Debtors Need Lawyers, Too: Illinois Courts Ensure Access

Until recently, Illinois courts rarely reviewed attorney-client retainer agreements. But with the economic downturn, civil liability has increased and retainers funded with money from judgment debtors have been challenged in court. Whether you are a creditor who is concerned about limiting ways for a debtor to protect money from collection, a debtor who wants to preserve meaningful access to lawyers when your assets are subject to collection to satisfy a judgment, or a lawyer who wants to protect your debtor/creditor clients, it is important to be aware that the current trend in Illinois case law reflects an attempt to ensure the judgment debtor's right to legal representation against the judgment creditor's right to collect the debtor's assets.

The leading case is Dowling v. Chicago Options Associates, a 2007 Illinois Supreme Court decision in which a judgment debtor gave a law firm a large cash retainer in return for its agreement to help him protect his assets from a judgment creditor. The retention agreement directed the firm to either apply the retainer funds to its final monthly invoice for the retention, or use them to satisfy delinquent fee payments in the interim and return unearned fees to the client when the engagement ended. The client was to pay the firm's fee invoices as they were issued. After the creditor served citations to discover assets on the client and the firm, he learned that the firm had deposited the cash retainer into its general account instead of its trust account. The trial court ordered the firm to turn that money over to the creditor.

But the Illinois Supreme Court held that the retainer monies were beyond the creditor's reach because they constituted an "advance payment retainer," defined as a "present payment to the lawyer for the commitment to provide legal services in the future." Ownership of the advance payment retainer passes immediately to the lawyer upon payment and goes into the lawyer's general account. It cannot go into a trust account since a lawyer cannot commingle a client's property with the lawyer's property. The purpose of an advance payment retainer is to ensure the client's access to legal counsel.

The Illinois Supreme Court explained that most retainers are "security retainers," which are not present payment for future services and are deposited in a trust account until the lawyer applies it to charges for services rendered. Such funds remain the client's property and are subject to creditor claims, which "could make it difficult for the client to hire legal counsel." The court set these requirements for an advance payment retainer agreement:

1. It must be in writing;
2. It must call the retainer an advance payment retainer;
3. It must state that the funds become the property of the lawyer when paid and will not be held in a client trust account;
4. It must inform the client where the funds will be deposited and how the lawyer will handle withdrawals from the retainer in payment for services rendered;
5. It must inform the client that it can choose the type of retainer;
6. It must provide that the lawyer is unwilling to represent the client without receiving an advance payment retainer and the attorney's reasons; and
7. It must describe the special purpose of the retainer and why the advance payment retainer is advantageous to the client.
8. If there is ambiguity about the intent of the parties, courts must construe the agreement as providing for a security retainer.

These conditions were recently liberalized in Hannafan & Hannafan v. Bloom, a November 1, 2011 Illinois Appellate Court opinion. Hannafan, a law firm, obtained a judgment in 2010 against its client, Bloom, for unpaid legal fees. Responding to Hannafan's citation, Bloom's subsequent lawyer produced an advance payment retainer agreement with Bloom, which the parties had signed in 2007, just after Dowling was published. While the advance retainer agreement included most of the Dowling conditions, it did not (1) provide that Bloom alone had the option to choose a retainer, (2) state why his lawyer believed an advance payment retainer was advantageous to Bloom or (3) indicate that his lawyer required the advance payment retainer as a condition of representation. Hannafan sought an order requiring Bloom's lawyer to turn over the funds in his possession, claiming they were a security retainer subject to collection. The trial court denied the motion, finding that the advance retainer agreement was "in substantial compliance with the Dowling test."

The Appellate Court agreed, holding that although the advance retainer agreement did not expressly include the recitals in question, it did state that the parties had considered those matters. Moreover, Bloom's lawyer had told the trial court that the advantages of an advance payment retainer were not set out in the written agreement because Bloom's case involved sensitive issues that "the parties sought to keep confidential from third parties." Putting them in writing "would not have served the best interests of the client," and "the Dowling court sought to protect the interests of clients, not third-party creditors." Bloom wanted his lawyer to "provide him with legal representation against judgment creditors, a situation Dowling specified as appropriate for the use of an advance payment retainer."

Thus substantial—not strict—compliance with the Dowling standards can result in an enforceable advance retainer agreement if the lawyer and client make their intentions clear in their written agreement. While most judgment creditors view the advance retainer agreement as an artifice by which the judgment debtor can protect otherwise reachable funds, there is a good faith component. The Dowling court reflected on "the potential for abuse of advance payment retainers" when "a judgment debtor seeks to resist efforts of a judgment creditor to collect on a judgment." The Illinois Supreme Court noted that Rule of Professional Conduct 1.5(a) requires lawyers to charge reasonable fees, and it did not preclude judgment creditors from challenging excessive advance payment retainers on that basis. Meanwhile, financially distressed clients will surely make use of the advance retainer agreement, which protects both their money and their access to counsel.