OPINION 391
February 1978

DR 9-102.

HANDLING OF FUNDS RECEIVED BY AN ATTORNEY A Grievance Committee has requested an ethics opinion concerning the proper handling of funds received by an attorney. The Committee has provided five specific fact situations which seek an interpretation of DR 9-102 and other provisions of the Code of Professional Responsibility.

DR 9-102 is entitled: "Preserving Identity of Funds and Property of a Client" and provides:

"(A) All funds of clients paid to a lawyer or law firm, other than advances for costs and expenses, shall be deposited in one or more identifiable bank accounts maintained in the state in which the law office is situated and no funds belonging to the lawyer or law firm shall be deposited therein except as follows:

      1. Funds reasonably sufficient to pay bank charges may be deposited therein.
      2. Funds belonging in part to a client and in part presently or potentially to the lawyer or law firm must be deposited therein, but the portion belonging to the lawyer or law firm may be withdrawn when due unless the right of the lawyer or law firm to receive it is disputed by the client, in which event the disputed portion shall not be withdrawn until the dispute is finally resolved. "

(B) A lawyer shall:

      1. Promptly notify a client of the receipt of his funds, securities, or other properties.
      2. Identify and label securities and properties of a client promptly upon receipt and place them in a safe deposit box or other place of safekeeping as soon as practicable.
      3. Maintain complete records of all funds, securities, and other properties of a client coming into the possession of the lawyer and render appropriate accounts to his client regarding them.
      4. Promptly pay or deliver to the client as requested by a client the funds, securities, or other properties in the possession of the lawyer which the client is entitled to receive."

This provision creates a two-fold duty insofar as the handling of funds belonging to a client are concerned. DR 9-102(A) creates the requirement that funds which belong in part to a client or clients at the time those funds come into the possession of the attorney must be placed into a "trust" account or accounts which are separate and apart from the attorney's personal accounts or the law firm's operating accounts; and DR 9-102(B)(3) creates the requirement that an attorney must maintain complete records of those funds and render appropriate accounts to his client regarding them. Thus, an attorney must keep accurate bookkeeping records and must segregate those funds which belong in part to the client from those funds which belong entirely to the attorney.

The policy behind such a rule was stated succinctly in the recent case Archer v. State, 548 S.W.2d 71 (Tex.Civ.App. 1977, writ ref'd. n.r.e.) at 74, to wit: "DR 9-102 recognizes that an attorney will be entrusted with the client's moneys in the course of handling his affairs. It guards against the dangers of commingling; the probability in some cases, the possibility in many cases, and the danger in all cases that such commingling will result in loss of the clients' funds. . . . It calls for a reasonable manner of handling the clients' funds; it is a simple directive as to the manner of handling, rather than a misappropriation, which is another matter; it avoids the appearance of impropriety, and assures that there will be no loss of the clients' funds despite 'good intentions.' To comply with it, all that is required is good office management."

Because the requirements created by DR 9-102 are imposed only upon funds which belong at least in part to the client, an initial determination must be made as to the nature and ownership of funds coming into the possession of an attorney. Often such a determination will involve the construction of a contract of employment and, thus, will involve questions of contract law as well as questions of ethics. However, the Code is not entirely silent on this matter. DR 2-110 (A)(3) provides: "A lawyer who withdraws from employment shall refund promptly any part of a fee paid in advance that has not been earned."

DR 2-110(B)(3) provides that an attorney must withdraw when the attorney has been discharged by the client. Therefore, when a fee has been paid in advance and when an attorney withdraws from the representation of a client, the attorney must return that portion of the fee which has not been earned. The client, then, continues to have an interest in those funds paid to an attorney which represent the advance payment of a fee which has not been earned.

The first fact situation proposed by the Grievance Committee deals with the advance payment of a fee. That situation provides:

  1. An attorney agrees to represent a client in a legal matter for an hourly fee, to be billed monthly. The client is required to pay some amount in advance for the attorney's fee and for estimated costs and expenses. The attorney (a) deposits the entire amount received in his general operating account, (b) establishes an account payable on his firm's accounting records reflecting a credit to the client for the full amount, and (c) thereafter renders monthly billings to the client reflecting the amounts earned as fees and paid for costs and expenses, and charging the client's account payable.
  2. In this fact situation the attorney receives an advanced payment for estimated costs and expenses and an advance fee which is not yet earned and which may presumably be returned if the monthly billing on an hourly basis for actual work done does not exceed the advance payment of the fee. In this situation the client continues to have an interest in that portion of the fee which is not yet earned. Because the funds in question do belong, in part, to the client, the handling of such funds must conform to the requirements imposed by DR 9-102 (A) and (B)(3).

    The attorney in the first fact situation does, apparently, maintain accurate records and renders appropriate accounts; however, he fails to segregate these funds which belong in part to the client from those funds which belong entirely to the attorney. The funds representing the advanced payment of a fee in this fact situation must be placed into a separate "trust" account.

    DR 9-102(A) does specifically exclude advances for costs and expenses from this requirement that funds belonging to the client be placed into the trust account. This, of course, tends to support the proposition that other advances (such as for payment of fees) belong in the trust account. Although the attorney may deposit advances for costs and expenses in his general operating account, the safer practice probably would be to place all of the funds into the trust account when costs and expenses are merely estimated and to make the necessary disbursements from that account. See Ethics Opinion 245 (1961) which states that the additional bookkeeping required by the ban on commingling is a necessary burden of the profession.

  3. An attorney agrees to represent a client in a legal matter on the same basis as 1 except that a portion of the advance fee is a non-refundable retainer, which, while it will be applied to the hourly work done on the case, is not to be refunded in the event it exceeds the hourly work done. The entire advance fee was deposited by the attorney to his general operating account, and an account payable was establish on the attorney's books reflecting a credit to the client of only that portion which is refundable.
  4. A non-refundable retainer belongs entirely to the attorney at the time it is received in that the fee is earned at the time the fee is received; therefore, it may be placed into the attorney's general operating account. However, that portion of the advance fee which represents payment for services not yet rendered and which is refundable belongs in part to the client at the time the funds come into the possession of the attorney and, therefore, must be deposited into a separate, "trust" account. When a client produces one check which represents a non-refundable retainer and a refundable advance payment, the entire check should be deposited into the 9-102 trust account. Because the attorney may withdraw those funds which are due and owing to the attorney pursuant to 9-102 (A)(2), the attorney may then transfer the funds which represent the non-refundable retainer into his general operating account.

  5. An attorney agrees to represent a client in a legal matter for a reasonable fee to be determined and billed at the conclusion of the matter. A retainer is required which is to be applied to the total fee shown to be due by the final bill. The attorney deposits the amount received in his general operating account.
  6. The retainer in this fact situation is to be applied toward payment of the final bill and would appear to be nothing more than an advance payment similar to that payment described in the first fact situation. If the payment is not earned at the time it is made to the attorney, the funds do belong in part to the client and must be placed into the trust account. In such a case the client would be entitled to a return of the unearned fee and should have that return protected by the rule against commingling just as the client who deposits property with the attorney for its safekeeping. If, of course, the retainer is non-refundable regardless of the work done and is owned entirely by the attorney at the time he comes into possession of those funds, they need not be placed into the trust account. In this third fact situation it appears that the retainer is refundable and does not belong entirely to the attorney at the time it comes into his possession; therefore, these funds must be deposited into the 9-102 trust account.

  7. Does it make a difference in 3 if the retainer received is only a small portion of the attorney's estimate of the total fee, i.e., is $100.00 on what is estimated to be about $1,000.00?
  8. Regardless of the estimated size of the retainer in relation to the total fee, the retainer does not belong entirely to the attorney until it is earned. As long as the client retains an interest in the funds, those funds must be deposited in the trust account. When the retainer is earned and belongs entirely to the attorney, the funds representing the earned portion of the payment may be withdrawn pursuant to DR 9-102 (A)(2).

  9. An attorney agrees to represent a client in a legal matter for a flat fee payable in advance. There is no further understanding concerning the refundability of the fee either in whole or in part. Upon receipt of the money from the client, the attorney deposits the funds in his firm's general operating account.

Although the determination of the nature or ownership of funds coming into the possession of an attorney may involve the construction of the employment contract and, thus, questions of contracts law, the general rule as to the proper handling of such funds is that, when the client owns a portion of these funds that portion belonging to the client must be placed in the 9-102 trust account and must be segregated from funds belonging entirely to the attorney. If it should be determined subsequently by a court that this advance fee is refundable unless and until fully earned by the attorney, the attorney will have violated DR 9-102 if he fails to place those funds in the trust account. The better practice, then, would obviously be to place all funds whose nature or ownership is questioned or disputed into the 9-102 trust account. This practice has been recognized in a long line of New York County Lawyers' Association ethics opinions dealing with the handling of disputed funds which are reproduced as Opinions numbers 1681, 1945, 1999, and 7081 in Digest of Bar Association Ethics Opinions and 1970 Supplement to the Digest of Bar Association Ethics Opinions edited by Olavi Maru.

This practice of placing advanced fees into the 9-102 trust account and this self-restraint as to the use of fees until they are earned would not impose significant burdens upon attorneys in light of DR 9-102(A)(2) which provides that those portions of funds so deposited may be withdrawn by the attorney when due unless the right to receive those funds is disputed by the client. The only real burden imposed upon the attorney in such a case involves some additional bookkeeping. As Ethics Opinion 241 (1961) has noted, additional bookkeeping is a necessary burden of the profession. In light of the harm to the profession and the public caused by the loss of clients' funds and by the mere appearance of impropriety, it is a relatively small burden for the profession to bear.

The attorney in such a situation as this should have a thorough understanding with his client as to the ownership of the flat fee paid and whether any part would be refundable in event of discharge. Some attorneys do not have a clear understanding with their client regarding the ownership of a flat fee payable in advance and whether any part would be refundable in event of discharge of the attorney and this should be avoided by a proper understanding and agreement between the attorney and client.

In response to this specific fact situation, the attorney is not entitled to the full use of the fee until that fee has been earned. DR 2-110 (A)(3). There might be some question as to whether the attorney can be required to return an unearned portion of a fee when the client has discharged the attorney without sufficient cause. See, for example, White v. Burch, 33 S.W.2d 512 (Tex. Civ. App. 1930, writ ref'd.), and Howell v. Kelly, 534 S.W.2d 737 (Tex. Civ. App. 1976, no writ as yet) which deal with contingent fee contracts. Regardless of the resolution of the legal question concerning the ownership of the full fee in such a situation, the fact remains that DR 2-110(A)(3) would require the return of an unearned fee in certain situations and, thus, creates a continuing obligation on the part of an attorney to insure that any unearned portion of a fee be protected and available for recovery by the client.

At the time the advance fee is paid to the attorney in the fact situation, there is no guarantee that the attorney will be entitled to the full amount. Therefore, the attorney must place those funds into the 9-102 trust account and may withdraw portions of those funds pursuant to DR 9-102(A)(2) when that portion of the fee is due (earned) and not before.