Divorce lawyers, hold your breath. The Illinois Supreme Court is about to decide if earned fees may be disgorged. Right now it depends on which appellate district you are in, but soon the rule will be universal.
Where both parties lack the financial ability or access to assets or income to pay reasonable attorney fees, “the court (or hearing officer) shall enter an order that allocates available funds for each party’s counsel, including retainers or interim payments, or both, previously paid, in a manner that achieves substantial parity between the parties.” 750 ILCS 5/501(c-1)(3). This is known as disgorgement.
Disgorgement of retainers and interim payments has been around for 20 years as a product of the Leveling of the Playing Field Amendments to the Illinois Marriage and Dissolution of Marriage Act. However, it was assumed by many that fees billed, earned and paid to one’s attorney would not be disgorged.
The statute does not say only unearned fees may be disgorged, but it shocked many divorce lawyers to think their earned fees for services rendered could be turned over. This is far different than taking retainer funds, held in a client trust account, which are available and refundable if not earned.
In In re Marriage of Earlywine, 2013 IL 114779 (Ill. 2013), the Illinois Supreme Court held a trial court may order disgorgement of an advance payment retainer if both parties lack the financial ability or access to assets or income to pay reasonable attorney fees. The court did not discuss what portion, if any, of the advance retainer was earned at the time of disgorgement. Rather, the focus was on to whom the retainer funds belong and whether all types of retainers are subject to disgorgement.
The attorney in Earlywine argued the advance retainer funds became his property immediately upon payment and were placed in his general account; thus, they were not subject to disgorgement. The court rejected this argument, noting advance retainers are to be used sparingly. The court refused to countenance the attorney’s deliberate effort to shield his client’s funds from disgorgement to the economically disadvantaged spouse by collecting an advance retainer instead of a security retainer. To do so would frustrate the stated purpose of the Leveling of the Playing Field Amendments — to equalize the parties’ litigation resources so that both parties may be represented by legal counsel.
Earlywine left open the question of whether used security retainers and earned fees are subject to disgorgement. The 2nd District Appellate Court says yes; the 1st and 3rd Districts say no. Soon, the Illinois Supreme Court will decide.
In In re Marriage of Squire, 2015 IL App (2d) 150271, the 2nd District Appellate Court upheld the disgorgement of $60,000 from a wife’s attorney to give to the husband’s counsel in order to level the playing field.
It made no difference the wife’s attorney had already billed and earned the fees, depositing them into his general account. The appellate court still deemed the funds available for purposes of disgorgement, consistent with the purpose of leveling the playing field. After Squire, there was a push to modify the language of Section 501(c-1)(3) to provide disgorgement only of retainer funds held by an attorney, but not yet earned. The proposal did not pass.
Nonetheless, the 1st and 3rd Districts still rejected the Squire approach, holding that earned fees may not be disgorged because they are not available funds. In In re Marriage of Altman, 2016 IL App (1st) 143076, the 1st District Appellate Court held that if leveling of the playing field is the only consideration, then used and unused retainers alike would be subject to disgorgement.
However, the word “available” in the statute is significant, indicating a legislative intent to allow turnover of retainers that have not been exhausted. The appellate court expressed legitimate concern over the burden placed on lawyers and law firms who had billed their clients, earned the fees and transferred the funds into their general account, only to have them relinquished to the other side.
Disgorgement would have a particularly harsh impact on newer lawyers charging a fixed fee and alternative pricing options in an effort to provide access to justice and affordable family law services to low- and moderate-income people.
The 3rd District Appellate Court adopted the Altman approach in In re Marriage of Goesel, 2017 IL App (3d) 150101, and drew a timeline in the sand, holding “a trial court may not require payment of interim attorney fees by way of disgorgement of retainer funds previously paid to an attorney when, prior to the attorney receiving notice of the petition for interim fees, the attorney is under no obligation to otherwise return those funds to the client.” Id. at ¶34. Recognizing the conflict among appellate districts, the Illinois Supreme Court allowed the petition for leave to appeal in Goesel, No. 122046.
While it will be months before Goesel is decided, we look forward to a universal answer on whether earned fees and used security retainers may be disgorged. For now, earned fees in the 1st and 3rd Appellate Districts cannot be disgorged, but they may be disgorged in the 2nd Appellate District.