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Flat Fee Confusion: Earned Upon Receipt or Trust Account?

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By Jonathan R. Tung, Esq. on April 25, 2016 3:53 PM

There's a lot of confusion out there (so imagine the level of non-compliance) about the proper way to handle client funds properly, particularly flat fees. Do you place these in an interest-bearing account for the benefit of the client? How do you go about your business in good faith without putting your license and practice at risk?

Unfortunately, the rules are non-universal and can be abstract and ambiguous. Here we'll look at what some sources have to say.

Nothing Concrete

It's an unfortunate feature of legal ethics that nothing seems particularly bright line. For years, the standard billing model came in two standard flavors: per hour and the contingency fee. These are the vanilla and chocolate of the law firm billing world.

But ethics is pretty much in flux on the issue of handling what seems like probably the simplest billing scheme one could imagine: flat fees for certain tasks. And it turns out the rules are confusing due to different takes on the basic Model Rule and what "flat fee" actually means.

The Model Rule View

The most basic thing that can be said about the flat fee debate is this: some jurisdictions basically follow Model Rule 1.15(c) which treats a "fixed fee" or "flat fee" as an advance fee -- because it is usually collected at the beginning of an attorney-client relationships -- to be deposited into a trust account. This is the general rule in these jurisdictions unless there is some written informed agreement to the contrary in the fee agreement. That is, the law may take this money to be their property upon actual receipt before the work is done, but the client must furnish written informed consent.

To reiterate. Under Model Rules -- most states excluding California -- you are generally required to deposit flat fees in a trust first. Your fees may be deducted from the trust as you complete work. How fees are deducted from the account is currently in an ethical flux.

The Rule in California

It appears (and we say that because the rule appears to be changing yet again) that the current rule in California cuts against the Model Rules and presumes that flat fee agreements are ethical; and even though the ethical route is to place flat fee funds into a trust account, discipline may or not come based on the California Supreme Court case of Baranowski v. State Bar (1979). There were other lower court opinions in the state that even appeared to allow the lawyer to treat the funds as earned the moment the attorney-client relationship was established.

Here too the lawyer may arrange with written consent that he takes property before the work is completed -- but that could be playing with fire.

What Is Suggested -- and Is Ethical Under Both Regimes

The safest route is to create a client trust fund to deposit your collected flat-fees. As you complete work, you may deduct fees from this account but it is best practice to send your client an accounting of your work before you withdraw funds.

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