Frequently Asked Questions for Retainers and Dowling
1. What is the Dowling decision about and what does it mean for my practice?
If you take retainers, i.e., fees in advance of legal services to be performed, the Illinois Supreme Court’s decision in Brian Dowling v. Chicago Options Associates, Inc. et al. (DLA Piper Rudnick Gray Cary (US), LLP), 226 Ill.2d. 277, 875 N.E.2d 1012, 314 Ill.Dec. 725 (Ill. 2007) impacts your practice. The Dowling decision addresses the issue of who owns fees paid by a client to a lawyer in anticipation of legal services: the client or the lawyer. The answer to this question impacts on where those fees are to be deposited: if the fees remain the property of the client, they must be deposited in the trust account; if they become the lawyer’s property, then the lawyer would deposit those fees in his/her business account. Payment by a client to a lawyer for services already rendered are not effected by this decision because in those circumstances there is no issue of whose property it is: it the lawyer’s and would be deposited in the lawyer’s business account.
The Court in Dowling identifies and defines the three types of fee retainers available in Illinois: classic, security and advance payment retainers. The Court outlines the essential requirements of all retainers but, more importantly, states that fees paid in advance that are deposited in the business account (a/k/a advance payment retainers), rather than the trust account, must meet certain requirements in order for the lawyer to show that this type of arrangement is in the client’s best interest. While these newly-announced standards are to be given prospective application, lawyers need to review their existing retainer agreements and incorporate the Court’s directives into their future retainer agreements.
2. What is an “advance payment retainer” and what are the requirements?
Under an advance payment retainer, the client intends to make a present payment to the lawyer in exchange for the commitment to provide legal services in the future. Ownership of this retainer passes to the lawyer immediately upon payment and is deposited in the lawyer’s own account. However, if the representation ends before the retainer has been exhausted, the retainer is subject to refund under Rules 1.15(b), 1.16(d) and 1.16(e) of the Rules of Professional Conduct.
Under Dowling, an advance payment retainer agreement must: (1) be in writing; (2) clearly define and expressly name the type of retainer being paid; (3) set out where the funds will be deposited and how withdrawals will be handled; (4) contain language advising the client of the option to place money into a security retainer; (5) state that the choice of the type of retainer to be used is the client’s alone; (6) state the special purpose behind the retainer and explain why an advance payment retainer is advantageous to the client. Dowling at *9.
3. What is a “security payment retainer”?
The security retainer is intended to secure payment of fees of future services that the lawyer is expected to perform, rather than be present payment for the lawyer’s commitment to perform. As such, the payment remains the property of the client until the lawyer applies it to charges for services that are actually rendered and, therefore, it must be deposited in a trust account. The Court stated that these types of retainers should be in writing and should clearly define the kind of retainer being paid and state that the funds remain the property of the client and will be deposited in the trust account. Dowling at *12.
4. What is a classic retainers?
A classic retainer is defined as a fixed sum of money paid to a lawyer to ensure that the lawyer's availability during a specified period of time or for a specified matter.. That kind of retainer is considered to be earned immediately, becomes the property of the lawyer, regardless if the lawyer ever actually
performs any services for the client and is deposited in the lawyer's business account. Dowling at *6.
5. How do I determine if my retainer agreement is an advance payment, a security retainer or a classic retainer?
The type of retainer that is appropriate will depend on the circumstances of each case. In deciding which kind of retainer to use, look to the ''guiding principle,'' which, the Court admonished, ''should be the protection of the client's interests.” Dowling at *11. To best protect those funds, the Court concluded that “[i]n the vast majority of cases, this will dictate that funds paid to retain a lawyer will be considered a security retainer and placed in a client trust account, pursuant to Rule 1.15.” An advance payment retainer can be entered into “only when necessary to accomplish some purpose for the client that cannot be accomplished by using a security retainer.'' Id.. The Court found that the use of an advance retainer agreement was appropriate in instances where a client is facing bankruptcy, a collection action or a criminal forfeiture proceeding and therefore needs to secure sufficient funds out of the reach of seizure in order to hire counsel.
6. Under what circumstance is a deposit in my business account appropriate? Can I make the engagement conditioned on the client’s agreement that the fees paid to secure the engagement will be an advance payment retainer?
The Court found that advance payment retainers “should be used only sparingly” and “when necessary to accomplish some purpose for the client.” Dowling at *11. The decision whether an advance payment retainer is appropriate is dependent on the circumstances of each case. Dowling at *11. “In the vast majority of cases,” the Court concluded, a security retainer best serves the client’s interests. Id. Some of examples the Court pointed out of when an advance retainer agreement would be appropriate, are instances where a client is facing bankruptcy, a collection action or a criminal forfeiture proceeding and therefore needs to secure sufficient funds out of the reach of seizure in order to hire counsel.
The Court recognized that a lawyer might be unwilling to represent the client without receiving an advance payment retainer. In that case, the Court said that the lawyer would have to set forth in the agreement his/her reasons why and an explanation to the client why an advance payment retainer is advantageous to the client. Dowling at *13.
7. Can I still charge a flat fee retainer? Where is it deposited?
Yes, but after Dowling where it must be deposited will be dictated by the terms of your agreement with the client and whether the agreement meets the standards set forth in Dowling. With Dowling, the Court stated that “in the vast majority of cases” the protection of the client’s interests will require that the funds paid be considered a security retainer that must be placed in the trust account. Dowling at *11. Advance payment retainers, the Court cautioned, should be used “sparingly” and only where the lawyer can show, through the agreement, that in the circumstances of the case, such an arrangement was “necessary to accomplish some purpose for the client that cannot be accomplished by using a security retainer. Dowling at *11.
8.. What should I do with retainer agreements already in place?
You will not need to change existing fees agreements entered into before the Dowling decision. The Court stated that the standards will be given prospective application. Dowling at *17. However, you should review your existing fee agreements and see what changes you may need to make to future retainer agreements, particularly if you presently deposit fees in your business account, in order to conform your agreements with the Dowling standards.
9. What if I don’t have a written retainer agreement, can I still deposit the fees in my business account even if the client has no objection?
No. While the Court did not require all retainer agreements to be in writing, the agreement for an advance fee deposited in the business account, however, must be in writing, the agreement must meet certain identified disclosure requirements. If it is not in writing, the agreement will be construed as a security retainer and therefore it must be deposited in the trust account in order to provide the greatest protection for the client’s funds. Dowling at *13
10. What’s the effect of these new standards? Could I be disciplined if I failed to meet all of the requirements?
The ARDC’s initial emphasis will be to educate lawyers on what is required under Dowling so that their retainers are in compliance with the Court’s decision. Dowling sets forth what lawyers need to include in their written retainer agreements in order to show that the client has been fully informed about how the funds will be handled and why the terms of the retainer are in the client’s interests. If a retainer agreement is not in writing or the writing is deficient in providing sufficient information to meet the Dowling requirements, the agreement will be construed as a security retainer and therefore must be deposited in the trust account. Dowling at *13. Failure to comply with the standards the Court outlines could subject the lawyer’s conduct to scrutiny by the ARDC and/or to efforts to set the agreement aside in a civil action.
11. Do all retainer agreement have to be in writing?
No. The Court suggested that “[a]ny 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 must 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.” Dowling at *12. Under the Rules of Professional Conduct, the requirement of a writing for fee agreements applies only to contingency fee agreements (R. 1.5(c)), co-counsel engagements (R. 1.5(f)) and referral arrangements (R. 1.5(g)).
12. If I need to open a trust account, where do I go for more information?
The ARDC publication, Client Trust Account Handbook provides information on the requirements of holding property in trust including how to open a trust account. A hard copy may be obtained by calling the ARDC at 800-826-8625 or 800-252-8048).
The Lawyer Trust Fund of Illinois, which receives the interest income earned on pooled trust accounts, has information how to open an IOLTA (Interest on Lawyer Trust Account) trust account, as well as where to find financial institutions eligible to hold IOLTA accounts. The Lawyers Trust Fund website is www.ltf.org.
The Commission’s Ethics Inquiry Program is a telephone inquiry service that allows Illinois attorneys to call for help in resolving hypothetical ethical dilemmas. To make an inquiry, please call the Commission offices in Chicago (312-565-2600) or Springfield (217-522-6838). The Commission does not accept ethics inquiries by e-mail or facsimile.