Attorney Fees/ Trust Accounts

1. Attorney Fees/ Trust Accounts Week 6

2. Objectives Understand financial organization in law firms Recognize ethical issues related to fee agreements Explain the purposes of and reasons for trust accounts Recognize ethical problems with trust accounts Evaluate options for preventing and dealing with trust account ethical violations

3. Accounting Procedures • General Bank Account v. Trust Account • General Account: Earned Fees • Trust Account: Client money/third party funds • Required for attorneys who handle client funds • Ledger sheets

4. California Law • California Business & Professions Code §§ 6146-6149-.5 (Fee Agreements) • Rules of Professional Conduct 3-400, 3-410 • (Fee Agreements) • (See separate posting for laws and sample fee agreements from Calif. State Bar)

5. Agreements with clients Should always be in writing set forth the expectations of the parties explicitly explain the costs of the representation be explained to the client be signed by both parties The client must be given a copy

6. Omit from fee agreements Guarantees Limit on lawyer liability* Limits on liability* Charges for costs

7. UPL and fee agreement It is UPL for a paralegal to “negotiate” fee agreements Fee agreement must be explained to the client A paralegal can explain the contract without committing UPL

8. Fees vs. Costs Fees are the money earned by the law firm Fee generators are lawyers and paralegals Costs are the “out of pocket” costs paid to third parties related to the representation filing expenses, court reporter expenses, expert expenses

9. Rules of Legal Fees English Rule – the loser pays for litigation American Rule – each party pays for his/her own legal fees absent agreement Fee-shifting statute – a statute that says the loser pays the other party’s legal fees

10. Different Fee Agreements Contingency Hourly Value Bonus Fixed Fee

11. Contingency Agreements Lawyer gets paid “fees” only if there is a positive outcome that generates money “Costs” traditionally charged to client regardless of outcome—But Calif. Has different rule—depends on fee agreement Typical in plaintiff’s personal injury work

12. Contingency Agreements, cont. Typically set forth a split of the money generated by the case Costs Lawyer’s Portion Client’s Portion Fee agreement must say where the costs are paid from

13. Contingency Agreements, cont. Some agreements pay the costs off the top and then divide the remaining amount Some agreements divide the money and then pay the costs from the client’s portion

14. Costs & Contingency Fees The law firm typically fronts the costs in contingency cases Then gets reimbursed (no mark-up) at the end of the case If no recovery attorney often uses “unrecovered costs” as tax deduction

15. Advertising & Contingency fees Advertisements should not say “no recovery; no fees” because it misleads potential clients who do not understand the difference between “fees” and “costs” Contingency fee agreements should say that the client is responsible for costs

16. Hourly Fee Agreement Each lawyer and paralegal in a law firm is assigned a “billing rate” Lawyers range from $100/hr to more than $1000/hr Paralegals range from $30/hr to $200/hr

17. Hourly Fee Agreement, cont. Each “biller” keeps track of his/her time on each case Time is billed to the client according to each biller’s billable rate Client is also billed for costs

18. Hourly Fee Agreement, cont. Hourly agreements are used in divorce (marital dissolution), criminal defense, personal injury defense, business litigation Fee agreement should include potential future increases in billable rates (such as annual increases)

19. Keeping track of time Time records should always be honest Time records should be complete with description of the task Keep track of time contemporaneously with the task Time is billed (usually) in 1/10 of hour (6 minute increments)

20. What is billable? Paralegal tasks are billable at paralegal rates Secretary/clerical tasks are not billable

21. What is awardable? In a fee-shifting case, the prevailing party will apply to the court to have the losing party pay prevailing party’s legal costs and fees The petition must include a complete accounting of attorney/paralegal time on the case

22. Court awarded fees Courts award “objectively reasonable” fees Courts award fees for time spent by the correct biller (paralegals for paralegal tasks, etc.) Courts will not award fees for clerical work

23. Ethical fees “padding” timesheets is inflating your time or billing for work you did not do Overbilling is “fraud” – a tort and a crime

24. Retainers Security retainer-works like a deposit-it stays in an account to ensure the client pays the lawyer bills Some law firms bill against the retainer – take money from the retainer amount to pay the bills

25. Retainers, cont. Non-refundable retainers – earned on receipt Advance payment retainer – earned on receipt – advance payment for future legal work

26. Fee fights Sometimes clients and lawyers fight about the legal fees Some of those fights end up in litigation Some confidential information can be used in this litigation

27. Referral Fees Paying a fee to someone who refers a case to your law firm is illegal Exception: California lawyers can pay other California lawyers for a referral

28. Pro Bono “pro bono publico” is Latin for doing legal work for free (for the public good)

29. Duty of Accounting The legal professional must keep accurate records of all funds received from the client Records should clearly differentiate each client’s money from the others

30. Trust Accounts Often called “Attorney Trust Account” But it should be called “Client Trust Account” “Retainers” (those not earned on receipt) must be deposited into this account

31. Trust Accounts, cont. Client money must be kept in an interest-bearing checking account One account can hold money from all of the firm’s clients But accurate records must be kept on money going in and out for each client

32. Trust Accounts, cont. Account must always have a positive balance (more than $0) Account must only have client money in it Money owed to the lawyer must be removed immediately (when it is earned)

33. Trust Accounts, cont. Deposit: Retainers Settlement money Judgment money Escrowed funds

34. General Operating Account Regular business checking account Should be used for paying office expenses Rent Salaries Overhead items Money is earned and removed from trust account, it should be deposited in here

35. Where the money goes… • Lawyer trust account • General operating account • Lawyer personal account

36. Account violations Many lawyers are disciplined for not having enough money in the trust account All client accounts added together should equal the total amount in the account

37. Account violations, cont. Lawyers are disciplined for having the wrong money in the trust account Only client money should be in the trust account Earned fees must be taken out immediately “Commingling” is mixing the money

38. Account violations, cont. Lawyers are disciplined for using this account improperly Personal or office expense payments must not be paid from this account When money is earned, it must be moved to the General Op. Acct. before spending it

39. Account violations, cont. Banks will report improper use of trust accounts Never bounce a check Find your state law on keeping a small amount of “extra” money in the trust account to cover check costs etc

40. IOLTA Banks collect the interest on client trust accounts This money is used to fund legal services and pro bono organizations Interest On Lawyer Trust Accounts