Billing Issues - Frequently Asked Questions
Why Are Billing Practices Important?
Sensible billing practices can be utilized to avoid some of the most common legal malpractice claims. According to the most recent data from the ABA1, in 2011:
- 3.54% of all legal malpractice claims are caused by clerical errors, including preventable billing errors; and
- 4.53% of legal malpractice claims resulted from intentional wrongs, including where an attorney intentionally or knowingly engaged in improper billing practices.
1 See ABA Standing Committee on Lawyer’s Professional Liability, Profile of Legal Malpractice Claims: 2008-2011 11 (2012).
What Ethical Duties Involve Billing Practices?
- Model Rule 1.5: Fees
- Unreasonable Fees: Lawyers cannot charge unreasonable fees.1 In general, billing rates and other information regarding fees should be communicated to the client in writing at the beginning of representation.Additionally, if, during on ongoing representation, there are any changes to the billing rates or fee structure, the client should be informed in writing.2
- Contingency Fees: Contingent fee arrangements are scrutinized heavily by courts and state bar organizations, and are almost always required by ethics rules to be in writing. Contingency fee agreements must clearly define the method for calculating the fee, including amounts owed by the client regardless of the outcome,3 as well as the “percentage or percentages that shall accrue to the lawyer in the event of settlement, trial or appeal; litigation and other expenses to be deducted from the recovery; and whether such expenses are to be deducted before or after the contingent fee is calculated.”4 Furthermore, after resolution of a matter subject to a contingency fee agreement, the client should be sent a written statement describing the outcome, showing the calculation of the payment of any recovery to the client, and describing the method used to calculate that amount.5 Keep in mind too that certain matters should not be handled under a contingency fee contract, including criminal cases6 and domestic relations matters where the purpose is to secure a divorce, alimony, or a property settlement.7
- Splitting Attorneys’ Fees: A law firm may not split fees with lawyers outside the firm unless: (1) the fees are divided in proportion to the services performed, (2) the lawyers from each respective firm assume joint responsibility for the matter, or (3) the client agrees to the arrangement in writing with knowledge of each lawyer’s share.8 However, keep in mind that the requirements applicable to splitting fees differs by jurisdiction, so always check the relevant local rules.
- Model Rule 1.15: Safekeeping Property
- Safekeeping a Client’s Cash in Trust Funds: Lawyers have several ethical responsibilities when it comes to the safekeeping of trust funds. First, lawyers should never comingle client funds with the lawyer’s personal funds in the client trust account.9 Second, if a lawyer chooses to store multiple clients’ funds in a single trust account, the lawyer should never comingle those client funds with the lawyer’s personal funds.10 Third, funds received from a third party as a result of any representation should also be kept separate from the lawyer’s own property.11
- Withdrawal from Trust Accounts: Under certain circumstances, it is safe to withdraw trust account funds for payment of fees as they are earned. If a fee agreement explicitly allows withdrawal of funds for earned fees, or if a client makes an advance to the trust account and specifically states that the advance is intended to pay future attorney’s fees, attorneys can, in most cases, safely withdraw funds to pay fees.12 However, notice should always be provided to the client when fees are withdrawn for this purpose. Additionally, trust accounts should be managed using only generally accepted accounting practices, and any other laws applicable to attorney trust accounts in the specific jurisdiction.13 With respect to funds received by the lawyer that should be forwarded to the client, the funds should be sent promptly with notice of why the funds are being sent.14 Funds owned by third-parties should be treated in the same manner, except in very limited circumstances.15 Usually, if a lawyer’s fees are contested, then the lawyer may only withdraw undisputed portions from the trust account.16
- Fee Disputes: Where a fee dispute exists, trust funds should not be withdrawn to pay disputed fees even if a fee agreement allows withdrawal.17 Fees are considered in dispute once an inquiry about their validity is made, regardless of whether a fee agreement exists.18
- Safekeeping Property Other than Cash: Safekeeping assets other than money can be a challenge in that the methods required to adequately safeguard the property can differ according to the type of property being kept. As an initial matter, when safeguarding client property, lawyers should always maintain careful records of what property is being held, and the methods being used for safeguarding.19 Safeguarding a vehicle is a very different proposition than safeguarding expensive jewelry. Whatever method you choose, be prepared to defend the reasonableness of the methods you’ve chosen to protect the property.
- Safekeeping Property of a Client in a Dispute with a Third-Party: Lawyers usually owe duties only to clients, not to third-parties, including creditors.20 When a creditor or other claimant alleges that property being held by a lawyer is owned or owed to the creditor, lawyers “should not unilaterally assume to arbitrate a dispute between the client and the third-party.”21 However, in some situations, a creditor may have “a lawful claim against specific funds or other property in a lawyer’s custody, such as a client’s creditor who has a lien on funds recovered in a personal injury action” such that the lawyer may have an obligation to the creditor.22 Usually, absent a court order or proof of lien, lawyers should not transfer the assets of a client to any other party. To be safe, research the applicable law carefully before acting.
- Model Rule 1.1: Duty of Competency
- Lawyers have a duty to provide competent representation to a client, which demands the “legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation.”23 In addition, the duty of competency specifically requires the “use of methods and procedures…of competent practitioners.”24 Accordingly, lawyers should periodically research what billing procedures are generally acceptable in the legal community to ensure that the procedures they are using meet the standard.
- Model Rule 1.3: Duty of Diligence
- Lawyers have an ethical duty to, “act with reasonable diligence and promptness in representing a client.”25 Failing to timely bill for services or keep sufficient records supporting billing can violate this duty. Therefore, it is important that proper billing policies are in place and followed.
1 See MODEL RULES OF PROF’L CONDUCT R. 1.5(a) (amended 2013), available here.
2 See MODEL RULES OF PROF’L CONDUCT R. 1.5(b) (amended 2013), available here.
4 See MODEL RULES OF PROF’L CONDUCT R. 1.5(c) (amended 2013), available here.
6 See MODEL RULES OF PROF’L CONDUCT R. 1.5(d)(2) (amended 2013), available here.
7 See MODEL RULES OF PROF’L CONDUCT R. 1.5(d)(1) (amended 2013), available here.
8 See MODEL RULES OF PROF’L CONDUCT R. 1.5(e) (amended 2013), available here.
9 See MODEL RULES OF PROF’L CONDUCT R. 1.15(a) (amended 2013), available here.
10 See MODEL RULES OF PROF’L CONDUCT R. 1.15 cmt. 1 (amended 2013), available here.
11 See MODEL RULES OF PROF’L CONDUCT R. 1.15(a) (amended 2013), available here.
12 See MODEL RULES OF PROF’L CONDUCT R. 1.15 cmt. 1 (amended 2013), available here.
13 See MODEL RULES OF PROF’L CONDUCT R. 1.15 cmt. 1 (amended 2013), available here.
14 See MODEL RULES OF PROF’L CONDUCT R. 1.15(d) (amended 2013), available here.
15 See MODEL RULES OF PROF’L CONDUCT R. 1.15(d) (amended 2013), available here.
16 See MODEL RULES OF PROF’L CONDUCT R. 1.15(d) (amended 2013), available here.
18 See MODEL RULES OF PROF’L CONDUCT R. 1.15(e) (amended 2013), available here.
19 See MODEL RULES OF PROF’L CONDUCT R. 1.15(a) (amended 2013), available here.
20 See MODEL RULES OF PROF’L CONDUCT R. 1.15(e) cmt. 4 (amended 2013), available here.
22 See MODEL RULES OF PROF’L CONDUCT R. 1.15(e) cmt. 4 (amended 2013), available here.
23 See MODEL RULES OF PROF’L CONDUCT R. 1.1(amended 2013), available here.
24 See MODEL RULES OF PROF’L CONDUCT R. 1.1 cmt. 5 (amended 2013), available here.
25 See MODEL RULES OF PROF’L CONDUCT R. 1.3 (amended 2013), available here.
Risk Management Best Practices Database Legal Statement
Information provided by Attorney Protective is not intended as legal advice. This publication provides best practices for use in connection with general circumstances, and ordinarily does not address specific situations. These best practices are not intended to meet or establish the standard of care, and sometimes recommend practices that exceed the standard of care. Specific situations should be discussed with legal counsel licensed in the appropriate jurisdiction. By publishing practice and risk prevention tips, Attorney Protective neither implies nor provides any guarantee that claims can be prevented by use of the suggested practices. Though the contents of Attorney Protective's Best Practice Database have been carefully researched, Attorney Protective makes no warranty as to the accuracy, applicability or timeliness of the content. Anyone wishing to reproduce any part of the Attorney Protective Best Practices Database content must request permission from Attorney Protective by calling 877-728-8776 or sending an email to email@example.com. Additionally the rules cited in the contents of this database may have since changed. You should check the laws and model rules in your state for specific information on the topics addressed here.