The Settlement Check, the Hospital Lien, and the Nonrefundable Fee
Owen Tate is a Manchester personal injury lawyer. He settled Rosa's auto case for $48,000. The fee agreement is a one-third contingency, and the firm advanced $2,150 in costs. Dartmouth-Hitchcock asserts a lien of $11,200 for Rosa's treatment. Rosa does not dispute $7,200 of it, but insists $4,000 was for a pre-existing thyroid condition unrelated to the crash, and she has told Tate in writing not to pay that portion. Tate has not yet deposited the settlement check. Separately, in March Rosa paid Tate a $6,000 "flat fee" to handle her eviction appeal. The written agreement says the fee is "earned upon receipt and nonrefundable." Tate deposited the check into his business operating account the day it arrived. In October Rosa discharged him after the notice of appeal was filed but before any brief was written. Tate estimates he spent eight hours at $300 per hour, or $2,400. Rosa demands $3,600 back. Tate proposes to keep the $3,600, apply it against the disputed $4,000 lien balance, and disburse the rest of the settlement.
1. How must the $48,000 be handled from deposit to disbursement?
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The check goes into the firm's trust account, not the operating account, and nothing leaves until the funds have actually cleared.
Step 1: Deposit. Rule 1.15 requires client and third-party funds to be held in trust. Depositing the check into the operating account is commingling even if every dollar is later accounted for and the client suffers no loss-the violation is in the handling, not the outcome.
Step 2: Identify who owns what. Rosa owns the gross until the fee and costs are earned and the lien is resolved. The firm's $16,000 contingency fee (one-third of $48,000) becomes the firm's property only on disbursement, and only if the agreement computes the fee on the gross rather than on the net after costs-check the language, because the difference here is roughly $717. The $2,150 in advanced costs is reimbursable if the agreement so provides.
Step 3: The disputed lien. Tate may not simply pay the hospital over Rosa's written objection, and he may not ignore the lien either. Rule 1.15(c) requires a lawyer holding funds in which a third person claims an interest to keep the disputed portion separate until the dispute is resolved. Practically: disburse the undisputed $7,200 to Dartmouth-Hitchcock, hold $4,000 in trust, notify the carrier and the provider in writing of the dispute, and consider interpleader if they will not resolve it.
Step 4: Distribute. Pay Rosa the undisputed remainder promptly, with a written settlement statement showing gross, fee, costs, lien payments, and the holdback. Never use the client's funds as leverage in a fee fight.
2. Must Tate refund any of the $6,000 flat fee, and does the "earned upon receipt" clause change the analysis?
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Yes, he must refund the unearned portion-on these facts $3,600-and the clause does not save him.
Advance fees are client property until earned. A fee paid in advance of work is not the lawyer's money the moment it lands. It belongs in trust, and as the work is performed the earned portion may be transferred out. Depositing the entire $6,000 into the operating account in March converted client funds to the firm's use before they were earned.
The label does not control. A written agreement cannot make an unearned fee nonrefundable. Rule 1.16(d) requires a lawyer who withdraws or is discharged to refund any advance payment of fee that has not been earned. Language purporting to make a flat fee nonrefundable is at most a statement about how the earned portion will be calculated; it cannot override the refund obligation. The proper drafting approach is to state the flat fee amount, describe what it covers, and explain in plain terms that the client will receive a refund of the portion not earned if the representation ends early.
Computing the refund. Eight hours at $300 is $2,400 earned, leaving $3,600. But a lawyer who converted the funds and who now must reconstruct hours should expect scrutiny of the time records; if the records are thin, a court may discount the claimed hours.
Practical answers: refund $3,600 promptly, provide a written accounting, and do not net it against the lien. A lawyer may not take a client's money as self-help on a disputed obligation; the remedy for a disputed fee is a fee action, not a setoff.
3. Tate wants to offset the $3,600 refund against the $4,000 disputed hospital bill and tell Rosa the difference is her problem. Evaluate.
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This is the worst of the available options, because it mixes two unrelated pots of money and converts a trust-accounting duty into leverage.
The two obligations are independent. Rosa's right to a refund of unearned fees arises from Rule 1.16(d) and the fee agreement in the eviction matter. The hospital's claim arises from the personal injury matter. Nothing authorizes Tate to satisfy one with the other. His client owes him nothing on the lien; she owes the hospital, if anyone, and she disputes part of it.
The setoff problem. Even if the fee were genuinely owed, a lawyer holding client funds may not unilaterally apply them to a disputed debt. Rule 1.15 requires the disputed portion to stay in trust. Applying it instead converts disputed funds to the lawyer's use-exactly the conduct trust accounting rules are built to prevent, and the sort of thing that draws a bar complaint even when the arithmetic works out.
The communication problem. Telling the client "the difference is your problem" while holding her settlement money invites a claim for conversion, a fee-dispute complaint, and possible discipline for conduct prejudicial to the administration of justice.
Correct path: refund $3,600 to Rosa; disburse $7,200 to the hospital; hold $4,000 in trust with written notice to the carrier and provider; pay Rosa the balance of the settlement with a full written accounting. If the hospital will not negotiate the disputed $4,000, file an interpleader and let a court decide who gets it.