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MARYLAND STATE BAR ASSOCIATION, INC.
COMMITTEE ON ETHICS
ETHICS DOCKET NO. 1989-19
Trust Accounts: Use of Interest
In your letter you state that you have all of your clients enter into retainer agreements and have raised a question as to whether certain language within your retainer agreement is compatible with your obligations under applicable Maryland requirements. The two paragraphs to which you make reference read as follows:
""The lawyer maintains a trust account for all clients. All monies received from the client by the lawyer will be deposited in the trust account. All expenses and legal fees are then paid out of the trust account by the lawyer, as appropriated. A ledger card is maintained by the lawyer for the client which details each deposit and payment.
Whatever interest, if any, that might be earned by the Client's money being deposited in the Lawyer's trust account will not be credited to the clients. Rather, that interest will be taken by the Lawyer and used to defray a portion of the operating cost for local telephone calls and administrative processing necessary to provide the client up-to-date information and efficient service, which are not specifically itemized and separately billed to the client.""
In Ethics Docket 81-44, the Committee determined that it was unethical for an attorney to put a client's money in an interest-bearing account and request the client to waive the interest unless the earned interest was directly attributable to and credited against a specific or specifically ascertainable fee. In that regard, please note that references are made to the Disciplinary Rules which have now been replaced by the Maryland Rules of Professional Conduct. However, the basic ethical considerations referred to in the Disciplinary Rules of Ethics Docket 81-44 have been carried to the current Rules including Rule 1.5, Rule 1.7 and Rule 1.8.
Rule 1.5(a) requires that a lawyer's fee be reasonable. Rule 1.5(b) requires a lawyer to communicate the basis for calculating the fee to the client before or within a reasonable time after commencing representation. In Ethics Docket 81-44, the Committee noted, ""that the passive act of holding a client's money while it earns interest does not justify the charging of a fee. … It follows … that any fee charged for such passive conduct by the attorney is 'clearly excessive.'"" (emphasis in original).
Furthermore, Article 10, Section 44 of the Maryland Annotated Code limits the circumstances in which an attorney may place a client's money in an interest-bearing account without crediting the interest to the client. An attorney has the discretion to determine the type of account in which the lawyer deposits client funds. If the monies received from a client ""are too small in amount or are reasonably expected to be held for too short a period of time to generate at least $50 of interest or such larger amount of interest as in the judgment of the attorney may equivalent to the cost of administering an account for the benefit of the client or beneficial owner,"" the attorney may choose to pool such funds in an interest-bearing account and have the interest paid to the Maryland Legal Services Corporation (""MLSC""). Md. Ann. Code Art. 10, Sec. 44(2) (1987). Clearly, then Section 44 requires interest on client funds held by an attorney to be paid either to the client or the MLSC.
Rule 1.7(b) provides that ""[a] lawyer shall not represent a client if the representation of that client may be materially limited … by the lawyer's own interest, unless: (1) the lawyer reasonably believes the representation will not be adversely affected; and (2) the client consents after consultation."" An attorney who keeps the interest on deposits prior to disbursement would have conflicting interests: The independent exercise of professional judgment may require the lawyer to recommend the establishment of an account earning interest for the client while the lawyer personally would benefit if he retained the interest earned on any money deposited in his account. In such circumstances, the representation of the client could be adversely affected by the lawyer's own interests.
Rule 1.8(a) prohibits transactions between clients and attorneys ""unless: (1) the transaction is fair and equitable to the client; and (2) the client is advised to seek the advice of independent counsel in the transaction and is given a reasonable opportunity to do so."" As discussed above, an attorney may not keep the interest earned on client's funds held by the attorney. Thus, an arrangement in which the attorney keeps such interest would not be, by definition, fair to the client.
Your letter of August 19, 1988 also inquires as to whether the applicable Maryland requirements would only apply to clients located in the State o Maryland or otherwise. Our understanding is that you maintain your office for the practice of law in Maryland and that you are a member of the Maryland Bar. Accordingly, the requisites of the Maryland Rules of Professional Conduct apply to all of your transactions with your clients irrespective of where your clients are located or where your funds are maintained.
References: Ethics Docket 1981-44
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