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By Samson Habte
A lawyer did not act unethically by initially charging a “nonrefundable 'minimum fee'” or by depositing the fee in an operating account--but he did breach another ethics rule by failing to refund an unearned portion of the fee after the client fired him, the North Dakota Supreme Court held July 23 (In re Hoffman, N.D., No. 20120290, 7/23/13).
The ruling came in a disciplinary case against attorney Michael R. Hoffman, who charged a $30,000 nonrefundable “minimum fee” for his work in a criminal matter and refused to refund any part of it when he was discharged after spending less than 26 hours on the case.
Bar counsel alleged that Hoffman's fee was “unreasonable” under North Dakota Rule of Professional Conduct 1.5(a), that he violated Rule 1.15 by putting the fees into an operating account rather than a client's trust account, and that he breached Rule 1.16 by failing to provide a refund when terminated.
In a per curiam opinion, the court concluded that Hoffman violated Rule 1.16 only. It ordered a refund of unearned fees as a sanction, but not a reprimand too as a hearing panel had urged.
Hoffman did not contravene Rule 1.5, the court said, because North Dakota, unlike other jurisdictions, “has not yet adopted a rule barring the use of nonrefundable fee agreements as against public policy and per se unreasonable.”
The court further noted that North Dakota has refrained from holding that advance fees cannot be treated as the lawyer's property upon payment if a contract expressly states that they will not be held in trust.
But Hoffman clearly ran afoul of Rule 1.16, the court decided. “Even if advance fees are by agreement not being held in trust for a client,” the court explained, “they may still be subject to refund if later determined not to have been unearned.”
In July 2010, Bradford Wetmore retained Hoffman to defend him against “four counts of gross sexual imposition,” the court said.
A written contract provided that for a nonrefundable $30,000 “minimum fee,” Hoffman would “defend the case to dismissal, sentence or deferred imposition of sentence, including a jury trial if necessary.” The parties also agreed “that the fee immediately became Hoffman's property on payment, and … would not be held in Hoffman's trust account,” the court said.
Hoffman spent 25.8 hours on the case before he was terminated. Wetmore asked Hoffman to return the “unearned portion” of the $30,000 payment. Hoffman refused.
Bar counsel charged Hoffman with violating Rules 1.5, 1.15, and 1.16.
A hearing panel found those allegations proven and recommended that Hoffman be reprimanded and required to return $25,460 to Wetmore.
The court first rejected the hearing panel's conclusion that Hoffman's fees were “unreasonable” under Rule 1.5.
Contrary to bar counsel's assertion, “this Court has not yet adopted a rule barring the use of nonrefundable fee agreements as against public policy and per se unreasonable,” the opinion states.
Some jurisdictions have adopted that view, the court noted. E.g., In re Cooperman, 633 N.E.2d 1069 (N.Y. 1994). Others have held that nonrefundable minimum fees are ethically permissible, it added. E.g., Grievance Admin'r v. Cooper, 757 N.W.2d 867, 25 Law. Man. Prof. Conduct 34 (Mich. 2008); Arizona Ethics Op. 10-03, 26 Law. Man. Prof. Conduct 410 (2010).
But although the court said it has not had occasion to “set forth the “permissible parameters of nonrefundable retainers,'” it has suggested that “the specific agreement at issue” should be analyzed to determine whether a fee arrangement is “reasonable” under Rule 1.5.
That approach should be applied here, it said. Accordingly, the justices reviewed the specifics of the fee agreement and concluded that Hoffman proffered persuasive reasons for requiring the amount of security that he did.
“The record shows Hoffman was taking over a serious felony case from another attorney, and Hoffman testified he was concerned Wetmore was changing attorneys to obtain a continuance of the preliminary hearing,” the court said. Hoffman thus “felt the need to protect himself,” and the fee was designed to compensate him “for his availability, for the time and responsibility he invested, and for the risk he assumed in the early stages of a serious case involving multiple felonies,” the court said.
The court also concluded that Rule 1.15 did not preclude Hoffman from placing the $30,000 in an operating account, as provided by the retainer. (Again, other jurisdictions may not agree. E.g., In re Mance, 980 A.2d 1196, 25 Law. Man. Prof. Conduct 525 (D.C. 2009) (purportedly “flat” fee is to be treated as advance fee and must be placed in trust).)
Although concluding that Hoffman did not violate Rule 1.5 or 1.15, the court decided nevertheless that he was required by Rule 1.16(e) to refund the unearned portion of his fee.
The court said that a decision it handed down last year, In re Hann, 819 N.W.2d 498 (N.D. 2012), “should have put lawyers on notice that unlimited usage of nonrefundable 'minimum fee' agreements may be in question.”
That rule's requirements are not vitiated simply because the “minimum fee” was designated as “nonrefundable,” the court added, citing authorities from other jurisdictions. See In re Sather, 3 P.3d 403, 16 Law. Man. Prof. Conduct 309 (Colo. 2000) (attempt to label fees as “nonrefundable” did not relieve lawyer of duty to return unearned fees upon discharge); Dowling v. Chi. Options Assocs. Inc., 875 N.E.2d 1012, 23 Law. Man. Prof. Conduct 232 (Ill. 2007) (advanced fees already property of lawyer still “are subject to a lawyer's duty to refund any unearned fees, pursuant to Rule 1.16”); Missouri Formal Ethics Op. 128, 26 Law. Man. Prof. Conduct 341 (2010) (Rule 1.16 requires any fee, even flat fee or security retainer that has become property of lawyer, to be refunded if not earned).
“While it may be quite understandable that a criminal defense attorney would need to collect a sizable retainer to assure payment,” the court said, “the retainer in circumstances of termination of representation may represent a windfall, and all fees are subject to an analysis of reasonableness.”
It would be unreasonable to allow Hoffman to reap that windfall here, the court said.
Accordingly, it concluded that Hoffman violated Rule 1.16 but declined to impose any discipline beyond ordering him to refund $25,460 to Wetmore and to pay partial costs of the disciplinary proceeding.
Nancy Hollander of Freedman Boyd Hollander Goldeberg Urias & Ward, Albuquerque, N.M., argued for Hoffman. The disciplinary board was represented by Disciplinary Counsel Paul W. Jacobson, Bismarck, N.D.
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