The Risk Manager, Fall 2007

At a recent KBA Services Committee meeting the question was raised of how many Kentucky lawyers accept credit cards to collect fees. No one knew the answer and the group’s best guess was that relatively few did. If this is correct, many Kentucky lawyers are missing out on both a good business practice and a good risk management practice.

Lawyers, steeped in tradition, are often slow to accept change in how they practice – especially if the change tends to ‘commercialize’ the way legal service is delivered. This may account for the conclusion that many lawyers in Kentucky do not accept credit cards. If this is the case, however, they are ignoring that we now live in a society that thrives on use of credit cards to pay for services. Offering a credit card option for fee payment improves client service by providing a convenient way for fee payment consistent with the way many people now routinely pay their bills.

Even more important is that accepting credit card payments for earned fees, retainers, and advance expenses facilitates payment at the inception of a representation as well as payment for replenishment of retainers and payment of in-progress billing. Fee disputes often arise at the end of a representation when a large fee is due – this is especially the case if the client was disappointed in the outcome of his matter. Regular billing and payment by credit card reduces client disputes over fees that frequently lead to bar complaints and malpractice claims. Best of all you get paid for your valuable services.

So what’s the problem? While it is true that fee collection by credit card was recognized many years ago as permissible for Kentucky lawyers, accepting credit card payments was inhibited because there were a number of unanswered ethics questions about how to safeguard fees paid by credit card. This made it difficult to know how to manage a firm’s accounts. Specifically:

• May all billing to a client be paid by credit card or only earned or non-refundable fees? What about retainers (unearned fees) and advance expense payments?
• In what kind of firm bank account should credit card payments be deposited when received by the bank – an office account or a trust account?
• How are bank credit card service charges applied? Does the full amount charged apply to the client’s bill or only an amount net of bank service charges?
• If a client disputes a charge and directs the credit card issuer to “charge back” the payment against the firm’s trust account, is the firm at risk of using other client funds to cover firm obligations?

Fortunately, the recent Formal Ethics Opinion KBA-E426 (3/23/2007) answers all these questions. It provides both the professional responsibility guidance and the client trust account management considerations required to confidently accept credit card payments in your practice. This opinion is a must read whether you are currently accepting credit card payments or are considering to do so. The opinion was published in Bench & Bar, Vol. 71, No. 4, July 2007.

One question not addressed in KBA-E426 was: Is it permissible to arrange for automatic charges against a client’s credit card? This question was discussed as follows in the article “Credit Cards, Firm Trust Accounts, and Thou,” (Bench & Bar, Vol. 67, No.6 , Nov. 2003, available on our web site – go to the Resources/Bench &Bar Articles page).

The Missouri, South Carolina, and Nassau County (N.Y.) bars permit automatic credit card charges (i.e., without the client signing the credit card slip) if the client agrees. The key consideration in all three states is clarity of client communications. It is not enough simply to include automatic credit card charges as part of the terms in a letter of engagement. A lawyer must discuss the procedure with the client and get specific approval. A receipt must be sent to the client notifying of the charge. South Carolina requires that the client be sent a bill for review before making the pre-authorized charge against the credit card. Nassau County requires a written agreement if charges are for prospective services.

By following the procedures developed in other states for automatic credit card payments, Kentucky lawyers should meet ethical requirements of client communication and fair dealing. Nonetheless, it is an aggressive method of collecting fees that suggests a call to the KBA Ethics Hotline is in order before employing automatic credit card charge procedures. (footnotes omitted)