Left Hand, Meet Right Hand. You Need to Talk

Assembly Bill 1515 (Gonzalez – San Diego) was amended effective 3/20/14 to add new section 6068(p) to the Business and Professions Code which would require an attorney to deposit advanced fees into a client trust account and withdrawn them only as earned:

(p) To deposit fees and expenses that have been paid in advance for legal services into a client trust account, which shall be withdrawn by the attorney only as fees are earned or expenses incurred. The State Bar shall adopt for approval by the Supreme Court any necessary amendments to its rules of professional line conduct to conform with this subdivision.

Subsection (p) and the new Rule of Professional Conduct contemplated by the Legislature would be similar to ABA Model Rule 1.15(c):

Rule 1.15 Safekeeping Property (c) A lawyer shall deposit into a client trust account legal fees and expenses that have been paid in advance, to be withdrawn by the lawyer only as fees are earned or expenses incurred.

In 2001, the State Bar of California, at the urging of our Supreme Court, appointed a Rules Revision Commission to revise our Rules of Professional Conduct, with, among other goals, making them more consistent with the rules in other 49 states, which are all based on the ABA Model Rules.

Nine years later, after an exhaustive process that certainly must have taken hundreds if not thousands of man-hours, a final version of proposed new Rules of Professional Conduct was presented to the Board of Trustees (who were then known as the Board of Governors) of the State Bar, who finally adopted the new rules on September 22, 2010.

But the ground had shifted in those nine years.  Former Chief Justice Ron George, who apparently been pushing the rules revision project, announced in July 2010 that he would not seek re-election and retired in January 2011.   The Great Recession that began in 2008 was plunging the state and the judicial branch into a financial crisis that would severely impact the funding of the courts.   Dissident judges of the Alliance of California Judges began to question the governance of the Administrative Office of the Courts.

The State Bar was having its own leadership struggles.  Gov. Schwarzenegger had vetoes the dues bill in 2009;  in 2010, the Legislature’s fee bill created the Governance in the Public Interest Task Force that was to begin the ongoing process of completely removing any real attorney control over the State Bar.  “Governors” became “Trustees” and the public protection became the alpha and omega of the organization. Suddenly, consistency with other states professional rules didn’t seem important anymore.  And the new proposed rules, rules that had been criticized by two members of the Commission that wrote them as too lawyer-friendly, have sat in strange limbo for the last 42 months.  As of December 26, 2013, only 14 of the proposed new rules have been sent to Supreme Court for approval.  It’s hard not to conclude that this project is dead on arrival.

The concept of requiring unearned advanced fees in trust is not new, even in California, not one of the 30 jurisdictions who have adopted this rule.  After former Rule of Professional Conduct 8-101 was adopted in 1975, the State Bar tried to argue that it required unearned advanced fees to be placed in trust in Baranowski v. State Bar (1979) 24 Cal.3d 24.  The Supreme Court side-stepped the issue as only the Supreme Court can:

The novel aspect of the issue is the seemingly implicit contention of the respondent State Bar that the issue of costs and expenses is irrelevant. Its argument would appear to be that any advance fee payment must be deposited in an identifiable trust account until such time as it is earned. We need not, however, resolve the question of whether or not an advance fee payment is correctly characterized as money “received or held for the benefit of clients” within the meaning of rule 8-101 fn. 4 since petitioner’s violation of the various sections of the Business and Professions Code fully warrants the Disciplinary Board’s recommendation of a six-month actual suspension.

After the most recent revision of the Rules in the late 1980’s, the Supreme Court was presented with a revision to current Rule 4-100, the successor to 8-101, that would have made it apply explicitly to advanced unearned fees. It rejected that revision.

Model Rule 1.15 (C) was considered “controversial” by the Rules Revision Commission and was explicitly considered and rejected for the following reasons:

Rejected mandatory advance fee deposit in trust account: The Commission rejected one concept of Model Rule 1.15(c), which requires that all advance fees be placed in a trust account until earned. Many lawyers can follow this principle as a matter of good risk management and to foster good client relations, but there are situations in which the requirement would create harm. For example, lawyers in certain fields of practice, such as criminal defense and family law lawyers, customarily utilize advance fee payments beginning when received and count on this in order to provide services to their clients. If their advance fees had to be deposited in a client trust account, the funds could be seized by client creditors or by law enforcement agencies, so the client would have funds with which to pay for a defense. Adding the MR’s requirement would prevent some lawyers from representing clients, thereby limiting access to justice in those areas. In addition, there are situations in which the client could be harmed if advance fees were placed in the lawyer’s trust account, such as when creditors attach or government agencies freeze client trust funds that otherwise would be held to pay legal fees and expenses (S.E.C. v. Interlink Data Network of Los Angeles Inc. (9th Cir. 1996) 77 F3d 1201). This, also, is a significant access to justice issue. Finally, our Supreme Court has historically refused to approve such a mandatory rule. The Commission believes these public protection issues are better addressed by a rule that regulates advanced fees and makes the standards for handling such fees explicit. (See Proposed Rule 1.15(d), above.)

Minority: A minority believe that Model Rule 1.15 is a much more understandable and workable rule on safekeeping property for California lawyers than this very complex rule for the reasons stated by the Los Angeles County Bar Association Professional Responsibility and Ethics Committee. In addition, California should provide the same level of public protection provided in the Model Rule and in the rule followed by most jurisdictions by requiring advance fees to be deposited in a client trust account. Having such a requirement would greatly simplify this rule and would reconcile this rule with proposed rule 1.5.

The Board-approved version of California proposed Rule 1.15 has not yet been sent to California Supreme Court for approval.

According to the AB 1515 Advance Fees Fact Sheet DRAFT produced by Assemblywomen Gonzalez office, the sponsor of AB 1515 is the State Bar.  In the past, the Board would have placed this on its agenda and taken a vote on whether to sponsor such legislation.  While there was discussion at the Board of Trustees planning meeting in January 2014 of the idea of requiring advanced fees to be placed in trust, no other public action was taken by the Board.  How the State Bar came to be a sponsor of this legislation is as yet a mystery.  Clearly though, soliciting the opinion of the public, not the mention the “members” of the State Bar, on this issue was not thought to be important.

So now we have the bizarre situation of the State Bar adopting a rule that advanced fees don’t have to be placed in trust, a rule that you would expect to be forwarded to the Supreme Court, and then the State Bar sponsoring Legislation that  would require advanced fees to be placed in trust.

This institutional schizophrenia may be what State Bar President Luis Rodriguez was obliquely referring to in his opening remarks at the recent annual State Bar Ethics Symposium in San Francisco.  He practically pleaded with the audience, many of them California lawyers with a high degree of involvement in ethics, to scrutinize carefully proposals coming from the State Bar.   One could wonder who is running the place.

 

 

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