Must a firm refund a retainer after withdrawing for a conflict, and can it make the client release malpractice or misconduct claims?

Plain-English summary

Bar Counsel and the Grievance Commission asked the Professional Ethics Commission about a firm that took a $1,000 retainer to handle financial negotiations with a bank, then discovered a conflict and withdrew from that representation while continuing to handle the client's unrelated collection matters. When the client demanded the full retainer back, the firm first kept the part it attributed to the collection work, then returned the balance only after the client signed a release of any and all claims of ethical misconduct, professional negligence, economic harm, physical injury, or emotional distress.

On the retainer, the Commission applied Rule 3.5(a)(3), under which a withdrawing lawyer must promptly refund any part of a fee paid in advance that has not been earned. Because the $1,000 was paid specifically for the bank matter from which the firm withdrew, none of it could be treated as 'earned' by the firm's work on the unrelated collection matters, so it had to be refunded.

On the release, the Commission split the analysis. Under Rule 3.6(b), a lawyer may not exonerate himself from or limit liability to a client for malpractice, so a release of future malpractice claims was prohibited. A release of malpractice claims already existing at the date of the release could be valid only as a 'settlement' under the rule's second sentence, and because settling a malpractice claim is a business transaction with a client under Rule 3.6(i)(2), it had to meet the Rule 3.6(i)(1) safeguards: the terms must be fair and reasonable, fully disclosed in understandable terms, the client must be advised and given a reasonable opportunity to seek independent counsel, and the client must consent in writing. (One member disagreed that settling a malpractice claim is a business transaction.) As for the release of present or future ethical-misconduct claims, the Commission concluded it is both ineffectual and prohibited by Rule 3.2(f)(1) (no lawyer may circumvent or subvert the Bar Rules), so a lawyer may neither request nor accept such a release.

Currency note

This opinion was issued in 1986, before Maine's replacement of the former Maine Bar Rules with the Maine Rules of Professional Conduct (effective August 1, 2009). Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Must a firm refund a retainer when it withdraws from the matter it was paid for?

A: The opinion concluded yes. Under Rule 3.5(a)(3) a withdrawing lawyer must refund any advance fee not earned, and a retainer paid for the specific matter the firm withdrew from is not earned by work on unrelated matters.

Q: Can a lawyer make a client release future malpractice claims?

A: The opinion concluded no. Rule 3.6(b) bars a lawyer from exonerating himself or limiting his liability to a client for malpractice, so a release of future malpractice claims is prohibited.

Q: Can a lawyer settle a malpractice claim that already exists?

A: The opinion concluded yes, but only as a business transaction with the client under Rule 3.6(i): the settlement must be fair and reasonable, fully disclosed in understandable terms, with the client advised and given a chance to consult independent counsel, and consenting in writing.

Q: Can a client release a lawyer from claims of ethical misconduct?

A: The opinion concluded no. Such a release is both ineffectual and prohibited by Rule 3.2(f)(1), and a lawyer may neither request nor accept it.

Background and rules framework

The opinion interprets former Maine Bar Rule 3.5(a)(3) (prompt refund of unearned advance fees on withdrawal), Rule 3.6(b) (limiting liability for malpractice, with an exception for settling or defending a claim), Rule 3.6(i)(1) and (2) (business transactions with a client), and Rule 3.2(f)(1) (no circumvention of the Bar Rules). These correspond to ABA Model Rule 1.16(d) (refunding unearned fees on termination), Model Rule 1.8(h) (limiting malpractice liability and settling claims with unrepresented clients or former clients), Model Rule 1.8(a) (business transactions with a client), and Model Rule 8.4(a) (violating the rules through the acts of another or otherwise).

Citations and references

Rules of Professional Conduct:

• Model Rule 1.16(d) (refund of unearned fee); Model Rule 1.8(h) (limiting liability; settling malpractice claims); Model Rule 1.8(a) (business transactions with a client); Model Rule 8.4(a)
• Maine Bar Rules 3.5(a)(3), 3.6(b), 3.6(i)(1), 3.6(i)(2), 3.2(f)(1)

Other opinions cited:

• Maine Professional Ethics Commission Opinion No. 66: release of a lawyer from claims of ethical misconduct

See also

• ABA Formal Op. 505: Fees Paid in Advance
• ABA Formal Op. 02-425: Arbitration in Retainer Agreements

Source

• Landing page: https://mebaroverseers.org/attorney_services/opinion.html?id=91115

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

Issued by the Professional Ethics Commission

Date Issued: March 14, 1986

Pursuant to M. Bar R. 11(c)(1), both Bar Counsel and the Grievance Commission have requested an advisory opinion from the Professional Ethics Commission with respect to the following fact pattern:

Client C retains the services of law firm XYZ for the specific purpose of handling certain financial negotiations with Bank B on behalf of C. The written agreement between C and XYZ with respect to this representation specifically indicates the hourly rate for such services, as well as C's obligation to pay an initial retainer of $1,000. C made payment of the retainer, and XYZ commenced its representation of C by contacting B.

Subsequent to this initial work performed by XYZ, it was determined that the firm had an apparent conflict of interest, and was no longer able to represent C, regarding any claim against B.

Prior to ending XYZ's representation of C with respect to matters involving B, XYZ had represented C on certain collection matters, unrelated to B or the conflict. It was agreed, that despite XYZ's withdrawal from representation of C concerning B, that XYZ would continue to represent C on the collection matters. When C was advised by XYZ of its inability to represent him reference B, C demanded the return of his entire $1,000 retainer. XYZ then indicated that portions of the retainer were to be applied toward services and expenses regarding the defense of the unrelated collection claims, and returned to C the retainer less the amount attributable to such claims. Later, however, XYZ returned the balance of the retainer, upon C's execution of a release of XYZ from any and all actual or threatened claims of ethical misconduct, professional negligence, economic harm, physical injury or emotional distress.

Questions Presented

• Given the specific language of the fee agreement, is XYZ authorized to retain portions thereof for other unrelated matters, or are they required to return all of the retainer to C?

• Was the release from professional negligence authorized pursuant to M. Bar R. 3.6(b)(2)?

• In any event, notwithstanding the answers to questions 1 and 2 above, is a release from any present or future claims of ethical misconduct appropriate pursuant to the Maine Bar Rules?

Opinion

• Return of Retainer. Maine Bar Rule 3.5(a)(3) provides, inter alia, that 'a lawyer who withdraws from employment shall refund promptly any part of a fee paid in advance that has not been earned.' By virtue of Rule 3.5 (a)(3), the critical question here is whether the portion of the initial retainer fee which was not refunded to the client had been 'earned' by the firm. If the initial retainer fee was paid to the firm for the specific purpose of the firm's representation of the client in the subject matter of representation from which the firm later withdrew from representation, it is the opinion of the Commission that under Rule 3.5(a)(3) no part of that initial retainer fee could be said to have been 'earned' by the firm's representation of the client in other matters which were unrelated to the subject matter for which the initial retainer was paid.

• Release from Professional Negligence. Maine Bar Rule 3.6(b) provides:

(b) Limiting Liability. A lawyer shall not attempt to exonerate himself from, or limit, his liability to his client for his personal malpractice or that of his partners or salaried employees. This rule shall not prevent a lawyer from settling or defending a malpractice claim.

To the extent that the release in question purports to release the firm from malpractice claims that might arise in connection with the firm's future representation of the client, the release would be prohibited by the first sentence of Rule 3.6(b).

To the extent that the release purports to release the firm from malpractice claims that might have existed as of the date of the release, the release would be permissible only if it could be considered to constitute the 'settlement' of a malpractice claim under the second sentence of Rule 3.6(b).

Since the settlement of a malpractice claim with a client constitutes a 'business transaction' with a client within the meaning of Rule 3.6(i)(2), the requirements of Rule 3.6(i)(1), which are made applicable to such a transaction by virtue of Rule 3.6(i)(2), must be read into the 'settlement' provision of the second sentence of Rule 3.6(b). Construing the 'settlement' provision of the second sentence of Rule 3.6(b) in conjunction with Rule 3.6(i)(1) and (2), the Commission concludes that a lawyer's settlement and acceptance of a release of his client's malpractice claim against him is not permissible unless, consistent with Rule 3.6(i)(1) and (2), the release and settlement are fair and reasonable to the client and are fully disclosed and transmitted to the client in manner and terms which should have reasonably been understood by the client; the client is advised and given a reasonable opportunity to seek independent professional advice of counsel of the client's choice regarding the settlement and release; and the client consents in writing to the settlement and release.[1] One member of the Commission believes that the settlement of a malpractice claim with a client is not a 'business transaction' within the meaning of Rule 3.6(i)(2) and is therefore not subject to the restrictions imposed by the opinion.

• Release from Present and Future Claims of Ethical Misconduct. It is the opinion of the Commission that a client's release of a lawyer from past or future claims of ethical misconduct is both ineffectual and prohibited by virtue of Maine Bar Rule 3.2(f)(1), which provides that '[a] lawyer shall not (1) directly or indirectly . . . circumvent, or subvert any provision of the Maine Bar Rules.' It would therefore be improper for a lawyer to request or to accept a client's release of present or future claims of ethical misconduct. See Ethics Commission Opinion No. 66.

Footnote

[1] The Commission notes that the release in any event may be ineffectual because of lack of consideration if the only consideration for the release was the refund to the client of the initial retainer fee. Assuming the facts to be as discussed in part (1) above, the client would have been entitled to that refund as a matter of right.