Disciplinary Board v. Hoffman, 2013 ND 137

Background

In July 2010 Bradford Wetmore hired Michael R. Hoffman on a written contract providing a $30,000 "minimum fee" (expressly nonrefundable) plus $1,000 into a trust for costs; Hoffman deposited the $30,000 into his operating account.
Hoffman performed limited services from July–September 2010 (about 25.8 hours, including a preliminary hearing on Sept. 21); Wetmore discharged Hoffman on Sept. 22, 2010 and asked for return of any unearned portion; Hoffman refused.
Disciplinary Counsel charged Hoffman with violations of N.D.R. Prof. Conduct 1.5 (fees), 1.15 (safekeeping property), and 1.16(e) (duties on termination).
A Hearing Panel found violations of 1.5, 1.15 and 1.16(e), recommended a reprimand, refund of $25,460, and assessment of costs; Hoffman objected.
The North Dakota Supreme Court reviewed de novo, concluded the $30,000 minimum fee was reasonable and properly retained (no 1.5 or 1.15 violation), but held Hoffman violated 1.16(e) by failing to refund the unearned portion after termination.
Court ordered Hoffman to refund $25,460 with interest from Sept. 22, 2010, and to pay partial disciplinary costs of $2,400; it declined to impose further discipline.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether Hoffman's $30,000 nonrefundable "minimum fee" was an unreasonable fee in violation of Rule 1.5	The minimum fee was effectively an unearned advance and unreasonable given the work performed	The fee was reasonable for the case, common in the locality, and clearly communicated as nonrefundable	Fee was reasonable under Rule 1.5; no 1.5 violation
Whether depositing the $30,000 in Hoffman's operating account violated Rule 1.15	The payment was an advance fee and should have been held in trust until earned	Because the contract labeled the fee nonrefundable and the fee became counsel's property, depositing in operating account was proper	No 1.15 violation: under the contract the $30,000 became lawyer's property and need not be held in trust
Whether Rule 1.16(e) requires refund of any unearned portion of a designated nonrefundable fee upon client termination	Nonrefundable designation cannot shield lawyer from Rule 1.16(e); client discharged counsel before contemplated work completed so unearned portion must be returned	A nonrefundable minimum fee is earned on receipt and not subject to refund upon termination	Court held Rule 1.16(e) requires refund of unearned fees upon termination even if fee was labeled nonrefundable
Remedy and sanction: amount to refund and disciplinary penalty	Hearing Panel proposed refund ($25,460) plus reprimand and full costs	Hoffman urged no refund and no discipline or retroactive application of later law	Court ordered refund of $25,460 with interest and partial costs $2,400; declined to impose reprimand

Key Cases Cited

In the Matter of Cooperman, 633 N.E.2d 1069 (N.Y. 1994) (criticizes special nonrefundable retainers as against public policy)
In re Disciplinary Action Against Hann, 819 N.W.2d 498 (N.D. 2012) (discusses flat-fee/retainer analysis and need to evaluate earned portion on termination)
Grievance Adm’r v. Cooper, 757 N.W.2d 867 (Mich. 2008) (upholds certain nonrefundable minimum fees under state ethics rules)
In re Disciplinary Action Against Karlsen, 778 N.W.2d 522 (N.D. 2008) (required refund of unearned portion of nonrefundable flat fee when work not completed)
Disciplinary Bd. v. Madlom, 688 N.W.2d 923 (N.D. 2004) (nonrefundable fee violated Rule 1.5 where representation terminated before work completed)
Kentucky Bar Ass’n v. Earhart, 360 S.W.3d 241 (Ky. 2012) (nonrefundable fees may be permitted but total fee must remain reasonable; refund may be required upon termination)
In re Sather, 3 P.3d 403 (Colo. 2000) (labeling a fee nonrefundable does not relieve obligation to return unearned fees upon discharge)