SharpThinking

No. 73  Perspectives on Developments in the Law from The Sharp Law Firm, P.C.   August 2012

Retainer Moneys May Be Diverted to Opponent

In Marriage Dissolution Actions, Court Holds

By Rebecca L. Reinhardt, Rreinhardt@lotsharp.com, 618-242-0246

            An attorney may be forced to turn over to the opponent retainer moneys received in a dissolution-of-marriage action, regardless of the fee structure arranged with the client, a panel of the Illinois Appellate Court ruled last month.

            In a decision that is sending shock waves around the Illinois family law bar,  the Second District Appellate Court in Earlywine v. Earlywine,  2012 IL App (2d) 110730, held that a court, in a dissolution-of-marriage action, can order that funds held by one party’s attorney be turned over to opposing counsel as interim attorney fees.  This ruling not only applies to client trust accounts, in which funds are owned by the client, but also to funds which have been provided to the attorney as an “advance payment retainer” and which have been placed in the attorney’s operating account as property of the attorney.                                                                                               

            As decreed in Dowling v. Chicago Options Assoc. Inc., 226 Ill.2d 277 (2007), Illinois law recognizes three types of “retainers” paid by clients to attorneys:  the classic or general retainer; the security retainer; and the advance payment retainer.  The classic or general retainer is paid by a client to the lawyer to secure the attorney’s availability during a specified period or for a specific matter.  This type of retainer is earned upon receipt and immediately becomes the property of the attorney.  This is often set as a flat fee and must be kept separate from the client’s funds.  The security retainer is an unearned retainer placed in a trust account, where the client retains ownership interest.  The attorney generally bills against the separate account once the fee has been earned.  Any unused portion of this retainer is returned to the client.  The advance payment retainer consists of a present payment to the attorney in exchange for the commitment to provide legal services in the future.  Ownership of this retainer passes to the attorney immediately upon payment.  Because of the ethical obligation to segregate client funds from that of the attorney, these funds are generally placed in the attorney’s general operating account.  The classification of the retainer type is based in contract law and principle, the primary objective being to give effect to the client and the attorney’s intent.

            However, in stark contrast to principles of contract law and classification of the type of retainer an attorney receives are the public policy concerns involving individuals in a dissolution-of-marriage action.  In a dissolution proceeding the court is a court of equity and has broad discretion to effectuate equity between the parties.

            Section 501(c-1)(3) of the Dissolution of Marriage Act, 750 ILCS 5/501(c-1)(3), allows for the court to assess an interim attorney’s fees award against an opposing party in an amount to enable the petitioning party to participate in the litigation effectively.  The section states that “if the court finds that both parties lack financial ability or access to assets or income for reasonable attorney’s fees and courts, the court shall enter an order that allocates available funds for each party’s counsel, including retainers or interim payments, or both, previously paid, in a manner that achieves substantial parity between the parties” (emphasis added).

            In Earlywine, the husband and the wife were in significant debt.  As a result, in order to proceed in a dissolution action the husband borrowed $8,750 from family members.  He then in turn provided the funds to his attorney in the form of an advance payment retainer.  Because the retainer was an advanced payment retainer, the husband’s attorney obtained an immediate ownership interest in the funds.  Husband’s attorney then initiated dissolution-of-marriage proceedings.  The wife thereafter petitioned for an award of interim attorney’s fees.  The circuit court, after finding that there were no other funds available, ordered the husband’s attorney to turn over to the wife’s attorney $4,000 of the retainer.  Husband appealed.  

            The Appellate Court determined that because the legislature clearly stated in the statutory language that previously paid retainers could be utilized to achieve parity between the parties, the ownership interest in the funds were irrelevant.  Husband’s attorney was ordered to turn over $4,000 of the retainer paid by the husband to the wife’s attorney.  The court also noted that while it recognized the source of the funds were a loan from the husband’s family members, who most likely had no intent of the funds being turned over to the wife’s attorney, the public policy of parity between the parties outweighed this consideration.

            While it appears from the facts in Earlywine that the retainer funds were still available, the decision leaves open the issue of funds paid on retainer that have been earned and expended by the attorney.  As the court points out in Earlywine, the Dissolution of Marriage Act does not distinguish between the forms of retainers paid that are subject to turn over orders.  This leads to a potential ethical conundrum for attorneys.  Ethically, client funds must be separated from the attorney’s funds.  Once earned, or in the form of an advance payment retainer, the funds are generally placed in a firm operating account, and ethically may be spent by the attorney.  The treatment of the retainer as a security retainer may not ultimately resolve the issue either, in that, the Earlywine court disregarded that the ownership interest in the funds rested with the husband’s attorney, not the husband.

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