The Ethics of Charging and Collecting Fees
by
Nancy E. Kaufman, Esq. and Constance V. Vecchione, Esq.
edited by Alison Mills Cloutier, Esq.
Updated May, 2008
BAR COUNSEL’S HANDLING OF FEE COMPLAINTS
Lawyers’ fees are a frequent cause for complaint to the Office of Bar Counsel. In particular, approximately 10% of the over 5000 inquiries received annually by Bar Counsel’s Attorney and Consumer Assistance Program (ACAP) involve fee disputes. ACAP is often able to resolve these complaints by contacting the lawyer and having him or her provide a written explanation and itemization of the fees charged, or advising the parties of the availability of fee arbitration or other forums for mediating the dispute. If the dispute cannot be resolved through ACAP or the complaint alleges disciplinary violations, a file will be opened.
RULES OF PROFESSIONAL CONDUCT AND ETHICAL CONSIDERATIONS IN FEE CASES
Duty to Charge a Reasonable Fee
The Massachusetts Rules of Professional Conduct (Mass. R. Prof. C.) prohibit clearly excessive fees. Mass. R. Prof. C. 1.5(a). “Clearly excessive” is not defined. The rule lists eight factors considered in deciding whether a fee is “clearly excessive.” These factors include the time and labor required, the fee customarily charged, the nature and length of the professional relationship, the reputation and ability of the lawyer, and whether the fee is fixed or contingent. A fee may also take into account, in proper circumstances, the result obtained. When the client and the lawyer agree to payment on a time-charge basis, however, the lawyer may not unilaterally charge a bonus or premium on top of time charges for results obtained. Beatty v. NP Corp., 31 Mass. App. Ct. 606 (1991).
A fee may be clearly excessive and in violation of Mass. R. Prof. C. 1.5 even where an attorney performed the work billed according to an agreement with the client, if the fee is grossly disproportionate to what was required in the case and customarily charged for such services. In Matter of Fordham, 423 Mass. 481 (1996), the court censured an attorney who charged $50,000 for an OUI case. The fee was calculated on an hourly basis. The time charged was expended in a conscientious and diligent manner, some of it in becoming conversant with such cases since the lawyer did not have experience in district court. The court nonetheless found the lawyer (an experienced civil litigator) and his associates had devoted substantially more hours than would have been spent by a prudent experienced lawyer and the fee charged was much higher than the fee customarily charged for this type of bench trial. The court observed,
It cannot be that an inexperienced lawyer is entitled to charge three or four times as much as an experienced lawyer for the same service. A client “should not be expected to pay for the education of a lawyer when he spends excessive amounts of time on tasks which, with reasonable experience, become matters of routine.”
Consideration is also given to the work performed for the fee. It is generally improper to charge for non-legal work at legal rates. See the Matter of Kliger, 18 Mass. Att’y Disc. R. 350 (2002), where a public reprimand was imposed for inadequate record keeping and charging an excessive fee by charging legal rates for non-legal services, including acting as caretaker for mentally ill but legally competent client.
Duty to Explain the Fee
The rules require a lawyer who has not regularly represented a client to communicate the basis or rate of the fee, “preferably in writing,” before or within a reasonable time after commencing the representation. Mass. R. Prof. C. 1.5(b). When the fee is not contingent, the fee agreement need not be in writing. Good practice dictates a written fee agreement to prevent surprise or confusion.
Mass. R. Prof. C. 1.5(c) provides that a fee may be contingent on the outcome of the matter for which the service is rendered, except where a contingent fee is prohibited by Mass. R. Prof. C. 1.5(d) or other law. The use of a percentage by an attorney to calculate his reasonable fees at the conclusion of a case does not automatically constitute a contingent fee, although it is a strong indication that a contingent fee is being collected. See Matter of Saab, 406 Mass. 315, 320 (1989). The question is whether the collection of all or part of the fee is contingent by agreement of the lawyer and the client upon the outcome of the case. A percentage fee might be excessive if the client was bound to pay it regardless of the outcome, since a lawyer is not entitled to collect for the risk factor associated with contingent fees in such circumstances. See Matter of the Discipline of an Attorney, 2 Mass. Att’y Disc. R. 115 (1980).
Mass. R. Prof. C. 1.5(c) requires a contingent fee to be in writing. See Grace & Nino v. Orlando, 41 Mass. App. Ct. 111 (1996) (lawyer’s attempt to introduce parol evidence to explain ambiguity improper; any portion of a contingent fee agreement not in writing would not comply with then SJC Rule 3:05 and would be champertous and unenforceable). It must be signed in duplicate, and the lawyer must provide a signed duplicate copy to the client within a reasonable time after making the agreement. The lawyer must also retain a copy of the contingent fee agreement for seven years after the conclusion of the contingent fee matter. There are two exceptions to these requirements. Contingent fee agreements for collection of commercial accounts or insurance subrogation claims need not be in writing and need not contain all the information set forth in Mass. R. Prof. C. 1.5(c).
Mass. R. Prof. C. 1.5(f) suggests a form for contingent fee agreements. A lawyer’s failure to have a properly executed contingent fee agreement ordinarily results in discipline. To the extent that the lawyer includes terms in a contingent fee agreement that materially differ from, or add to, those in this model fee agreement, the lawyer should explain those terms specifically to the client and obtain the client’s consent to the terms in writing. Matter of the Discipline of an Attorney, 451 Mass. 131 (2008).
Mass. R. Prof. C. 1.5(d) prohibits charging a contingent fee in a criminal case and in a “domestic relations matter, the payment or amount of which is contingent upon the securing of a divorce or upon the amount of alimony or support, or property settlement in lieu thereof.”
Lawyers settling contingent fee cases through structured settlements cannot collect the fee by calculating the agreed-upon percentage on the total settlement figure. Instead, the lawyer must either take the applicable percentage from each installment payment as it is received or calculate the total contingent fee based on the present value of the total settlement or of the annuity purchased by the insurer to fund the settlement. (See, however, Doucette v. Kwiat, 392 Mass. 915, n.1 (1984), which cited decisions from other jurisdictions invalidating contingent fees calculated on a present value basis without reaching whether such calculations are permissible in Massachusetts.) Matter of Callahan, 11 Mass. Att’y Disc. R. 23 (1995), and Private Reprimand no. 90-34, 6 Mass. Att’y Disc. R. 439 (1990), are two excessive fee disciplinary cases involving attorneys who took their fees up front on the total of the installment payments rather than applying the percentage to the present value of the settlement, thereby collecting a clearly excessive fee in violation of former DR 2-106. When the possibility of a structured settlement is foreseeable, lawyers should set out the method by which the lawyers’ fees will be calculated in the event of a structured settlement in the written agreement.
Ambiguities in any fee agreement are construed against the lawyer who drafted it. In Matter of Kerlinsky, 406 Mass. 67 (1989), an attorney was publicly censured for, among other things, unilaterally increasing the one-third percentage fee provided for in the contingent fee agreement to one-half of a tort recovery for handling a successful appeal from a defendant’s verdict. Absent a valid supplementary agreement for extra compensation in the event an appeal was taken, the one-third cap set forth in the fee agreement was construed as including all services, including an appeal, which led to the recovery. Kerlinsky was required to make restitution pursuant to G.L. c.221, §51, which provides that a lawyer who unreasonably neglects to pay over money collected for the client shall forfeit five times the lawful rate of interest on the money from the time of demand. See also Grace & Nino, Inc. v. Orlando, supra, construing an “obscurity” in a contingent fee agreement against the attorneys who drafted it.
In Cambridge Trust Company v. Hanify & King, 430 Mass. 472 (1999), the lawyers and client had negotiated a contingent fee agreement which provided that the law firm be paid a percentage of the amount recovered. The underlying claim went to arbitration. The arbitrator awarded damages and attorney’s fees. The firm claimed to be entitled to apply its percentage fee to the aggregate of the awards of damages and attorney’s fees. The client sought to limit the lawyers’ recovery to the awarded fees. The court held that the attorneys were entitled to a percentage of the sum of both awards under the circumstances presented, because the language in the agreement was clear and the clients were sophisticated and had independent counsel during the negotiation of the fee agreement. The court held, however, that “where a contingent fee agreement is ambiguous or silent as to how attorney’s fees are to be treated, the contingent percentage must be calculated on the total amount minus the court-awarded fees, with the attorney awarded the greater of the two amounts.” Hanify, supra at 479. The form of contingent fee agreement in Mass. R. Prof. C. 1.5 has since been amended to reflect this default rule.
Settlement or discharge of outstanding liens is ordinarily part of the services provided in return for a contingent fee. A lawyer who retained additional funds from a structured settlement as a fee for settling liens violated G.L. c.221, §51, and was required to pay the amount withheld plus interest at five times the lawful rate from the date of the client’s demand for payment. Doucette v. Kwiat, 392 Mass. 915 (1984). See also Delano v. Milstein, 56 Mass. App. Ct. 923 (2002), overturning a superior court order requiring a lawyer who wrongfully withheld trust funds to repay the funds plus two times the lawful rate of interest. The Appeals Court ruled that the multiplier of five is mandatory, not discretionary. It is unprofessional conduct to collect a contingent fee for collecting a routine PIP payment. MBA Ethics Op. 77-7.
An attorney discharged from a case before obtaining recovery may not ordinarily recover under the contingent fee agreement but may recover under quantum meruit. For this reason, lawyers should keep time records even if the agreement provides for a contingent fee. Salem Realty v. Matera, 10 Mass. App. Ct. 571 (1980), aff’d, 384 Mass. 803 (1981). If the representation terminates before the conclusion of the case, quantum meruit recovery as a general rule will be granted only if and when the contingency occurs, i.e., the client ultimately obtains a recovery. Liss v. Studeny, 450 Mass. 473 (2008).
Malonis v. Harrington, 442 Mass. 692 (2004), considers the liability of the client and successor counsel, Harrington, for paying a fee claimed by prior counsel, Malonis, whom the client had discharged in good faith prior to the conclusion of a contingent fee case involving an automobile accident. Malonis had performed significant work on the case prior to his discharge, including filing a complaint and conducting discovery. After being discharged, Malonis sent a notice of lien to the client; Harrington; and BFI, the self-insured employer of the operator of the other vehicle involved in the accident. Harrington settled the case with BFI, assuring BFI that he “‘would take care of’” Malonis. Id. At 695. Harrington refused, however, to pay any portion of his fee to Malonis, deeming Malonis’s demand “‘ridiculous.’” Id. Malonis then sued the client, Harrington, and BFI.
The court disposed of the immediate question of liability by holding Harrington responsible for paying the fee due to his explicit assumption of responsibility at the time of settlement for “taking care of” Malonis. The court recognized, however, the confusion that exists in sorting out the respective responsibilities of prior counsel, successor counsel, and the client in satisfying the legitimate quantum meruit demands of a lawyer who is discharged before the conclusion of a contingency fee case.
To address the confusion, the court referred the question to its standing advisory committee on the rules of professional conduct. In the interim, the court laid down certain principles to be followed pending the adoption of a rule. Citing the strong fiduciary duty lawyers owe to clients, the court noted that Rules 1.16(d) and (e) require a withdrawing lawyer to take reasonable steps to protect the client’s interest. That duty includes discussing with the client the consequences of the discharge and the lawyer’s expectation of being paid for work performed. Id. at 700. In addition, Mass. R. Prof. C. 1.4(b) requires a lawyer to advise the client sufficiently to enable the client to make informed decisions about the representation. Consequently, the lawyer who is discharged and the successor lawyer share an obligation to have a “frank discussion” with the client about the discharged lawyer’s expectation of being paid and whether that fee will come from the client’s share or the lawyer’s share of the recovery. Id. at 701. The obligation to communicate the basis of the fee to the client is also found in Mass. Rules of Prof. C. 1.5(b), to have a clear written contingent fee agreement in Mass. R. Prof. C. 1.5(c), and to refrain from charging a clearly excessive fee in Mass. Rules of Prof. C. 1.5(a). “A client should never be made to pay twice.” Id. at 702.
To avoid disputes in the future, we would advise successor counsel, before he or she receives the case, to confer with the client on the issue and to execute a written agreement unambiguously identifying the party responsible for payment of former counsel’s reasonable attorney’s fees and expenses.
Id. at 702. Absent an express agreement to the contrary, the client will properly assume that both lawyers will be paid from the contingent fee obtained under the second agreement. Id. at 701-702. The “advice” given in the opinion “shall govern the situation” until further recommendations are made.
Mass. R. Prof. C. 1.5(c) also requires in contingent fee cases that the lawyer provide the client with a written statement as to the outcome of the matter and, if there is a recovery, showing the remittance to the client and the method of its determination. In addition, a lawyer must account for the receipt, maintenance, and distribution of funds. Mass. R. Prof. C. 1.15.
Mass. R. Prof. C. 1.8(e) permits the repayment by the client of court costs and expenses of litigation to be contingent on the outcome of the matter. This option is reflected in the language of clause 3 of the form of contingent fee agreement set out in Mass. R. Prof. C. 1.5.
Duty to Provide Notice to Clients as Fees are Withdrawn
Mass. R. Prof. C. 1.15 was substantially amended as of July 1, 2004. The rule mandates detailed accounting and record keeping for client funds. Mass. R. Prof. C. 1.15(d) requires, first, that upon final distribution of any trust property or upon request by the client or third person on whose behalf a lawyer holds trust property, the lawyer shall promptly render a full written accounting regarding such property, and second, that on or before the date on which a withdrawal from a trust account is made for the purpose of paying fees due to a lawyer, the lawyer shall deliver to the client in writing an itemized bill or other accounting showing the services rendered, written notice of amount and date of the withdrawal, and a statement of the balance of the client’s funds in the trust account after the withdrawal.
Division of Fees
Mass. R. Prof. C. 1.5(e) governs division of fees among lawyers. Lawyers are permitted to divide fees with members of their firms or with former members pursuant to a retirement or settlement agreement without client consent. Mass. R. Prof. C. 1.5(e) provides that a lawyer may divide a fee with a lawyer who is not a partner or associate in the same firm only if the client has been informed that a division of fees will be made, consents to the joint participation, and the total fee is reasonable. Although the rule does not so specify, the SJC has held that the client’s consent must be in writing. See Saggese v. Kelley, 445 Mass. 434 (2005). Thus, the client must consent in advance and in writing to the lawyer’s payment of a referral fee. Further, the comments to the rule note that, although the lawyer is not required to volunteer the specific fee division between counsel, if the client requests that information, then the lawyer is required to disclose the share of each lawyer.
In Matter of Kerlinsky, 406 Mass. 67 (1989), the attorney violated former DR 2-107(A)(1) by withholding an additional 15% of a tort recovery to pay for services of an out-of-state attorney when the client did not receive full disclosure and did not give his prior consent to the arrangement. See also Matter of Fine, 12 Mass. Att’y Disc. R. 149 (1996), a public reprimand holding that a lawyer who divides his fee with another lawyer is obligated to assure himself that the client has consented to the fee split.
A lawyer has special responsibilities if someone other than the client is paying the fee. Mass. R. Prof. C. 1.8(f) provides that the client must be consulted and consent in advance if the lawyer’s fee is to be paid by a person other than the client, and, of course, that there be no interference with the lawyer’s independent professional judgment or with the client-lawyer relationship. The client does not surrender any rights or privileges because he or she is not paying the fee. It is the client, not the person paying the fee, who directs the lawyer’s actions.
Fee Disputes
When the client disputes the right of an attorney to withdraw a fee from funds the lawyer is holding, the lawyer may not pay himself or herself and leave the client to his or her remedies. The lawyer is required to turn over to the client the funds belonging to the client and maintain the disputed funds in escrow until the dispute is resolved. Mass. R. Prof. C. 1.5(c). Lawyers should attempt to avoid fee controversies with clients and should not lightly sue a client. Among other concerns, a lawsuit against a client for fees is an invitation to a counterclaim for malpractice. See Fishman v. Brooks, 396 Mass. 643 (1986).
Mass. R. Prof. C. 1.15(b)(2), as revised effective July 1, 2004, restates and clarifies an attorney’s obligation to hold disputed fees in trust. The revised rule confirms that a lawyer who knows that the right of the lawyer or law firm to receive such portion is disputed shall not withdraw the funds until the dispute is resolved. A new provision of the rule requires that the disputed portion must be restored to a trust account until the dispute is resolved if the right of the lawyer or law firm to receive such portion is disputed within a reasonable time after the lawyer sends the notice required by Rule 1.15(d) that the funds have been withdrawn.
G.L. c. 221, §50, is the only statute that establishes an attorney’s lien (“charging lien”). There must be an authorized commencement of an action, counterclaim, or other proceeding in any court or before any state or federal department, board, or commission. In such matters, the attorney may assert a lien for reasonable fees upon the judgment, decree, or other order in the client’s favor and upon the proceeds derived therefrom. Boswell v. Zephyr Lines, Inc., 414 Mass. 241 (1993); Cohen v. Lindsey 38 Mass. App. Ct. 1 (1995).
The attorney may not withhold the file from the client to collect a fee. Mass. R. Prof. C. 1.16(e) requires an attorney to make available to a former client all papers and documents that the client supplied and all pleadings and other court papers. The lawyer can require reimbursement for out-of-pocket expenditures for items such as depositions, photographs, reports, or medical records before turning them over and, if the lawyer and client have not entered into a contingent fee agreement, may withhold work product for which the client has not paid. Payment for these expenditures and work product may not be required as a condition of turning over the documents if withholding the materials would prejudice the client unfairly.
In Torphy v. Reder, 357 Mass. 153 (1970) the court held that the attorney may not assert a possessory lien upon client property (stock certificates and bankbooks) held for a special purpose or as escrow agent. A lawyer may not secure a fee by taking a lien on the subject matter of the litigation except in contingent fee cases. Mass. R. Prof. C. 1.8(j). MBA Op. 91-1 advises that a lawyer may not take as a retainer in a divorce case a promissory note secured by the marital home where it is foreseeable that the home may be part of the subject matter of the divorce; Private Reprimand 92-32, 8 Mass. Att’y Disc. R. 325. Where otherwise appropriate, an attorney under Mass. R. Prof. C. 1.8(j) may acquire a lien granted by law, including pre-judgment attachment or trustee process, to secure the collection of fees. See also BBA Op. 93-2.
Attorneys sometimes send notice to successor counsel or an insurer regarding fees owed. There is no authority for requiring an insurance company or successor counsel to honor such notices. It would be deceptive and misleading on the part of the attorney to suggest otherwise. The former client’s directives must take precedence. A notice sent to either successor counsel or an insurance company must not imply that the attorney has an enforceable lien unless a statutory lien has been filed under G.L. c.221, §50.
Mass. R. Prof. C. 1.6(b)(2) permits a lawyer to reveal confidences or secrets necessary to establish a claim on behalf of the lawyer in a controversy between the lawyer and the client. Comment 19 to Rule 1.6. However, disclosure of information must be restricted to that information and those persons essential to collect the fee and must not unduly prejudice the client. See Private Reprimand 94-2, 10 Mass. Att’y Disc. R. 309 (1994) (lawyer revealed confidences and secrets beyond those “necessary” to collect the fee).
Retainers
A “classic” retainer binds the attorney to employment for ongoing services and to the exclusion of adverse parties. The retainer is seen as payment for the establishment of this exclusive relationship. The advantage to the client is in securing the services of the lawyer of choice over a period of time, while the lawyer foregoes the possibility of employment by others whose interests might be adverse to the client. The payment is in return for the attorney’s agreement to be bound to the client and is therefore “earned” when paid. Blair v. Columbian Fireproofing Co., 191 Mass. 333 (1906). Retainers may be considered as earned when paid when the attorney makes clear to the client that the attorney will have to forego other work to take on the case and the total fee is reasonable.
More typically, the word “retainer” refers to the payment of a fee in advance to the lawyer for a particular service or in a particular case. The fee is earned as services are provided. Retainers paid in advance are client funds and must be deposited to a trust account until earned by the lawyer. Mass. R. Prof. C. 1.15.
Retainers should be deposited to an IOLTA account unless the lawyer believes the retainer will be held for a substantial period of time or unless the retainer is so large that it will generate significant interest. In that case, the retainer should be deposited to an individual trust account. Mass. R. Prof. C. 1.15(e). Since the lawyer may not commingle personal funds with client funds, the lawyer must promptly withdraw the fee from the client funds account as it is earned. Mass. R. Prof. C. 1.15(b)(2). Matter of Karahalis, 7 Mass. Att’y Disc. R. 130 (1991).
As noted above, Mass. R. Prof. C. 1.15 requires lawyers to maintain appropriate records regarding the receipt, maintenance, and distribution of client funds. Retainers are in this category. Mass. R. Prof. C. 1.15(d) requires the attorney to render a full written accounting upon final distribution of trust property or upon request of the client or third person entitled to the funds, as well as to provide an itemized bill or accounting, written notice of the amount and date of the withdrawal, and a statement of the balance each time that the lawyer withdraws any part of the retainer from the trust account to pay his or her fees. Mass. R. Prof. C. 1.5(c) also requires written accountings at the conclusion of contingent fee matters.
A flat fee or non-refundable fee, as with all other fees, must be reasonable. The fee may not interfere with client’s right to discharge the attorney at any time. Mass. R. Prof. C. l.16(a)(3). In Smith v. Binder, 20 Mass. App. Ct. 21 (1985), the clients paid the attorneys a retainer of $8,500 for representation in criminal case. The clients sued the attorneys for an accounting and refund after they discharged the attorneys three weeks later. The attorneys claimed the fee was non-refundable and asked the court to take judicial notice that it is an accepted custom and practice among attorneys of the criminal bar that retainers taken in connection with representation of criminal defendants are non-refundable. The trial judge found that the plaintiffs knew the fee was non-refundable. The Appeals Court reversed, finding no evidence to support that finding. In a footnote, the Appeals Court noted authority that requiring a client to agree to a non-refundable fee was unethical. In its opinion, the Appeals Court observed that the right to change lawyers at any time was “[e]ssential to the lawyer client relationship” and that, if the lawyer were permitted to keep the unearned portion of the fee, the right to change lawyers would be of little value. See also Matter of Cooperman, 633 N.E.2d 1069 (N.Y.Ct.App. 1994), holding that non-refundable special retainers are unethical and unconscionable, and MBA Op. 95-2, advising that an attorney may not enter into a fee agreement with a client for a particular case or service if the agreement requires the client to pay a non-refundable retainer, citing the Cooperman decision.
For further guidance about the ethics of charging and collecting fees, please visit the Office of Bar Counsel website, www.mass.gov/obcbbo.
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