American Prepaid Legal Service Institute

Can You Take the Credit?

You work in a small law firm. You have recently agreed to represent a client in a business transaction, and you have requested a fee advance to cover the first 20 hours you will spend on the matter. The client wants to pay you the fee advance with his credit card. Can you accept the credit card payment?

In general, lawyers may accept credit card payments from clients in payment of legal fees that have already been earned. ABA Formal Opinion 00-419 (2000) withdrew a number of earlier ABA opinions on legal fee financing issues and stated that the use of credit cards is permissible so long as the lawyer's promotion of the fact that he accepts credit cards is not false, fraudulent or misleading. Most state bar opinions also permit lawyers to accept credit card payments. See the following excerpt from the ABA/BNA Lawyers' Manual on Professional Conduct:

Most states now permit lawyers to accept credit card payment for fees. E.g., Colorado Ethics Op. 99 (1997); Florida Ethics Op. 00-4 (2000); Hawaii Ethics Op. 35 (1996); Michigan Informal Ethics Op. RI-168 (1993); New York State Ethics Op. 709 (1998); New York County Ethics Op. 690 (1992); New York City Formal Ethics Op. 1995-1 (1995); North Carolina Ethics Op. 247 (1997) (index to North Carolina opinions are located here); Ohio Supreme Court Ethics Op. 91-12 (1991) (index to Ohio Supreme Court Board of Grievances and Discipline Opinions is located here:); South Carolina Ethics Op. 98-08 (1998); South Dakota Ethics Op. 92-2 (1992) (index to South Dakota ethics opinions is available here:); Utah Ethics Op. 97-06 (1997); see also Maine Bar Rule 3.3(b) (lawyer may accept payment by credit card for legal services). - 41 Law Man. Prof. Conduct 602

See Also California State Bar Opinion 2007-172 (2007) and Kentucky Opinion E-426 (2007)

For further information on legal fee financing arrangements with clients, see the August 2006 Eye on Ethics article entitled "Litigation Financing."

Fee advances: retainers and flat fees

In general, fees that have been paid in advance of the legal services to be performed belong to the client and must therefore be placed in the client trust account until they are earned. Note, however that certain types of advance payments may be considered to be the lawyers' property upon receipt such as retainers (fees that are paid to secure the lawyer's future availability) or flat fees (fees that are not based on the amount of time that a lawyer spends on the matter) are considered to be the lawyer's property upon receipt and should be placed in the lawyers operating account. Check your local rules, ethics opinions and case law for guidance as to how certain fee advances are characterized in your jurisdiction. For further discussion and analysis of these issues, see the attached excerpt from annotations following Rule 1.15 from the 2007 edition of the ABA Annotated Model Rules of Professional Conduct, and the chapter entitled, "Trust Accounts: General" that appears at page 45:101 of the ABA/BNA Lawyers' Manual on Professional Conduct.

Credit cards; fee advances; "charge backs"

I. Arizona

With regard to fee advances, i.e. fees that are considered to be the clients property until they are earned, there have been a number of state bar ethics opinions that have considered whether a lawyer may accept payment by credit card. In Arizona, both the Arizona State Bar and the Arizona Supreme Court have made pronouncements on this issue. State Bar of Arizona Opinion 08-01 (2008) addressed this question and had concluded that a lawyer may not deposit a fee advance in the form of a credit card payment in his trust account. Even though some of the conclusions reached in this opinion may have been effectively withdrawn by recent emergency amendments to the Arizona Supreme Court Rules (See discussion below) they nonetheless highlight the basis for the ethical concerns involved when a lawyer accepts a credit card in payment of fee advances. The Arizona Ethics Committee had two basic objections to the use of credit cards for fee advances. First, it noted that some credit card companies prohibit charging for future services and that for a lawyer to accept payment by a credit card company that had such restrictions would violate the lawyers agreement with the credit card company. Second, the Committee was concerned that if the client were to dispute the lawyers fee in the future after the lawyer had withdrawn them, the credit card company could withdraw or charge back the disputed amount from the trust account that could put other clients trust funds at risk:

& Once the lawyer transfers funds from the trust account, however, the client may still have a right to dispute the charges with the credit-card provider. Therefore, if the trust account were the designated credit-card merchant account, the provider could have the ability to access the trust account and withdraw an amount equivalent to the amount the client has disputed even after the lawyer has removed the earned portion of the funds. Because the original funds would no longer be in the trust account, the funds withdrawn by the credit-card provider would not be the same funds and, therefore, could be funds belonging to other clients. For this reason, we conclude that the potential danger to the property of other clients created by the credit-card providers right of access precludes use of the trust account as the designated merchant account for credit-card transactions involving payment of expected fees or costs. Furthermore, while the period of time available to a cardholder to dispute a charge may vary according to contract, we conclude that the opportunities for a client to dispute a charge generally are long enough to make them incompatible with the lawyers prohibition against commingling lawyer property and client property in the trust account. - Arizona State Bar Opinion 08-01.

In November of 2008, the State Bar of Arizona filed a petition with the Arizona Supreme Court in which it requested a series of amendments to Rule 1.15 of the Arizona Rules of Professional Conduct and to Supreme Court Rule 43 Trust Accounts. A copy of the petition with appendices is located here. In response, the Arizona Supreme Court adopted on an emergency basis the amendments as proposed which became effective on January 1, 2009. The Arizona Supreme Court order regarding this matter along with a redlined version of the amended rules is located here. The State Bar of Arizonas petition is open for public comment until May 20, 2009.

The amendments as adopted permit lawyers to place credit card payments for fee advances into their trust accounts provided that the lawyer strives to get the credit card company to agree to debit all charge backs against the lawyers business account. The amendments provide further that in the event that the chargeback is debited against the lawyers trust account, the lawyer would have three days to replace them with his own funds:

&To further protect client and third-party funds, lawyers and law firms should strive to use a credit card processing service that deposits advance fees, costs and expenses into the trust account but which debits the operating or business account for all fees and charges related to credit card transactions (e.g., merchant or credit card transaction fees, chargebacks and fees associated therewith, other charges or fees related to credit card transactions).

Lawyers and law firms are permitted to place their own funds into their trust accounts in very limited circumstances. Lawyers and law firms that accept payment by credit card for advance fees, costs or expenses must at all times maintain sufficient funds of their own in their trust accounts to ensure that no bank or credit card fees or charges results in the conversion or misappropriation of funds belonging to clients or third parties. A lawyer violates this rule by failing to make the required deposit within three business days of receipt of notice or actual knowledge that a chargeback has been made to the trust account. When lawyers and law firms are required to maintain their own funds in their trust accounts to reimburse the account for trust account and credit card fees and charges, such funds must be deposited into their trust accounts before such fees or charges are imposed. Lawyers and law firms must maintain in their trust accounts sufficient funds of their own to pay fees and charges related to operation of the trust account, and to pay all credit card fees and charges (e.g., merchant and credit card transaction fees, chargeback fees, minimum monthly transaction fees, address verification fees). Lawyers and law firms must make a reasonable determination of the amount of their own funds that may appropriately be kept in their trust accounts to pay trust account and credit card fees and charges. Lawyers who maintain an unreasonable amount of their own funds in their trust accounts will be subject to a finding of misconduct. Lawyers and law firms that use credit card processing services that debit all chargebacks and credit card fees and charges from an operating or business account are not required to maintain their own funds in their trust accounts since no client or third-party funds will be at risk due to debits from the trust account& - Order Amending on an Emergency Basis Rule 42, Er 1.15, And Rule 43, Rules Of The Supreme Court No. R-08-0030

II. Other state bar opinions

California State Bar Opinion 2007-172 (2007) stated that since under the California Rules of Professional Conduct, a lawyer is permitted but not required to deposit advance fee payments into his client trust account, the lawyer could deposit fee advances into his business account. The California Committee went on the suggest that in order to preserve the funds' availability, once the lawyer deposits the fee advance into his business account, he could then transfer the advance into his trust account. Having done so, he could then cover any debits that might arise from a fee dispute with his own operating funds in the business account:

The fact that an attorney need not deposit fees not yet earned into a client trust account does not mean that, solely as a matter of prudence, the attorney should decline to do so. Upon termination of employment, an attorney is subject to an ethical obligation under rule 3-700(D)(2) to "[p]romptly refund any part of a fee paid in advance that has not been earned." Failure to deposit such fees into a client trust account risks their unavailability at the time, if any, at which they must be refunded. After they are deposited in a merchant account by a credit card issuer, such fees may ethically be transferred into a client trust account. By means of such a transfer, an attorney would ensure their availability should he or she be required to refund any or all of them to the client. Although not ethically required to make a transfer of this sort, the attorney may consider doing so solely as a matter of prudence. It follows that Attorney in the Statement of Facts may ethically accept a deposit for fees not yet earned. California State Bar Opinion 2007-172 (2007)

The California committee went on to consider whether credit card payments for advanced costs and expenses could be placed in the client trust account. Under the California Rules of Professional Conduct, unlike fee advances, advance payments for costs and expenses must be deposited in the client trust account. Therefore, the committee concluded that because of concerns similar to those expressed in the State Bar of Arizona opinion, funds paid in advance for costs and expenses may not be deposited in a client trust account since the credit card company could withdraw disputed funds after they had been disbursed thereby placing other clients' funds at risk:

Because an attorney must deposit advances for costs and expenses from a client into a client trust account, he or she may not ethically accept such a deposit by credit card, as explained above, to the extent that the credit card issuer deposits funds into a merchant account that is subject to invasion. It follows that the attorney may not ethically accept any payment or deposit from a client by credit card, whether for earned fees or fees not yet earned, if the payment or deposit includes advances for costs and expenses. California State Bar Opinion 2007-172 (2007).

Kentucky Opinion E-426 (2007) states that if a lawyer accepts a credit card payment for a fee advance that must be deposited into his client trust account, he should try to negotiate an agreement with the credit card company so that in the event of a fee dispute and subsequent charge-back of the disputed fees, it would debit the lawyer's business account and not the trust account for any disputed fees. The Opinion cautioned that "any arrangement that could result in the charge back against another client's funds in the trust account is strictly prohibited."

See Also North Carolina Opinion 97 Eth Op. 9 (1998). Oregon Opinion 2005-172 (2005) suggests that the lawyer have an arrangement with his bank whereby the bank will either debit another account or automatically transfer funds from the lawyers business account into his trust account in the event of a chargeback.

State Bar of Michigan Opinion RI-344 (2008) suggested that the lawyer get the credit card company to agree to withdraw the funds from his business account. Otherwise, the fee should not be considered as earned until after the time the client has to dispute the amount has expired:

...Credit card companies give their customers a period of time in which to dispute a charge. When the customer informs the credit card company of a dispute, the credit card company removes the charge from the customer's account (here the client) pending investigation of the dispute and charges it back to the merchant's account (here the lawyer). If the chargeback is accomplished by withdrawing funds from the trust account and the lawyer has withdrawn the disputed amount believing that the legal fees had been earned, the Trust Money will be depleted below the required level and the lawyer will have committed an ethical violation. The less problematic practice would be to obtain the credit card company's agreement to withdraw chargebacks from the business account. If not, the lawyer should conclude that the fees and expenses are not earned until the dispute period has passed. State Bar of Michigan Opinion RI-344 (2008)

For further information on this topic, see an article by Constance V. Vecchione, chief bar counsel with the Massachusetts Board of Bar Overseers, "No Easy Credit."