Retainers without the trust accounting

The Legal Ethics of Trust-less Retainers

One of our most popular blog posts is a post about how lawyers can realize the benefits of a retainer without a trust account.  By storing a client payment method and subsequently charging the payment method in accordance with the attorney/client engagement agreement, firms can get the benefits of having access to funds on hand without the burden of trust account compliance.

But no sooner had we rolled that post out than lawyers, who really liked the idea, started asking lawyerly questions like “Yeah, but what are the rules governing this practice?”

Background

We’ve got some answers, but first, some background: in that post, we outlined a billing strategy in which, upon commencing representation, lawyers inform the client that they will bill the client according to a mutually-agreed timeline. At that same time, the lawyer also securely stores the client’s payment information in a system like Gravity Legal. Finally, the lawyer ensures that any billing done on the client’s matter - hourly or flat fee - is done in accordance with the client engagement agreement.

Specifically, lawyers who asked us wanted to know how quickly after a firm provides the invoice to a client is a firm permitted to charge a stored credit card. “Immediately” seemed a bit hasty but waiting 30 days to charge the card or bank account didn’t make this process feel like much of an improvement over the old way of “Send the client bill. Await payment.” So, legal billing and payments nerds that we are, we dove in.

The Rules

Only two states have specific rules or ethics opinions about this particular practice. They are New York and, somewhat surprisingly, Missouri. Let’s start with those two.

New York - 20 Days is fine (but less may be too)

In Opinion 1112 the New York State Bar Association Committee on Professional Ethics answered this very question. According to the summary of the opinion:

A lawyer’s retainer agreement may provide that (i) the client secures payment of the lawyer’s fees by credit card, and (ii) the lawyer will bill the client’s credit card the amount of any legal fees, costs or disbursements that the client has failed to pay within 20 days from the date of the lawyer’s bill for such amount. . . .

The opinion continues by further clarifying that the attorney must alert the client to the right to dispute an invoice before the lawyer charges the amount and that the lawyer can’t charge the card for disputed funds. The charge must also comply with any other rules that the New York State Bar set out related to credit card charges.

As far as the timing, the opinion approves of the proposed provision in a lawyer's engagement agreement that specified a 20-day waiting period. The opinion does not speak to, and therefore leaves open, the possibility that a firm may use a shorter waiting period provided that the firm complies with the remainder of the opinion.

Missouri -  “A specified amount of time”

Missouri Bar Opinion Number: 970040 tackled two questions in this vein. As the opinion put them:

Question 1. Under an hourly fee contract, may Attorney include a clause that, after presenting the client with bill, Attorney will wait a specified period of time. If the client has not paid the bill through other means by that time, Attorney will bill the amount to the client´s credit card without the client separately signing the individual credit card slip? 

Question 2. In a criminal defense case, may Attorney include a clause in the contract that Attorney would take a certain fee up front. If a trial becomes necessary, Attorney would bill the additional fee associated with going to trial to the client´s credit card without the client separately signing the credit card slip? 

The Missouri Bar concluded that the answer to both of the questions is yes. As far as timing, the Missouri Bar said that the attorney should wait “a specified amount of time” - referring to the waiting period specified in the engagement agreement. Beyond that, the Missouri Bar said that simply including this information in the fee agreement would not suffice and that the attorney needed to orally identify the relevant provision and make sure that the client understands it. The opinion underscored the need for the attorney to notify the client of the intent to bill a specified amount and that the attorney should send a receipt or confirmation of billing.

What about the other 48?

That’s helpful for attorneys in New York and Missouri. But what about attorneys in the other 48 states?

We did a fair amount of research and, unfortunately, we weren’t able to locate opinions in any other states.

But, we’ve learned a bunch from our lawyer customers over the years. And one thing is reasoning by analogy. While there may not be a specific opinion about this particular practice anywhere but New York and Missouri, that doesn’t mean there’s not a best practice from which we could crib a rubric.

Examining the rules of professional conduct we found ABA Model Rule 1.15: Safekeeping Property. This is the rule that governs how law firms should use their trust account. Subsection (c) of that rule also specifies when lawyers can permissibly move money that’s earned from the client trust account to the lawyer’s operating account.

It’s not a perfect analogy. Moving money from one's trust to one's operating account is not exactly the same as charging a stored credit card. But, it's pretty close. And it seems like a reasonable precedent. 

Again, unfortunately, there’s little specific uniformity in how states approach the answer to this question but the rules do tend to follow a general pattern: firms should (1) not transfer funds from the trust account to the operating account until such fees are earned, (2) transfer earned fees from their trust account to their operating account promptly, and (3) not use trust account funds as “leverage” to resolve a fee dispute.

Let’s review a few of the relevant rules.

ABA

The American Bar Association’s Model Rule 1.15 is brief, as most ABA Model Rules are, simply requiring that funds should be withdrawn only “as fees are earned or expenses incurred.”

Applying the ABA Model Rule to our situation, a firm with a client payment method securely stored should be fine to charge the payment method for work completed as the fees are earned. 

To be clear, that doesn't mean that alerting the client to the impending charge is not a best practice. This simple analogy speaks only to timing.

California

The California rule, Rule 1.15, focuses on timing and underscores that any dispute about the funds must be resolved before the attorney can withdraw them.

1.15(c)(2) funds belonging in part to a client or other person . . . must be withdrawn at the earliest reasonable* time after the lawyer or law firm’s interest in that portion becomes fixed.  Except if the funds are disputed, in which case they're to be withdrawn only when the dispute is resolved.

The asterisk refers to the definitions provided within the rules where “reasonable” is defined as follows: ‘“Reasonable”  . . . means the conduct of a reasonably prudent and competent lawyer.’  

It would stand to reason that a reasonable lawyer could charge a client’s credit card in accordance with an engagement agreement, provided the conditions for charging the card had been met.

Texas

The Texas rule, Rule 1.14, doesn’t provide much guidance in answering our question. But comment 2 to the rule does point lawyers to 1.14(c):

When a lawyer receives from a client monies that constitute a prepayment of a fee and that belongs to the client until the services are rendered, the lawyer should handle the fund in accordance with paragraph (c). After advising the client that the service has been rendered and the fee earned, and in the absence of a dispute, the lawyer may withdraw the fund from the separate account.

Applying that language to our question - when can a lawyer or firm charge a client credit card that the firm is securely storing - the answer would be after advising the client that the service has been rendered and, therefore, that the fee has been earned.

Wisconsin

As a final example, we turn to Wisconsin. Wisconsin addresses the issue of when a law firm can consider fees as “earned” and move those fees from the trust account to their operating account in rule 1.5(h)(2).

(2) The lawyer may withdraw earned fees on the date that the invoice is transmitted to the client, provided that the lawyer has given prior notice to the client in writing that earned fees will be withdrawn on the date that the invoice is transmitted.

The rule goes on to state that the invoice must include the following: (1) an itemized bill that shows which services were provided; (2) the amount of the payment and notice of the withdrawal; and (3) the client’s remaining trust account balance if any.

Translating that over to our question - when can a lawyer or law firm charge a client’s stored credit card in Wisconsin? - it would stand to reason that so long as a Wisconsin lawyer gives prior notice in writing about the arrangement and then ensures that the bill describes the services rendered, the amount of payment due, a notice of withdrawal, and the client’s remaining balance due, the client can charge the client’s card on the very day that the invoice is sent.  

Stepping back and looking at the 48 opinion-less states, some themes emerge. The best practices for charging stored payment methods are likely the following:

  1. Start early: Let clients know upfront about your billing practices - including how and when you will charge their stored payment methods. Further, be sure to describe this practice in your engagement agreement not only so you can enforce it against clients but also so they have a clear record of what you will do.
  2. Send a detailed invoice, in advance: A few days before you plan to charge a client’s stored payment method, alert them to the impending charge. Include in that notification the services rendered, the amount due, notice that you’ll be charging the payment method, the date of the upcoming withdrawal, and the remaining balance due, if any.
  3. Make sure you stick to the schedule: The trust account rules are very finicky about timing. This is understandable as trust accounting can be complicated and legal regulators don’t want firms keeping earned funds in the trust account. While the trust-less retainer model is a bit different, it’s important to remember that no one likes surprise charges to their credit cards or bank accounts. Providing notice - as mentioned in #2 above - can help but also sticking to the schedule means fewer surprises for you and, more importantly, for your clients.

A retainer without trust accounting is a compelling proposition. All the benefits of quick payment and high collection rates with none of the risks of trust accounting. But the idea of a “stored credit card” is still relatively new, especially in legal, so it’s not a surprise that the rules for this practice may not be “there” quite yet. The good news is that if you’re in New York or Missouri, you’ve got some fairly solid guidance. And if you’re not, there are still some solid best practices that, combined with a healthy reading of your local rules, are likely to help you leverage this powerful tool in your practice as well.

 

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