This opinion addresses how a lawyer should hold a so-called refundable retainer. The question is whether it is permissible under the Rules of Professional Conduct for a lawyer to deposit a refundable retainer into the lawyer's operating account as opposed to depositing the retainer into an escrow account. The facts of the inquiry are straightforward. As an advance against which future charges will be made, the Inquirer's firm receives a refundable retainer. While in the past such a retainer was deposited by the firm into its escrow bank account, the inquiry questions whether the firm may instead deposit the retainer into the firm's general operating account. This issue has been addressed by the Disciplinary Board of the Supreme Court of Pennsylvania (Board) in Office of Disciplinary Counsel v. Anonymous, No. 98 DB 92 (1994) (the Board Decision). 1 At its heart, the issue concerns RPC Rule 1.15(a), which reads as follows:
A lawyer shall hold property of clients or third persons that is in a lawyer's possession in connection with a representation separate from the lawyer's own property. Funds shall be kept in a separate account maintained in the state where the lawyer's office is situated, or elsewhere with the consent of the client or third person. Other property shall be identified as such and appropriately safeguarded. Complete records of such account funds and other property shall be preserved for a period of five years after termination of the representation.
The Committee recommends that members of the Association adhere to the practice and standard of the Board decision. Thus, a lawyer should deposit a refundable retainer into the lawyer's escrow account and transfer sums from that account to the lawyer's operating account as such sums are earned and payable. The Committee recommends that the lawyer render periodic accounts to the client for the funds as received, earned, and transferred.
THE BOARD DECISION
According to the Disciplinary Board, RPC 1.15(a) requires the segregation into an escrow account of unearned (or advanced) fees and advanced costs. Board Decision at 9, 15. The lawyer should transfer the appropriate amounts to the lawyer's operating account when they are earned or become due, to avoid a commingling violation of Rule 1.15(a).
In the Board's view, this conclusion holds attorneys to a higher standard with regard to handling of funds, id. at 9, and serves the rule's purpose of protecting clients and third parties. The prior Code of Professional Responsibility excepted from the segregation requirement advances for costs and expenses and funds belonging in part to a client and in part presently or potentially to the lawyer or law firm. Code DR 9-102(A). No comparable exceptions are present in Rule 1.15(a), and furthermore, in light of the absence of any qualifiers in the rule, the Board held that a violation does not depend upon the intent of the lawyer. Rather, there is strict liability for violation of the rule. The Board summarized its holding as follows (Board Decision at 16):
[W]here money belonging to an attorney is combined with fees not yet earned or with funds to be expended in the course of the representation, the attorney MAY NOT deposit the whole sum in either the general office account or an escrow account. To do so would be an automatic technical violation of the Rule no matter which account is chosen. It is the attorney's responsibility under Rule 1.15(a) to insure that such funds are not commingled.
The Board noted that the better practice would have been for the attorney to have requested two checks from the client to avoid the commingling. Id. at 15.
A lawyer should adopt the standard announced in the Board Decision requiring the lawyer promptly to deposit any refundable retainer received from a client into the lawyer's escrow account.2 As fees are earned or reimbursable expenses are disbursed by the lawyer, she or he must transfer the appropriate amount to the lawyer's operating account in accordance with the retention agreement. This Committee also recommends that, as advised by the P.B.A. Committee, the lawyer provide the client with periodic statements accounting for the sums received, deposited, and transferred, along with the fees and reimbursable expenses incurred.
This conclusion follows from the nature of the refundable retainer and the requirements of Rule 1.15(a). A retainer given as an advance deposit against future fees is property held in trust for the benefit of the client. As such, the refundable retainer is property of the client. 3 Rule 1.15(a), which prohibits the commingling of client funds with a lawyer's own property, is obligatory and cannot be waived.
The Committee's conclusion is also supported by a number of additional factors. First, of course, although the Board's Decision was not appealed, it carries significant authority as the Board's pronouncement of how it will treat such matters when brought to its attention. The Board's reasoning, moreover, correctly emphasizes the transcendent concern for public confidence in the legal profession.
In addition, in most instances the client will not have separate, independent legal counsel. The bright line approach of the Board in its Decision avoids a potential conflict of interest or even the appearance of a conflict. PRPC Rule 1.8(a) (lawyer's acquisition of an ownership, possessory, or other pecuniary interest adverse to client).
Immediate deposit of a refundable retainer into the lawyer's escrow account affords significant protections to the client, consistent with the public's expectations and likely those of the client. Specifically, by depositing the refundable retainer into the escrow account, the lawyer assures that such funds will not be subject to attachment by the lawyer's creditors. Similarly, in the event of the insolvency or death of the lawyer, the client will not thereby become embroiled in the delay and potential dilution of the client's funds resulting from proceedings concerning the bankruptcy or administration of the lawyer's estate.
For these reasons, a refundable retainer should be placed into the lawyer's escrow account and be treated as discussed above.
1. The Pennsylvania Bar Association's Committee on Legal Ethics and Professional Responsibility (P.B.A. Committee) has also addressed this and related topics. See P.B.A. Committee Formal Opinion 95-100, Ethical Considerations in Connection with Retainers Paid on Account of Legal Services (1995), which in part reaches a contrary result.
2. While the Board Decision advocates separate payments by a client of refundable and non-refundable amounts, this is not always achievable. The Committee suggests that when a lawyer receives a mixed payment of refundable and non-refundable sums, the gross payment should be deposited into the lawyer's escrow account. The portion belonging to the lawyer should then promptly be transferred to the lawyer's operating account.
3. S.E.C. v. Interlink Data Network of Los Angeles, 77 F.3d 1201, 1205 (9th Cir.1996).