Week 6 1

2 Objectives ◦ Understand financial organization in law firms ◦ Recognize ethical issues related to fee agreements ◦ Explain the purposes of and reasons for trust accounts ◦ Recognize ethical problems with trust accounts ◦ Evaluate options for preventing and dealing with trust account ethical violations

 General Bank Account v. Trust Account  General Account: Earned Fees  Trust Account: Client money/third party funds  Required for attorneys who handle client funds  Ledger sheets 3

 California Business & Professions Code §§ (Fee Agreements)  Rules of Professional Conduct 3-400, ◦ (Fee Agreements)  (See separate posting for laws and sample fee agreements from Calif. State Bar) 4

5 Agreements with clients  Should ◦ always be in writing ◦ set forth the expectations of the parties ◦ explicitly explain the costs of the representation ◦ be explained to the client ◦ be signed by both parties  The client must be given a copy

6 Omit from fee agreements  Guarantees  Limit on lawyer liability*  Limits on liability*  Charges for costs

7 UPL and fee agreement  It is UPL for a paralegal to “negotiate” fee agreements  Fee agreement must be explained to the client  A paralegal can explain the contract without committing UPL

8 Fees vs. Costs  Fees are the money earned by the law firm ◦ Fee generators are lawyers and paralegals  Costs are the “out of pocket” costs paid to third parties related to the representation ◦ filing expenses, court reporter expenses, expert expenses

9 Rules of Legal Fees  English Rule – the loser pays for litigation  American Rule – each party pays for his/her own legal fees absent agreement  Fee-shifting statute – a statute that says the loser pays the other party’s legal fees

10 Different Fee Agreements  Contingency  Hourly  Value  Bonus  Fixed Fee

11 Contingency Agreements  Lawyer gets paid “fees” only if there is a positive outcome that generates money  “Costs” traditionally charged to client regardless of outcome—But Calif. Has different rule—depends on fee agreement  Typical in plaintiff’s personal injury work

12 Contingency Agreements, cont.  Typically set forth a split of the money generated by the case ◦ Costs ◦ Lawyer’s Portion ◦ Client’s Portion  Fee agreement must say where the costs are paid from

13 Contingency Agreements, cont.  Some agreements pay the costs off the top and then divide the remaining amount  Some agreements divide the money and then pay the costs from the client’s portion

14 Costs & Contingency Fees  The law firm typically fronts the costs in contingency cases  Then gets reimbursed (no mark-up) at the end of the case  If no recovery attorney often uses “unrecovered costs” as tax deduction

15 Advertising & Contingency fees  Advertisements should not say “no recovery; no fees” because it misleads potential clients who do not understand the difference between “fees” and “costs”  Contingency fee agreements should say that the client is responsible for costs

16 Hourly Fee Agreement  Each lawyer and paralegal in a law firm is assigned a “billing rate”  Lawyers range from $100/hr to more than $1000/hr  Paralegals range from $30/hr to $200/hr

17 Hourly Fee Agreement, cont.  Each “biller” keeps track of his/her time on each case  Time is billed to the client according to each biller’s billable rate  Client is also billed for costs

18 Hourly Fee Agreement, cont.  Hourly agreements are used in divorce (marital dissolution), criminal defense, personal injury defense, business litigation  Fee agreement should include potential future increases in billable rates (such as annual increases)

19 Keeping track of time  Time records should always be honest  Time records should be complete with description of the task  Keep track of time contemporaneously with the task  Time is billed (usually) in 1/10 of hour (6 minute increments)

20 What is billable?  Paralegal tasks are billable at paralegal rates  Secretary/clerical tasks are not billable

21 What is awardable?  In a fee-shifting case, the prevailing party will apply to the court to have the losing party pay prevailing party’s legal costs and fees  The petition must include a complete accounting of attorney/paralegal time on the case

22 Court awarded fees  Courts award “objectively reasonable” fees  Courts award fees for time spent by the correct biller (paralegals for paralegal tasks, etc.)  Courts will not award fees for clerical work

23 Ethical fees  “padding” timesheets is inflating your time or billing for work you did not do  Overbilling is “fraud” – a tort and a crime

24 Retainers  Security retainer-works like a deposit-it stays in an account to ensure the client pays the lawyer bills  Some law firms bill against the retainer – take money from the retainer amount to pay the bills

25 Retainers, cont.  Non-refundable retainers – earned on receipt  Advance payment retainer – earned on receipt – advance payment for future legal work

26 Fee fights  Sometimes clients and lawyers fight about the legal fees  Some of those fights end up in litigation  Some confidential information can be used in this litigation

27 Referral Fees  Paying a fee to someone who refers a case to your law firm is illegal  Exception: California lawyers can pay other California lawyers for a referral

28 Pro Bono  “pro bono publico” is Latin for doing legal work for free (for the public good)

29 Duty of Accounting  The legal professional must keep accurate records of all funds received from the client  Records should clearly differentiate each client’s money from the others

30 Trust Accounts  Often called “Attorney Trust Account”  But it should be called “Client Trust Account”  “Retainers” (those not earned on receipt) must be deposited into this account

31 Trust Accounts, cont.  Client money must be kept in an interest- bearing checking account  One account can hold money from all of the firm’s clients  But accurate records must be kept on money going in and out for each client

32 Trust Accounts, cont.  Account must always have a positive balance (more than $0)  Account must only have client money in it  Money owed to the lawyer must be removed immediately (when it is earned)

33 Trust Accounts, cont.  Deposit: ◦ Retainers ◦ Settlement money ◦ Judgment money ◦ Escrowed funds

34 General Operating Account  Regular business checking account  Should be used for paying office expenses ◦ Rent ◦ Salaries ◦ Overhead items  Money is earned and removed from trust account, it should be deposited in here

 Lawyer trust account  General operating account  Lawyer personal account 35

36 Account violations  Many lawyers are disciplined for not having enough money in the trust account  All client accounts added together should equal the total amount in the account

37 Account violations, cont.  Lawyers are disciplined for having the wrong money in the trust account  Only client money should be in the trust account  Earned fees must be taken out immediately  “Commingling” is mixing the money

38 Account violations, cont.  Lawyers are disciplined for using this account improperly  Personal or office expense payments must not be paid from this account  When money is earned, it must be moved to the General Op. Acct. before spending it

39 Account violations, cont.  Banks will report improper use of trust accounts  Never bounce a check  Find your state law on keeping a small amount of “extra” money in the trust account to cover check costs etc

40 IOLTA  Banks collect the interest on client trust accounts  This money is used to fund legal services and pro bono organizations  Interest On Lawyer Trust Accounts