FLAT FEE ARRANGEMENTS AFTER IN RE HULT . . . WHEN IS A FEE EARNED? JOHNSON COUNTY BAR ASSOCIATION NOVEMBER 8, 2018

I. DOES YOUR FEE AGREEMENT …. Describe the payment as a “retainer” or a “flat fee”? If it is a flat fee, what does the agreement say will happen if the relationship ends early? If it is a retainer, does the agreement describe services, or instead state that the payment is to engage you in as the client’s lawyer? Does the agreement clearly explain the task or event that will earn the fee? Does the agreement say that the fee is earned when paid?

II. K.R.P.C. 1.5 1.5(a). Client-Lawyer Relationship: Fees The factors to be considered : The time and labor required, the novelty and difficulty of the questions involved, and the skill requisite; will the case preclude other employment by the lawyer; the fee customarily charged in the same area; the amount involved and the results obtained; the time limitations; the nature and length of the professional relationship with the client; the experience, reputation, and ability of the lawyer whether the fee is fixed or contingent.

Terms of Payment [2] A lawyer may require advance payment of a fee, but is obliged to return any unearned portion. See Rule 1.16(d). . . .

III. K.R.P.C. 1.15(a) 1.15. Client-Lawyer Relationship: Safekeeping Property (a) A lawyer shall hold property of clients or third persons that is in a lawyer's possession in connection with a representation separate from the lawyer's own property. Funds shall be kept in a separate account maintained in the state of Kansas. . . . Complete records of such account funds and other property shall be kept by the lawyer and shall be preserved for a period of five years after termination of the representation.

K.R.P.C. 1.15(b) (b) Preserving identity of funds and property of a client.   (1) All funds of clients paid to a lawyer or law firm, including advances for costs and expenses, shall be deposited in one or more identifiable accounts maintained in the State of Kansas . . . and no funds belonging to the lawyer or law firm shall be deposited therein except as follows: . . . (ii) Funds belonging in part to a client and in part presently or potentially to the lawyer or law firm must be deposited therein, but the portion belonging to the lawyer or law firm may be withdrawn when due.

(2) The lawyer shall: (iv) Promptly pay or deliver to the client as requested by a client the funds, securities, or other properties in the possession of the lawyer which the client is entitled to receive.

[1] . . . Rule 1.15(a) requires that trust funds be deposited in an account separate and apart from the lawyer's, at a financial institution in the state of Kansas. . . . [4] Third parties, such as a client's creditors, may have just claims against funds or other property in a lawyer's custody. A lawyer may have a duty under applicable law to protect such third-party claims against wrongful interference by the client and, accordingly, may refuse to surrender the property to the client. However, a lawyer should not unilaterally assume to arbitrate a dispute between the client and the third party.

[8] Rule 1.15 specifically requires a lawyer to preserve "complete records" concerning the law firm's trust accounts. It also obligates a lawyer to "promptly render a full accounting" for the receipt and distribution of trust property. A violation of Rule 1.15 subjects a lawyer to professional discipline.

IV. K.R.P.C. 1.16(d) 1.16. Client-Lawyer Relationship: Declining or Terminating Representation (d) Upon termination of representation, a lawyer shall take steps to the extent reasonably practicable to protect a client's interests, such as giving reasonable notice to the client, allowing time for employment of other counsel, surrendering papers and property to which the client is entitled and refunding any advance payment of fee that has not been earned. The lawyer may retain papers relating to the client to the extent permitted by other law.

V. IN RE SCIMECA, 265 Kan. 742 (Kan. 1998) The 12-count complaint against Scimeca alleged multiple offenses, including eight counts of excessive fees, allegations that Scimeca failed to refund expense deposits, and allegations that he used a deceptive and fraudulent retainer agreement.

Scimeca’s retainer agreement provided for nonrefundable retainers Scimeca’s retainer agreement provided for nonrefundable retainers. Scimeca’s fee agreement stated that the retainer was a refundable minimum fee, and was owed to the attorney. He also required that clients sign promissory notes which violated consumer credit disclosure requirements. During the disciplinary process Scimeca stipulated "that nonrefundable unearned retainers are prohibited by the Kansas Comment to Rule 1.5 and by Rule 1.16(d)." He explained that he never intended "to keep an unearned fee," and that in "the exercise of good judgment" he would decide whether a retainer fee should be refunded.

The Supreme Court explained, 265 Kan. at 758-759, that:   An attorney who receives advance funds belonging to a client, either as a fee or expenses, must keep those funds separate and not commingle them with other funds. The key question is whether an advance payment belongs to the client or the attorney. If the funds are paid to the attorney to be used for a specific purpose, they must be used for that purpose. In such a situation, the attorney acts as a fiduciary for his or her client. Where the funds are advanced by the client for costs or expenses, they must be kept in a trust account until used for those purposes.

The Supreme Court quoted from the ABA/BNA Lawyers' Manual on Professional Conduct:  "The basic question is, Whose money is it? If it's the client's money in whole or in part, it is subject to the trust account requirements. If it is the lawyer's money, placing it into a trust account would violate the anti-commingling rule. "In general, analysis turns on when the money is deemed 'earned,' for once money is earned it is the lawyer's. The majority of courts and ethics committees . . . have determined that fee advances are not earned when paid, and therefore must be deposited into the trust account.

"A retainer can serve one of two purposes, or some combination of the two. Either it is a fee paid in advance to ensure the lawyer's availability and to compensate the lawyer for foregoing the opportunity to be hired by the client's adversary--in effect, an option--or it is an advance deposit for fees not yet earned. It may also be a hybrid, and thus harder to evaluate. "Many courts and ethics committees have held that payments made to ensure availability are indeed earned when paid, and therefore belong to the lawyer and are not subject to trust account requirements.”

In Scimeca the Deputy Disciplinary Administrator argued that all fees advanced by a client should be refundable. The Kansas Supreme Court disagreed, stating, 265 Kan. at 759-760: The better view is to resolve the question based upon the agreement between the parties. If the contract or agreement between the attorney and the client clearly states that the fee advanced is paid as a nonrefundable retainer to commit the attorney to represent the client and not as a fee to be earned by future services, then it is earned by the attorney when paid and is the attorney's money. If, on the other hand, the retainer is to be earned by future services performed by the attorney, then it remains the client's money and subject to MRPC 1.15.

Designating the advance fee as a minimum fee contemplates that it must be earned by future services to the client. . . . Absent clear language that the retainer is paid solely to commit the attorney to represent the client and not as a fee to be earned by future services, it is refundable. There was no such language in the agreements respondent entered into with his clients. The panel's finding that respondent's "non-refundable" retainer was a fee advanced for services to be performed, and thus subject to the trust account requirements of MRPC 1.15, is supported by the record.

VI. IN RE HULT 410 P.3d 879 (Kan. 2018) Kansas attorney Hult represented clients in Iowa on federal immigration issues. The Iowa representation on federal immigration issues was permissible, but his “systematic presence” in Iowa obligated Hult to maintain an Iowa trust account and file an annual report confirming that he held funds for Iowa clients in trust. Hult failed to file the report and filed to maintain the trust account. Pursuant to his flat fee arrangements Hult accepted fee deposits from clients for work not yet completed, and for future expenses. The payments were deposited into Hult’s operating account – he had no trust account.

The Iowa complaint alleged that Hult violated Iowa Court Rule 45.10 (1) Definition . A flat fee is one that embraces all services that a lawyer is to perform, whether the work be relatively simple or complex. (2) When deposit required. If the client makes an advance payment of a flat fee prior to performance of the services, the lawyer must deposit the fee into the trust account. (3) Withdrawal of flat fee. A lawyer and client may agree as to when, how, and in what proportion the lawyer may withdraw funds from an advance fee payment of a flat fee. The agreement, however, must reasonably protect the client's right to a refund of unearned fees if the lawyer fails to complete the services or the client discharges the lawyer. In no event may the lawyer withdraw unearned fees.

The Iowa Board concluded that Hult violated Iowa’s trust account requirements by failing to maintain a client trust account in Iowa, and by failing to deposit advance flat fee payments into the trust account. After the Iowa Supreme Court reprimanded Hult, he was obligated to report the Iowa disciplinary case to the Kansas disciplinary administrator. He failed to report the Iowa misconduct to the Kansas disciplinary administrator. Because Hult did not report the misconduct to Kansas, he violated KRPC 8.3(a).

In a footnote the Court stated:   In a footnote the Court stated: The respondent stipulated that he failed to properly safeguard his clients' property in violation of KRPC 1.15. Properly safeguarding the property of others necessarily requires lawyers to deposit unearned fees into an attorney trust account. The respondent failed to establish a trust account for his clients located in Kansas. . . In fact, during the hearing in this matter, the respondent indicated that he did not understand what a trust account was and asked one of the panel members to explain it to him. . . By failing to have trust accounts and by failing to deposit unearned fees as well as funds held on behalf of clients into a proper trust account, the hearing panel concludes that the respondent violated KRPC 1.15(a).

AGGRAVATING AND MITIGATING FACTORS The Kansas Supreme Court indefinitely suspended Hult. The Court referred to the following aggravating and mitigating factors. Absence of a Dishonest or Selfish Motive. Personal or Emotional Problems. Cooperation During the Hearing and Acknowledgment of the Transgressions. Inexperience in the Practice of Law .

Attorney misconduct must be established by clear and convincing evidence. In re Foster, 292 Kan. 940, 945, 258 P.3d 375 (2011). The Deputy Disciplinary Administrator recommended indefinite suspension from the practice of law. The respondent recommended probation according to his probation plan. The panel did not recommend probation because respondent failed to timely file his probation plan. The panel agreed with the Deputy Disciplinary Administrator and recommended indefinite suspension.   Hult’s license to practice law in Kansas was indefinitely suspended.