Ethics Counsel on www.OKbar.org

OBA Ethics Counsel

Ethics Opinion No. 291

Adopted 1977

SYLLABUS

A lawyer employed to represent a city for an agreed salary or retainer who renders legal services on behalf of special assessment districts within such city without additional compensation may not permit the city to assess and collect from property owners in such district, and deposit in such city's general fund, amounts denominated as attorney's fees; the city may retain only the portion of any such amounts as appropriately reimburse it for that portion of the salary or retainer paid to its attorney attributable to legal services actually rendered in connection with such special assessment districts. This principle is generally applicable to all cases where by prior agreement, statute or court order a client's counsel fees are payable by another party, without regard to whether the lawyer's employment is on a salaried, retainer or ad hoc basis.

QUESTION SUBMITTED

A lawyer has been retained by a municipal corporation to serve as city attorney, for an agreed regular compensation. In his letter of agreement with the city it is provided that he will serve, without additional compensation, as attorney for all special assessment districts formed within the city during his tenure as city attorney. However, the city is following a practice of including an amount designated as an attorney's fee as part of the final assessment against the property included in such special assessment districts, collecting the amounts including such "fee" and depositing them in the city's general fund. The lawyer inquires whether the practice is in conformity with the Code of Professional Responsibility. For the reasons set out hereinafter, we hold that it is not.

OPINION

The applicable disciplinary rules are the following:

DR 3-101(A):

"A lawyer shall not aid a non-lawyer in the unauthorized practice of law."

DR 3-102(A):

"A lawyer or law firm shall not share legal fees with a non-lawyer...."

See also, EC 3-8.

There are also involved here in framing answers to the question posed, the Disciplinary Rules and Ethical Considerations relevant to the manner in which legal fees are established, particularly DR 2-106(A) and (B), and EC 2-17 and 2-18. It is assumed for the purposes hereof that the cost of legal services required in the establishment of a special assessment district is a proper charge against the property included therein. However, the matter of the manner in which such fees are set is important, and requires discussion.

Taking the latter issue up first, a lawyer should not acquiesce in the establishment by a lay agency, without consultation with the lawyer, of the amount of a legal fee attributable to services rendered by the lawyer, which will be involuntarily imposed upon a third party, here the property owners in the special assessment districts. DR 2-106(A) provides that a lawyer "shall not enter into an agreement for, charge, or collect an illegal or clearly excessive fee," and DR 2-106(B) details the various factors which should be considered by the lawyer as guides in determining the reasonableness of a fee. See EC 2-17 and 2-18. A fortiori, where, as here in the case of a special assessment district property owner, the person required to pay the fee has no choice in the matter (unlike the usual case where a borrower voluntarily signs a note or loan agreement providing for the payment of an attorney's fee, or where a reasonable fee is established by a court), the lawyer has a special responsibility to ensure that the fee established is reasonable.

Assuming an appropriate resolution of the problem relating to the fixing of the amount of the fee to be collected from the property owners, we turn to the disposition of the fees collected.

The Oklahoma Opinions most nearly in point are relatively old. Opinion 7 (9/25/36), 341-43 P.2d Okla. Dec., Ethics Advisory Ops. App. 15 (1960), held that it was unethical for an attorney on retainer from a loan company to remit to that company attorney's fees collected pursuant to a stipulation in a note, even if the fees collected are less than the amount of the retainer. The opinion went on to say that the same result would obtain if the attorney was on a regular salary from the loan company. The reason cited was the prohibition against the division of fees with a layman. This was reaffirmed in Opinion 131 (2/26/37), id. at 110, although State ex rel. Mothershed v. Comm'rs of the Land Office, 135 Okla. 107, 274 P. 473 (1929), was cited as holding to the contrary. (The court therein held that an attorney fee award in connection with a suit on a promissory note was valid although the fulltime, salaried county attorney would not receive any portion of such award, on the ground that the award would go to indemnify the county for a proper portion of the county attorney's salary.) Cf. Opinion 251 (9/14/67), 38 Okla. Bar J. 1893 (9/30/67), reaffirmed by Opinion 269 (1/23/73), 44 Okla. Bar J. 353 (1/27/73), discussing in the context of collection agencies the application of the prohibitions against fee divisions with laymen and the intervention of lay intermediaries.

An American Bar Association Opinion of equally hoary vintage, No. 157 (5/5/36), ABA, Opinions of the Committee on Prof. Ethics 240 (1967 ed.) (herein cited ABA Opinions), held that in jurisdictions where a provision in a promissory note for attorney's fees is held by the courts to provide for the award of reasonable compensation for the legal fees and costs of collection to the payee or holder (but in no event more than the amount stipulated in the note), "it is improper for the attorney to accept less for his services than is awarded and paid to the client as attorney's fees; otherwise stated, the attorney cannot divide with his client the amount awarded by the court as attorney's fees." See also Opinions 8 (4/28/25), ABA Opinions 240, and 10 (7/13/26), id. at 246.

In a more recent ABA Informal Opinion No. 544 (12/31/62), 1 ABA Committee on Ethics and Prof. Resp., Informal Ethics Opinions 137 (1975), it was held that where a lending institution employs a salaried lawyer to consummate mortgage closing transactions, and the mortgagor pays to the lender a legal fee, which is retained by it, it is unethical for an attorney to participate in the practice. This procedure is condemned as both a violation of former Canon 34 (forbidding fee-splitting), and probably of Canon 47 (aiding the unauthorized practice of law), the latter on the ground that the lending institution is thereby selling its attorney's services.

Drinker prefers the "aiding the unauthorized practice of law by a layman or lay agency" analysis, taking the position that such fees in fact belong to the client, so no fee-splitting occurs, but if the lawyer permits the client to retain them, then the client is in effect practicing law. See Drinker, Legal Ethics 67, 97, 179, 181-85 (1957), and authorities cited. It nevertheless appears that most ethics opinions analyze the problem in terms of fee-splitting. The rule as finally formulated by Drinker (id. at 182) is as follows:

"The only situations in which a lawyer may properly permit a client to receive and retain fees paid by others on account of his legal services are when such payments are to reimburse the client in whole or in part for the client's legal expenses actually incurred in the specific matter for which they are paid."

We believe that the foregoing statement appropriately formulates the applicable ethical principle and adopt it. Therefore, it is our opinion that all lawyers, whether employed on a salary, on a continuing retainer or on an ad hoc basis, must so structure their employment arrangements that legal fees assessed against another party by prior agreement, statute or court order are retained by their client only to the extent that such amounts are attributable to the legal expenses incurred by the client attributable to the specific matter with respect to which they are paid.

Consistent with State ex rel. Mothershed v. Comm'rs of the Land Office, 135 Okla. 107, 274 P. 473 (1929), and with considerations of practicality and ordinary common sense, this requirement can be satisfied in the case of lawyers on salary or regular retainer by crediting such fees against an appropriate portion of the lawyer's salary or retainer. Oklahoma Opinions 7 and 131, supra, are modified accordingly. However, any amount in excess of the portion of the lawyer's salary or retainer appropriately allocable to the legal matter in question may not be retained by the client, but must be paid to the laywer [sic].

Applying the foregoing to the instant situation, it would appear appropriate for the lawyer to modify his agreement with the city to provide for special assessment district fees (the amount of which he should participate in setting) to be paid to him; his retainer or salary may, however, be reduced pro tanto. The economic result would thus be the same for both the lawyer and his client the city, but the principle that a lay agency may not profit from the services rendered by its lawyer would be preserved. This result may superficially appear to exalt form above substance, but if a different practice should be countenanced, profit-making lay agencies could argue that they, too, should be permitted to hold themselves out to render legal services through lawyers employed by them, with the result that such lawyers' loyalty and responsibility would run to such agency and not to the client served. We therefore require strict adherence to the basic principle set out above.