All in the Family: Disgorgement of Attorney Fees

All in the Family: Disgorgement of Attorney Fees

November 1, 2012

Published in Chicago Lawyer, November 2012
By Daniel R. Stefani

The Illinois Marriage and Dissolution of Marriage Act ("IMDMA") allows for one party to petition the court to order another party to pay their attorneys' fees during the pendency of a case. If the court finds that both parties lack the financial ability to pay their own attorneys' fees, the court shall enter an order that allocates available funds for each party's counsel in a manner that achieves substantial parity between the parties. Available funds include "retainers or interim payments, or both, previously paid". In such a situation, an attorney for one party may be required to disgorge "retainers, interim payments or both" pursuant to the statute. The Court's ability to reach into attorneys' client trust accounts and/or operating accounts to achieve such disgorgement is an issue that the Appellate Court has had to deal with on two occasions in 2012.

In the case of In re Marriage of Earlywine, 972 N.E.2d 1248, the Appellate Court, reviewed the issue of whether a trial court could require disgorgement of money held as an advance payment retainer.

The Appellate Court held that the trial court could require such a disgorgement of an advance payment retainer as a means of furthering the policy of establishing substantial parity between the parties in dissolution actions by "leveling the playing field".

In Earlywine, petitioner's attorney was ordered by the trial court to turn over to respondent's attorney the sum of $4,000 that petitioner's attorney held as an advance payment retainer. Petitioner paid the sum of $8,750 to his counsel during the case which came from his family members as loans. The trial court found that a substantial amount of fees had been paid to petitioner's attorney from other sources and despite the fact that petitioner did not have the ability to pay respondent's fees, it was reasonable to order that petitioner's counsel disgorge a portion of those fees paid in order to achieve substantial parity between the parties. On a motion to reconsider, petitioner argued that the fees paid to his attorney were paid as an advance payment retainer and therefore, not subject to disgorgement in light of Dowling v. Chicago Options Associates, Inc., 226 Ill. 2d 277 (2007).

In Dowling, the Supreme Court explicitly recognized not only the classic retainer and security retainer, but a third type of retainer known as an advance payment retainer. Monies paid in the form of an advance payment retainer become the property of the attorney immediately upon payment and are deposited into that attorney's general operating account. Said retainer is therefore protected from judgment creditors.

The trial court held that public policy allowing divorce litigants to participate equally should override the advance payment retainer device of protecting the fees paid from creditors. The trial court specifically held that "to allow petitioner to shelter the fees paid on his behalf as an advance payment retainer defeats the purpose of the ‘substantial parity' provisions of the IMDMA".

The Appellate Court agreed stating that the Supreme Court cautioned that "advance payment retainers should be used only sparingly" and that a spouse in a divorce action is different than a judgment creditor. The court went on to state that permitting the use of an advance payment retainer in a divorce case would do away with the leveling of the playing field between the parties. The court further held that because the IMDMA did not limit what type of "retainer" was subject to disgorgement (even though the money in an advance retainer technically belonged to petitioner's attorney), the trial court could order that a portion of the money still be disgorged.

In September 2012, the Appellate Court, First Judicial District of Illinois issued Illinois Supreme Court Rule 23 Opinion on a similar issue in In re Marriage of Elizabeth Nash and Heriberto Lopez Alberola, No. 1-11-3724.

In Nash, the court considered the propriety of a disgorgement order against respondent's counsel from a retainer that had been initially deposited into their operating account and which was substantially earned at the time of the order. The Appellate Court reversed the trial court holding that the disgorgement order was void. Unfortunately, the Appellate Court did not get to the issues of whether the disgorgement order could reach such funds when they were already earned by respondent's counsel because the trial court failed to make the requisite findings that respondent lacked the ability to pay attorney fees which is a condition precedent to a disgorgement order as required under the IMDMA.

Had the trial court made the requisite finding, the court could have dealt with the issue of whether a disgorgement order could reach fees not only paid as a "retainer" but those fees already earned and deposited into the attorney's operating account. In defense of such a position, respondent's counsel argued that the disgorgement order was void because the court lacked statutory authority to order such disgorgement because the fees had already been paid and earned and deposited into their operating account and requiring respondent's counsel to turn over those fees would amount to an unwarranted deprivation of its property rights and constitute a violation of the constitutional right to substantive and procedural due process, the contracts clause, and the doctrine of separation of powers.

Given the two aforementioned cases, there is clearly still an issue of how far the IMDMA provides for a disgorgement order to reach into law firms' operating accounts when the fees have been earned by the attorney. Although there appears to be legal justification to block the reach of a disgorgement order into attorney's operating account, the statute still provides for such broad language and practitioners should be aware of such a potential reach into their own pockets.