1. Handling of Advance Fees and IOLTA Accounts AILA Seminar – October 9, 2015 Donald M. Scheetz Assistant Disciplinary Counsel The Supreme Court of Ohio

2. PROPER HANDLING OF FLAT, ADVANCED, AND NON-REFUNDABLE FEES

3. Board Advisory Opinion 96-4 In Advisory Opinion 96-4, the Board of Commissioners on Grievances and Discipline stated that a flat fee, paid in advance, could be deposited into the attorney’s business account and that it did not need to be placed in the attorney’s client trust account.

4. However, the opinion further stated that, just because the flat fee was deposited into the business account doesn’t mean that it is non-refundable.

5. Board Advisory Opinion 96-4 was issued during the period of time that Ohio was governed by the former Code of Professional Responsibility. Effective February 1, 2007, the Supreme Court of Ohio adopted the Rules of Professional Conduct, which are modeled on the American Bar Association’s Model Rules of Professional Conduct.

6. Although the Board has not withdrawn Advisory Opinion 96-4, its continued viability after the adoption of the Rules of Professional Conduct is questionable.

7. Rule 1.15(c) of the Ohio Rules of Professional Conduct “A lawyer shall deposit into a trust account legal fees and expenses that have been paid in advance, to be withdrawn by the lawyer only as fees are earned or expense incurred.”

8. Unless there is an applicable exception to Rule 1.15(c), any fees that are paid to the lawyer in advance that have not yet been earned must be deposited into the lawyer’s client trust account. Is there an exception for “flat fees” or “non- refundable” fees? The answer is “YES” – but only in two situations.

9. Types of Advance Fee Payments “True” or “Classic” Retainer Advance Fee or Retainer “Flat Fee” “Earned Upon Receipt Fee” Comment [6A] to Rule 1.5 of the Ohio Rules of Professional Conduct

10. “True” or “Classic” Retainer The “true” or “classic” retainer is a fee paid in advance solely to ensure the lawyer’s availability to represent the client and precludes the lawyer from taking adverse representation.

11. Advance Fee Payment or Retainer What is often called a “retainer” is, in fact, an advance payment to ensure that fees are paid when they are subsequently earned, on either a flat fee or hourly fee basis.

12. Flat Fee A flat fee is a fee of a set amount for performance of agreed work, which may or may not be paid in advance but is not deemed earned until the work is performed.

13. Earned Upon Receipt Fee An “earned upon receipt” fee is a flat fee paid in advance that is deemed earned upon payment regardless of the amount of future work performed.

14. “When a fee is earned affects whether it must be placed in the attorney’s trust account.” Comment [6A] to Prof. Cond. R. 1.5 Thus, the only two situations in which the attorney is NOT required to deposit the fees into his or her client trust account are (1) a “true” or “classic” retainer; and (2) an “earned upon receipt” fee.

15. Limitations on Charging or Collecting an “Earned Upon Receipt” or “Non-Refundable Fee” Prof. Cond. R. 1.5(d)(3) provides, in pertinent part, as follows: “A lawyer shall not enter into an arrangement for, charge, or collect any of the following:

16. (3) a fee denominated as ‘earned upon receipt,’ ‘nonrefundable’ or in any similar terms, unless the client is simultaneously advised in writing that if the lawyer does not complete the representation, the client may be entitled to a refund of all or part of the fee based upon the value of the representation pursuant to division (a) of this rule.”

17. Disciplinary Counsel v. Summers, 131 Ohio St.3d 467, 2012-Ohio-1144 “When a lawyer agrees to represent a client through the conclusion of the case for a flat fee, and that lawyer withdraws from representation without cause before the work is completed, he cannot retain the entire flat fee by resorting to a mathematical calculation of his billable hours.

18. To hold otherwise would leave clients at the mercy of lawyers who charge significant flat fees to provide complete representatoin only to withdraw when the demands of the case become too onerous.”

19. Cleveland Metropolitan Bar Assn. v. Gruttadario, 136 Ohio St.3d 283, 2013-Ohio-3662 The lawyer charged a flat fee of $4,000 to represent grievant’s son in a criminal proceeding but failed to perform the agreed- upon services and refused to refund any portion of the fees, claiming that he had expended more than 70 hours on the case.

20. The Supreme Court of Ohio rejected the lawyer’s claim, stating in part as follows:  “But the key flaw in Gruttadario’s position is that he did not accept representation on an hourly fee basis – he agreed to a flat fee for the work and then he did not complete it. Therefore, he could not have been entitled to retain the entire flat fee.”

21. TRUST ACCOUNT GUIDELINES

22. Trust Account Requirements Rule 1.15, Rules of Professional Conduct Lawyer shall hold client or third person property: In connection with a representation Separate from lawyer’s property Duty to safeguard

23. Prompt notification Prompt delivery Full accounting upon request Identify and label Maintain complete records

24. What Funds belong in Trust Account Funds belonging to client Funds belonging partly to client and partly or potentially to lawyer (i.e. settlement proceeds) Funds belonging to 3 rd party, related to handling of case (medical bills payment)

25. Funds in which a third party has an interest Rule 1.15 (d) Board of Commissioner Opinion # 2007-7

26. Funds claimed by two or more persons Rule 1.15(e)

27. What Does NOT belong in Trust Account Funds belonging totally to the lawyer Funds not related to the representation of a client

28. Safeguarding OTHER property For property other than funds, lawyer is required to maintain for seven years a record:  That identifies the property;  The date received;  The person on whose behalf the property was held;  The date of distribution.

29. Rule 1.15: Safekeeping Property A lawyer may deposit his/her own funds in a client trust account for the sole purpose of:  Paying bank service charges OR  Obtaining a waiver of bank service charges but only in the amount necessary for that purpose.

30. Common Violations in Maintenance of Trust Account Records Failure to maintain individual client records or equivalent Failure to maintain duplicate deposit slips Failure to reconcile individual client records to bank statements and the general trust account record Failure to maintain records after completion of the lawyer’s fiduciary duty

31. Common Violations in the Use of Trust Accounts Improper transaction processed through the trust account Using the trust account as an operating account Using the trust account for family and non- client related transactions Depositing earned fees into the trust account

32. Assuming bank’s decision to grant immediate credit on deposited item is the equivalent of the funds actually being collected Failing to withdraw earned fees from the trust account Maintaining a large balance of lawyer or law firm funds in the trust account

33. When do I deposit funds As quickly as possible, since you have a duty to safeguard them

34. When do I transfer fees Within a reasonable time after they are earned Once earned, fees do not belong in a trust account You can’t spend your money UNTIL it is moved from trust account to operating account

35. Staff Assistance Staff may assist – employees must be competent and properly supervised Internal controls must be adequate to safeguard client funds and property ODC v. Ball, 67 Ohio St.3d 401; Rule 5.3

36. The Lawyer MUST Train and supervise staff; and Regularly review records.

37. Regular Review of Records Lawyer most familiar with client matters:  Most likely to spot errors  i.e.: wrong amount recorded to wrong client  Knows to safeguard amounts that need special attention – those involving unresolved disputes

38. Can non-lawyers be signers on trust account Technically yes; management considerations: Since attorney is responsible is it worth the risk? It is necessary?