In Dickson v. Mann, No. D081851 (Cal. Ct. App. July 16, 2024), the California Court of Appeal addressed the ownership of funds in a client trust account and whether they were subject to a creditor’s lien. The law firm Higgs Fletcher & Mack LLP (HFM) agreed to represent a client, Jack Mann, on a flat fee basis, placing a substantial sum, $585,000, in the firm’s client trust account. Thereafter, one of Mann’s creditors sought to levy the funds he had paid into the law firm’s trust account. After hearing arguments, the trial court concluded that the money in question was Mann’s and therefore subject to the creditor’s lien, despite HFM’s contention that it was their property based on the flat fee agreement. The Court of Appeal affirmed the lower court’s decision.

True Retainers and Flat Fee Agreements

In Dickson, the Court of Appeal ruled that 1) a flat fee for legal services paid in advance is not earned until the services are rendered; and 2) funds in a client trust account are de facto presumed to belong to the client unless the lawyer or law firm can prove otherwise.

The decision notes a difference between a “true retainer”—a fee paid to ensure the lawyer’s availability during a certain period—and funds advanced for legal services yet to be rendered. HFM argued the $585,000 in the client trust account had been earned because it was paid in conjunction with a flat fee agreement for legal services, which provided that the funds were to be “deemed earned by [HFM]when received.” Thus, HFM claimed the $585,000 flat fee was paid for services and costs for representation in four matters.

However, because the $585,000 was not a true retainer, under the Rules of Professional Conduct, HFM did not actually earn the funds until the contemplated legal services had been provided. Thus, in response to Dickinson’s levy, HFM bore the burden of establishing that it had provided the contemplated legal services to have a viable claim to the money. Because HFM could not show it had provided any legal services, HFM fell short in establishing its superior claim to the money held in trust.  Accordingly, the funds in the client trust account remained the legal property of Mann.

The Rules of Professional Conduct allow flat fees for specified legal services. However, Rule 1.5(d) states that flat fees cannot be designated as “earned on receipt” or labeled non-refundable unless they fit the criteria of a “true retainer,” and the client has agreed to this in writing after full disclosure.

The Rules of Professional Conduct also say flat fees may be paid “in whole or in part in advance of the lawyer providing those services.” But any unearned portion of the fees must be returned to the client in the event “the representation is terminated or the services for which the fee has been paid are not completed.”  

Best Practices for Flat Fees and Client Trust Accounts

The case brings to the forefront several critical lessons for fee agreements between law firms and clients:

Be Wary of Clients with Outstanding Judgments

Law firms face serious risks when representing clients with outstanding judgments, financial issues, and even criminal exposure. As Dickinson reflects, simply denoting a large deposit as a flat fee is not enough to protect the law firm from third party creditors. To this end, while the Court of Appeal found it unnecessary to analyze the issue, trial court in Dickinson, on its own, expressed its concern that the fee flat fee arrangement violated the Uniform Voidable Transactions Act by impairing Mann’s efforts to enforce his judgment. When the prospective client has a judgment or is accused of engaging in conduct rendering their funds “dirty”, the law firm should carefully consider the risk of levy or claw back. Solutions may include having a third party pay with “clean” money or passing on the representation.

True Retainer Clarification

The distinction between a true retainer and a flat fee agreement must be clear and understood by the client, ensuring non-refundable fees are properly categorized and disclosed. A true retainer, as defined by the Rules of Professional Conduct 1.5(d), is a fee “a client pays to a lawyer to ensure the lawyer’s availability to the client during a specified period or on a specified matter, but not to any extent as compensation for legal services performed or to be performed.”

Ownership of Trust Account Funds

Though the presence of funds in a client trust fund does not establish definitively, in all cases, that the funds belong to a client, the Dickson decision reinforces the idea that only funds earned by fulfilling the agreed-upon legal services can be considered the property of the law firm. Until then, funds held in attorney trust accounts remain the property of the client. This means they are subject to levy in the event of a judgment or other creditor action.

Flat Fee Agreements

The court’s ruling may have implications for flat fee agreements and their terms of payment. Because fees may only be transferred out of the client trust account once the fees are earned, a flat fee might be considered unearned—and thus not the property of the law firm—until after the full resolution of the matter for which the firm has been hired. To avoid problems with this issue, the engagement agreement should include payment terms for the flat fee that define when parts of the flat fee will be considered as having been earned (e.g., by periods of time or stages of the case, for example).

Diligent Fund Management

Attorneys are mandated to manage client funds in trust accounts diligently by only claiming funds that are earned and moving them out of trust accounts promptly, as per the ethical guidelines.

The Dickson v. Mann case highlights the pitfalls of flat fee agreements. It underscores the importance of proper handling of client trust accounts and employing precise, client-centric practices in law firm fee agreements and retainers. Law firms are well-advised to stay abreast of these regulations to ensure compliance and uphold the highest standards of professional conduct.

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