With the recent meltdown of financial institutions, some lawyers have been wondering whether and how client funds held in a lawyer’s IOLTA account are be covered by FDIC insurance in the event of a bank failure. In general, the rule has been that FDIC insurance covered $100,000 of any individual’s funds deposited in a single financial institution, regardless of how many accounts that $100,000 was spread over, including the portion of the individual’s funds that are in the lawyer’s trust account.
With the recent meltdown of financial institutions, some lawyers have been wondering whether and how client funds held in a lawyerâ€™s IOLTA account are be covered by FDIC insurance in the event of a bank failure. Â In general, the rule has been that FDIC insurance covered $100,000 of any individualâ€™s funds deposited in a single financial institution, regardless of how many accounts that $100,000 was spread over, including the portion of the individualâ€™s funds that are in the lawyerâ€™s trust account.
On Friday, the FDIC announced its approval of a final rule regarding the Temporary Liquidity Guarantee Program (TLGP), which was originally adopted on October 13, 2008, as one of the steps to address the credit crisis. Part of the new regulation provides that FDIC insurance will apply to all funds held in lawyers’ IOLTA accounts, without any limit per client, until December 31, 2009. Â After that date, the guarantee amount will revert back to the basic insurance amount, which I believe is $100,000.
The press release, which includes a link to the actual regs, can be found here.
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But you started reading it anyway.
We’re all so inundated with disclaimers and license agreements at every turn that we barely flinch anymore when we see the words “privileged and confidential” or worse, long paragraphs in small fonts portending doom for the unwitting recipient of a misdirected e-mail or the surfer of law firm websites. Disclaimers seem to have spread like a consensual virus – a lawyer sees another lawyer using a disclaimer, figures it must be a good idea, and includes it in his or her own materials.
The following is a fictionalized account of a conversation between the plaintiff’s attorneys in Illinois Central Railroad Co. v. Broussard, No. 2007-CA-01010-COA (Miss.Ct. App. Sept. 30, 2008), as reported at 24 Lawyers’ Manual 535 (Oct. 15, 2008).
Associate: You know that asbestos case we filed a couple of weeks ago?
The following is a fictionalized account of a conversation between the plaintiffâ€™s attorneys in Illinois Central Railroad Co. v. Broussard, No. 2007-CA-01010-COA (Miss.Ct. App. Sept. 30, 2008), as reported at 24 Lawyersâ€™ Manual 535 (Oct. 15, 2008).
Associate: You know that asbestos case we filed a couple of weeks ago?
Partner: You mean Broussard? Yeah, that was a close one! Got in just before the statute of limitations expired.
Associate: Thatâ€™s the one. We got a motion to dismiss on it.
Partner: So what else is new. Fire up your keyboard and letâ€™s knock that one back at them.
Associate: Itâ€™s going to be kind of a tough one.
Partner: Why is that?
Associate: Well, they say heâ€™s dead.
Partner: What, do they think we counted the days wrong? We checked and double-checked that we were getting in before the statute expired.
Associate: No, not dead like his claim is dead. Dead like heâ€™s dead. Like gone to a better place dead.
Partner: They think Broussard is dead?!
Partner: Didnâ€™t you talk to him before we filed?
Associate: No, you always like to talk to the clients.
Partner: How dead do they think he is?
Associate: Really quite dead. Like 20 months worth of dead.
Partner: Have you tried calling him?
Associate: Ya. Number disconnected.
Upon being informed the client was dead, the decedentâ€™s firm moved to dismiss their complaint. The Mississippi Court of Appeals, reviewing the district courtâ€™s denial of sanctions against the law firm, held 6-4 that the complaint was frivolous and that Rule 11 sanctions should be awarded.
As alternative billing approaches go, flat fees have many fans. Clients like to know exactly what a particular legal service will cost and lawyers like to leverage experience they have gained in providing the same service to others. Sometimes a flat fee even lets a lawyer spend more time on a matter because there’s no concern that the client will feel the lawyer was trying to run up the bill by spending more time on legal research or clever drafting. Flat fees are also important for clients who are at a high risk of future nonpayment.
As alternative billing approaches go, flat fees have many fans. Clients like to know exactly what a particular legal service will cost and lawyers like to leverage experience they have gained in providing the same service to others. Sometimes a flat fee even lets a lawyer spend more time on a matter because thereâ€™s no concern that the client will feel the lawyer was trying to run up the bill by spending more time on legal research or clever drafting. Flat fees are also important for clients who are at a high risk of future nonpayment.Â
The place where lawyers tend to get in trouble ethically with flat fees is when they want the fee to be both flat and nonrefundable. From a definition standpoint, calling a fee â€œflatâ€� merely says what the amount will be and says nothing about when the client is expected to pay, when the fee will be considered earned, and what portion (if any) the client will get back if the client is unhappy or just decides the lawyer is ugly.
One way to handle the flat fee is to have the client pay the amount up front, put it in the lawyerâ€™s trust account, and state in the representation agreement when the fee will be considered earned, so that the lawyer can take it out of trust and put it in the business account. Â This works well for document-intensive projects, such as an estate plan or an incorporation. But even in a criminal matter the agreement could be that 25% of the fee is earned after the arraignment, another 25% after the omnibus, and the rest after trial, with all of the fee earned at any time a plea bargain is reached.
Most lawyers who use flat fees, however, see them also as a way of avoiding having to place funds in a trust account. Â Of course, one could avoid trust account issues by having the client pay after the work is done, but getting the money up front is a key part of keeping a law practice afloat.
This is where the ethics problems start. Â Traditionally, lawyers in many jurisdictions have only been able to accept a flat fee, payable in advance, and earned upon receipt (i.e. â€œnonrefundableâ€�) if the fee was considered an availability retainer. Â In other words, â€œIâ€™m willing to take on your manslaughter case, but it could be such a big case that I will have to a) hire additional staff and/or b) turn down other business, so the only way I can agree to do this is if you agree that once you pay me my $50,000 fee, I wonâ€™t have to return it if you change your mind a month from now.â€� Â In some jurisdictions, the RulesÂ ofÂ ProfessionalÂ Conduct require that the lawyer make special written disclosures to the client about the non-refundable aspect of the fee and that the fee will not be placed in the trust account (if any portion was refundable up front, then it wouldnâ€™t be earned, and it would have to go in the trust account).Â
Inevitably, a client comes back a short time after paying the lawyer the fee, after very little work has been done on the case, and says that the client has changed his or her mind so theyâ€™d like a refund. The lawyer says, sorry that wasnâ€™t our deal, and the frustrated client complains to the ethics authorities.Â
Smart lawyers both follow the technical rules and give the client back some money. Â Not-so-smart lawyers . . . well, they spend a lot of time trying to convince the ethics authorities that it was reasonable for the lawyer to charge a 5-figure fee for very little work. Â At the end of the day, all fees must be reasonable.
In criminal, bankruptcy, and federal court matters, to name a few, it really can be difficult for a lawyer to withdraw once he or she gets started, and it can be challenging to figure out ahead of time how much work a case will require. Â Availability retainers make sense if a lawyer focusses on one of these areas â€” some cases will be resolved quickly, some will go to trial, and hopefully it will all work out in the end.Â
But for practice areas in which lawyers are typically paid hourly, the trend toward lawyers insisting on non-refundable retainers has been troubling to some ethics authorities. Lawyers sometimes take what would just be an ordinary retainer headed for the trust account, call it â€œnonrefundableâ€� and both deposit it inÂ the business account and refuse to return any money to the client who quits before the work is done.Â
This isnâ€™t something that keeps me awake at night. Â Lawyers are very heavily regulated â€” when I remodeled my house, I wrote huge checks to a contractor, and there was no â€œtrust accountâ€� in sight. Â I think thereâ€™s very little risk that a family law attorney who takes a $3,000 retainer up front to start a divorce isnâ€™t going to earn all of that money. But itâ€™s also not fair to the client to set up the retainer in such a way that the lawyer can get paid for not working, especially if thereâ€™s no particular cost to the lawyer. Lawyers have to ask themselves if thereâ€™s a good reason for making the fee non-refundable, other than to avoid the hassle of using a trust account.Â
So keep quoting those flat fees to clients. Just watch out for the ethics bumps.
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