Sorted by Commenter - Ethics - State of California

RRC – Rule 1.5 [4-200]
E-mails, etc. – Revised (6/1/2010)
extent lawyer L holds funds that belong to client C, certain authorities can in proper
circumstances seize C’s property while it is in the hands of L. Common instances are, primarily,
the right of the government to seize what it considers to be stolen or diverted moneys of a
criminal defendant, C, deposited anywhere including in the trust account of C’s lawyer L.
Similar rights of sequestration exist with respect to assets of a bankrupt client C, who may have
paid his lawyer L a deposit to assure the lawyer’s payment for services during bankruptcy
administration, or where the client engages the lawyer for almost anything, but perhaps
particularly to contest a tax assessment, and the IRS levies a jeopardy assessment and obtains
an instant right of seizure. In all these cases, if the lawyer is not paid, the lawyer will not accept
the engagement; and in each instance the client needs a lawyer and is prepared to pay. The
true adverse interest at that point is that of the authorities who have the potential of seizing the
assets. When this subject came up before the Commission in the 1980s, someone argued that
the suspects had access to the public defender; so, protecting the possibly tainted assets with
which the lawyer would be paid against seizure did not matter. But that argument did not
prevail, and I have not heard it this time.
If we want to protect the parties’ mutual expectation that the client can pay the lawyer in
advance and that the lawyer will be paid at the outset without fear of retroactive sequestration,
we cannot have the front end fee be not deemed paid in full on receipt. If we go that way, we
will then have to separately address the other issue, how to protect the client against the
possibility that the lawyer will not perform as contracted.
That brings me to the law on point. As I mentioned in an earlier message, I had a legal matter
recently which required me to parse this part of the law. I wish that I had then been aware of
the material Randy provided with his 5/19/10 email, but the Chandler/Shechet article had not
been published yet when I needed it. That article, and the accompanying State Bar Arbitration
Advisory, correctly state the law as it now stands: “True retainers,” and only true retainers, are
fully earned on receipt; but every other form of arrangement involving fees paid in advance –
however defined and structured – is not a true retainer and is not earned until (and unless) work
defined in the engagement letter has been performed. But a “true retainer” is “rare in today’s
marketplace,” to quote the Arbitration Advisory; and that is a generous description. Under the
case law as it has developed since Baranowksi, for better or worse, if there is an expectation
that even the slightest smidgen of work will be performed and payment for it covered or
contained in the front end payment, that payment is not a true retainer. It thus becomes subject
to seizure in appropriate circumstances, and is not an unchallengeable assurance for payment
to the lawyer as s/he sets out on the case journey.
If we want to protect the expectations of both client and lawyer that the fee, once paid, will
actually compensate the lawyer for the entire expected engagement, we have to start at the
beginning, meaning that we must redefine the front end fee as actually and fully earned even
though the services have not been fully performed. That is not in itself a corruption of legal or
economic standards: for example, there are accounting standards which allow the taking of a
payment for future deliveries into income when received, subject perhaps to a reserve against
nonperformance. Thus, a fee paid to a plumber or to a lawyer on December 31 for work to be
done the next year is income to a cash basis taxpayer in the calendar year of receipt. If I am
paid for a carload of wedgies to be delivered in due course, I have received the payment as
income when I receive the money, though I may have to post a reserve for the cost of
manufacture and delivery of the goods. Thus, from an ordinary business and accounting
perspective, there is nothing wrong with a provider being paid in advance for what he provides.
If there is a nondelivery, the buyer has his recourse, which we all know well.
RRC - 4-200 [1-5] - E-mails, etc. - REV (06-01-10).doc -155-
Printed: June 2, 2010