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    July
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    2007

    Impact of New Fee and Trust Account Rules on Family and Criminal Law Practitioners

    The new fee and trust account rules became effective July 1, 2007. Here, the authors address hourly and flat fee engagements for lawyers, the new opportunity for lawyers to outright deposit advanced fees – whether flat fees or hourly fees – into their general business account, and the changes to the rules that most affect family and criminal law practitioners. Sample end-of-representation letters are included.

    Gerald W. Mowris

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    Wisconsin Lawyer Wisconsin Lawyer
    Vol. 80, No. 7, July 2007

    Impact of New Fee and Trust Account Rules on Family and Criminal Law Practitioners

    The new fee and trust account rules became effective July 1, 2007. Here, the authors address hourly and flat fee engagements for lawyers, the new opportunity for lawyers to outright deposit advanced fees – whether flat fees or hourly fees – into their general business account, and the changes to the rules that most affect family and criminal law practitioners. Sample end-of-representation letters are included.

    bankby Diane S. Diel & Gerald W. Mowris

    In April 2004, the Wisconsin Supreme Court approved, after reviewing comments primarily from collection attorneys, a joint petition of the Office of Lawyer Regulation (OLR) and the State Bar of Wisconsin that amended and revised the trust account rules. The order adopting the rule was published in the June 2004 Wisconsin LawyerTM. The preamble to the published rule read:

    "Following a public hearing, the Wisconsin Supreme Court has repealed and recreated SCR 20:1.15 regarding lawyers' safekeeping of property, and trust accounts and fiduciary accounts. The amendments to SCR 20:1.15 are the most significant changes since the rule's inception in 1988. The new rule is effective July 1, 2004."

    As the rule was introduced to Wisconsin practitioners, the State Bar, the supreme court, and the OLR found themselves engulfed in a general hue and outcry about the new rule. Typically predictable and sedate continuing legal education programs designed to educate practitioners about the new rules erupted in protests and walk outs. Practitioners complained about the following and other issues:

    • the absolute requirement that all advanced fees be deposited in trust accounts and made subject to the billing, deferred transfer to general account, and other bookkeeping requirements of SCR 20:1.15;
    • the absolute prohibition on payment by credit card of advanced fees;
    • the nonwaiveable, required five-day wait after billing before fees could be withdrawn from trust accounts;
    • the client's unlimited opportunity to object at any time to the fees charged by simply making an objection and demanding return of the fee, thereby triggering a requirement that the lawyer not disburse funds to the general account or, if disbursed, return to the trust account any and all fees that were disbursed from the trust account; and
    • the client's unlimited time to object to a fee already transferred from a trust account to the business account and the requirement that the fee be returned to the trust account until the objection was resolved.

    The good news is that the supreme court has now adopted an order amending SCR 20:1.15, effective July 1, 2007, that relieves or eliminates most of the foregoing issues. An excellent article by State Bar ethics counsel Tim Pierce about the new rules (with sample fee agreements) appeared, along with the rules themselves, in the June 2007 Wisconsin Lawyer.

    Diane 
Diel

    Diane S. Diel, U.W. 1976, practices as a solo practictioner in Milwaukee, focusing on family law.

    Gerald Mowris

    Gerald W. Mowris, U.W. 1973, practices in criminal defense with Pellino, Rosen, Mowris & Kirkhuff SC, Madison. Both authors served on the State Bar’s Trust Account Rule Working Group.

    This article addresses the basic rules that became effective July 1, 2007 and now govern hourly and flat fee engagements for lawyers, the new opportunity for lawyers to outright deposit advanced fees - whether flat fees or hourly fees - into their general business accounts, and the changes to trust account and fee rules that most affect family and criminal law practitioners.

    State Bar Forms Working Group to Review the 2004 Trust Account Rules

    While the new rules will affect all lawyers, the majority of the complaints about the 2004 revisions to the trust account rules came from general practitioners, family lawyers, and criminal defense attorneys. One of the major concerns was that the 2004 rule revision required that all advanced fees be deposited in trust accounts. This was contrary to the practice of lawyers who charge flat fees. In fact, the OLR was sufficiently concerned about the conflict between this rule and earlier opinions, decisions, and guidance concerning the definitions of flat fees that the OLR specifically agreed not to take action against any lawyers for failing to place advanced fees in trust accounts if the advanced fees were flat fees. In part, the OLR also was concerned about the possibility of federal seizure of trust funds held for the benefit of a client during the representation.

    Additionally, until the effective date of the 2004 rules, many "hourly" billing lawyers typically had charged what they identified in their written fee agreements as nonrefundable "retainer" fees and, with the blessing, they believed, of State Bar Professional Ethics Committee Opinions 86-09 and 93-04,1 had deposited these "retainer" fees to their firm's business account. Such advanced fees were applied to cover a certain number of hours of work. When the covered hours of work were exceeded, the lawyer would either convert the billing to an hourly basis or require that the client advance additional funds. Hourly billing lawyers found a simple way to avoid the problem of their "nonrefundable retainer" being found to be unreasonable in situations in which their services were terminated early in the representation: they actually refunded portions of the retainer to clients. The 2004 version of the rules clearly prohibited this practice (as did previous versions, although less clearly), because a retainer is by definition not for advanced fees and could not be hourly based. The era of being able to refund a nonrefundable retainer was at an end.

    Lawyers who bill on an hourly basis also developed a practice of allowing clients to charge their nonrefundable retainers to their credit cards. The 2004 rules absolutely prohibited this practice.

    To address the hue and cry around the adoption of the 2004 rules, then State Bar President Michelle Behnke appointed a Trust Account Rule Working Group to review the rule and suggest changes to it. Members of the working group either were volunteers from or were nominated by the State Bar Criminal, Family Law, and Bankruptcy sections, and thus the group at its inception consisted of lawyers from several different practice areas. OLR Director Keith Sellen and trust account administrator Mary Hoeft Smith also served on the working group. Lawyers practicing in real property, probate, trust, environmental, and other areas provided additional input. Finally, after an initial hearing before the supreme court, members of the public were added to the working group. The critical task set to the working group was to craft new rules that: 1) reflect an understanding of and meet the concerns of the various substantive practice groups of lawyers; 2) protect the public against the loss of funds caused by lawyer misconduct; and 3) reduce the OLR's heavy burden of addressing lawyer-client fee disputes. The final petition approved by the Wisconsin Supreme Court represented the outcome of literally thousands of hours of work and research by working group members.

    Definitions

    One of the working group's first steps was to define retainer, advanced fee, and flat fee.

    A retainer really should be called a "reservation fee" or an "availability fee." It is not payment for any specific legal services, whether past, present, or future. It is simply an amount paid specifically and solely to secure the availability of a lawyer to perform services on behalf of a client. A retainer becomes the lawyer's property on receipt but, like all fees, must be reasonable.

    An advanced fee is an amount that is paid to a lawyer in contemplation of future services and that will be earned on an agreed on basis, whether hourly, flat fee, or some other basis. An amount paid for services to be performed in the future is an advanced fee, no matter how it is characterized.

    A flat fee is a fixed amount paid to a lawyer for specific, agreed on services, or a fee paid to cover the time until a fixed, agreed on stage in a representation is reached, regardless of the time required of the lawyer to perform the service or reach the agreed on stage in the representation. It is not an advance against the lawyer's hourly rate, and the lawyer may not bill against it on an hourly rate. Flat fees become the lawyer's property on receipt but are subject to the requirements of the rules, specifically SCR 20:1.5, SCR 20:1.5(b)(4) or (4m), SCR 20:1.15(e)(4)h. SCR 20:1.15(g), and SCR 20:1.16(d).

    It is important to recognize that a flat fee ordinarily is an advanced fee and thus must be placed in a trust account unless the lawyer follows the alternative protection rules for advanced fees found in SCR 20:1.15(b)(4m).

    These definitions are not new. Rather, they are traditional definitions that are consistent with Wisconsin Supreme Court case law, Wisconsin ethics opinions, and case law from other jurisdictions. It is important to keep these definitions in mind as you review the new rule and your fee agreements.

    Issues Confronting Criminal Defense Attorneys

    In the field of criminal defense, lawyers who do not get paid at the beginning of representation often do not get paid at all. Criminal defense is a practice area in which judges often will require an attorney to complete the representation of a client, even if the client stops paying the lawyer. For these and other reasons, most criminal defense lawyers charge flat fees for their representation of clients.

    The new rules specifically allow a lawyer to establish a flat fee, but the rules also reflect the fact that there are occasions when a client will become unhappy with his or her attorney part way through the case and desire to change counsel. When that occurs, there often is a conflict between the client (who wants some of his or her money back), and the lawyer, who may have identified his or her flat fee as nonrefundable. Because all fees are subject to the requirements that they be reasonable and earned and thus cannot be absolutely nonrefundable, many criminal defense lawyers have had complaints filed against them with the OLR as a result of disputes over fees.

    The working group tried to develop a method that would allow a criminal defense lawyer to accept a flat fee, put the fee into his or her business account to protect it from claims by other parties (including the government), and assure that the lawyer was paid for the representation bargained for, and, at the same time, provide a relatively swift method for resolving fee disputes that would both protect the client's interests and keep the attorney from having to defend himself or herself before the OLR.

    Issues Confronting Family Lawyers and Other Hourly Billers

    Family law practitioners and other hourly billers implementing the 2004 trust account rule changes were confronted with trust account and billing requirements that changed the way they used their clients' advanced fees and imposed on them obligations to send bills and notices, and then wait five days to collect funds. Estimates of the amount of extra work involved in managing the billing and other paperwork ranged from several hours per week per lawyer to hundreds of hours per firm per month. Some lawyers sent bills two or more times per month. Because SCR 20:1.15(b)(3) prohibits mixing attorney property with client property in trust, questions arose about how often the lawyer was supposed to bill.

    Further confounding the issue was the fact that the credit card advanced fee was the bread and butter of many divorce lawyers. Clients without access to liquid funds frequently charged their advanced fees to credit cards. Clients who did not have cash advance agreements on their credit cards and who had no other source of funding for a fee advance to a lawyer were left without the opportunity to secure representation. Family lawyers were concerned that a client who was dissatisfied with a result achieved during the case could later object to a fee long since earned, which would require the lawyer to return the fee advance to the trust account.

    Improvements to Rules Governing Advanced Fees Held in Trust

    The 2007 order makes several important changes that ease the administration of trust accounts and protect the lawyer's interest in being fairly compensated while professionally and capably representing clients. The new rules permit a lawyer, with advance written permission of a client, to move the earned portion of a fee from the trust account to the general account on the day a billing is rendered. This provision is especially important to bankruptcy law practitioners, who prepare a bankruptcy petition for filing, process the bill for services against the bankrupt client's advanced fee, and then file the petition for bankruptcy. Now, instead of filing a petition showing that the debtor has an asset in the form of a credit balance in trust with the lawyer that is reachable by the trustee, the lawyer may transfer funds on the day the bill is rendered. Similarly, for solo or small firm lawyers, transferring the funds on the day the billing is rendered will create ease and efficiency in administering the trust account.

    The former unlimited right of a client to require that a fee be returned to a trust account when making an objection to the fee is now limited to a period of 30 days after the funds are removed from trust. Objections made more than 30 days after the transfer do not result in the obligation to return funds to the trust account. Further, the client must state specific, "particularized and reasonable" bases for the objection. It is markedly easier and safer for lawyers to manage their trust funds after the approval of the 2007 changes to the rules.

    Alternate Protection for Deposits of Advanced Fees to General Business Accounts

    Criminal defense attorneys, family law practitioners, and other hourly billing lawyers believed that the original 2004 trust account rule changes were being obeyed only by honest lawyers and would not prevent theft by dishonest lawyers. The statistics compiled by OLR Director Keith Sellen concerning theft of trust funds by lawyers suggested that, indeed, the vast majority of lawyers were and are honest. Before the 2004 rules changes, losses due to theft from trust accounts each year were limited to an average of approximately $15,000, with rare exceptional larger losses caused by individuals so corrupt or impaired that it was absurd to imagine that any version of trust account rules would protect the public or prevent theft. At the same time, however, the numbers of fee disputes being presented to the OLR in the guise of complaints of unethical conduct were rising and were distracting the OLR from its mission to supervise the practice of law and protect the public from misconduct by persons practicing law in Wisconsin. The working group struggled to balance these complaints and issues in a way that would allow lawyers to reduce the paperwork burden and simply place their advanced fees in their general business account. Supreme Court Order 06-04 accomplishes that goal.

    Rules Governing Deposit of Advanced Fees to the General Business Account

    All lawyers, whether criminal defense attorneys charging a flat fee or family law practitioners or other hourly billers charging an advanced fee, now may ethically deposit those advanced fees in their business account providing they follow the procedures outlined in SCR 20:1.15(b)(4m) ("Alternative Protection for Advanced Fees"). This rule requires a lawyer who accepts an advanced payment of a flat fee and desires to put the fee directly into the business account to give the client a written notice containing certain information. That information must include:

    1) the amount of the advanced payment;

    2) the basis or rate of the lawyer's fees;

    3) any expenses for which the client will be responsible (money for costs and expenses must still be put in trust);

    4) an explanation that the lawyer has the obligation to refund any unearned advanced fee and provide an accounting of the fee at the termination of the representation;

    5) a statement that the lawyer must submit a dispute about a requested refund of advanced fees to binding arbitration within 30 days of receiving a request for such a refund; and

    6) a statement that the client may file a claim with the Wisconsin Lawyers' Fund for Client Protection if the lawyer fails to provide a refund of advanced fees.

    Sample fee agreements providing these notices for both defense lawyers and hourly billers are included with Tim Pierce's article "New Trust Account Rules on Lawyer Fees and Fee Agreements" in the June 2007 Wisconsin Lawyer, which also is online on WisBarTM, the State Bar's Web site.

    The elegant solution found by the working group addresses all the basic problem areas. The lawyer's interests in streamlined bookkeeping and administration are served with minimal additional written agreements and notices to the client. The client's interest in securing refund of converted funds is securely and capably protected by all the lawyers in Wisconsin via their support of the Wisconsin Lawyers' Fund for Client Protection. Finally, the OLR's desire to minimize the number of grievances brought to it that really are fee disputes is realized by the requirement that the lawyer submit, at the election of the client, to mandatory fee arbitration.

    End-of-Representation Considerations for Flat Fee Users and Defense Lawyers

    Criminal defense lawyers have a new and distinct obligation to the client at the conclusion of the representation. The defense lawyer must deliver an accounting to the client of the use of the flat fee. Generally, such an accounting need only be a sentence or phrase indicating that the services the lawyer was engaged to perform have, in fact, been performed. If the representation ends before the agreed service was performed, then the lawyer must deliver, in writing, an accounting indicating how much was earned and including a refund of any unearned, advanced fees. In addition, the lawyer must deliver notice of the right of the client to submit any fee dispute to binding arbitration within 30 days, and the notice must meet the same end-of-representation requirements set forth below.2 Sample end-of-representation letters for flat fees are included as Appendix A: Letter at Conclusion of Representation - Fully Earned Flat Fee; and Appendix B: Letter at Conclusion of Representation - Return of Unearned Portion of Flat Fee.

    End-of-Representation Considerations for Hourly Billers and Family Lawyers

    Like lawyers who charge flat fees, lawyers who bill by the hour have an obligation under the alternate protection rules to provide an end-of-representation notice to the clients with either a "final" accounting of their fees, or an accounting "from the date of the lawyer's most recent statement to the end of the representation regarding the client's advance fee payment."3 A sample end-of-representation notice for hourly billers is included as Appendix C: Letter at Conclusion of Representation - Hourly Billing.

    Hourly billers often will exhaust the advanced fee long before the case is closed. When that happens, such lawyers then will bill the client on a monthly basis. Further complicating the issue of when to give end-of-representation notice under the alternate protection provisions in family law matters is the fact that even after the divorce judgment is handed down, there may be many hours of work left to wrap up the final distribution of property. If the former spouses continue to have disputes about children, support payments, or the like, there literally may never be a true end to the representation.

    Since the alternate protection provisions apply to advanced fees, and not to bills sent for work that has been performed, it may be that a "best practice" would be to send a client a notice of the exhaustion of the advanced fee and notice that the bill is being converted to an hourly, pay as you go, billing system. Such a notice, however, will not relieve the lawyer of the end-of-representation duties imposed by SCR 20:1.15(b)(4m), which are:

    • to send a notice to the client at the end of the representation with the lawyer's accounting for services from the date of the last invoice,
    • to provide notice of the client's obligation to notify the lawyer within 30 days of any objection to the billing, and
    • the lawyer's absolute duty to submit any dispute not resolved within 30 days after notice to fee arbitration.

    Conclusion

    The working group lawyers practicing in diverse fields who represented the interests of criminal defense lawyers practicing in diverse fields strongly believe that this rule will protect the lawyer's ability to accept advanced fees, whether hourly or flat fees, deposit them into business accounts, and responsibly and ethically represent clients, while at the same time getting fairly paid and avoiding OLR complaints. The working group also believes that the advanced fee rule will allow lawyers to safely resume securing fees by credit card without the additional obligation of creating a separate credit card trust. Further, lawyers who elect to continue to use their trust accounts to hold clients' advanced fees benefit by streamlining their paperwork. All members of the working group keenly believe that the new rules are more protective of the public both in terms of literal protection against theft of fees and in ease of resolution of any fee dispute. The resolutions reached by the working group represent a vast improvement over the 2004 rules and reflect the power of seating together at a single table, skilled lawyers from many practice areas who were determined to understand and solve the problems of the 2004 rule changes.

    Endnotes

    1This was an incorrect reading of those opinions, because E-86-09 and E-93-04 were both careful to define a retainer as a payment solely to secure the lawyer's availability, and not as payment for any legal services.

    2See SCR 20:1.15(b)(4m).

    3SCR 20:1.15(b)(4m)b.1.

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