The Retainer That Went Straight Into Operating
Etta retains you in a family law matter. She sends $25,000 by e-transfer with the note 'retainer – do what you need to do.' You deposit it into the firm's general operating account because the trust account requires a branch visit. Three days later you transfer $8,000 to the firm as 'fees earned to date,' and use $3,000 of the remainder to cover payroll while another client's settlement cheque clears. Thirty days later you send Etta a one-line invoice: 'Professional services to date – $11,000.' Etta terminates you by email, disputes the account, and demands return of the full $25,000. You reply that you will hold the funds and the file until she pays, and that the $8,000 is non-refundable. The trust records contain no Etta ledger.
1. Identify the failures and state what should have happened.
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Nearly every step is wrong.
- Deposit. Money received on account of fees and disbursements belongs in trust immediately, whatever the inconvenience. 'The bank is far away' is not a reason.
- Individual ledger. Each client's trust money must be recorded in a separate client ledger, with a running balance. There is none.
- Withdrawal for fees. You may withdraw trust money for fees only after delivering a bill containing reasonable particulars and only to the extent of the amount billed. You withdrew $8,000 before any bill existed, on your own estimate.
- Mixing and misuse. Using $3,000 of client money for firm payroll is not a technical breach - it is converting trust funds, because the money was not yours and was not owed to you.
- Reconciliation. Monthly reconciliation of the trust account and ledger would have caught the $3,000 hole before it grew.
- The invoice. 'Professional services to date' is not a bill with particulars; it cannot justify a withdrawal.
A 'non-refundable' label does not convert unearned money into earned money.
2. Can you keep the $8,000 or the $11,000? Can you hold the funds and the file until she pays?
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No on both counts.
Fees. You may keep only what is actually earned and properly billed. An $11,000 account described as 'services to date' with no time entries, rates or disbursements is not a proper bill, and the $8,000 was taken before any bill existed, so it was never authorised. Any excess is Etta's money and must be repaid now.
The $3,000. This is the serious one. You must replace it from your own funds immediately, not when payroll allows, and then find out whether any other client's money was affected.
Set-off and lien. A lawyer may claim a lien on the file for unpaid fees, but cannot use trust money as security for a disputed account. Trust funds are the client's property and must be paid out on request, with the fee dispute resolved by assessment or an action. Holding the file is also constrained: if withholding it would prejudice Etta in the family proceeding, a court will order it produced, and you should not make the file hostage to a disputed account.
Deliver a proper account, a trust statement and the file, and pay out the undisputed balance.
3. What regulatory and insurance steps are now required, and what do you tell Etta?
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Regulator. A trust shortage or misuse of trust money must be reported to the Law Society promptly and in writing. Do not wait to see whether Etta complains; she already has. Expect an investigation and possible interim suspension, and cooperate fully - including producing the ledgers, bank statements and your own notes.
Insurer. Notify your professional liability insurer at the same time. A trust claim and a negligence claim about the family matter may both follow.
Etta. Give her the facts she is entitled to: a proper account, a trust ledger, and a cheque for the undisputed balance, with a written explanation of the fee dispute and how it can be resolved. Do not tell her the money was 'non-refundable' or that she must pay before the file is released.
Records. Do not reconstruct or backdate ledgers. A rebuilt ledger produced after the complaint is worse than no ledger.
Advise Etta to obtain independent advice about both the account and the conduct of her family matter. Resist the urge to fix the relationship by discounting the bill quietly; that looks like concealment.