July 20, 2022 – When a third party pays a client fee but a conflict arises and you need to withdraw from the case, who receives the refund of the advanced fee?
I was asked to represent a young man facing criminal charges. I normally charge a flat fee of $7,500 paid in advance. The client could not afford my fee, but the client’s mother agreed to pay and I agreed to take the case.
Soon after, I learned that another firm client would be an adverse witness and that I had to withdraw because of the conflict.1 I realized that I had therefore not earned the advanced fee and was willing to refund the fee, but was uncertain as to whether the refund should go to the mother or the client.
When a third party pays an advanced fee on behalf of a client, does any refund go to the third-party payor or to the client?
SCR 20:1.8(f) permits, and to some extent regulates, a lawyer’s receipt of fee payments from a non-client third party,2 but that rule says nothing about the receipt of advanced fees from a third party.
Tim Pierce is ethics counsel with the State Bar of Wisconsin. Reach him by email or through the Ethics Hotline at (608) 229-2017 or (800) 254-9154.
SCR 20:1.5(f) requires lawyers to hold advanced fees in trust unless the alternative protection for advanced fees (SCR 20:1.5(g) is used. Again, the black letter of that rule does not address the question at hand, but the Wisconsin Comment to that rule states:
Lawyers are obligated to hold advanced fee payments in trust until earned, or use the alternative protection for advanced fees as set forth in SCR 20:1.5(g). Additional requirements for advanced fees are identified in SCR 20:1.0(ag). Sometimes the lawyer may receive advanced fee payments from 3rd parties. In such cases, the lawyer must follow the requirements of SCR 20:1.8(f). In addition, the lawyer should establish, upon receipt or prior to receipt of the advanced fee payment from a 3rd party, whether any potential refund of unearned fees will be paid to the client or 3rd-party payor. This may be done through agreement of the parties or by the lawyer informing the client and 3rd-party payor of the lawyer's policy regarding such refunds. Lawyers also receive cost advances from clients or 3rd parties. Since January 1, 1987, the supreme court has required cost advances to be held in trust. Prior to that date, the applicable trust account rule, SCR 20.50(1), specifically excluded such advances from the funds that the supreme court required lawyers to hold in trust accounts. However, by order dated March 21, 1986, the supreme court amended SCR 20.50(1) as follows: "All funds of clients paid to a lawyer or law firm, other than advances for costs and expenses, shall be deposited in one or more identifiable trust accounts as provided in sub. (3) maintained in the state in which the law office is situated and no funds belonging to the lawyer or law firm may be deposited in such an account except as follows. …" This requirement is specifically addressed in SCR 20:1.5(f). (emphasis added)
This gives the lawyer flexibility, but does put the burden on the lawyer to have an established firm policy for advanced fees from third parties or to establish an understanding before or upon receipt of the advanced fee.
In the scenario above, where the lawyer has done neither, the lawyer should contact both the client and the third-party payor to determine if there is agreement as to where the refund should go. If there is no such agreement, the Wisconsin Comment to SCR 20:1.5(g) states:
If the client's fees have been paid by one other than the client, then the lawyer's responsibilities are governed by SCR 20:1.8(f). If there is a dispute as to the ownership of any refund of unearned advanced fees paid by one other than the client, the unearned fees should be treated as trust property pursuant to SCR 20:1.15(e)(3).
SCR 20:1.15(e)(3) states:
Disputes regarding trust property. When a lawyer and another person or a client and another person claim an ownership interest in trust property identified by a lien, court order, judgment, or contract, the lawyer shall hold that property in trust until there is an accounting and severance of the interests. If a dispute arises regarding the division of the property, the lawyer shall hold the disputed portion in trust until the dispute is resolved. Disputes between the lawyer and a client are subject to the provisions of SCR 20:1.5(h).
Therefore the lawyer would be required to hold the amount of the refund in the lawyer’s trust account until the dispute is resolved.3
On Holding Funds Subject to Dispute
Holding funds that are subject to dispute is a position that most lawyers would prefer to avoid, and in order to do so, the lawyer must take steps upon or before receipt of advanced fee payments from third parties.
First, the lawyer must obtain the client’s informed consent, and should make clear to the third-party payor that they are not the client, cannot direct or control the lawyer, and cannot be provided any information about the matter without the client’s informed consent (see SCR 20:1.8(f)).
While not required by the rule, it is certainly a good idea to obtain the client’s informed consent and provide this information to the third-party payor in writing. The lawyer should not, however, provide the third party with a copy of the engagement agreement, because the agreement is protected information (see SCR 20:1.6). Nor should the lawyer have the third-party payor sign the engagement agreement, which creates the false impression that the third-party payor has some say in the representation.
The lawyer should also give thought to establishing an office policy in such situations, which can be that the refund, if any, either goes to the client or goes to the third-party payor.
It’s Best to Plan Ahead
When a lawyer calling the ethics hotline finds themselves in this situation, they are often surprised that, while the rules do provide an answer, a clear answer requires that the lawyer prepare in advance.
Firms that often receive advanced fees should consider establishing firm policy regarding payment of such fees from third parties.
In Case You Missed It: Read Past Ethical Dilemmas
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1 For a discussion of conflicts arising from current or former client’s as witnesses, see Wisconsin Ethics Opinion EF-20-02.
2 SCR 20:1.8(f): A lawyer shall not accept compensation for representing a client from one other than the client unless: (1) the client gives informed consent or the attorney is appointed at government expense; provided that no further consent or consultation need be given if the client has given consent pursuant to the terms of an agreement or policy requiring an organization or insurer to retain counsel on the client's behalf; (2) there is no interference with the lawyer's independence of professional judgment or with the client-lawyer relationship; and (3) information relating to representation of a client is protected as required by SCR 20:1.6.
3 If a lawyer is using the alternative protection for advanced fees under SCR 20:1.5(g) and therefore not holding the amount of the advanced fee in trust, the rules are not clear as to whether the disputed amount of refund must be transferred to the lawyer’s trust account. Given the language of SCR 20:1.15(e)(3), the lawyer should strongly consider placing the disputed amount in trust.