The ethics of getting paid: fee agreements and trust accounts
1. One Profession, May 17, 2019:
The ethics of getting paid: fee
agreements and trust accounts
Todd C. Scott
VP Risk Management
Minnesota Lawyers Mutual Ins Co
Michael Trittipo
Attorney Editor
Minnesota State Bar Association
2. 1. Have a fee agreement
◦ A. Know your choices.
◦ B. Put it in writing
◦ C. Do it right (dotting “i”s & crossing “t”s)
2. Have a trust account
◦ A. Use it
◦ B. Use it right (where, when, how, why for what, whose money)
◦ C. Put it in writing (at least monthly)
3. Avoid scams (from far or near)
◦ A. Know a little UCC
◦ B. Do some digging (a/k/a due diligence)
◦ C. Trust – but verify; don’t create temptations
Focus today:
3. First two subject to rules:
1. Have a fee agreement – RPR 1.5(b)
2. Have a trust account – RPR 1.15 & Appendix 1
4. Third from statute and best practices:
1. Have a fee agreement – RPR 1.5(b)
2. Have a trust account – RPR 1.15 & Appendix 1
3. Scams?
◦ From outside – UCC, Minn. Stat. ch. 336, art. 3
(negotiable instruments)
◦ From inside – best practices on separation of powers, esp. as to
money, but see also RPR 5.3 (delegate – but supervise well)
5. Why focus on fee agreements?
• Most common source of admonitions (per OLPR 4/2018)
• Within your control
• To your benefit that client “get it” clearly
• Can help you avoid many potential problems
7. What can a lawyer charge?
… [(b) & (c) address communicating the fee basis, the not-yet-earned presumption, and contingencies]
8. What can a lawyer charge?
A division of fee between lawyers who are not
in the same firm may be made only if:
(1) in proportion to the services performed by each
lawyer or, by written agreement with the client,
each lawyer assumes joint responsibility for the
representation;
(2) the client is advised of the share that each
lawyer is to receive and does not object to the
participation of all the lawyers involved; and
(3) the total fee is reasonable.
9. Billing arrangements
Did you know?
It is not required to
have a written
contract for
hourly fee legal
services…
But it is a really,
really, really, really
good idea…
10. Billing arrangements
Why?
It is still considered
good public policy
to allow lawyers and
clients to have an
oral agreement to
perform legal
services, especially
when things should
happen quickly.
11. Billing arrangements
When is a
written contract
required?
Retainer agreements
Flat fee agreements
Contingency fee
agreements
13. Billing arrangements
The engagement agreement
must have:
Date of start of legal services
Names of person(s) contracting for
services
Scope of legal services
Fees (if any) being charged: basis or rate
Any other requirements necessary to
proceed
14. Billing arrangements
The non-engagement
agreement should have:
Affirmative statement you are not
representing the client in their legal
matter.
General warning that time limits may
be tolling on their matter and they
should consult with other attorneys
immediately.
15. Billing arrangements
Q. Why are
non-engagement
letters so
important?
A. You want to be able to
prove that an attorney-
client relationship never
was formed, therefore
you had no fiduciary duty
to the person.
Togstad v. Vesely, Otto, Miller & Keefe, 291 N.W. 2d 686 (1980)
17. Billing arrangements
The closing letter should
have:
Date of the letter.
Affirmative statement that the matter
has concluded and you are no longer
representing the client.
Q. Why is this so important?
A. You want to clearly identify the last day
of the legal representation
18. 1. Hourly fee:
An agreed upon rate of payment
owed by the client that is
calculated by the number of
hours the attorney works on the
client’s matter.
Tracking billable time:
The hourly fee is usually
calculated in tenths of an hour
and the lawyer is permitted to
have minimum hourly fees if it is
included ion the writing.
19. 1. Hourly fee:
An agreed upon rate of
payment owed by the client
that is calculated by the
number of hours the attorney
works on the client’s matter.
How rates are
determined:
The lawyer and client can agree
to any hourly rate, and it is not
required that an agreement be
in writing. However, it is a
good idea to have the fee
agreement in writing in case
there is a misunderstanding
about the fee between the
lawyer and client.
Hourly fee invoicing:
The invoice needs to be in writing but invoice by
email other electronic means is permitted.
20. 2. Hourly fee with
retainer payment:
An agreed upon rate of payment
owed by the client that is
calculated by the number of
hours the attorney works on the
client’s matter. The client also
agrees to pay the lawyer in
advance a sum of money that will
be held in trust, but which the
lawyer may earn.
How the fee is earned:
For the lawyer to earn the
retainer money, the work must be
completed and the client must be
notified in writing.
How the fee is billed:
Once properly earned, the lawyer can
transfer money from the retainer out of
trust and into the firm’s general account.
21. 3. Flat fee:
The final fee owed to the lawyer
is a certain set amount that the
client will pay at the start of the
matter. Flat fees are more
frequently used in domestic case,
criminal, and immigration legal
matters.
Flat fee agreement:
Lawyers charging flat fees will
carefully identify, in writing for
the client, what services the
client will receive in exchange for
the flat fee amount.
22. 3. Flat fee:
The final fee owed to the lawyer
is a certain set amount that the
client will pay at the start of the
matter. Flat fees are more
frequently used in domestic case,
criminal, and immigration legal
matters.
Non-refundable fees:
Not permitted under Minnesota
rules. Sometimes allowed in
other jurisdictions. (More
detail & tips on this point
to follow)
23. 3. Flat fee:
The final fee owed to the lawyer
is a certain set amount that the
client will pay at the start of the
matter. Flat fees are more
frequently used in domestic case,
criminal, and immigration legal
matters.
Legal flat fee menu:
A list of flat fees for basic legal
services.
24. 4. Contingency Fee:
The final fee owed to the lawyer
is contingent upon the outcome
of the case. Often the fee is a
percentage (25%, 33%, 40%) of
the whatever the client collects as
a part of the case.
How expenses are
handled:
Case costs or expenses are often
added to the fee. Case costs are
out-of-pocket expenses the
lawyer may have incurred from
3rd parties while working on
behalf of the client.
25. Hourly Fee Hourly with
Retainer
Flat fee Contingency Fee
No written
agreement
required.
Agreement
must be in
writing.
Agreement must
be in writing.
Agreement must
be in writing.
Billed monthly. Billed monthly. May be billed
once.
May be billed
once.
Expenses added
to legal fee.
Expenses added
to legal fee.
Expenses added
to legal fee.
Expenses added
to legal fee.
4 types of fee structures
26. Basic hourly legal bill
There is no requirement for how
the bill should look. This bill is
written on firm letterhead.
The goal is to make the bill
understandable. The fewer
questions the client has, the more
likely they are to pay the bill in a
timely way.
Extended, specific descriptions
may be more convincing than
cryptic, generic ones. (To judges,
too, in fee-award cases.)
27. Basic hourly legal bill
with retainer balance
The invoice will usually have all of
the attributes of an ordinary
hourly bill, but also:
Trust account section showing
prior balance (before invoice)
and current balance (after
invoicing.)
28. Basic flat fee bill
The invoice will usually have:
Firm name at top
Recipient’s name
Date of invoice
Invoice number
Date of legal services
Description of legal services
Total amount due
29. Basic contingency
settlement statement
The statement will usually have:
Firm name at top
Recipient’s name of name
of case
Settlement amount
Attorneys fee with
percentage agreement
Payments to others
Expenses owed by client
Net to client
30. Advance planning for “advance” fees
Rule 1.15(b): … Except as provided below, fee payments received by a lawyer before legal
services have been rendered are presumed to be unearned and shall be held in a trust
account pursuant to Rule 1.15.
(1) A lawyer may charge a flat fee for specified legal services, which constitutes complete
payment for those services and may be paid in whole or in part in advance of the lawyer
providing the services. If agreed to in advance in a written fee agreement signed by the
client, a flat fee shall be considered to be the lawyer’s property upon payment of the fee,
subject to refund as described in Rule 1.5(b)(3). Such a written fee agreement shall notify
the client:
(i) of the nature and scope of the services to be provided;
(ii) of the total amount of the fee and the terms of payment;
(iii) that the fee will not be held in a trust account until earned;
(iv) that the client has the right to terminate the client-lawyer relationship; and
(v) that the client will be entitled to a refund of all or a portion of the fee if the agreed-
upon legal services are not provided.
(2) [“Availability” fees]
(3) Fee agreements may not describe any fee as nonrefundable or earned upon receipt but
may describe the advance fee payment as the lawyer’s property subject to refund. …
31. Advance planning for “advance” fees
1) Only as complete payment for specified services
(Flat-fee or defined-scope, not open-ended hourly.)
2) Can’t say “non-refundable” or “earned upon receipt”
(or “24 hours later,” etc.)
3) May say “the lawyer’s property, subject to refund”
(but “my property” ≠ “earned.”)
4) Must give five (5) specific notices
5) Only fees for service, NOT client money advanced for costs
(e.g., filing or recording fees. Those must still go into a trust account.)
Rule 1.15(b)(3): Fee agreements may not describe any fee as nonrefundable or earned upon receipt but
may describe the advance fee payment as the lawyer’s property subject to refund. … In re Petition for
Disciplinary Action Against Torgerson, 870 N.W.2d 602 (Minn., 2015) The fees aren’t earned until the
specified services are actually completed.
32. What’s the motivation?
1) To avoid having a trust account just
because you think it’s hard to do it
right? Reconsider! Having and
using a trust account and doing the
record-keeping is not that hard.
2) Being sure one’s dotted all the “i”s
and crossed all the “t”s for advance
fees is actually more onerous – and
failure on any Rule 1.5(b) element
can be disastrous.
33. What’s the motivation?
Accidental occasional slip-ups in record-keeping for trust accounts are
often handled with only private admonitions. The most severe
treatment in any Minnesota Supreme Court decision of the past two
years for merely inadvertent “misappropriation” alone has been a public
reprimand and two years probation.
In contrast, messing up even a single element required for taking money
in advance without using a trust account typically creates an intentional,
not just negligent, violation. The intentional act is choosing to put the
money into the business account instead of into a trust account. And
intentional misappropriation, even of only a couple hundred dollars, can
be sufficient basis on its own for disbarment.
34. Summary on fee agreements
Have written fee agreements to avoid
misunderstandings about bills.
Ensure your fees are reasonable: review the
criteria in Rule 1.5
Get sufficient retainers, but use a trust account;
they’re not scary or hard, & they can shield you
Think twice before suing a client for fees: it
often results in a counter-claim
Arbitrate fee disputes to avoid client lawsuits
35. Trust accounts
Why you need one
What you need to do
Where to open an account
What kind of account(s) to open
What books & records are needed
How you create and keep those in order
Where to find how-to’s & help
36. Why? Not just a modern nanny
“bureaucratic” requirement
Historical and international comparisons
◦ Beginning ca. 13th century in Europe
◦ European requirements now: like U.S. or more stringent
Compare:
◦ Wisconsin 2016 amendments
◦ Minnesota pre-1975
◦ Minnesota now
Structural issue: money an inherent conflict; plus a
power/information imbalance (who has access to do
what) – so fiduciary duties
37. Why? Reasons go back
centuries (even millennia)
Roman and Greek antipathy to lawyers– especially to
lawyers asking for or receiving compensation at all
Early European antipathy over compensation
◦ Icelandic sagas (ca. 13th cent.) “After accepting a[n expensive]
ring at the initial consultation, Eyjolf [the lawyer, told his
client] ‘Be most careful not to say that ye have given goods for
my help.’” The Story of Burnt Njal (Sir George Webbe Dusent
trans., 1971), n.137.
Not just money (ambidexterity) – but it played a role
38. Why? In N.A., too, tension
over lawyers being paid
◦ Issues not unique to Old World or medieval times
◦ Roughly 1650-1720, American colonies like Virginia and
Carolina (most) often made “mercenary” lawyers illegal
“[It is] a base and vile thing to plead for money or reward; nor
shall anyone (except he be a near kinsman…) be permitted to
plead another man's cause, till … he hath taken an oath, that
he doth not plead for money or reward ….” The Fundamental
Constitutions of Carolina (1669), § 70. 2 Poore, note 48, at 1404
◦ Maybe a feature of Utopias generally (incl. Sir Thomas
More’s, but also aspiring ones)
39. Why? Resolution: trust, but
verify (require accounting)
Court’s recognized lawyers had a duty toaccount to
clients (and to disciplinary authorities)
“Account” was non-technical: simply to tell what
happened to the money, what was done
But since it is money, counting’s involved, too.
(Shakespeare mentions “counters” twice.)
Lawyers remain unpopular (Henry VI), but clients can
demand an accounting – so lawyers must be prepared
to give an account (to tell what happened, to the penny).
40. Two duties:
◦ actually safekeeping the property
(avoiding commingling, using
separate accounts to protect from
own creditors, etc.), and
◦ keeping the right records to show it,
i.e., to be able to give an account
(no “no harm, no foul” rule)
(essentially the duty of loyalty or honesty for the first, and the duties
of diligence and competence for the second)
41. Short answer:
Rule 1.15 says so
◦ (a) ”All funds of clients or third persons held by a lawyer
or law firm in connection with a representation shall be
deposited in one or more identifiable trust accounts ….”
◦ (c)(3) “A lawyer shall: … maintain complete records of all
funds … of a client or third person coming into the
possession of the lawyer and render appropriate accounts
to the client or third person regarding them ….”
◦ (h) “Every lawyer engaged in private practice of law shall
maintain or cause to be maintained on a current basis,
books and records sufficient to … establish compliance
with paragraphs (a) through (f).
42. What’s “complete” or “sufficient”?
◦(c)(3) “A lawyer shall: … maintain
complete records
◦ (h) “… [and] on a current basis … books and
records sufficient to … establish compliance
with paragraphs (a) through (f).”
… ?
43. What’s “complete” or “sufficient”?
◦ Q: 1.15(c)(3) “A lawyer shall: … maintain complete records
(h) “… [and] books and records sufficient to … establish compliance
with paragraphs (a) through (f).” … Tell me more?
◦ A: 1.15(i) … “The Lawyers Professional
Responsibility Board shall publish annually
the books and records required [by (h)].”
◦ It does so by “Appendix 1.” Re-read each year.
44. Rule 1.15: “Amended Dec. 27, 1989 …, July 28, 1999 …, June 17,
2005 …, Dec. 21, 2006 …, effective July 1, 2010; effective July 1,
2011 …
Appendix 1 may change each year even if Rule 1.15 doesn’t
◦ 2015 amendments re reconciliation date, method of handling
negative balances, “separately maintained,” etc.
Every year, you certify that you’re in compliance. That’s a sworn
statement, and disciplinable on its own if not true.
Re-read regularly for changes
—both Rule 1.15 & Appendix 1
47. 2015 amendments, highlights
Trial balance used to be required as of “the end of each month,” but 2015 changed
that to “as of the date of the monthly bank statement.”
Allowed PDFs as “print-outs,” needn’t be on paper with ink
Books and records must be maintained “ separately … for each individual trust
account.” (“May factor into … whether to open a separate interest-bearing
account ….”) (Read “individual” as “distinct,” not as “non-pooled.”)
Set ceiling on “nominal” funds of lawyer in trust account at$200.00 specifically.
Added specific detail on how, during reconciliation, to treat any negative balance
found in a client ledger.
Added credit cards provisions; required a check number in register
“Director does not consider overdrafts caused by a lawyer issuing funds from a
trust account prior to the deposit instrument clearing to be bank error.”
48. That looks hard. I’ll risk 1.15(b)’s pitfalls!
Balderdash.
Can be done with a check
register & paper ledgers,
or simple spreadsheets
Many software choices to
make it even easier
Don’t treat “hard” as an
excuse to delegate* it until
you’ve done it yourself
* And never confuse “delegate” with “abdicate”
49. How to do it: six easy steps
◦ Go to an OLPR-approved bank
(“financial institution”). (1.15(d,j))
◦ Open an IOLTA account.*
◦ Name it, including “trust account”
(explicitly, with those words)
◦ Puts world (creditors) on notice:
not your firm’s money
◦ Make its checks a :
not required but a good idea
◦ Deposit most money your get from
or for clients into it.
◦ Pay most matters’ expenses & your
fees out of it.
◦ Keep complete records** on what
goes in & out.
* If you need a different type, you’ll know
50. Spoiler alert: Two (2) main things lawyers
don’t do that get them into trouble. Two.
1) Not keeping “client
matter subsidiary ledgers.”
2) Not doing a three-way
(3-way) reconciliation each
month.
51. How-to: paper and Ink
• Recommended by Jay Foonberg in ABA guide, as a foundation or
background before computerizing. (So you know what records
should look like. “It’s the software’s|accountant’s fault!” No.)
• Described in an Ill. Att’y Registr’n & Disciplinary Commiss’n guide:
– http://www.iardc.org/clienttrusthandbook_toc.html
• And in California:
– http://www.calbar.ca.gov/calbar/pdfs/ethics/2003_CTA_Handbook.pdf
52. How to: paper and ink: LPRB guide “Other People’s
Money: Operating Lawyer Trust Accounts”
53. How-to: paper and ink: LPRB guide “Other People’s
Money: Operating Lawyer Trust Accounts”
Simple; easy to
understand
Main downsides to
manual entry on paper:
1) need to enter every
amount twice (two
places: “double entry”)
2) manual/mental/calc
addition & subtraction
(just 3rd grade math)
54. How-to, using software
Software saves the double-entry: enter any amount just ONCE,
and say just ONCE which client matter it involves.
Some software requires you to set up a “chart of accounts”;
other software does an equivalent for you behind the scenes,
based on you telling it (1) the clients & matters you’re holding
money for, and (2) what bank account the money is in. Easy.
The MSBA has guides for specific programs of both types.
56. How-to basics, easy overview
(same whether paper or software)
A. Every day you need these two books*:
◦ 1) check register – with a running balance
◦ 2) “matter subsidiary ledgers” – with running balances
B. Once a month you receive a bank statement.
C. When you do,
◦ 1) reconcile your check register with the bank statement
◦ 2) add up the “matter subsidiary ledgers” balances
◦ 3) verify that (a) the total sum from step 2 matches (b) your
check register’s and (c) the “adjusted” bank statement
balance’s (three amounts must all match)
◦ “Print” your work to prove you did it. Print: (1) the check
register, (2) the “trial balance,” and (3) the three-way (not just
two-way) reconciliation. Keep the monthly “print-outs.”
D. If all three (3) balances don’t match, fix it.
* “Books” are what you do; “records” are what the bank gives you. Close enough.
57. How-to main details, paper or software
◦ 1) for each entry in the check register show:
◦ the date
◦ the amount
◦ who to, & number, if it’s a check*
◦ the client & matter it’s for
◦ the purpose (briefly)
◦ and the running balance (software will do for
you)
◦ 2) each entry in each client matter
subsidiary ledger must show the same (but
the client & matter is already obvious)
◦ 3) you will also need two more “subsidiary
ledgers”: one for interest (IF it’s not always
zero), and one for a “nominal” amount of
your fees: under $200
* Even for deposits, it’s good to show the source, even if not required.
This is how software
saves you work.
58. How-to on 3-way reconciliation – Part 1
◦ First reconcile two
amounts:
(1) the “adjusted“
bank statement
balance, with
(2) your check
register balance
-- easy, familiar
◦ Should be no (zero)
difference,. If not
zero, find and fix.
59. How-to on 3-way reconciliation – Part 2
◦ Then make sure the
same amount (as
shown {1} in the
bank statement and
{2} your check
register) equals
{3} the sum of all
current balances
shown in the client
subsidiary ledgers.
62. Reminder: Two (2) main things lawyers
don’t do that get them into trouble. Two.
1) Not keeping “client matter subsidiary
ledgers” (or not keeping them current)
2) Not doing a three-way (3-way) reconciliation
each month.
Do those monthly, and you’re pretty much good.
Using legal-specific software like Cosmolex or
Tabs3 makes it easier & gives you guard-rails
(won’t let you write a check that might make any
client subsidiary ledger have a negative balance,
nor make a check or a deposit without assigning
it to a specific client matter, etc.)
63. How-to extra tip: never bypass your
business account for earned fees
• In re Miley, 486 N.W.2d 759 (Minn. 1992) (lawyer disciplined for
personal use of a trust account)
• First put earned fees into your operating account, then you can make
checks to whomever out from it
• But also: never leave earned fees in a trust account. No “cushions,”
no commingling.
64. How-to extra tip: credit cards
• Credit cards can be a problem.
• Taking credit cards may help some clients pay.
• But typical issuer agreement gives issuer rights to unilaterally reverse
transactions, debit accounts to which deposits were made, etc. – violating
1.15(j)
• Solution 1: put into operating (business) account, with immediate
transfer of unearned parts to trust account. Reversal then can only
affect your operating account, not the trust account.
• Solution 2: choose a service (e.g., Lawpay) that will guarantee not to
ever withdraw from the trust account, only your business account
65. How-to, final tips:
• Always use separate books for business and trust accounts
– KISS: Separate, separate, separate
– Avoids opportunities for confusion or mistake: avoids seeing
assets in operating accounts, & protects against overlooking
trust account shortfalls; also prevents tax confusion
• Always cash basis, never accrual (don’t get fancy; KISS)
– What’s there, not what will be
– Actual payments, not bills or anticipated bills
• Mirror reality without mental or software gymnastics (KISS)
– Use asset/liability whenever can, not income/expense
– Be consistent; make it simple and routine
66. How-to: Advisory opinions
LPRB will answer questions about actions you are considering
Must be asked in advance: prospective only
Need to be sufficiently concrete and complete as to the facts
http://lprb.mncourts.gov/LawyerResources/Pages/AdvisoryOpinions.aspxf
(651) 296-3952
69. Trust account scams
How does the scam work?
Attorney hired to collect debt:
Real estate transaction
Tort claim
Divorce
Equipment leases
Fake check arrives at firm
Fake check is deposited in client trust
Attorney wires money from trust to
foreign bank account
70. Trust account scams
Why does the scam work?
Attorney thinks check has “cleared”
Efforts to verify check fail
Scammer pressures the attorney to
disburse funds.
Know the difference between “Check
cleared” and “Available funds”
71. Trust account scams
• “Where the lawyer has reason to be concerned about whether a check being
deposited will clear, the lawyer should not issue trust account checks against
that deposit until he or she has confirmed with the issuing bank that the
deposited check has cleared.” (emphasis added)
– http://www.mncourts.gov/lprb/trustfaq.html
• The FAQ’s phrasing is oddly soft. Really a “must not,” not just a “should not.”
See App. 1:
◦ “Except in the context of real estate sales transactions, an attorney shall not
disburse funds from a trust account unless the bank in which the attorney
maintains the trust account has made the funds available for disbursement and
the instrument that is the source of the deposit has cleared the bank account on
which it was issued. (emphasis added)
73. Theft of client funds
KPMG Research:
Most theft conducted by fraudulent checks
Deposits made to employee’s own account
Deposits made to vendor accomplice
Access to: credit cards, payroll deposits,
petty cash
Inadequate financial controls
Decentralized system for payment
approval
74. Theft of client funds
Focus on financial management :
Does an attorney approve the bill to be
paid?
Does an attorney authorize checks for
payment?
Does an attorney sign expense checks?
Does the firm routinely audit financial
procedures?
75. Take-aways
Put most fee agreements into writing early.
Know your options.
For anything looking like “advance” payment,
touch all the bases; fly-speck the documents;
read the rules for detail, not just gist.
Get money up front when you can, and keep it
topped off, evergreen.
But have and use a trust account.
If you delegate, stay aware & keep control.
76. Take-aways
Trust accounts are not too onerous to handle, and don’t have “gotcha”s.
Lawyers get into bad trouble when they DON’T have or DON’T use trust accounts – when
theyAVOID using trust accounts.
Lawyers DON’T generally get into trouble for small, periodic little slip-ups in the trust
accounts themselves.
The courts are lenient on occasional negligence; hard on intentional avoidance.
“Just do it,” (“it” being a three-way reconciliation) at least once a month. There has never
been a lawyer disciplined for trust account violations who used the account with subsidiary
ledgers, did a three-way reconciliation monthly & could show his monthly print-outs.
Use the OLPR advisory opinion service.
Watch out for “easy money”; don’t be pushed into issuing checks too fast.
Know the difference between “funds available” and “check cleared.”
Have guard-rails, checks & controls to reduce temptation and “blind spots.”
Delegate, but supervise.
77. Thank you!
Todd C. Scott
VP Risk Management
Minnesota Lawyers Mutual Ins Co
Michael Trittipo
Attorney Editor
Minnesota State Bar Association
