The California State Assembly approved AB 1515, the bill that would require California attorneys to place unearned advanced fees in trust by a vote of 79-1.  The bill is now been assigned to the Senate Judiciary Committee.

The State Bar Board of Trustees has tabled the recommendation from its Operations Committee that the Bar sponsor the bill.  It seems likely that the bill will be amended to carve out criminal defense and bankruptcy work.

John Steele and I had the pleasure of discussing the pros and cons of AB 1515 with the Santa Clara Bar Association Board. They asked excellent questions, including whether there is an empirical evidence regarding the role advanced fees play in funding solo and small firm practices.  Usually, there is little or no empirical evidence supporting the adoption of a new discipline rule and this time is not different.  It’s assumed that placing advanced fees in trust will increase public protection.  Moreover, its assumed that the quantum increase in public protection whatever negative consequences, intended or unintended, flow from the rule change.

The rationale for this rule change now is the state of the Client Security Fund, which paid out $11 million in 2013, most of which is claimed to be because of unearned fees claims.  But Client Security Fund rules only allow payment when the conduct amounts to conversion:

Client Security Fund Rule 3.431 (B): “Failure to refund unearned fees received in advance for services when the attorney performed an insignificant portion of the services or none at all. Such a failure constitutes a wrongful taking or conversion. All other instances of an attorney’s failure to return an unearned fee or the disputed portion of a fee are outside the scope of this provision and not reimbursable under these rules.”

Is placing advanced fees in a client trust account really going to address this type of dishonest conduct?  Carolyn Elefant at MySingle.com raises the question of whether there is a better way to help solo and small firm practices fund their cash flow AND protect consumers from being ripped off than the the traditional and costly method of requiring placing advanced fees in trust.  I have seen the power of credit card companies to bring fraudulently run businesses to a halt in the loan modification context where the business model is built on credit card payments.  Ms. Elefant dares to ask whether we even need the traditional client trust account given the protections that can be built into electronic payments.

The impact of financing in the provision of low cost legal services is acknowledged by the State Bar itself.

 But that issue never made it to the discussion of AB 1515–at least this year.  The news now comes that AB 1515’s sponsor Lorena Gonzalez had requested that bill be “held in Committee” — meaning it is dead for this year, to await revival next year in what hopefully will be a more scrupulous examination than this years’s strange process.