Money is the Root of All Evil: An Essential Primer on Flat Fees
by Charles E. Mortimer
In Colorado, complaints alleging mishandling or misappropriation of funds typically comprise 12% of our annual intake. Worse, a significant percentage of these complaints prove to be founded, resulting in action by the Office of Attorney Regulation. It is the author’s observation that thirteen years after the Colorado Supreme Court set down rules for charging and handling flat fees, misunderstanding and misuse of flat fee arrangements and advanced flat fees create more exposure to the most serious sanctions than perhaps any other conduct.1
Act One: A properly crafted and administered fee arrangement is an essential foundation for an attorney’s ethical collection of fees.
A poorly devised fee arrangement not only jeopardizes the lawyer’s right to receive payment for his work, it opens the gate to the gallows yard.
With the exception of contingent fee arrangements and other particular fee arrangements dictated by statute, a fee agreement may be the wise choice, but it is not required by the Colorado Rules of Professional Conduct. Colo. RPC 1.5(b) requires an attorney to provide his client a written statement concerning "the basis or rate of the fee and expenses…before or within a reasonable time after commencing the representation." This written statement is required only when the lawyer "has not regularly represented the client." Changes in the basis or rate of the fee or expenses also must be promptly communicated to the client in writing.2
Problems arise most often when lawyers attempt fee arrangements other than hourly, typically involving a flat fee component.3 While laudable, flat fee arrangements and hybrid fee arrangements must be administered consistently with the Rules of Professional Conduct.4 The lawyer must communicate clearly to the client when and how fees will be earned.
Providing your client with a document stating merely that you are charging a "flat fee" to perform a certain representation is a great way to build unwanted suspense. In the absence of an expressed statement clarifying the arrangement, the fee will not be deemed earned until the representation is fully completed. A lawyer would be wise to break the representation into stages—to describe in the fee statement when each stage is completed and what amount has been earned at the completion of each particular stage. The amount charged for each stage must be reasonable when measured against the factors set forth in Colo. RPC 1.5(a).
Colo. RPC 1.5(f) provides, quite simply: "Fees are not earned until the lawyer confers a benefit on the client or performs a legal service for the client. Advances of unearned fees are the property of the client and shall be deposited in the lawyer’s trust account pursuant to Rule 1.5(f)(1) until earned." Rule 1.5(g) expressly prohibits nonrefundable fees and retainers.
All advance fee payments—whether they will be billed on an hourly basis, a flat fee basis, or some other basis—must be placed in trust until they are earned as described in the fee statement. When they are earned, the lawyer should provide a written notice or "accounting" to the client explaining what task has been performed and the amount of fees earned and thus transferred from the lawyer’s trust account to the operating account.5
Act Two: Conflict arises when a lawyer places advanced flat fees in his operating account before earning the money pursuant to the terms of the statement.
This practice amounts to the unauthorized exercise of dominion and control over the client’s money—what some call conversion of client funds. Any time a lawyer is found to have converted or misappropriated client funds, serious sanctions may follow. When a lawyer attempts to defend this conduct by saying that he thought a flat fee arrangement authorized him to deposit the advanced fee in his operating account right away, he will be reminded that his belief is contrary to law which, in turn, he is considered to know—also as a matter of law.6 The sound of hammering can be heard as the gallows are built.
The suspense reaches fever pitch when the lawyer’s services are terminated or an ethics complaint is made before completion of the representation. If the fee statement does not delineate stages or events when the fee is earned (and merely implies that the fee will be earned when the representation is completed), then termination of the representation prior to completion may result in forfeiture of the entire fee. Also, if the advanced fee was deposited in the operating account before it was earned—or worse, spent—the attorney begins the climb toward Hitchcock’s noose.
If unearned funds are not refunded within a reasonable time following termination of the representation, the heavy rope may be felt on the lawyer’s neck.7
If the lawyer was savvy enough to communicate the basis or the rate of the fee in writing to the client at the beginning, then he or she better be prepared to live by the communication. If the attorney tries to extricate himself/herself from the predicament by claiming that the fees taken have been earned based on an hourly rate or other basis that is not described in the original fee statement, the trap door will begin to creak.
Act Three: In addition to always maintaining advanced fees in trust until earned or refunded, based on the terms of a well-drafted fee statement, two alternatives are recommended to address these circumstances.
First, an attorney would be wise to include a quantum meruit provision—not an hourly conversion clause—in any fee statement that does not provide for a straight hourly fee arrangement.8 Such a provision would advise the client that if the attorney’s services are terminated before completion of the representation, then the attorney will be entitled to compensation for services performed, but not yet paid for, based on the fair value of the services performed.9
Second, a well-drafted flat fee statement would include several closely situated stages when fees would be earned so that, if the client were to terminate the attorney at some point between two stages, the amount of compensation in dispute would be much less than if the client terminated the attorney and no, or few, stages were described in the fee statement. In the situation with several defined stages, the attorney would have less incentive to pursue the smaller unpaid balance and risk the counterclaim of an unhappy client.
The phone rings with a reprieve from the governor.
Prologue: The law is a professional calling, not a business intended to maximize the accumulation of wealth.
Of course, attorneys are entitled to be paid well for the services they perform. Assuming lawyers will continue to request fees for their work, the development of alternatives to hourly fee arrangements is extremely important to enhance broader access to justice. Creativity in this area is to be encouraged, but must be held in check by lawyers’ professional responsibilities. Lawyers must be guided by the simple rules outlined above, lest they be tragically mistaken for criminals.D
>Chip Mortimer is Deputy Regulation Counsel in the Office of Attorney Regulation where, after fourteen years of private practice, he no longer keeps time records, sends bills, or handles and accounts for other people’s money. The irony is not lost on him. You can reach him with your questions at (303) 928-7783.
1 This issue was first addressed by the Colorado Supreme Court in In re Sather, 3 P.3d 403 (Colo. 2000).
2 ABA Model Rule 1.5 (b) requires the fee statement to include the scope of the representation. Unfortunately, the Colorado Rules of Professional Conduct do not include this requirement. However including the scope can only benefit each side of the bargain by nailing down the understandings and expectations of the parties about what the lawyer is doing and what the client is paying for.
3 The importance of alternatives to the hourly fee arrangement cannot be overstated. A quick Google search will locate numerous blogs and resources addressing such alternatives.
4 A hybrid fee arrangement that includes a contingent fee component must comply with C.R.C.P. Chapter 23.3, Rules Governing Contingent Fees.
5 Colo. RPC 1.15(c); 1.4 (a) (3) (b).
6 In re Attorney C, 47 P.3d 1167, 1173, n. 12 (Colo. 2002).
7 Colo. RPC 1.16(d).
8 Any agreement that purports to restrict a client’s right to terminate the representation, or that unreasonably restricts a client’s right to retain a refund of unearned or unreasonable fees, is prohibited. Colo. RPC 1.5(g).
9 This suggestion stems from Dudding v. Norton Frickey & Associates, 11 P.3d 441 (Colo. 2000), in which the Colorado Supreme Court held that an attorney would be entitled to compensation on termination of a contingent fee arrangement prior to completion of the representation only if a quantum meruit provision, and not an hourly conversion clause, were included in the contingent fee agreement. Limiting compensation to quantum meruit would not restrict the client’s right to terminate the representation by possibly requiring the client to pay more than the original agreement would have if it had not been terminated.