanction by considering the ethical duties violated, respondent’s mental state at the time of the misconduct, and the potential or actual injury caused by respondent’s misconduct.” It noted that the attorney had committed forty violations in fourteen matters “that involved failing to refund unearned fees, collecting illegal fees, failing to communicate with clients, neglecting client matters, and failing to cooperate with the Bar’s investigation into that conduct”, as well as four violations related to his intentional conversion of client funds. The court further observed that the clients had not only suffered financial injury and emotional distress, but that many had gone without legal representation because they could not hire new attorneys without the return of the advance funds.
Additionally, the court determined that “the aggravating circumstances substantially outweigh[ed] the mitigating circumstances” as the attorney “repeatedly put his own interests ahead of his clients, to their financial and emotional detriment.” It also stated that the attorney’s “fail[ure] to fully acknowledge the harm he has caused to his clients and to the profession . . . demonstrates respondent’s unfitness to represent future clients.” For those reasons, the court affirmed the sanction of disbarment.
The Inherent Risks of “Earned on Receipt” Fee Agreements
Litigation Section leaders believe that while “earned on receipt” fee agreements provide flexibility, attorneys must also ensure the work gets done. “That’s where lawyers get into trouble,” says David Seserman, Denver, CO, cochair of the Section’s Solo and Small Firm Committee. “When they have fees and they take it prematurely, that is where you start having ethical problems.”
“If you hire a painter to paint a house, you expect the painter to paint it and you will get your money back if it does not happen,” explains John M. Barkett, Miami, FL, cochair of the Section’s Ethics & Professionalism Committee. “We are a self-policing profession, and you have to be able to make sure you trust lawyers and the lawyer here was going to get punished no matter what, as no bar ever tolerates the mishandling of client funds,” he adds.
Approach Problems Directly
Section leaders observe that these problems usually begin with other issues unrelated to legal work, as they did here. “It looked like he had a good track with no apparent indication that he was going to slack off in his work,” Barkett remarks. “He likely got overwhelmed and probably should have talked to a lawyer assistance program.”
Addressing bar investigations directly is crucial. “The head in the sand strategy never works with a bar association,” counsels Barkett. “What he needed was humility and what he reflected was hubris; he needed to be apologetic and humble but instead, he was resistant,” he concludes.
Hashtags: #ethics, #lawyerdiscipline #disbarment
- Susan F. Dent, “Self-Serving Retainer Agreement Leads to Attorney Withdrawal,” Litigation News, (Jan. 14, 2020).
- Oregon Rules of Professional Conduct.
- Stephanie Francis Ward, “Sealing the Deal: How to Negotiate Fee Agreements,” ABA J. Podcast (Nov. 7, 2021).
- Laura W. Givens, “Lawyer Forfeits Contingency Cut for Violating Ethics Rules,” GPSolo eReport (Dec. 9, 2019).
- Rachel A. Harris, “Failure to Follow Ethics Rule Voids Fee-Splitting Agreement,” Litigation News (July 20, 2021).
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