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Category: Ability to Pay

Article: The Right Retainer: Classic, Security or Advance-Payment?

February 7, 2021

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:

  1. 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.
  1. Be transparent and direct with prospective clients regarding retainer agreements.
  2. A reasonable advance-payment retainer for all services to be rendered will give attorneys the most protection against future unknown creditors.
  3. 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.
  4. 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.

Security Firm Tells Federal Circuit It Can’t Pay Attorney Fees

October 16, 2020

A recent Law 360 story by Julia Arciga, “Security Firm Tells DC Circ. It Can’t Pay Union’s Atty Fees,” reports that a security guard service told the D.C. Circuit it's not able to cough up over $51,000 in attorney fees and costs it was ordered to pay a union for "stonewalling" arbitration over an employment dispute, claiming the district court was erroneous in finding the company had means to pay the sum.  In a hearing, an attorney for Preeminent Protective Services Inc., Eden Brown Gaines of Brown Gaines LLC, told a three-judge panel the lower court had "ignored" evidence of the company's inability to pay the attorney fees.

If the company is unable to pay the sum, Gaines said, "Preeminent's officials will be held in contempt, and they won't have the ability to purge it."  She also claimed the disconnect between what Preeminent could pay and the court's demands showed the court did not adequately tailor its remedy to the company's alleged misconduct.  On top of that, Gaines said, Preeminent's inability to pay the attorney fees would negatively affect contempt proceedings against the company — after the court found it was slow-walking arbitration proceedings with the union in an employment dispute.

Judge Gregory G. Katsas expressed doubt toward Gaines' claim, stating it was Preeminent's "burden to show that" it couldn't pay the fees.  "The court didn't ignore evidence," he said, adding that the lower court "didn't discharge your burden" because it felt the evidence wasn't enough.  The lawyer for the union said the court looked at the evidence, and completely debunked the notion that Preeminent couldn't pay.

"The district court had ample reason to conclude it had the ability to pay," Michael Anderson of Murphy Anderson PLLC told the appeals panel, pointing to Preeminent's public statements on its website boasting about its profits.  Anderson also said Preeminent asking the courts to ease up on a payment it had to make due to its financial situation was ignoring a path for financial relief through bankruptcy.  "It is a circumvention of the bankruptcy code for the court to give relief due to one party's inability to pay," he said.

Gaines, however, claimed the attorney fees Preeminent had to pay were "not a debt" and therefore "can't be discharged in bankruptcy."  "[Company] officials can be jailed if they can't pay. ... Financial statements were submitted under seal to the court, which is more accurate than an outdated website, and it showed Preeminent can't pay," she said, adding that the court was not giving the company a proper chance to purge itself from further contempt against the court.

The dispute between Preeminent and the union dates to 2017, when Preeminent took over a security subcontract from Business Resource and Security Services USA Inc., which had employed union members Crystal Middleton and Renay Campbell at a Washington, D.C., public site as security officers.  Six months after Preeminent's takeover, the union filed a complaint claiming a collective bargaining agreement required Preeminent to hire Middleton and Campbell, but Preeminent had refused to take them on.

The union won its bid to compel arbitration of the issue, but the district court later found the company was dragging its feet for more than a year.  In June 2019, the court found Preeminent in civil conditional contempt for disrupting the arbitration process.  The court then ordered the company in November 2019 to pay $51,097.20 in the union's attorney fees and expenses in connection with its "stonewalling" throughout arbitration.

The company appealed the decision to the D.C. Circuit, and asked the court to put off its attorney fees payment while its challenge proceeded — but the district court denied Preeminent's request in May.  During the hearing, Gaines and Anderson also argued over the validity of Preeminent's appeal and whether the D.C. Circuit could hear the case.  According to Anderson, Preeminent should have filed its complaint within a month after the court found it in contempt, rather than after the court finalized the attorney fees amount in November 2019.

PTAB: Inability to Pay Fees No Reason to Deny IPR

September 20, 2020

A recent Law 360 story by Britain Eakin, “PTAB Says Inability To Pay Legal Fees No Reason To Deny IPR,” reports that the Patent Trial and Appeal Board has agreed to review Dareltech LLC's "selfie stick" patent, rejecting the company's argument that since it can't afford to pay for counsel, Microsoft's inter partes review challenge should be denied.  The decision instituting IPR, the board said Dareltech's inability to pay to defend its patent doesn't qualify as a reason for the board to exercise its discretion to deny review, as the company had argued.

"Patent owner's current financial circumstances are not sufficient reason to preclude petitioner from pursuing its statutory rights to challenge the patentability of the claims," the decision said.  Dareltech had asserted that its lead counsel doesn't participate in post-grant matters, and that its backup counsel had been representing the company in other matters pro bono, but is unable to devote the time and resources to this IPR.

Additionally, Dareltech argued that it incurred expenses to prosecute the patent family, develop and commercialize the claimed invention without significant revenue and defend related IPRs, and so the board should deny review.  But the board was unmoved.  The PTAB also shot down Dareltech's argument that the board should deny the petition because it has no district court dispute with Microsoft, which it contends is acting as a proxy for Chinese technology company Xiaomi.

 

 

Boston Calls $2.3M Fee Request ‘Beyond The Pale’

August 17, 2020

A recent Law 360 story by Brian Dowling, “Boston Calls Officers’ $2.3M Fee Request ‘Beyond The Pale’” reports that calling the request "beyond the pale," the city of Boston asked a federal judge to pare down a $2.3 million fee bid by Black police officers who won a $484,000 back pay ruling in a long-running discrimination case, citing a litany of issues including "egregiously high" hourly rates.  After being hit with the back pay ruling due to a promotion exam's disparate impact on Black officers, the city attacked the fee request by lawyers from Lichten & Liss-Riordan PC and Fair Work PC.

"The well-settled case law and the facts and circumstances presented by this case lead to the inexorable conclusion that the court should — indeed, must — reduce their requested fees and costs in fundamentally significant ways," the city wrote to U.S. District Judge William G. Young.

A primary contention in the city's opposition is that the officers' inclusion of nearly $1 million in legal fees and costs from an earlier related lawsuit, Lopez v. City of Lawrence.  The police officers have argued that the Lopez case laid the foundation for the success in the present case, Smith et al. v. City of Boston.  The Smith lawsuit focused on promotions from sergeant to lieutenant, whereas the Lopez case related to promotions from patrolman — the entry-level position — to sergeant.  The two tests were similar, but two different judges came to two different conclusions about them.

Saying there's no "legitimate basis" to include billing from the Lopez case, Boston explained that it dealt with "different exams, brought by different plaintiffs against different defendant cities … tried to a different judge, and which the plaintiffs indisputably lost at trial and on appeal."

The city said the entire amount billed from the Lopez case, $977,951.07, should be cut from the fee request.  Boston said further reductions were warranted because the officers failed to gain certification as a class action and the lawsuit fell short in pressing a claim that one of the two tests was discriminatory.

The city also argued the hours billed by the officers' attorneys are "extraordinarily high" and reflect the type of "excessive, redundant billing and overstaffing" that the First Circuit has taken issue with in the past.  Attorneys for the officers accounted for their hours "almost exclusively" using block billing, the practice of lumping together daily time spent on a case rather than itemizing specific tasks done for a client, the city said.

In an unrelated case in April, U.S. District Court Judge Nathaniel M. Gorton slashed nearly $2 million off a $2.7 million attorney fee request due to "pervasive shortcomings" including block billing.   Boston's analysis of Lichten & Liss-Riordan PC founder Harold Lichten's billing records showed many days with a single block of time for multiple tasks or generic tasks "so vague as to be all but meaningless," the city said.

The city also said Lichten failed to keep time records since mid-2015 and proposed cutting his undocumented hours since then from 274 to 137.  In addition to the volume of hours, Boston said the "egregiously high" hourly rates claimed by the attorneys need to be reduced.  The fees pegged the fair market rate for the lawyers who represented the officers at $700 per hour for Lichten and $450 and $350 per hour for the firm's attorneys Benjamin Weber and Zachary Rubin. 

"These rates are simply far above the market rate for lawyers of comparable experience and skill — both for work performed then and now," the city said.  In addition to the specific billing arguments detailed in the city's 23-page opposition, Boston said the court weighing the fee reward "must be mindful that it is limited taxpayer funds, necessary to provide public services, that are at stake."

Federal Circuit Backs Attorney Fee Cap in IDEA Cases

August 14, 2020

A recent Law 360 story by Andrew Karpan, “DC Circ. Backs Atty Fee Cap in Civil Right Row” reports that the D.C. Circuit rejected the efforts of attorneys representing hundreds of parents in a civil rights case to collect over $5 million in fees from Washington, D.C., and ruled that a congressional cap that strictly limited the amount they could collect in those cases was perfectly valid.

The opinion, authored by U.S. Circuit Judge Gregory Katsas, found that an appropriations rider Congress passed in 2009 did not violate the Takings Clause of the Fifth Amendment nor was it an illegal intervention into the court's power to award fees.  The rider expressly forbade Washington from paying more than $4,000 in attorney fees in any single civil rights case filed under the Individuals with Disabilities Education Act, which mandates special education services for kids.

Crucially, Judge Katsas wrote, Congress started limiting the city's ability to pay out legal fees in IDEA cases in 1999, which was before the parents in these cases filed suit.  "The fee cap does not interfere with any reasonable expectations, for each of the awards at issue was entered at a time when Congress had already limited the District's ability to pay IDEA fee awards," the judge said.  The ruling covered eleven separate IDEA cases, all of which preceded 2009 and all of which successfully alleged that Washington didn't provide a special needs education to students who qualified for one.

Back in 2015, a magistrate judge calculated the city's tab in those cases at about $3.7 million, along with another $1.3 million in interest, according to the ruling.  Two years later, a D.C. federal judge used the cap to trim the fee award to $220,000 but left the interest, which had notched up to $1.4 million by then.  Both the parents and the city challenged that ruling.  Congress, which provides funding to public schools in Washington through the District of Columbia Appropriations Act, had every reason to be concerned about using that budget to pay lawyers in IDEA cases, Judge Katsas observed.

The city's "long struggle" to comply with IDEA was costing it $10 million a year by the time Congress began limiting how much of that funding could be spent on fee payments in those cases, the ruling noted.  An appropriations rider passed in 2009 had instituted the permanent $4,000 cap on the awards.

The parents argued, in part, that the rider violated their rights to fees that a court had awarded them but the panel said shaving a fee award isn't "a per se taking."  Deciding to trim an award that had already been issued didn't misappropriate the powers of Congress either, the panel added.  Lawyers for the parents should also have known they wouldn't be able to collect more than $4,000 a case because the initial rider dated to 1999, Judge Katsas added.

But in addition to ruling that the cap was perfectly legal, the D.C. Circuit also scratched the $1.4 million in interest the parents had won.

"This principle is as old as the Republic," Judge Katsas mused on this point, citing a ruling the Supreme Court made in 1789, in Hoare v. Allen, and in which the court similarly scratched the interest on debts owed to a British creditor during the Revolutionary War, as the Constitutional Congress had expressly banned paying debts to British subjects.

Similarly, Judge Katsas wrote, Congress had banned Washington from paying lawyers in IDEA cases fees above a certain amount: interest couldn't be collected on fees above that amount either.  The panel sent the award back to a lower court to recalculate using the capped award instead. 

The D.C. Circuit ruled on an IDEA fee bid in a different case just last year, when a panel initially rejected a nearly $7 million fee award in a class action suit leveled under that law, ruling in that case that a lower court had used an invalid matrix for calculating fees.