Lawyers increasingly accept credit cards and other payment services such as Paypal and Square for payment of fees.  Lawyers pay for these services through a combination of per transaction and percentage of the transaction fees. When the funds advanced by the client pay the lawyer for fees already earned, credit cards present an issue of whether fees can be passed along to the client.

Unearned fees and unincurred expenses, however, present a more difficult challenge because the funds must be kept in a trust account. When a lawyer has a trust account with a bank as well as a credit card merchant account, banks can often arrange to charge all transaction fees against the lawyer’s operating account rather than the trust account. This is not necessarily the case for independent credit card services, Paypal and Square. Fees may be deducted from the transaction that would otherwise have gone to the lawyer’s trust account. Chargebacks potentially threaten other client funds in the trust account if it is tied to a credit card, Paypal or Square.

Texas Foundation for Equal Justice rules for trust accounts subject to IOLTA states that:

“No funds belonging to the attorney or law firm, except funds reasonably sufficient to pay for fees or obtain a waiver of fees or to keep the account open, may be deposited in such an account.”

When clients have made payments to lawyer trust accounts through a credit card, Paypal or Square, some lawyers have simply deposited an additional amount sufficient to cover the amount deducted by the third party processor as shown on a monthly statement. While IOLTA appears to allow deposit of credit card fees to a trust account, both IOLTA and trust account rules prohibit lawyers from paying their operating expenses out of trust accounts and replenishing the trust account later. Texas Disciplinary Rule 1.14 (“Such (client) funds shall be kept in a separate account…”), Order Amending Rules Governing the Operation of The Texas Access to Justice Foundation,  Texas Supreme Court Misc. Docket No. 06-9166, December 18, 2006, Rule 4, Deposit of Certain Client Funds, (“(T)he funds covered by this rule shall be subject to withdrawal upon request and without delay.) Some states have held that the lawyers’ obligation is simply to return unearned fees promptly, but Texas appears to take the position that unearned fees must be deposited in trust accounts.  State Bar of Texas, Lawyer’s Guide to Trust Account, When to Use Trust Accounts, pg. 3,http://www.texasbar.com/Content/NavigationMenu/ForLawyers/ResourceGuides/TrustAccounts/TrustAccountBooklet.pdf.

To meet these rules, deposits made to cover credit card fees would have to occur when the deduction is made, which is often impossible. Indeed, several states have issued ethics opinions indicating that lawyers cannot accept credit card payments tied to trust accounts. See State Bar of Arizona Ethics Opinions 08-01: Fees; Trust Accounts; Credit Cardshttp://www.azbar.org/Ethics/EthicsOpinions/ViewEthicsOpinion?id=697 (rule later amended), State Bar of California Standing Committee on Professional Responsibility and Conduct, Formal Opinion No. 2007-172,http://ethics.calbar.ca.gov/LinkClick.aspx?fileticket=ngt5WX-QswE%3d&tabid=836 (California does not require deposit of unearned fees into a trust account).

In other cases, lawyers have added a charge to client bills sufficient to cover fees. If such a fee was acceptable, clients must be informed of the charge in advance. Despite recent settlement agreements between credit card issuers and merchants which potentially allow such fees, Texas law does not allow such fees by any merchant, and it appears that enforcement of this rule has recently intensified. Texas has long prohibited such fees on credit cards in Section 339.001 of the Finance Code, and recently extended the prohibition to debit and stored value cards. See http://www.dallasnews.com/investigations/watchdog/20130627-the-watchdog-texas-merchants-who-charge-extra-for-credit-debit-purchases-face-more-than-a-warning-letter.ece  This author has made no investigation as to whether federal law applies to or may preempt state law on this issue.

Lawyers have options that both preserve the integrity of the trust account and allow use of credit cards.  A lawyer can arrange to have credit card fees can be paid from an operating account rather than the trust account to which client funds are deposited, though many credit card issuers are unwilling to make such accommodations. Another solution in some situations may be to suggest that a client take a cash advance on their credit card to pay a retainer, though that will incur a higher rate of interest.

With Paypal and Square, no safe solution is evident. Some lawyers have tied one of these accounts to a clearing bank account, and transfer funds from the clearing account to their trust account, along with any additional amount necessary to cover fees if necessary. This eliminates the potential for chargebacks, but does not eliminate a temporary shorting of client funds.

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A good summary of credit card ethics opinions ishttp://www.americanbar.org/newsletter/publications/youraba/201210article12.html.