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Advanced Legal Fees and Related Escrow Issues

I recently gave a lecture where I was discussing retainers, legal fees, and escrow. It became clear that there’s some confusion over advanced legal fees paid to a lawyer.

A general retainer is a retainer paid to a lawyer for unspecified future services and for the lawyer to be available to the client in the future. For example, this might be used to engage a lawyer on a monthly or yearly retainer to be available for representation or to give the client legal advice as issues arise. Under this type of retainer, the fee paid is not an advance fee but is deemed earned immediately upon receipt. See NYSBA Opinion 570.

An advanced payment retainer is a sum of money paid to an attorney in the expectation of it being earned during the representation. Advance legal fees may be treated in one of two ways:

  1. If the parties agree that the advanced fee will be deposited and drawn against as it is actually earned, or drawn against in agreed-upon increments, this money belongs to the client until earned.
  1. Alternatively, if the attorney and client specifically agree that the fee is earned upon payment, or if they fail to designate that the fee belongs to the client until earned as described under item 1 above, then the fee is deemed to be earned by the lawyer upon payment, subject to accounting and the prompt return of any unused portion to the client upon discharge or completion of the retainer requirements. See NYSBA Opinion 816.

If the parties agree that the advance fee will be deposited and drawn against as earned or in agreed-to increments, this fee belongs to the client until such time as it is earned pursuant to the agreement. Accordingly, this advanced fee must be deposited into escrow and maintained in escrow until a partial or complete release is permitted. RPC 1.15(b) & (c).

A general retainer, or an advance retainer that is earned upon payment, is the property of the lawyer and does not need to be deposited into escrow. Indeed, it cannot be deposited into escrow, as that would be commingling personal funds with client funds and/or misuse and mismanagement of the lawyer’s escrow account. See NYSBA Opinion 983; RPC 1.15(a).

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