In this article I will try to provide guidance on the thorny issues raised by lawyers’ efforts to charge fixed fees, especially when they are labelled “nonrefundable.” Although this is a perennial issue, we are addressing it now in light of a new ABA opinion—Formal Opinion 505 (Opinion 505)—which discusses the principles as set forth in the applicable Model Rule. However, as discussed here due to differences in the New York rule, Opinion 505 does not in all respects apply to New York lawyers.

Unlike under New York Rule of Professional Conduct 1.15, as explained below, the Model Rule requires all advance payments of fees—however described and categorized—to be deposited in a lawyer’s or firm’s trust or IOLTA account until earned, and prohibits lawyers from withdrawing funds for payment of fees until that time. The policy behind this rule is twofold. First, it supports the principle that clients may terminate lawyers at any time for any or for no reason, and therefore that they should not be effectively precluded from doing so because the lawyer has already taken the fee and may be unwilling to return it because of how it was described in the engagement letter. And, second, it addresses the problem where even though the lawyer is under an obligation to return unearned fees (however described in the engagement letter), the lawyer may actually be unable to return the fee, having spent it and not having sufficient other funds with which to make the required reimbursement.

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