ABA ETHICS OPINION ON “NONREFUNDABLE” FEES PAID IN ADVANCE PROVIDES USEFUL GUIDANCE FOR TENNESSEE LAWYERS

The ABA’s May 3, 2023 Formal Opinion 505 on “fees paid in advance for contemplated services” provides useful guidance for Tennessee attorneys.1 This is so even though Tennessee’s professional conduct rules in this area differ from the Model Rules in permitting nonrefundable advance fees in some circumstances.

Formal Opinion 505 provides a useful review of often confusing terminology in this space, discusses the ethical obligations of handling client fees paid in advance, and—most significantly—takes on the question of whether there is any such thing as a “nonrefundable” advance fee. In this column, I will review the major points made in Formal Opinion 505, discuss differences found in Tennessee authorities, and address key takeaways for Tennessee lawyers.

Terminology: General Retainers, Advance Fees, Flat Fees. The opinion notes that lawyers regrettably often use the term “retainer” loosely to mean any money paid at the outset of a representation. Because the purpose of the fee is significant in determining how it must be handled, the opinion does not use the generic “retainer” and instead differentiates between general retainers and advance fees, and then explains where flat fees fit into the puzzle.

A general retainer2 is paid to assure the lawyer’s availability to handle the client’s legal matters. It is earned upon receipt in exchange for the lawyer’s promise to be available. As such, it is deposited in the lawyer’s operating account. The opinion emphasizes the general retainer is neither a flat fee for the lawyer’s services nor a fund from which the lawyer’s future bills will be paid. The discussion concludes by noting general retainers are rare, benefit few clients, and “must be explained clearly and in detail” when utilized.3

An advance fee4 is paid to the lawyer for legal work to be performed in the future. An advance fee is not owned by the lawyer; it is possessed by the lawyer to secure payment of the future services. As such, it must be deposited in a trust account and not the attorney’s operating account.5

Wrapping up the terminology discussion, the opinion addresses “flat fees”6 for legal services—such as a fee of $10,000 for a divorce or $5,000 for a will. A flat fee need not be paid in advance, of course. But if payment of the flat fee is required in advance of the performance of the services, then that, too, is an “advance fee” that should be deposited in a trust account.7 The opinion notes that the lawyer and client might agree that portions of the flat fee could be withdrawn as earned at defined milestones in the matter.8

When Must a Fee that was Paid in Advance be Returned to the Client?

Opinion 505 explains that if the lawyer-client relationship is terminated, any fee paid in advance that is unearned must be returned to the client. This duty is found in Model Rule 1.16(d) which requires the refund of any advance payment of fee or expense that has not been earned or incurred.”9 It is also reflected in the requirement that fees be reasonable, found in Rule 1.5(a).10 The opinion also explains that Model Rule 1.15(a) and (c)’s prohibitions on commingling client and lawyer funds are part of the arsenal of rules aimed at client protection.11 By not allowing the lawyer to deposit the client’s funds in the lawyer’s operating account before the fees are earned, any unearned funds will be available for return to the client if the relationship ends.

But What if an Attorney Calls an Advance Fee “Nonrefundable” or “Earned Upon Receipt”? Formal Opinion 505 explains that describing an advance fee as “nonrefundable” does not make it so. The opinion provides, “The Model Rules of Professional Conduct do not allow a lawyer to sidestep the ethical obligation to safeguard client funds with an act of legerdemain. . . .” The opinion cites the obligations noted above— found in Rules 1.5, 1.15, and 1.16—as duties that cannot be avoided with a nonrefundable label.12 In short, if the fee is an advance fee, there is an obligation to return it if the services are not performed.

The opinion ends with a discussion of three hypothetical scenarios— involving a nonrefundable retainer, purported general retainer, and a nonrefundable flat fee—and then a subsequent client discharge of the lawyer and request for the return of unearned fees. In each scenario, the labels do not allow the attorney to escape the obligation to return unearned fees paid in advance.13

A difference between Tennessee professional conduct rules and the Model Rules is relevant to this discussion. Tennessee rules explicitly permit nonrefundable attorneys’ fees, including advance fees, in defined circumstances. Tennessee RPC 1.5(f) provides that a nonrefundable fee “shall be agreed to in a writing, signed by the client, that explains the intent of the parties as to the nature and amount of the nonrefundable fee.” Comment 4 to Tennessee RPC 1.5 provides that the obligation to return a fee does not apply to a “reasonable nonrefundable fee.” Comment 4a defines a nonrefundable fee as one that is “paid in advance and earned by the lawyer when paid” and states that it is subject to a reasonableness standard of Tennessee RPC 1.5(a). The comment states that recognized examples of appropriate nonrefundable fees include general retainers (as addressed by Formal Opinion 505) and “where the client agrees to pay to the lawyer at the outset of the representation a reasonable fixed fee for the representation.” (emphasis added). Comment 4a to TRPC 1.5(a) continues, explaining that that for such a nonrefundable fee to be reasonable, the lawyer must “remain[] available to provide the services called for by the retainer or for which the fixed fee was charged.” The Tennessee Supreme Court has explained that because such nonrefundable fees are earned upon receipt, they should not be deposited in the attorney’s trust account.14

Two 1992 formal ethics opinions of the Tennessee Board of Professional Responsibility are instructive.15 Formal Opinion 92-F128 describes limited circumstances when an attorney might receive an “advanced earned fee as an unrefundable retainer.” The examples provided describe general retainers and not advance fee arrangements. A footnote to the opinion states, “It is not clear, however, whether a nonrefundable retainer would be valid.” The note provides an example of a client who would be entitled to the return of a nonrefundable advance fee when an continued on page 24

If you have an idea for Schooled in Ethics column, please contact Cathy Shuck at 541-8835.

Plan now to attend the Barristers monthly meeting on Wednesday, June 14, starting at 5:15 pm at the outdoor patio at The Firefly at the Hilton, located at 501 W. Church Avenue, Knoxville. Social time starts at 5:00 pm. Register by clicking June 14 on the event calendar at www.knoxbar. org. There will not be a July 12 Barristers meeting, but plan to join us for the Summer Party on July 14 (details below).

The Veterans’ Legal Advice Clinic is a joint project of the KBA/Barristers Access to Justice Committees, Legal Aid of East Tennessee, the Knox Co. Public Defender’s Community Law Office, the UT College of Law, LMU- Duncan School of Law, and the local Veterans Affairs office. This is a general advice and referral clinic which requires attorney volunteers for its continued operation. The next Veterans Legal Clinic will be held in person at the Knoxville Community Law Office on June 14, 2023. Sign up at https://www.knoxbar.org/?pg=Upcoming-Legal-Clinics.

The Barristers Sumer Fun CLE series begins on Thursday, June 15 at Printshop Beer Co. with a presentation on BUI laws from an officer’s perspective. Throughout the years, there has been an explosion of recreational boaters on TN waters. With larger crowds, increased vessel size, numerous lakeside bars and party coves, boating under the influence has become, to some, part of the lake life. TWRA’s Col. Darren Rider, Lt. Col. Matt Majors, Torrey Grimes (General Counsel), and Daniel Cox (Asst. Gen. Counsel) will speak on how they combat this epidemic as the boating season kicks off. Tickets are $30 for KBA Members / $45 for Non-Members. Registration/Check-In will be held from 4:30 - 5:00 p.m. This program is approved for 1 hour of General CLE Credit. Everyone who registers will receive one free drink ticket.

Set sail with the Barristers for an evening filled with camaraderie and fun! The Barristers Nautical Summer Party will be held on Friday, July 14, from 6:00 - 9:00 p.m. at Lighthouse Knoxville on 6800 Baum Drive. The cost is $25 per person before June 30, and after that date, the ticket price will increase to $30 per person. The Summer Party is open to guests, including members from the Knoxville Bar Association, law clerks, and/ or friends and family. Reservations are closed at 5 pm on July 10, so remember to register early by clicking July 14 in the event calendar at www.knoxbar.org.

The Volunteer Breakfast is a recurring event on the 4th Thursday of each month at 6:15 a.m. at the Volunteer Ministry Center, located at 511 N. Broadway, Knoxville, Tennessee. The Barristers Volunteer Breakfast Committee always needs volunteers to serve food or sponsor. The cost is $150 for sponsoring, and we need 4-5 volunteers. If you are unable to fund the breakfast, the Barristers will subsidize the cost of the breakfast. We meet at 6:15 a.m. and serve breakfast to approximately 30-40 individuals, generally leaving the site around 7:30 a.m. It’s a great way to serve the community! Please contact either Matt Knable at (865) 3605044 or Darrius Dixon at (865) 546-4646 with any questions and/or about volunteering.

The Barristers Diversity Committee has created a scholarship fund to help with travel and lodging costs for diverse students who are invited to attend preview days hosted by the law schools. Members are asked to donate to help ensure that one student, who may not otherwise be able to afford to visit a law school in Knoxville prior to their enrollment, is able to attend a preview day. Your donation would help alleviate one of the barriers preventing diverse students from being able to visit campuses in Knoxville and see all that its law schools and the Knoxville Bar have to offer. If you have questions, please reach out to Mariel Bough (mariel. bough@verasafe.com) or Grant Williamson (gwilliamson@bradley.com) for more information on how your donation will be used, or for more ways to get involved with the Information on how to donate online can be found on the KBA website on the Barristers Diversity Committee page.

THE KNOXVILLE BAR ASSOCIATION IS PLEASED TO WELCOME THE FOLLOWING NEW MEMBERS:

Heather Bryan

Concord Title

Spencer G. Frantom

Jeremy K. Hanson

Hanson & Hanson

Tara M. Hanson

Hanson & Hanson

Mitchell T. Harper

Harper Law Office

Cofield B. Hilburn, Jr.

Colton B. Hobbs

Law Office of Daniel Herrera

Marshall Andreas Jensen, II

Federal Public Defender Middle District of Tennessee

Richard A. Johnson

Johnson, Murrell & Associates

Nicole Schell Klapka

Law Firm of Nicole S. Klapka, P.A.

Michael Lee

Frantz, McConnell & Seymour, LLP

Nikol D. Pluess

Frantz, McConnell & Seymour, LLP

R. Jackson Pope

University of Tennessee

Joel P. Reeves

Kizer & Black, Attorneys, PLLC

Steven L. Rimmer

Teddy Ryan

Whitney P. Trujillo

Knox County Public Defender’s Community Law Office

Adriannette L. Williams

LMU – Duncan School of Law

Alexandra N. Allen

Sydney L. Cross

Charles Highland

Frank Olvey, III

Amber Shouse

By: Melissa B. Carrasco Egerton, McAfee, Armistead & Davis, P.C.