In virtually every gathering of lawyers that I have attended for as long as I can remember, I have heard one or more members of the audience explain away misconduct by other lawyers by saying something to the effect: “Well at least he wasn’t stealing money from the client.” From my observation, lawyers are generally aware that misusing funds from their law firm’s trust account is very serious professional misconduct. Fortunately, at least from my vantage point, the reported instances of conscious misuse of a law firm’s trust account have been relatively infrequent occurrences. Nevertheless, during the 30 years that I have been representing lawyers it still surprises me the number of lawyers that continue to be confused by “true retainers” and fees paid in advance. The problem is that confusion on this issue can lead to misuse of the law firm’s trust account and can be considered very serious professional misconduct.
Operationally, the key difference between fees paid in advance and a true retainer is that a true retainer can be immediately put into a law firm’s operating account. In contrast, fees paid in advance must be put into the law firm’s IOLTA account and can only be distributed to the law firm after the fees are earned.
Cluck v. Commission for Lawyer Discipline, 214 S.W.3d 736 (Tex.App.—Austin 2007) is illustrative of the confusion that many lawyers have about what is a true retainer and what is not. In Cluck, the fee agreement provided the following: “in consideration of the legal services rendered on my behalf in the above matter I agree to pay the [lawyer] a non-refundable retainer in the amount of $15,000.” That sentence, however, was follow by a sentence that explained the “[lawyer] fees are to be billed at $150 per hour, first against non-refundable fees and then monthly thereafter additional non-refundable retainers as requested.” The fee agreement then went on to say that “no part of the legal fee is to be refunded should the case be discontinued settled or for any other matter.” In rejecting the lawyer’s argument that the fee was a true retainer the Austin court of appeals pointed out that the difference between a true retainer and fees paid in advance is that a true retainer is not a payment for services. It is a fee paid to secure a lawyer’s availability. It is to remunerate him for the loss of the opportunity to accept other employment. Thus, the true retainer is to secure the services of the lawyer, but does not actually pay for the time expended by the lawyer in providing future services to the client. In Cluck, the court pointed out that if the lawyer can substantiate that other employment will probably be lost by obligating himself to represent the client, then the moneys may be a retainer and can be deemed earned at the moment they are received.
In contrast, if the money paid to the lawyer is paid to compensate him for time expended providing legal services to the client, then those moneys are a prepayment for services to be rendered. Those funds must be placed in the law firm’s IOLTA account and not distributed until earned. In Cluck, the court lost little time in pointing out that the language in the fee agreement that said the funds were designated as non-refundable did not make it non-refundable. The court looked at the language and the conduct of the lawyer in applying the money to pay for the services to be provided, and found that the money constituted fees paid in advance. The court pointed out that money that constitutes prepayment of a fee belongs to the client. Until the services are rendered, that money must be held in a trust account. Since the funds were not held in a trust account, the lawyer in Cluck was suspended.
The difficulty in differentiating between a true retainer and fees paid in advance has not been limited to family law practitioners. Instead, the issue has arisen in a variety of law practices. For instance, in Willie v. Commission for Lawyer Discipline, 2013 WL 816285 (Tex. App.-Houston [1st Dist.] 2013, the affected lawyer was representing clients in a business dispute. In Willie, the lawyer pointed to the language of the fee contract which referred to the moneys received by him as a non-refundable retainer.”
Unfortunately for him, the contract further provided “the retainer will be billed at a rate of $200.00 per hour.” Had Willie only described the funds as a non-refundable retainer, and if he could have proved that it was to secure his availability and that he was caused to forgo other representations, he might have had a chance of proving the moneys were a true retainer.
However, by including language in his fee agreement that said the retainer “will be billed at a rate of $200.00 per hour,” Willie stripped himself of the ability to assert the money was a true retainer. Not unlike many other lawyers, the lawyer in Willie apparently believed the funds he received were a true retainer. He put the money in his operating account and thereby violated Rule 1.14 of the Texas Disciplinary Rules of Professional Conduct. The lawyer in Willie, like most lawyers who violate Rule 1.14, was suspended from the practice of law.
The moral of the story is that if a lawyer is going to try to support an assertion of a true retainer then the fee agreement and his conduct must be absolutely clear; the money is to secure his availability and for nothing else. The other moral to the story is: if in doubt, put the money in the trust account, treat it as fees paid in advance, and properly account for the funds. Given the seriousness of the sanctions that can be meted out based on mishandling money, lawyers would be well served to think very carefully before they try to assert that moneys they receive are true retainers. Bruce A. Campbell