Belated Fee Complaints: What to Do?
LACBA Update, January 2004

By Ellen A. Pansky, member, LACBA Professional Responsibility & Ethics Committee. Pansky is a legal ethics expert practicing at Pansky & Markle in South Pasadena. The opinions expressed are her own.

Most times clients pay their attorneys without much ado, but occasionally a disgruntled client belatedly objects to previously paid legal fees. What should a lawyer do in these circumstances? Unfortunately, the answer is not crystal clear.

Rule 4-100, California Rules of Professional Conduct mandates that an attorney deposit advance fees and costs in a clearly identified client trust account. (See subparagraph (A).) Thus, fees other than true retainers and other fees earned upon receipt must be deposited in the client trust account. Rule 4-100 (A)(2) also requires the attorney to withdraw from the client trust account, “at the earliest reasonable time after the member’s interest in that portion becomes fixed,” earned fees. In other words, it is a violation of Rule 4-100 to leave earned fees in the client trust account, and to do so constitutes improper commingling.

Rule- 4-100 (A)(2) also provides that, when the client disputes the attorney’s right to receive a portion of trust funds, the disputed portion shall not be withdrawn until the dispute is resolved. Thus, an attorney who distributes undisputed earned fees acts ethically. An attorney who unilaterally withdraws fees that the attorney knows are disputed by the client acts unethically.

Typically the attorney performs the legal services, receives payment from the advanced funds, accounts to the client for the distribution, and all is well. But what should one do when the client raises a fee dispute after the fees already have been distributed to the attorney out of the trust account? There are only two alternatives: Restore the disputed funds to trust -- or don’t.

Assuming the attorney is reasonable in asserting that the fees actually have been earned pursuant to the fee agreement with the client, there is no California authority that requires the belatedly disputed funds to be restored to the trust account. Perhaps the closest case is In the Matter of Fonte (Rev. Dept. 1994) 2 Cal. State Bar Crt. Rptr. 752, 758, which involved a violation of Rule 4-100 (A) and a violation of Rule 3-700 (D)(2). Based on Fonte’s unilateral characterization of an advance fee as an alleged “true retainer fee,” and his unilateral distribution of client funds to pay for services that pre-dated the effective date of the retainer agreement, the State Bar Court held:

An attorney is not permitted to set his or her fees unilaterally. (McKnight v. State Bar (1991) 53 Cal.3d 1025, 1037.) If a client contests fees charged or paid, the disputed funds must be placed in a trust account until the conflict is resolved. (Rule 4-100 (A).) In Chang v. State Bar (1989) 49 Cal.3d 114, the Supreme Court found that an attorney, who had diverted settlement funds into a trust account with his name on it and later misappropriated the funds, also violated predecessor Rule 8-101 (B)(3) when he failed to turn over bank records and otherwise account to his client when the client disputed the attorney’s fee claim. (Id. at 128.)

The California Supreme Court did not hold in Chang v. State Bar that an attorney who collected a fee, later disputed by the client, must replace an amount equal to the disputed fee in a trust account. Similarly, the Supreme Court did not hold in McKnight v. State Bar that a subsequent fee dispute requires the attorney to deposit in trust an amount equal to the disputed fees. Chang and McKnight both involved an attorney’s wilful failure to refund unearned fees. (Cf. Baranowski v. State Bar (1979) 24 Cal. 3d 153, which held that the restoration of misappropriated trust funds back into the client trust account did not constitute unethical commingling.)

Certainly it is well-established that attorneys may not unilaterally collect a fee without prior client consent. Likewise, it is well-recognized that attorneys may not transfer disputed funds to themselves from a client trust account, once they are advised of the client’s objection to the distribution. Also, attorneys must account for trust funds received and distributed. These are the propositions established by Chang, McKnight, and Fonte.

Except for the inclusion of the phrase “fees earned or paid” in Fonte, there appears to be no reported California case that even suggests a client can compel an attorney to deposit in trust an amount equal to fees received by the attorney before a dispute arises. To infer such a holding would require an attorney to redeposit fees to which no dispute was ever raised at the time the fees were collected and distributed regardless of whether the client has a colorable fee dispute to assert. No case has ever imposed such a duty on an attorney.

In summary, if the client is raising a legitimate claim that the lawyer has charged an illegal fee or an unconscionable fee, the attorney would be wise to maintain in trust, and even to restore to trust, the disputed portion of fees until after the dispute is resolved. On the other hand, if the lawyer has distributed the contractual fee to himself or herself after the agreed-upon legal services have been fully performed, the client’s subsequent objection to the attorney’s prior distribution of the fee does not trigger any duty to restore to trust the disputed portion of the fee.