May 2007
Featured Disciplinary Case
Topic
Any written retainer agreement, regardless of the type of retainer contemplated, should clearly define the kind of retainer being paid. In the event that a jurisdiction recognizes advance payment retainers, the fee agreement should, at the very least, be in writing, use the term ‘advance payment retainer’, and clearly state that the funds become the property of the lawyer when paid and that the funds will not be held in a client trust account.
Summary
Dowling v. Chicago Options Associates, Inc., et al. (DLA Piper Rudnick Gray Cary (US), LLP), ___ N.E.2d ___, 2007 WL 1288279 (Ill. May 3, 2007). In this case of first impression in Illinois, the viability of advance payment retainers was acknowledged. Previously, only two types of retainers were explicitly recognized in Illinois: classic and security interest retainers. Also referred to as a true or general retainer, a classic retainer is paid by a client to the lawyer in order to secure the lawyer’s availability during a specified period of time or for a specified matter. This type of retainer is earned when paid and immediately becomes property of the lawyer, regardless of whether the lawyer ever actually performs any services for the client. Consistent with the law in a majority of jurisdictions, under a security retainer arrangement, funds paid to the lawyer are not considered present payment for future services. Rather, the retainer remains the property of the client until the lawyer applies it to charges for services that are actually rendered. Any unearned funds are refunded to the client. The purpose of a security retainer is to secure payment of fees for future services that the lawyer is expected to perform. Pursuant to Rule 1.15(a) of the Illinois Rules of Professional Conduct, a security retainer must be deposited in a trust account and kept separate from the lawyer’s own property.
The issue as to the viability of an advance payment retainer developed because Dowling obtained two judgments against a man named Davis totaling over $817,000. Thereafter, Davis set out to shield his assets. In February 2003, Davis hired mega-firm Piper to represent him in connection with the purchase of a home in Florida. For this purpose, Davis deposited a large sum of money in Piper’s trust account. The purchase of the home was completed on February 24, 2003, with funds paid from the trust account. On February 26, 2003, Davis and his wife authorized Piper to allocate about $100,000 of that money as a retainer, based upon an agreement referred to by the parties as an “engagement letter.” Piper transferred that money to its general account and applied it to monthly bills attributable to work performed for Davis and Seibel in connection with the purchase of their Florida home and, later on, in connection with the instant Illinois litigation with Dowling. The engagement letter was addressed to Davis and Seibel and stated, in pertinent part:
We are pleased to have the opportunity to represent you regarding your purchase of a home in Florida and to give you general advice regarding asset protection….We customarily send monthly invoices for services rendered and other charges incurred for your account during the previous month. The monthly invoice details the work performed and the types of charges incurred. Payment will be due thirty (30) days after the date of our invoice. Payment should be made in U.S. dollars, in checks or drafts payable to ‘Piper Rudnick LLP.’…You have authorized us to allocate $100,000 of the cash on hand as a retainer. These funds will be applied toward payment of the final monthly invoice containing entries with respect to the above-referenced matter and will be subject to repayment by us if the amount of our fees for work done and costs incurred that remain unpaid do not equal the amount of the retainer then held by us. Under such circumstances, the balance of the retainer would then be returned to you when our representation of you on this matter ceases. We reserve the right to use any part of said funds to satisfy a delinquent payment, and to discontinue our representation until you forward funds to restore the full retainer….Finally, I remind you that we are taking very aggressive positions to attempt to protect your assets and satisfy your related concerns. Those positions are likely to be attacked in litigation in Florida or Illinois. While we believe that our advice will, more likely than not, be upheld in court, given the animosity between you and the judgment creditor, litigation is a virtual certainty.”
Dowling served a citation on Piper based upon the transfer of money from Davis' Chicago bank account to Piper for the purchase of the Florida home. Dowling wanted Piper to turn over all money belonging to Davis held in Piper's
trust account (emphasis supplied) or, in the alternative, to enjoin Piper from distributing from its trust account any monies received from Davis.
Now let’s throw gasoline onto the fire. At a hearing on the citation, Piper, through one of its partners, told the circuit court that Piper was not holding any funds for Davis in its trust account (emphasis supplied). Based on this representation, the court denied Dowling's motion. Please note, at about this period of time there remained a balance on the retainer of $87,576.53, and that balance sat safely in Piper’s general account.
Dowling's counsel subsequently learned that Piper had indeed received funds from Davis which it had deposited in its general account. A second citation to discover assets issued. Piper produced records showing payments to Piper. Dowling then filed a motion to turnover assets, requesting that Piper pay Dowling $137,576.53 ($87,576.53, the balance on the $100,000 retainer and another $50,000 paid to Piper at a later time). The circuit court granted Dowling's motion and ordered Piper to pay $137,576.53.
On appeal, Piper argued that the court erred in ordering the funds turned over. Piper argued that the retainers belonged, not to Davis, but to Piper. According to Piper, the only way Davis could have reclaimed those funds was to terminate Piper's representation of him. The appellate court disagreed, finding that Piper's argument concerning the ownership of the retainer funds was “disingenuous.”
A majority of the Supreme Court disagreed with the appellate court ruling. Importantly, the Court was unanimous about the viability of an advance payment retainer. Three justices dissented, however, as to the application of the advance payment retainer based on the facts of this specific case. Tellingly, Justice Freeman wrote:
I fully agree with the majority's thorough and well-reasoned decision to recognize the existence and validity of “advance payment retainers” as an option available to Illinois lawyers and their clients in connection with the payment and use of retainers. I further agree with the majority's decision to identify the specific requirements that must be present in a fee agreement between an attorney and client in order for it to constitute an advance payment retainer…. must part company with the majority, however, with respect to the analysis and holding…that the $100,000 paid by Davis…to Piper in this case was an “advance payment retainer.” It is my belief that the appropriate disposition of this appeal is to remand the cause to the circuit court for further proceedings in which both parties, Dowling and Piper can present evidence with respect to the proper characterization of the fee retainer and the acknowledged ambiguities contained within that document. Despite relying upon several federal bankruptcy court decisions which state that the determination of the type of retainer which exists between an attorney and client is a question of fact to be decided in the trial court, the majority disregards these precepts. Instead, this court-a court of review-sits in this case as a finder of fact and bases its holding solely upon the February 25, 2003, engagement letter-the same letter, I must point out, which the majority candidly acknowledges to be “ambiguous.” I submit that these points reveal internal inconsistencies within the majority opinion.
In concluding that Illinois now recognizes an advance payment retainer, the Court cited as persuasive authority the
Client Trust Account Handbook published in 2001 by the Illinois ARDC. The handbook explicitly recognizes the distinction between security retainers and advance fee payments.
“[W]ith advance fee payments, the client agrees to pay in advance for some or all of the services that the lawyer is expected to perform on a particular legal problem. The prepayment is applied against the lawyer’s hourly fee and the lawyer spends down the retainer as services are rendered. In Illinois, unless otherwise provided by statute or court order, the specific terms of the fee agreement with the client determine whether such prepayments remain the client’s funds and must be deposited in the trust account until earned or whether they are the lawyer’s funds and therefore must not be placed in the trust account. If a lawyer and a client agree in writing or orally that the lawyer will deposit the prepayment in the client trust account and bill against it as the representation proceeds, the funds remain the property of the client and must be deposited in the trust account. Withdrawals can be made only with notice to and agreement of the client. On the other hand, if the lawyer and client agree that the prepayment is immediate compensation for the lawyer’s commitment to perform future services, e.g., a flat fee agreement, the funds are the property of the lawyer and may be deposited in the lawyer’s operating or business account.” Client Trust Account Handbook, pt. IV (A)(5).
The Court ruled that any written retainer agreement, regardless of the type of retainer contemplated, should clearly define the kind of retainer being paid. If the parties agree that the client will pay a security retainer, that term should be used in the agreement; it should also state that the funds remain the property of the client until used to pay for services rendered and that the funds will be deposited in a client trust account. If the parties determine that an advance payment retainer best meets the client’s needs, the written agreement must use that term and clearly state that the funds become the property of the lawyer when paid and that they will not be held in a client trust account. Importantly, “advance payment retainer agreements
must be in writing and they must clearly disclose to the client the nature of the retainer, where it will be deposited, and how the lawyer or law firm will handle withdrawals from the retainer in payment for services rendered.”(emphasis supplied) Further, the Court ruled that:
[A] written agreement providing for an advance payment retainer must contain language advising the client of the option to place his or her money into a security retainer. The agreement must clearly advise the client that the choice of the type of retainer to be used is the client’s alone; provided, however, that if the attorney is unwilling to represent the client without receiving an advance payment retainer, the agreement must so state, including the attorney’s reasons therefor. In addition, an advance payment retainer agreement must set forth the special purpose behind the retainer and explain why an advance payment retainer is advantageous to the client. Finally, in the event that the parties’ intent cannot be gleaned from the language of their agreement, we conclude that the agreement must be construed as providing for a security retainer....construing an unclear retainer agreement to establish a security retainer will provide the greatest protection for a client’s funds, since they will not be subject to the lawyer’s creditors and withdrawals from the funds may be made only with notice to and agreement of the client. Reimbursement to the client of any unearned fees may also be facilitated by construing an unclear agreement as a security retainer, since the funds must be held separate from the lawyer’s own funds.
The holding in the case has caused substantial discussion among NOBC members, especially Bar Counsel hailing from jurisdictions that do not recognize advance payment retainers. As one longtime Bar Counsel noted: “I haven't [yet] read the case, but that language from the summary makes it sound pretty scary. The "advance payment retainer" which causes ownership of the funds to pass immediately to the lawyer sounds more to me like the kind of money that should be held in trust.”
