Working with your attorney can be a new and difficult experience for you, and even if you’ve been working with attorneys for years, or even are an attorney yourself, you may not have realized what the different types of fees are and what legal requirements there are when charging these fees.
There are six types of permissible attorney’s fees. See if you can name all of them. Before we start naming them for you, we need to explain the difference between the lawyer’s operating account and the lawyer’s trust account.
The operating account is the lawyer’s business account and may be spent in any permissible way under the law or under the lawyer’s internal rules. For all intents and purposes, this is the lawyer or law firm’s money to be used as the lawyer or law firm see fit.
The trust account is the opposite. It is the clients’ money until it is earned by the lawyer and the lawyer must treat the money as such. This means that the lawyer must keep careful records to ensure that not even a penny is misplaced and that no one client’s account ever dips below zero or is used for purposes other than that client permitted. Such misuse of the trust account is embezzlement and can result in the lawyer going to jail and getting disbarred in the worst case scenarios. Trust account rules are among the most strict lawyers rules in the state of North Carolina and are not a matter to be taken lightly.
The most common type of lawyer billing is hourly billing. Hourly billing means that the lawyer records her time and multiplies that time by her billable rate. The client would then be responsible for that amount after the hours have been accounted for, typically monthly or at the end of the representation.
Hourly billing is subject to Rule 1.5 of the Rules of Professional Conduct which states that a lawyer may not charge a clearly excessive or illegal fee. The Rule gives some factors to take into account to determine if the fee is clearly excessive:
1) The time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly;
2) The likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;
3) The fee customarily charged in the locality for similar legal services;
4) The amount involved and the results obtained;
5) The time limitations imposed by the client or by the circumstances;
6) The nature and length of the professional relationship with the client;
7) The experience, reputation, and ability of the lawyer or lawyers performing the services; and
8) Whether the fee is fixed or contingent.
A retainer, or general retainer, is not what most people call a retainer. A retainer is consideration paid to the attorney for the exclusive use of the lawyer’s services in a particular matter. Most people confuse a retainer with an advanced payment, but they are two very different things in terms of how lawyer ethics are concerned and how they are treated in the accounting for the lawyer.
A retainer is a payment for doing no work, and therefore it is earned as soon as it is paid. Because there is no additional work required to earn the fee, the lawyer may deposit this money directly into the lawyer’s operating account and spend it how the lawyer sees fit.
Retainers are subject to very few rules, but must not be clearly excessive and the lawyer must abide by the terms by which the retainer was paid.
An advanced payment is typically referred to as a retainer, but they are very different things. An advanced payment is a security deposit placed in the lawyer’s trust account and billed towards or used for fees throughout the representation. It remains the client’s money until earned by the lawyer and any excess that was not earned must be refunded to the client.
This advanced payment is subject to numerous rules that the lawyers must follow. Unlike other fees, this fee isn’t subject to Rule 1.5 because the money received as an advanced payment is not a fee earned by the attorney. It is the client’s money until earned.
The advanced payment is, however, subject to the rules of trust accounting, specifically Rule 1.15-2 of the North Carolina Rules of Professional Conduct. Under Rule 1.15-2, all funds received by a lawyer that are not earned must be deposited in the lawyer’s trust account. Trust funds must be accounted for and treated as separate clients’ separate accounts, even if the funds are all combined in one account.
Lawyers may only withdraw funds from their trust account for permissible reasons, and the accounting of the trust account must be given to the client for all transactions. To this end, any items drawn on a trust account for the attorney’s fees must be payable to the attorney and shall indicate on the item the client balance on which the item is drawn. For example, if client John Mack owes $600 and he is paying through the trust account, the lawyer would make the check payable to the lawyer or law firm and put in the note section “Attorney Fees from John Mack Trust Acct.” As Rule 1.15-2(h) states, “Any item that does not capture this information may not be used to withdraw funds from a trust account or a fiduciary account for payment of the lawyer’s fees or expenses.”
The lawyer must also promptly deposit any entrusted money in the trust account, must report any misappropriation and must take the appropriate steps when working with abandoned property. With abandoned property, no amount of this money may benefit the attorney. The lawyer must follow N.C.G.S. § 116B-53 and comply with the requirements of Chapter 116B with regards to how the property will escheat (transfer to the State of North Carolina).
Contingency fees are fees that are based on the outcome of the case. Typically, you will find this kind of billing practice in personal injury and debt collection cases, but many others may contain a similar structure.
Contingency fees can range between very low percents like 1% or as high as 45%; however, the contingency fee is still subject to Rule 1.5 where they cannot be clearly excessive. Even if a contingency fee is 1%, it can still be clearly excessive because lawyers are held to a standard of payment per amount of work completed. If the attorney does a very low amount of work, yet is awarded millions, the State Bar may conclude that the fee is clearly excessive.
The standard for what makes a clearly excessive fee in a contingency case is a little different from hourly fees because one of the factors in Rule 1.5 is whether the fee is fixed or contingent. Presumably because the lawyer takes on a lot of the risk of there being a payout, the lawyer is allowed to have a higher upside in case of a substantial payment.
A flat fee is a fee paid at the beginning of a representation for a specific set of legal services. Lawyers may charge this fee for things that are isolated and take a fairly standard amount of time. This fee is not based on hours worked, but a set price regardless of how long it takes the lawyer to complete the work.
This flat fee is still subject to a number of rules, including Rule 1.5, which forbids charging a clearly excessive fee. Therefore, if the fee for services far outweighs the amount of work completed by the lawyer, the client can seek to disgorge the profits from the attorney. To do this, the client would go through the North Carolina State Bar to report the attorney for charging a clearly excessive fee or dispute the fee charged.
The flat fee is also subject to all the other rules of professional conduct. For example, a flat rate can be set to sell services on group coupon websites; however, the fee cannot be charged and considered earned until the lawyer has exercised professional judgment on whether or not the client actually would benefit from the service provided. The attorney must also ensure there are not conflicts of interest that would prevent the representation as well. Therefore, a ‘flat fee’ charged before doing these checks would be an advanced payment instead and must be deposited in the lawyers trust account.
A hybrid fee is a fee that is a combination of two or more of these other fees. The hybrid can be part general retainer and part hourly, part flat fee and part hourly or some other combination of these. If this hybrid fee is paid in one check, the entire amount must first be deposited into the lawyer’s trust account and then the earned portion may be drawn out of that account.
Any hybrid fee is going to be subject to all of the rules that the component fees are subject to. Problems arise in this type of fee when there is ambiguity as to what type of fee each portion is. If the lawyer states that the client is paying a retainer of $500, does the client understand this to be a general retainer that is already earned or a deposit for future earnings by the lawyer?
Lawyers in North Carolina are permitted to charge a minimum fee, but simply by placing a “nonrefundable minimum fee” in the attorney’s fee agreement does not absolve that attorney from the requirements of Rule 1.5 of the North Carolina Rules of Professional Conduct. Even if the fee is “nonrefundable,” if it is considered clearly excessive, the client is entitled to receive a refund on the portion that is above and beyond what the attorney has earned.
This is different from a retainer because the retainer is earned immediately simply because the attorney has accepted the client as a client of hers. Because of the potential for conflicts of interest, the retainer is a payment to not represent anyone contrary to this new client’s interests and is earned because the attorney is giving up potential work.
North Carolina Formal Ethics Opinion 10 from 2008 gives some guidance on the wording that should be used in these engagement letters to ensure that the client and lawyer both understand the nature of the way the lawyer is billing.
In conclusion, each variety of attorney billing practices comes with their own complications and must be carefully crafted to ensure compliance with the rules. Any perceived violation of these rules can be submitted to the State Bar for review and the attorney may suffer disciplinary action and be forced to grant a refund to the client of the excessive amounts. It is better to be sure that the fee agreement is in writing, clearly understood, and compliant with the rules.
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