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Avoiding a State Bar Grievance: Client Fee Disputes

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Fee disputes, including a lawyer’s attempt to collect a fee, are a common source of client complaints to the State Bar. To help avoid a grievance, not only with fee disputes but with any area of law practice, it is beneficial to periodically read the Rules and assess if you are implementing them in your practice. Specifically, Rule 1.5 provides a lawyer having a dispute with a client regarding a fee must make reasonable efforts to advise the client of the existence of the State Bar’s Fee Dispute Resolution Program at least 30 days prior to initiating legal proceedings to collect the disputed fee. While it is optional for the client to participate in the fee dispute resolution process, it is mandatory for the lawyer to participate if the client makes the request.  The Comments to the Rule provide that client notification must occur not only when there is a specific issue in dispute, but also when the client simply fails to pay. (Note, however, when the client expressly acknowledges liability for the specific amount of the bill but states that he or she cannot presently pay the bill, the fee is not disputed and client notification is not required but likely still is a good idea.)

For example, if your fee agreement provides for a 30% contingent fee, you can take the entire fee out of the trust account and move to the operating account once the settlement check is deposited and cleared. However, if your client argues that you are only entitled to a 20% fee, for instance, then the 20% that you and the client agree has been earned must promptly be removed from the trust account.  However, the disputed amount, the remaining 10% fee, must remain in trust until the dispute is resolved by agreement or court order.

But what happens if the client notifies you that he disputes the fee, but then he fails to file a fee dispute petition or to initiate legal action to recover the disputed funds? The effect of the Rules alone would force you to hold the disputed funds in trust indefinitely.  To avoid this result, Ethics Opinion 2006 FEO 16 provides the lawyer may transfer the disputed fee from the trust account to the operating account under the following circumstances:

1)      The lawyer has given the client 30-days written notice of the fee dispute program required under Rule 1.5(f);

2)      The client fails to elect fee dispute resolution;

3)      The funds held in the trust account are for services rendered and are not clearly excessive;

4)      After the 30 days has expired with no fee petition filed by the client, the lawyer gives the client a second written notice that the funds will be transferred to the operating account unless the client initiates legal action within 30 days. (If, at any point during the 30 days, the client elects to participate in the fee dispute program or initiates legal action to recover the funds, the lawyer must, at that point, hold the funds in trust pending resolution of the dispute); and

5)      Expiration of the second 30-day time period.

Once that second 30 days is up, you may transfer the disputed funds into your operating account.  Knowing and utilizing the Rules can go a long way in avoiding State Bar grievances and other costly disputes with clients.