Aug. 15, 2018 – When a client owes you hourly fees and has funds deposited in trust for a different case that you’re handling, is it OK to take your hourly fees from the second case’s trust?

Question

I represent a client in two separate matters.

The first is a post-judgment family law matter, and the client paid a flat fee in advance. The second matter is an unrelated civil suit, which is being billed on an hourly basis.

The client has tried to keep up with the hourly billings in the second matter but has fallen behind by several thousand dollars. We just received a substantial property division payment on the family law case into our trust account.

My managing partner instructed me to take the hourly fees owed in the second matter from the property division proceeds in the first matter before disbursing the funds to the client.

Is it permissible to take fees owed in one case from funds deposited in trust in connection with a different case?

Answer

This scenario first implicates SCR 20:1.15(e)(1), which states:

Notice and delivery. Upon receiving funds or other property in which a client has an interest, or in which a lawyer has received notice that a 3rd party has an interest identified by a lien, court order, judgment, or contract, the lawyer shall promptly notify the client or 3rd party in writing. Except as stated in this rule or otherwise permitted by law or by agreement with the client, the lawyer shall promptly deliver to the client or 3rd party any funds or other property that the client or 3rd party is entitled to receive.

Thus the lawyer must promptly provide written notice to the client of the receipt of the property division funds, including the amount, and delivery of the amount to which the client is entitled.

The second, less obvious rule that comes into play is SCR 20:8.4(f), which states that it is misconduct to “violate a statute, supreme court rule, supreme court order or supreme court decision regulating the conduct of lawyers.”

The Marine Standard

This rule is implicated because of Disciplinary Proceedings against Marine¹. In Marine, the court ruled, in part, that in order for an attorney to withdraw fees from client funds held in trust, agreement must be reached between the attorney and the client on at least three points:

1. the right of the attorney to look to the client for payment of fees,

2. the amount to which the attorney is entitled, and

3. the time at which payment will be expected.

Therefore, before applying any of the property division funds in the trust account, the lawyer needs to reach an agreement with the client to that effect.

If the client does not agree, the lawyer is obligated by SCR 20:1.15(e)(1) to promptly deliver the entire amount of the property division funds to the client.

The fact that the client may owe the lawyer fees does not give the lawyer the right to refuse to disburse funds that are held in trust in order to coerce the client to agree to the lawyer’s demands for payment.²

The Marine Standard Applied

The Marine standard [through SCR 20:8.4(f)] has been applied in several disciplinary matters.

For example, in Disciplinary Proceedings Against Hahnfeld³, the respondent lawyer represented the client in post-judgment matters against the client’s former spouse and in a separate civil action against the client’s former spouse and adult children. The respondent received a substantial property settlement payment in the first matter but failed to promptly notify the client of the receipt of the funds. The respondent eventually transmitted some of the funds to the client, but only after deducting, without permission, a substantial amount for fees earned in the second matter.

In OLR Private Reprimand 1993-23, the respondent lawyer deducted fees owed from returned bail money without the permission of the client.⁴

Takeaways

There are some important points to take from these rules and cases.

First, funds a lawyer receives into a trust account in connection with a representation are not fungible – meaning that funds received in a settlement of a client’s case cannot unilaterally be converted to another purpose, such as payment of the lawyer’s fees owed in another matter, without the consent of the owner of the funds.

Second, the Wisconsin Supreme Court has set forth standards of conduct for lawyers in case law as well as rules, and the holdings of these cases are enforced through SCR 20:8.4(f).⁵ While the holdings of such cases may not be readily apparent from reading the rules, lawyers need to be cognizant of them.

Finally, the Marine standard does not apply to funds that are placed in a lawyer’s trust account specifically for the purpose of paying the lawyer’s fees, such as advanced fees of the share of settlement that represents a lawyer’s agreed upon contingent fee.

Withdrawal of advanced fees from a trust is governed by SCR 20:1.5(h), and contingent fees are governed by SCR 20:1.5(c).

Endnotes

¹ 82 Wis. 2d 602, 610, 264 N.W.2d 285 (1978).

² See Wisconsin Ethics Opinion E-09-01.

³ 2013 WI 14.

⁴ See also Disciplinary Proceedings against Strnad, 178 Wis.2d 620, 505 N.W.2d 134 (1993); Disciplinary Proceedings Against Brown, 2010 WI 104, 329 Wis.2d 21, 787 N.W.2d 800 (2010).

⁵ Some other examples include Disciplinary Proceedings Against Shea, 190 Wis. 2d 560, 527 N.W.2d 314 (1995) (misconduct to deal dishonestly with firm partners with respect to fees); Disciplinary Proceedings Against Heilprin, 168 Wis. 2d 1, 482 N.W.2d 908 (1982) (misconduct to make unwanted sexual advances towards a client); Disciplinary Proceedings Against Owens, 172 Wis. 2d 54, 56-57, 492 N.W.2d 157 (1992) (failure to file income tax returns constitutes professional misconduct).