Receipt of Retainer Payments Concerns: Summary of MSBA Business Law Section Listserv Discussion

By msbabusiness Published December 5, 2012 Fall 2012

The following is a summary of an important discussion regarding (1) whether credit cards should be accepted for retainer payments and (2) if so, how those payments should be accounted for so as not to violate the fiduciary relationship with other clients. Below the summary, the listserv posts giving rise to this article are condensed and paraphrased, with thanks to Marty B. Ellis of Shumaker Williams, P.C., Barbara I. Berschler of Press, Potter & Dozier, L.L.C., Patricia A. Yevics, Director of the MSBA’s Law Office Management Assistance Program, Katherine L. Taylor of Taylor Legal, Howard A. Newman of Newman Law Offices, Jeffrey M. Axelson of Axelson, Williamowsky, Bender & Fishman, P.C., Philip L. Marcus of The Negotiation Pro, David R. Mahood, Brian M. Kurtyka of Kurtyka & Associates, L.L.C., and Harry M. Rifkin of the Law Offices of Harry M. Rifkin for participating in the discussion.

Additional thanks to Bill Carlson, MSBA Business Law Section Chair 2012-2013, of Shapiro, Sher, Guinot & Sandler for compiling the email exchange.

“Chargebacks” are the primary concern addressed by various bar associations regarding accepting advanced payments by credit card. “Chargebacks” are made when a client disputes the fee charged by the attorney and the credit card company withdraws the funds from the attorney’s accounts until disputed payment claims are settled.

Typically, a retainer payment is deposited into a trust account over which the attorney has a fiduciary duty. With a chargeback, money is withdrawn from the trust account even if the attorney has moved earned funds into the attorney’s operating account. The result is the credit card company garnishing funds within the trust account belonging to other clients. As a result, the lawyer breaches his duty of care over those funds. This is a non-issue with regards to payments for completed services because those funds are the property of the attorney.

Marty Ellis posts links to the State Bar Associations of North Dakota, D.C., Oregon, and Maine and their methods of addressing these issues. The preferred method is to negotiate with the credit card companies to ensure removal of funds from only the attorney’s operating account. However, when the company insists on removing funds from the same account to which the deposit was made, one of two alternative approaches is adopted. One approach requires the funds be deposited into the attorney operating account and immediately transferred to the trust account. The other is to make the deposit directly into the trust account and for the attorney to closely monitor the account to quickly cover any depletion of funds. Of these two approaches, the Maryland Bar has taken the minority approach of close monitoring.

The North Dakota State Bar Association analyzed several solutions to this problem: (1) Deposit funds into trust accounts and closely monitoring for chargebacks, being sure to immediately replenish withdrawals; (2) Deposit funds into the trust account along with a cushion of the attorney’s own funds; (3) Deposit funds into a trust but not drawing upon it until the dispute window closes; (4) Deposit retainer payments first into the operating account then immediately transferring those funds to the trust; (5) Negotiate with the credit card company to ensure chargebacks come only from the operating account.

The “closely monitoring” solution, according to the North Dakota Bar, requires a close watch over the account; otherwise the attorney would be liable for inappropriate administration of the trust. Regarding the “cushion,” the North Dakota Bar dismissed the solution outright because it required permanent co-mingling of funds. As to depositing funds and not drawing on them, the North Dakota Bar found that this approach does nothing to cover the risk of tapping the funds of other clients. Next, an initial deposit into an operating account followed by immediate transfer struck the North Dakota Bar as technically unethical, but pragmatically efficient. Last, negotiating with credit card companies was deemed to be the best option, but subject to the willingness of the credit card company.

By making an initial deposit into the operating account there is a violation of the bright line rule against co-mingling of funds; however, this approach also guarantees that fees and chargebacks come from the attorney’s property. Moreover, according to the North Dakota Bar, this approach has the least temporal co-mingling of funds. The North Dakota Bar concluded that the best option is to work out an arrangement with the credit card company, but if that is not possible, make an initial deposit into the operating account followed by swift transfer to the trust.

The D.C. Bar came to a similar conclusion, with the caveat that the client be informed of such an arrangement. The Oklahoma Bar also prefers first negotiating with the credit card company but if this does not work, favors the closely monitoring approach.

The MSBA addressed the issue and concluded that retainer payments be deposited to the trust fund and not be drawn upon until such time as services are complete and the time to dispute the charges has passed. Alternatively, the MSBA encourages negotiating with credit card companies to ensure chargebacks come strictly from the operating account. Moreover, the Montgomery County Bar rejects the approach approved by North Dakota, disallowing even momentary deposits of client funds into general operating accounts.

Taken together, the following must occur across the board: (1) the full amount of the deposit must go into a trust account, (2) all costs and fees must be charged to the firm’s operating account, and (3) in the event the retainer must be returned, the full amount (less any amount for work performed) must be returned and all transaction costs must be paid by the firm.

The company LawPay is set to help solve the issue. LawPay allows the attorney to establish two different accounts—a trust account and an operating account. LawPay ensures that credit card fees are taken only from the operating account so as to avoid the issues with garnishing fees from other clients, provided attorneys properly designate the accounts.

Posts in the order in which received

1. Marty Ellis; 12/5/2012

a. As a matter of conservative ethics a lawyer should only accept credit card payments for earned fees and never for retainers

b. Visa and Mastercard Debit Cards pose the same concerns as credit cards

c. Chargebacks are possible, meaning there are ethical concerns with processing instantaneous EFT payments into a trust account (same issue as a time-deferred deposit from the processing of a credit card payment)

d. Links to No Easy Credit by Constance V. Vecchione

e. Links to Should Lawyers Take Credit Cards? by Andrea Goldman & John W. Marshall

f. Links to Taking Charge: Accepting Credit Cards for Legal Fees by Phillip M. Perry

g. Links to State Bar Association of North Dakota opinion

h. Links to D.C. Bar Association ethics opinion

i. Links to Do you accept credit cards? by Jim Calloway

j. Links to Oregon State Bar Association ethics opinion

k. Links to Board of Overseers of the State of Maine Bar ethics opinion

l. Links to Credit cards: Service charges and Chargebacks by Peter Geraghty & Susan J. Michmerhuizen