It all starts with your retainer agreement – get it right!
Contingency fee retainer agreements
In California, retainer agreements in personal-injury or wrongful-death matters must comply with Business and Professions Code section 6147.
All Medical Injury Compensation Reform Act (“MICRA”) contingency-fee agreements must comply with Business and Professions Code section 6146.
A lawyer’s failure to comply with the statute renders the retainer agreement voidable at the client’s election. If the retainer agreement is voided for failure to follow the applicable statute, the attorney is only entitled to recover quantum meruit (“reasonable fee”) for the attorney’s services and costs incurred in successfully prosecuting the matter. (Guiterrez v. Girardi (2011) 194 Cal.App.4th 925, 932-933.) All attorney fee agreements are strictly construed against the attorney. (Severson & Werson v. Bolinger (1991) 235 Cal.App.3d 1569, 1572.)
Business and Professions Code Section 6147 sets forth the rules applicable to contingent-fee contracts. The section mandates that all contingency-fee retainer agreements be in writing and that the client be provided with a copy of the signed contract.
Section 6147 requires that a contingency fee contract include:
(1) A statement of the contingency fee rate that the client and attorney have agreed upon;
(2) A statement of how disbursements and fees incurred related to the litigation or settlement will affect the contingency fee and the client’s ultimate recovery;
(3) A statement of any additional expenses the client might have to
compensate the attorney for;
(4) A statement that the fee arrangement is negotiable between the attorney and client and not fixed by law, (provided the claim is not subject to Section 6146-MICRA); and
(5) A statement that the fee rates are the maximum limits for the contingency fee rate and that the attorney and client have the option to negotiate a lower rate if the claim is subject to section 6146-MICRA.
Percentages that can be collected in a contingency fee contract are not fixed under the code, unless governed by the MICRA codified at Section 6146.
Clarity in the agreement
Business and Professions Code Section 6148 states that a retainer agree-ment must clearly explain the basis of compensation: Indicate what the fee percentage(s) are, whether the agreement includes an hourly rate component, statutory fees, or any other expenses that a client will be liable to pay. (Bus. & Prof. C. Section 8148, subdivision (a)(1).)
Section 6148 also requires that attorneys disclose the nature of legal services that will be provided as well as the responsibilities of both parties to perform the contract. (Bus. & Prof. C. Section 6148, subdivision (a)(2), (3).) One should spell out in detail the nature of the dispute for which you are being retained to represent the client. This becomes increasingly important should another dispute arise that requires separate representation for the client. It is important to note that should a dispute arise, any ambiguity in a fee contract will be interpreted in favor of the client, not the attorney. (Mayhem v. Beninghoff (1997) 53 Cal.App.4th 1365, 1370.)
Are attorneys’ fees capped?
Attorneys’ fees obtained through actions on behalf of minors or incompetent adults require court approval. (Family Code § 6602; Probate Code § 2644(a).) Many, but not all, courts cap such fees at 25 percent of net recovery. However, Local Rules capping these fees, such as former LASC Local Rule 10.79(c)(3), have now been preempted by California Rules of Court, rule 7.955(d). Thus, if the contingency fee agreement calls for a fee in excess of 25 percent, a court has discretion to approve it after evaluation of the factors set forth in rule 7.955(b).
- The contingency fee contract must set forth how costs will affect the calculation of the fee, i.e.. whether costs are to be taken from the client’s gross or net recovery.
- The contingency fee contract must set forth the circumstances under which the client could be required to pay the attorney for work which is related to the matter covered by the retainer agreement at issue, but not covered by the retainer itself. That is, appeals, motions for new trial, the defense of cross-complaints against the client, etc.
- An attorney is subject to discipline in the event the attorney enters into an agreement for (or charges or collects) an illegal or unconscionable fee. (Rules of Professional Conduct, rule 4-200.) An example of an “unconscionable” fee is seen in In re Silverton (2005) 36 Cal.4th 81, 93-94. There, an attorney was disbarred for a variety of reasons, including entering into a fee agreement with personal-injury clients which gave the attorney the right to negotiate down any medical liens charged against the client’s recovery and keep the amount of the reduction for himself.
- If the attorney does not have malpractice insurance, this must be disclosed in writing at the time the lawyer is initially engaged unless the total amount of time the attorney reasonably expects to expend in representing the client is under four hours. (Rules of Professional Conduct, rule 3-410(A).) Thus, while not required to be contained in the retainer agreement itself, it is prudent to make this disclosure in the Retainer if the attorney does not have professional liability insurance.
- An attorney may not contract with a client to prospectively limit the attorney’s exposure for professional malpractice. (Rules of Professional Conduct, rule 3-400(A).)
Referral fees among attorneys
Referral fees are governed by Rule of Professional Conduct Section 2-200, “Financial Arrangements Among Lawyers.”
(A) A member shall not divide a fee for legal services with a lawyer who is not a partner of, associate of, or shareholder with the member unless:
(1) The client has consented in writing thereto after a full disclosure has been made in writing that a division of fees will be made and the terms of such division; and
(2) The total fee charged by all lawyers is not increased solely by reason of the provision for division of fees and is not unconscionable as that term is defined in rule 4-200.
(B) Except as permitted in paragraph (A) of this rule or rule 2-300 [sale of law practice], a member shall not compensate, give, or promise anything of value to any lawyer for the purpose of recommending or securing employment of the member or the member’s law firm by a client, or as a reward for having made a recommendation resulting in employment of the member or the member’s law firm by a client. A member’s offering of or giving a gift or gratuity to any lawyer who has made a recommendation resulting in the employment of the member or the member’s law firm shall not of itself violate this rule, provided that the gift or gratuity was not offered in consideration of any promise, agreement, or understanding that such a gift or gratuity would be forthcoming or that referrals would be made or encouraged in the future.
Compliance with Rule 2-200 is nondelegable and is required even where the attorney being referred to in the matter promises to obtain the informed written consent of the client for the referring attorney. (Margolin v. Shemaria (2000) 85 Cal.App.4th 891.) Failure to comply with Rule 2-200 will prohibit any referral or fee splitting arrangement. (Compagna v. City of Sanger 42 Cal.App.4th 533 (1996).
As noted, the client must consent to fee splitting in writing; however, the agreement between the two attorneys need not be in writing or signed by both attorneys. (Cohen v. Brown (2009) 173 Cal.App.4th 302.) The client consent may come at any time before the division is made, including after the services are fully performed. (Id.) However, the best practice is to do so as soon as possible, and preferably in the retainer agreement itself.
Potential liability issues
Might there be any possible liability for making a bad referral? There may be liability to the client for a “negligent referral,” referral to an incompetent or disbarred attorney, or failure to make a referral until after the running of the statute of limitations. (Miller v. Metzinger (1979) 91 Cal.App.3d 31.)
Managing client trust accounts properly
What is IOLTA? Interest on Lawyers Trust Account.
The account is for client money, not to be used for your money. You should be the only signatory on this account. You should not allow your spouse or an employee to sign on this account. There are serious penalties for failure to maintain proper record keeping, and you as the attorney are the one subject to discipline in the event a problem arises. (Black v. State Bar) 1972) 7 Cal.3d 676, 790.) Secretary’s alleged failure to deposit funds in trust account is not a defense to discipline for account mismanagement.
California Rules of Professional Conduct, Rule 4-100, requires that attorneys maintain at least four separate items for each client whose funds have been deposited into the Attorney-Client Trust Account: (1) a written ledger for each client showing funds received and disbursed [See sample ledger page 76]; (2) a written journal for each bank account; (3) all bank statements and canceled checks for each Attorney-Client Trust Account; (4) monthly reconciliation of the Attorney-Client Trust Account [See sample Client Distribution page 77]. The rules require that said records must be retained for a period of five years from the last disbursement of the funds on each client case.
All funds received or held for the benefit of clients must be deposited into the trust account.
- Identification as Trust Account: The account must be clearly labeled and identified as a “trust account” or similar words. [CRPC 4-100(A)] “Buffer fund” or “prudent reserve”: Placing a reserve of personal funds in the client trust account to prevent an overdraft is not permitted. Depositing excess funds (belonging to the attorney) violates the prohibition against commingling. (Silver v. State Bar (1974) 13 Cal.3d 134, 145 n. 7.)
- Overdraft protection: Replacement of client funds by operation of overdraft protection (bank extends credit) is not prohibited commingling so long as the credit does not exceed the overdraft (i.e., bank does not automatically extend a fixed amount that leaves a remainder after satisfying the overdraft). [California State Bar Formal Opinion 2005-169]
- Funds belonging in part to attorney: In the case of “funds belonging in part to a client and in part presently or potentially to the (attorney),” the attorney’s share must be withdrawn from the client trust account “at the earliest reasonable time” after the attorney’s interest “becomes fixed” unless the client disputes the fee. (CRPC 4-100(A)(2).)
- Lawyer’s personal use of client trust account: It is improper for an attorney to make personal use of a client’s trust account; e.g., to pay personal expenses from the account or to pledge it as security for a personal loan. (Hamilton v. State Bar (1979) 23 Cal.3d 868, 874-876 [attorney violates rule by using funds from client trust fund to pay bar dues].)
Other trust fund issues
Other trust fund misuses include:
- Opening a client trust account with a deposit of personal funds (commingling);
- Regularly depositing attorney’s salary checks into the client trust account;
- Drawing checks from the client trust account payable to “cash”;
- Drawing checks from the client trust account payable to named payees who are neither clients nor creditors of clients;
- Attaching a personal credit card and ready reserve account to the client trust account and authorizing the bank to make automatic withdrawals for the required monthly payments;
- Sheltering lawyer’s funds from other creditors (e.g., IRS, spouse) through use of the trust account (commingling).
[See Client Ledger and Settlement Distribution examples]
Thomas C. Zaret is a sole practitioner in West Los Angeles. He has been practicing personal injury litigation for 31 years and has tried numerous personal injury cases. He has been profiled in the Los Angeles Daily Journal. He is an AV peer review rated attorney who has been recognized the last six years as one of Southern California’s Super Lawyers. He graduated from Michigan State University with a B.S.in Psychology in 1981 with honors, and he received his J.D. from the University of San Francisco in 1984. He is a frequent speaker on the subject of liens.
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