A recent New York Law Journal article by Milton Williams and Christopher Dioguardi, “Retaining the ‘Right’ Retainer: Classic, Security or Advance-Payment?,” reports on different retainer types in New York. This article was posted with permission. The article reads:
This article evaluates which type of retainer agreement gives attorneys the best chance to preemptively shield their retainer fees before a client ends up in bankruptcy or the Department of Justice seizes and forfeits the client’s assets.
The scenario is this: A struggling business on the precipice of bankruptcy, or a criminal defendant whose property is subject to forfeiture, would like to hire you. The prospective client has funds available to pay its legal fees, but what if you and/or the client expect that bankruptcy trustees or the Department of Justice will soon claim those funds for themselves?
At the outset of an engagement, an attorney can structure his or her retainer agreement to protect the retainer to the greatest extent possible in the event the client’s creditor comes knocking. New York law recognizes three types of retainers: “classic,” “security,” and “advance payment.” And under New York law, a retainer fee is shielded from attachment so long as the client does not retain an interest in the funds. See Gala Enterprises v. Hewlett Packard Co., 970 F. Supp. 212, 219 (S.D.N.Y. 1997). For this reason, described in more detail below, it is the “advance payment” retainer agreement that will likely provide the most protection.
The ‘Classic’ Retainer
This type of retainer is typically a single, up-front payment to the lawyer simply for being available to the client—the attorney commits to future legal work for a specific period of time, regardless of inconvenience or workload constraints. The classic retainer is not for legal services, and is therefore earned upon receipt, whether or not the attorney performs any services for the client (i.e., it is nonrefundable). See Agusta & Ross v. Trancamp Contr., 193 Misc.2d 781, 785-86 (N.Y. Civ. Ct. 2002) (general retainer compensates a lawyer for “agree[ing] implicitly to turn down other work opportunities that might interfere with his ability to perform the retainer-client’s needs” and “giv[ing] up the right to be retained by a host of clients whose interests might conflict with those of the retainer-client”).
Because the classic retainer is earned upon receipt and is nonrefundable, it without a doubt provides the most protection against would-be creditors. However, the classic retainer is really only “classic” in the sense that it relates to antiquity. Indeed, it is difficult to imagine a situation in the modern practice of law where a client would want to pay a classic retainer. And attorneys would be remiss to draw up a nonrefundable classic retainer agreement unless certain specific conditions are met.
In general, under New York Rule of Professional Conduct 1.5(d)(4), “[a] lawyer shall not enter into an arrangement for, charge or collect … a nonrefundable retainer fee.” Further, under Rule 1.16(e), fees paid to a lawyer in advance for legal services are nonrefundable only to the extent they have been earned by the lawyer: “upon termination of representation, a lawyer shall promptly refund any part of a fee paid in advance that has not been earned.” See also Matter of Cooperman, 83 N.Y.2d 465, 471 (1994) (holding that nonrefundable retainer fee agreements clash with public policy and transgress the rules of professional conduct; affirming lower court decision that the use of nonrefundable fee arrangements warranted two-year suspension.); Gala Enterprises, 970 F. Supp. at 219 (narrowly construing the holding in Cooperman, and holding that only retainers with express non-refundability language are invalid per se).
The Security Retainer
While the classic retainer might offer the attorney the most security, the security retainer offers little defense against a client’s future creditors. Typically, payments pursuant to a security retainer are placed in an escrow or trust account to be drawn upon only as the fee is earned. In other words, the security retainer remains the property of the client until the attorney applies it to charges for services rendered.
So long as the client retains an interest in escrowed funds, the escrow account is attachable. Under New York law, a security retainer may be attached so long as it is subject to the client’s “present or future control,” or is required to be returned to the client if not used to pay for services rendered. See, e.g., Lang v. State of New York, 258 A.D.2d 165, 171 (1st Dept. 1999); Potter v. MacLean, 75 A.D.3d 686, 687 (3d Dept. 2010) (defendant owed more than $20,000 in arrears on child support obligations and subsequently paid law firm a $15,000 retainer fee; the court found that the retainer fee, which was held in escrow, was subject to restraining order); M.M. v. T.M., 17 N.Y.S.3d 588, 599 (N.Y. Sup. Ct. 2015) (wife’s restraining notice against husband’s attorney’s security retainer was valid and enforceable); see also Pahlavi v. Laidlaw Holdings, 180 A.D.2d 595, 595-96 (1st Dept. 1992) (judgment debtor deposited $50,000 with his attorney after receipt of a restraining order and the court ordered his law firm to return them).
The Advance-Payment Retainer
Similar to the security retainer, the advance-payment retainer is a fee paid in advance for all or some of the services to be performed on a specific matter. However, unlike a security retainer, ownership of the advance-payment retainer passes to the attorney immediately upon payment in exchange for the attorney’s promise to provide the legal services. This type of retainer is likely the best way to ensure that the client has sufficient funds to pay for expected legal services.
Under an advance-payment retainer agreement, the law firm places the money into its operating account and may use the money as it chooses, subject only to the requirement that any unearned fee paid in advance be promptly refunded to the client upon termination of the relationship (recall Rule 1.16(e)).
A client’s contingent future interest in an advance-payment retainer, if any, that would be refunded if the firm’s services were prematurely terminated is not a sufficient basis for attachment. See Gala Enterprises, 970 F. Supp. at 219. Therefore, the most secure option will likely be to require an advance payment for all services to be rendered, commonly referred to as a flat or fixed fee. In other words, a creditor would not be able to seize such a retainer, even if part of the retainer may yet be refundable. In Gala Enterprises, the court held that because a $150,000 flat fee as well as a $500,000 flat fee were subject to refund only if the legal services were prematurely terminated, the fees were therefore not attachable.
However, just because a client has paid an advance-payment retainer, does not mean that the retainer is untouchable. Two specific possibilities come to mind. First, Gala Enterprises illustrates that law firms might need to defend against fraudulent conveyance claims. That being said, if the retainer is not excessive or unreasonable, the attorney is in a good position to defend against any such claims. It goes without saying, when establishing a flat fee—or any fee for that matter—the fee must not be excessive. See Rule 1.5(a) (“[a] lawyer shall not make an agreement for, charge, or collect an excessive [] fee …”).
Second, attorneys of course must not accept funds that may have been obtained by fraud. See, e.g., S.E.C. v. Princeton Economic Intern. Ltd., 84 F. Supp. 2d 443 (S.D.N.Y. 2000) (lawyer who blindly accepts fees from client under circumstances that would cause reasonable lawyer to question client’s intent in paying fees accepts fees at his peril.).
Conclusion
In sum, we offer this advice:
- Review the Rules of Professional Conduct and case law cited herein, as well as the relevant New York State Bar Association ethics opinions, specifically: Ethics Opinion 570, June 7, 1985; Ethics Opinion 816, Oct. 25, 2007; Ethics Opinion 983, Oct. 8, 2013; and Ethics Opinion 1202, Dec. 2, 2020.
- Be transparent and direct with prospective clients regarding retainer agreements.
- A reasonable advance-payment retainer for all services to be rendered will give attorneys the most protection against future unknown creditors.
- Make clear in the retainer agreement that the client acknowledges and agrees that the advance-payment will become the law firm’s property upon receipt and will be deposited into the law firm’s operating account, not into an escrow account or a segregated bank account.
- Acknowledge in the retainer agreement that the client may be entitled to a refund of all or part of advance payment based on the value of the legal services performed prior to termination.
Milton Williams is a partner and Christopher Dioguardi is an associate at Walden Macht & Haran LLP in New York.