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In re Sather

Supreme Court of Colorado
3 P.3d 403 (2000)
ELI5:

Rule of Law:

An attorney must deposit all advance fees, including flat fees, into a client trust account and may only transfer funds to a personal or operating account after the fees are earned by conferring a benefit or performing a service for the client. Furthermore, an attorney may not label a fee 'non-refundable' as it is a material misrepresentation, given that fees are always subject to refund if they are unearned or excessive.


Facts:

  • Attorney Larry D. Sather entered into a 'Minimum Fee Contract' to represent Franklin Perez in a civil rights lawsuit.
  • The contract required Perez to pay a $20,000 fee, which was described as a 'minimum fee,' a 'non-refundable fee,' and a 'flat fee.'
  • The agreement explicitly stated that 'IN ALL EVENTS, NO REFUND SHALL BE MADE OF ANY PORTION OF THE MINIMUM FEE PAID.'
  • Perez paid Sather the $20,000 in two installments.
  • Sather did not place these funds into a trust account; he spent the money shortly after receipt, believing he had earned it upon receipt.
  • After Sather was suspended for an unrelated matter, Perez discharged him as his attorney.
  • Sather calculated that Perez was owed a refund of $13,076.36 for the unearned portion of the fee.
  • Because he had already spent the funds, Sather did not return the unearned portion promptly, taking nearly five months to complete the refund.

Procedural Posture:

  • An attorney disciplinary proceeding was initiated against Larry D. Sather.
  • A hearing board conducted a hearing on the matter.
  • The hearing board found that Sather violated Colo. RPC 1.15(a) by failing to keep client funds separate, Colo. RPC 1.16(d) by failing to promptly refund unearned fees, and Colo. RPC 8.4(c) by misrepresenting the fee as 'non-refundable.'
  • The hearing board recommended that Sather be suspended from the practice of law for a year and a day.
  • The Colorado Supreme Court took up the case as an original proceeding to review the hearing board's findings and recommendation.

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Issue:

Under the Colorado Rules of Professional Conduct, must an attorney deposit an advance 'flat fee' designated as 'non-refundable' into a client trust account until the fee is earned, and does labeling the fee 'non-refundable' constitute professional misconduct involving misrepresentation?


Opinions:

Majority - Justice Bender

Yes. An attorney must deposit advance fees into a client trust account until earned, and labeling a fee 'non-refundable' constitutes a misrepresentation. The court held that under Colo. RPC 1.15, all advance fees are client property and must be segregated in a trust account until they are earned. An attorney earns a fee only by conferring a benefit or performing a legal service for the client; fees are not earned simply upon receipt. Calling a fee 'non-refundable' violates Colo. RPC 8.4(c) because it is a material misrepresentation that misleads the client and may impermissibly burden the client's absolute right to discharge their attorney and seek a refund for unearned fees. While the court established these rules, it declined to sanction Sather for violating the trust account rule (RPC 1.15) because of prior ambiguity on the issue, but sanctioned him for misrepresentation (RPC 8.4(c)) and for failing to promptly return the unearned fees after discharge (RPC 1.16(d)).



Analysis:

This case prospectively establishes a bright-line rule in Colorado that all advance fees, regardless of their label (e.g., 'flat fee', 'lump-sum'), are client funds that must be held in trust until earned. The decision eliminates a common but ethically perilous practice of treating flat fees as the attorney's property upon receipt. By explicitly banning the term 'non-refundable,' the court aims to protect clients' rights to discharge their counsel without penalty and to receive refunds for unearned fees. This holding significantly clarifies attorney fiduciary duties regarding client funds and will require many practitioners to change their billing and accounting practices to comply with ethical rules.

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