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Archive for the ‘Professional Liability and MPL’ Category

Are Non-Refundable Lawyer Retainers Legal in California?

Posted on: January 26th, 2021

By: Greg Fayard

Joe wants to hire Bill, a California lawyer, to defend a breach of contract case. Bill agrees to defend Joe but will only take a $10,000 non-refundable retainer. Is this legal? No. 

Under Rule 1.5(d) of the Rules of Professional Conduct that govern California lawyers, non-refundable retainers are now permitted in a very limited circumstance—the rare “true retainer” situation. The “true retainer” is from an earlier time when there were fewer lawyers and a client needed to secure a lawyer’s services for a specified time in a specific matter.

True retainers are most often used by some lawyers who contract as general counsel for their clients. For example, in exchange for being on call 24/7 to handle accident emergencies for a trucking company, a true retainer arrangement is permissible where the trucking company would pay the lawyer, say $5,000, at the first of the month to secure the lawyer’s availability for the upcoming month. This “true retainer” ensures the lawyer’s immediate availability for that month.

In this situation, non-refundable legal fees are permitted so long as disclosed and agreed to in writing by the client. Otherwise, in our example, Bill cannot accept a non-refundable retainer to defend Joe’s breach of contract case. 

If you have any questions or would like more information, please contact Greg Fayard at [email protected], or any other member of our Lawyers Professional Liability Practice Group, a list of which can be found at www.fmglaw.com.

California Lawyers Who Ignore Lienholders Do So At Their (Disciplinary) Peril

Posted on: October 20th, 2020

By: Greg Fayard

In personal injury law, California lawyers regularly must deal with medical liens. For example, lienholders have certain rights to proceeds from a settled case and expect to be paid. In the past, if a California lawyer ignored or mishandled a medical lien on personal injury proceeds, the lienholder could pursue the attorney for the amount owed.

But now, under Rule 1.15 of the Rules of Professional Conduct, California lawyers can now be disciplined for ignoring or mishandling lienholder rights. That is, money from a California lawyer’s client trust account can only be released to the client or a lienholder if there is NO dispute as to who gets what.

Until the dispute over the personal injury funds is resolved, California lawyers have to keep the money in their client trust account. If a lawyer does not do this, and disburses funds that were supposed to go to a lienholder, the lawyer can now be disciplined by the State Bar. This means a California lawyer who is not careful with handling medical liens now is subject to both civil and disciplinary exposure.

If you have any questions or would like more information, please contact Greg Fayard at [email protected], or any other member of our Lawyers Professional Liability Practice Group, a list of which can be found at www.fmglaw.com.

Tax Court Finds that a Rejected E-Filed Tax Return Satisfies the Beard Test

Posted on: September 29th, 2020

By: Lee Whatling

The IRS’ software automatically rejects e-filed tax returns that do not meet certain criteria. Paper tax returns are generally not subject to the same treatment. This disparity came to a head in Fowler v. Commissioner, 155 T.C. No. 7 (2020), in which the petitioner’s timely-e-filed tax return was automatically rejected by the IRS’ software for the failure to provide a valid Identity Protection Personal Identification Number (“IP PIN”).

On October 15, 2014, a CPA firm timely e-filed a 2013 Form 1040 on behalf of their client, Mr. Fowler, signing the document using a Practitioner PIN. The same day, the IRS rejected the tax return for failure to provide a valid IP PIN. Since Mr. Fowler was a victim of identity theft, he was issued an IP PIN to confirm his identity when filing with the IRS. Following a second attempt to file the return, which was inexplicably not received by the IRS through certified mail, Mr. Fowler’s 2013 tax return was accepted by the IRS’ software on April 30, 2015. Almost three years later, on April 5, 2018, the IRS sent Mr. Fowler a notice of deficiency for the 2013 tax year. Mr. Fowler subsequently petitioned the United States Tax Court, arguing that the IRS’ assessment of his 2013 taxes was barred by the three-year statute of limitations, as prescribed in 26 U.S.C. § 6501.

The Court, on cross motions for summary judgment, agreed, finding that Mr. Fowler’s first attempt to file his 2013 return on October 15, 2014, was a properly filed required return, thus triggering the three-year statute of limitations. The unanimous court, applying the three-prong test in Beard v. Commissioner, 82 T.C. 766 (1984), aff’d, 793 F.2d 139 (6th Cir. 1986), found that Mr. Fowler’s October 2014 return (1) purported to be a return and provided sufficient information to calculate tax liability, (2) constituted an honest and reasonable attempt to comply with the requirements of the tax law, and (3) was executed under penalties of perjury.

The latter finding proved the most contentious, with the IRS arguing that Mr. Fowler’s omission of an IP PIN failed the signature requirement. The Court, however, found the instructions included with the 2013 Form 1040 controlling, noting that there was no IRS guidance characterizing an IP PIN as a signature. The 2013 Form 1040 instructions provided only that “a personal identification number (PIN),” either a Self-Select PIN or a Practitioner PIN, would constitute a valid e-signature. Therefore, as Mr. Fowler’s 2013 return was signed with a valid Practitioner PIN, the signature requirement was satisfied. The Court emphasized that taxpayers are entitled to rely on the instructions referenced on IRS forms and that the IRS “cannot disavow” those instructions when convenient to their litigation position. The Court then found that there was no genuine dispute that Mr. Fowler’s return was properly filed, since it was submitted and received by the IRS as an e-filed return. See Appleton v. Commissioner, 140 T.C. 273 (2013). Accordingly, as the 2013 return constituted a “properly filed” “required return,” the Court granted summary judgment in favor of Mr. Fowler, finding that the return triggered the three-year limitations period.

Although Fowler clarifies the requirements for a required return under the Beard test, a word of caution: The Court did not hold that an IP PIN would never constitute a valid signature. Under 26 U.S.C. § 6061, the Secretary has congressionally-granted authority to prescribe forms or regulations that define the signature method for a tax return and to develop procedures for the acceptance of signatures in digital or other electronic form. Practitioners, therefore, must keep abreast of any changes in the relevant rules and regulations concerning the requirements for a valid e-signature, as well as review the instructions to the relevant form for the relevant year. Failure to do so could result in an unexpected tax assessment for the client.

If you have any questions or would like more information, please contact Lee Whatling at [email protected], or any other member of our Accountants Liability Practice Group, a list of which can be found at www.fmglaw.com.

Arbitration Clauses in Legal Engagements Are Not Per Se Void

Posted on: September 17th, 2020

By: Dana Maine

Joining with most other jurisdictions, the Georgia Supreme Court affirmed a Court of Appeals decision finding that arbitration clauses in attorney engagement agreements are not against public policy and clarified the burden of persuasion for demonstrating procedural unconscionability in Innovative Images, LLC v. James Darren Summerville, et al., (Sept. 8, 2020).  In reaching this decision, the Supreme Court disregarded the question of whether the attorney violated Georgia Rules of Professional Conduct 1.4(b), which is identical to ABA Model Rule of Professional conduct 1.4(b).  This rule states, “A lawyer shall explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation.”  ABA’s Standing Committee on Ethics and Professional Responsibility has issued a formal opinion (02-425) which requires the attorney to fully apprise his/her client of the advantages and disadvantages of arbitration before asking the client to enter into an agreement requiring arbitration.  

The issue of violation of Rule 1.4(b) is a separate issue from whether the clause is enforceable, according to the Georgia Supreme Court.  Simply put, arbitration is favored in the State of Georgia and is not void as against public policy.  For the same reason, mandatory arbitration is not substantively unconscionable, leaving only the question of whether it is procedurally unconscionable.

In order for the clause to be procedurally unconscionable, it must be one “‘no sane [person] not acting under a delusion would make and that no honest [person] would take advantage of’ and ‘one where one of the parties takes a fraudulent advantage of the other.’” (Quoting NEC Technologies, Inc. v. Nelson, 267 Ga. 390 (1996)). Under the facts in the case, the only “evidence” to support unconscionability was the fact that defendants had not demonstrated that plaintiff was a sophisticated client.  The Georgia Supreme Court found error with the trial court’s shifting of the burden in this regard from plaintiff to defendant.  Thus, according to the Georgia Supreme Court, plaintiff had not met its burden and the arbitration clause was enforceable.

While the Georgia Supreme Court invited the State Bar to issue an advisory opinion on the topic, it made it unequivocally clear that any opinion would have no impact on the enforceability of an arbitration clause, and the clause would be enforced as long as the procedure for entering into the agreement was appropriate.  A practitioner should keep in mind the general rules that the client must be fully informed about the scope and effect of the arbitration clause, and the lawyer’s liability cannot be limited by referral of the dispute to arbitration.  In the end, arbitration can benefit both parties by bringing any dispute to a speedy and cost-effective conclusion.   

If you have any questions or would like more information, please contact Dana Maine at [email protected], or any other member of our Lawyers Professional Liability Practice Group, a list of which can be found at www.fmglaw.com.

Avoiding Implied Attorney-Client Relationships with Individual Members of Small Companies

Posted on: September 15th, 2020

By: Jennifer Weatherup

Where an attorney represents a partnership or entity, there is the potential for him or her to create an implied attorney-client relationship with its individual members, imposing a duty of care that the attorney may not be prepared to satisfy. This risk is particularly strong with small entities and partnerships, and attorneys who act on behalf of these entities must avoid inadvertently creating an implied relationship with any individual officers or members.

In California, the factors for determining the existence of an implied attorney-client relationship were set forth in Responsible Citizens v. Superior Court (1993) 16 Cal. App. 4th 1717. The Court in Responsible Citizens noted that, as a general rule, the attorney for a corporation represents the corporate entity, and represents its stockholders and its officers exclusively in their capacity as corporate representatives. However, it held that an attorney for a partnership could, through his or her conduct, enter into an “implied” attorney-client relationship to represent the interests of individual partners. Various factors could indicate that an implied relationship existed, including the type and size of the partnership, the nature and scope of the attorney’s engagement, the parties’ conduct, the existence of agreements between the attorney and the individual partner, and the attorney’s access to information regarding the individual partner’s interests. These factors must be considered within the totality of the circumstances.

Responsible Citizens was most recently revisited in September 2019, in the matter of Sprengel v. Zbylut (2019) 40 Cal. App. 5th 1028. The court in Sprengel concluded that, although it was relevant that the attorney represented a limited liability company with two 50 percent shareholders, this arrangement did not, in itself, create implied attorney-client relationships between the attorney and the shareholders. Because there was no evidence to demonstrate that “the parties conducted themselves in a way that would reasonably cause a shareholder to believe the attorney would protect the shareholder’s individual interests,” the plaintiff in Sprengel was unable to establish an attorney-client relationship with the defendant attorney.

To avoid owing a duty to their corporate client’s officers or shareholders, attorneys who represent partnerships and closely-held corporations should set reasonable boundaries between their representation and individual shareholders or members to avoid creating any impression that the attorney would protect their individual interests.

If you have questions or would like more information, please contact Jennifer Weatherup at [email protected]