New California Rules of Professional Conduct (“CRPC”), Rule 1.15, sets forth an attorney’s duties regarding safekeeping of funds and property of clients and other persons. For most attorneys, this Rule will be most relevant regarding management of an Interest on Lawyers Trust Accounts (IOLTA) account. Rule 1.15 is a particularly important change for those lawyers who charge a flat fee.

The first, and biggest, noticeable difference concern the deposit of flat fee advances.

Pursuant to subsection (a) of Rule 1.15, all advance payments for fees, costs, and expenses must be deposited into a trust account. (CRPC 1.15(a).) The old rule was silent as to where a flat fee advance could be deposited. New Rule 1.15, however, is clear that the default for a flat fee advance for legal services must be placed in a trust account. A flat fee advance can be placed in a lawyer’s operating account only if the lawyer discloses to the client in writing that: (1) the client has the right to have the flat fee advance placed in a trust account until the fee is earned; and (2) the client is entitled to a refund of any amount of the fee that is unearned because the services were not completed. (CRPC 1.15(b)(1).) If the flat fee exceeds $1,000, then the written disclosure must be signed by the client. (CRPC 1.15(b)(2).)

A flat fee is not a true retainer, and thus cannot be deemed “nonrefundable” or “earned on receipt.” (CRPC 1.5(d), (e).) Thus, consistent with Rule 1.15(b)’s disclosure requirement, any unearned flat fee advance must be returned to the client upon termination of services. (CRPC 1.16(e)(2).) Insufficient funds in a client trust account is a significant discipline issue.

The Executive Summary concerning proposed Rule 1.15 states:

“Paragraph (b) is intended to balance competing interests: (i) the public protection afforded by a rule intended to assure that unearned fees are available for a refund to a client; and, (ii) the freedom of a lawyer and client by agreement to set the terms of a fee arrangement.”

Paragraph (b) does not extinguish a lawyer’s obligation to account for such funds or to refund any amount owed to a client.  Additionally, while there is an avenue for a  lawyer to deposit a flat fee advance into his or her operating account in accordance with Paragraph (b), Comment 3 to Rule 1.15 makes clear that advances for costs and expenses, as opposed to fees for legal services, must always be placed into a client trust account.

The second big change with regard to trust accounting rules is that new Rule 1.15, as opposed to old Rule 4-100, explicitly applies to funds held on behalf of persons other than a client. This change is consistent with California case law and ethics opinions. (See, e.g. Crooks v. State Bar (1970) 3 Cal.3d 346, 358’ Cal. State Bar Opn. 1995-141).

Thus, a lawyer who holds fees for a third party must adhere to the same requirements for safekeeping of funds, recordkeeping, and prompt disbursement. (Rule 1.15(d); see also Standards adopted by the Board of Trustees of the State Bar pursuant to Rule 1.15(e).)

About the author:

Adam Koss is certified by the State Bar of California Board of Legal Specialization in Legal Malpractice Law.  He is a partner at the Koss Firm, where his practice focuses on ethics and professional liability, including risk management and malpractice claims. Adam is a member of the California State Bar’s Committee on Professional Responsibility and Conduct (COPRAC), BASF’s Legal Ethics Committee, and serves as a Special Deputy Trial Counsel for the State Bar’s Office of Chief Trial Counsel.