What does a California lawyer do when the client demands the entire personal-injury settlement be paid to the client, but the lawyer and client previously acknowledged a health care provider's lien on the funds?

Currency note

This opinion was issued in 1988, before the State Bar of California's adoption of the November 1, 2018 revisions to the Rules of Professional Conduct. The opinion interprets former California Rules 4-100 and 4-210 (the former California Rules of Professional Conduct, with the new rule scheme operative May 27, 1989, referenced in the opinion text); the substance is now in current Rule 1.15. Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

Disclaimer: This is an advisory ethics opinion. Advisory opinions are not binding; they interpret the State Bar of California's rules of professional conduct and are persuasive authority. This summary is for research purposes only and is not legal advice. Verify current rules before acting on any specific guidance.

About this page: The plain-English summary and Q&A below were written by Ezel based on the official opinion. The opinion text is reproduced at the bottom; the official source (linked) controls.

View original opinion

Plain-English summary

The committee considered an attorney who took a personal-injury matter on a contingent fee basis. The client also needed health care, and the provider agreed to treat the client to be paid from the recovery. Attorney and client both acknowledged the provider's interest in writing. After recovery, the client instructed the attorney to disburse all the proceeds to the client alone.

The committee opined that former Rule 4-100(B)(4) required prompt payment of trust funds the client was "entitled to receive," with the exception in former Rule 4-100(A)(2) only addressing conflicts between attorney and client over the funds. Former Rule 4-210(A)(1) allowed an attorney, with client consent, to pay third parties from funds collected for the client. The committee opined that a lawyer holding funds for a non-client third party is a fiduciary as to that party and subject to discipline if the relationship is breached (citing Johnstone v. State Bar, 64 Cal.2d 153 (1966), Simmons v. State Bar, 70 Cal.2d 361 (1969), Clark v. State Bar, 39 Cal.2d 161 (1952), and Crooks v. State Bar, 3 Cal.3d 346 (1970)). The committee also referred to the comment to ABA Model Rule 1.15: a lawyer should not unilaterally assume to arbitrate a dispute between client and third party.

The committee identified five alternatives. (1) The safest course was a civil action in interpleader under Code of Civil Procedure section 386 et seq., divesting the lawyer of responsibility and submitting the dispute to the court (citing Miller v. Rau, 216 Cal.App.2d 68 (1963)). (2) With the consent of both the client and the third party, the lawyer could retain the disputed amount in the client trust account pending resolution; unilateral retention was authorized under Rule 4-100(A)(2) only for a dispute between lawyer and client. (3) Disbursing to the client alone risked civil liability to the provider for degrading an enforceable lien (citing Johnstone) given the lawyer's individual acknowledgment of the provider's interest. (4) Disbursing to the provider against client instructions risked violating Rule 4-100(B)(4), because the lawyer would unilaterally determine the legal effect of the revocation and there might be equitable grounds (such as a dispute over amount or quality of services) the lawyer should not prejudge. (5) Most practical was a combination of (1) and (2): write to both parties stating the existence and nature of the dispute, that the lawyer cannot represent either side in it, that the lawyer will maintain the funds in trust pursuant to the parties' agreement, and that absent such agreement within a set time, interpleader will follow.

The committee opined that, because executing the lien document gave the lawyer fiduciary duties to the third party, the lawyer could not continue to represent the client in the dispute (citing former Rule 3-310(B); Johnstone). The committee opined that former Rule 4-210's full-disclosure requirement is designed to address this conflict at the outset: when the lien agreement is first executed, the client should be advised that the lawyer will be unable to represent the client in any later lien dispute and that, if not resolved otherwise, interpleader will be commenced and the client will need other counsel. The committee opined that the legal enforceability of the third party's interest was beyond its purview.

Common questions

Q: What is the safest course when the client revokes consent to pay an acknowledged lienholder?

A: Per the opinion, the safest course is to file an interpleader action under Code of Civil Procedure section 386 et seq., divesting the lawyer of responsibility and submitting the dispute to the court.

Q: Can the lawyer hold the disputed amount in the trust account while the parties work it out?

A: Per the opinion, yes, but only with the consent of both the client and the third party. The committee opined that former Rule 4-100(A)(2)'s authority to hold funds against client instructions applies only when the dispute is between attorney and client.

Q: Can the lawyer simply pay the client per the client's instruction?

A: Per the opinion, doing so risks civil liability to the third party for degrading an enforceable lien (citing Johnstone v. State Bar, 64 Cal.2d 153 (1966)) because the lawyer individually acknowledged the third party's interest.

Q: Can the lawyer pay the lienholder over the client's objection?

A: Per the opinion, no. The committee opined that Rule 4-100(B)(4) requires the lawyer to pay the client what the client is "entitled to receive," and that the lawyer should not unilaterally determine the legal effect of the client's revocation or prejudge possible legitimate disputes over amount or quality of services.

Q: Can the lawyer continue to represent the client in the lien dispute?

A: Per the opinion, no. The committee opined that the lawyer's acknowledgment of the third party's interest creates a conflict precluding representation of the client in the dispute over the lien, though the lawyer may continue to represent the client in all other respects.

Q: How can the conflict be avoided in advance?

A: Per the opinion, address it in the fee agreement or lien form: cap the lien, obtain the parties' authorization in advance for the lawyer to hold disputed amounts in trust, and disclose at the outset that the lawyer will not represent the client in any lien dispute and that interpleader may follow.

Background and rules framework

The opinion interprets former California Rules 4-100 (client trust accounts) and 4-210 (paying third parties from client funds with client consent), together with former Rule 3-310(B) (conflicts of interest), and refers to ABA Model Rule 1.15 and its comment.

Citations and references

Rules of Professional Conduct (former, in effect at time of opinion):

• Former California Rule 4-100; Rule 4-100(A)(2); Rule 4-100(B)(4)
• Former California Rule 4-210; Rule 4-210(A)(1)
• Former California Rule 3-310(B)

Statutes:

• Code Civ. Proc. § 386 et seq. (interpleader)

Cases:

• Greenbaum v. State Bar, 15 Cal.3d 893 (1976), mishandling trust funds as moral turpitude
• Miller v. Rau, 216 Cal.App.2d 68 (1963), interpleader approval
• Johnstone v. State Bar, 64 Cal.2d 153 (1966), fiduciary duties to third parties holding funds
• Simmons v. State Bar, 70 Cal.2d 361 (1969); Clark v. State Bar, 39 Cal.2d 161 (1952); Crooks v. State Bar, 3 Cal.3d 346 (1970), same
• Weiss v. Marcus, 51 Cal.App.3d 590 (1975); McCafferty v. Gilbank, 249 Cal.App.2d 569 (1967); Siciliano v. Fireman's Fund Insurance Co., 62 Cal.App.3d 745 (1976); Skelly v. Richman, 10 Cal.App.3d 844 (1970) (third-party lien civil liability)

Other opinions cited:

• ABA Model Rule 1.15 and Comment (third-party claims on lawyer-held funds; lawyer should not unilaterally arbitrate)

See also

• CA Ethics Op. 1988-97: Non-Lawyer Signatory on Client Trust Account

Source

• Landing page: https://www.calbar.ca.gov/legal-professionals/ethics-compliance-practice-resources/ethics/ethics-opinions
• Source HTML: https://www.calbar.org/ethics/Opinions/1988-101.htm

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

Ethics Opinions - FORMAL OPINION NO. 1988-101

Editor's Note:

State Bar Ethics Opinions cite the applicable California Rules of Professional Conduct in effect at the time of the writing of the opinion. Please refer to the California Rules of Professional Conduct Cross Reference Chart for a table indicating the corresponding current operative rule. There, you can also link to the text of the current rule.

THE
STATE BAR OF CALIFORNIA

STANDING COMMITTEE ON

PROFESSIONAL RESPONSIBILITY AND CONDUCT
FORMAL OPINION NO. 1988-101

ISSUE:

Client employs attorney to represent client in a personal injury matter on a contingent fee basis. Client is also in need of health care. Health care provider agrees to treat client with the understanding that health care provider will be paid out of the proceeds from any recovery in the personal injury matter. Attorney and client both acknowledge in writing health care providers' interest in the recovery. Thereafter when recovery is had, client instructs attorney not to disburse any funds to health care provider, but to disburse the proceeds to client alone. What is the ethical duty of the attorney in this situation?

DIGEST:

It is the opinion of the Committee that the safest course of action is to commence an action in interpleader. In the alternative, the attorney may contact both parties to the dispute, stating: a) the existence and nature of the dispute; b) that the attorney cannot represent either side in the dispute; c) that the attorney can retain the funds in trust pursuant to the agreement of the parties until the dispute is resolved; and d) that if the parties do not so agree, an interpleader action will be commenced.

AUTHORITIES INTERPRETED:

Rules 4-100 and 4-210 of the Rules of Professional Conduct of the State Bar of California (operative May 27, 1989).

DISCUSSION

In addressing this issue, it is assumed that: (1) there is no dispute between the attorney and the client regarding the attorney's fee interest in the recovery proceeds; (2) there is no dispute that the client initially authorized the disbursement of funds to the third party and thereafter instructed the attorney to pay the funds to the client; and (3) the attorney, as well as the client, acknowledged the third party's interest in the funds.1

Generally, mishandling of client trust funds constitutes moral turpitude and warrants severe disciplinary action. (See Greenbaum v. State Bar (1976) 15 Cal.3d 893 [126 Cal.Rptr. 785].) Rule 4-100 of the California Rules of Professional Conduct specifically addresses an attorney's responsibilities regarding trust funds. Paragraph (B)(4) provides:

A member of the State Bar shall:

. . . .

(4) Promptly pay or deliver, as requested by the client, any funds, securities, or other properties in the possession of the member which the client is entitled to receive.

The only exception to this rule, set forth in rule 4-100(A)(2), acknowledges the right of an attorney to hold in trust, contrary to client instructions, that portion of trust funds in which the attorney and client have conflicting interests. This rule does not, however, address conflicting interests between the client and a third party in funds held by the attorney. Rule 4-210(A)(1) touches on this issue by expressly allowing an attorney, with the consent of the client, to pay or agree to pay third parties out of funds collected or to be collected on behalf of the client.

The American Bar Association Model Rules of Professional Conduct also addresses this issue briefly in the comment to rule 1.15. There it is observed:

Third parties, such as the client's creditors, may have just claims against funds or other property in a lawyer's custody. A lawyer may have a duty under applicable law to protect such third-party claims against wrongful interference by the client, and accordingly may refuse to surrender the property to the client. However, a lawyer should not unilaterally assume to arbitrate a dispute between the client and the third party.

The comment to rule 1.15 also observes that the duties of a lawyer with respect to trust funds in his or her possession go beyond those limited solely to the client. This is consistent with California law. An attorney who holds funds on behalf of a non-client third party is a fiduciary as to that party and is governed by the California Rules of Professional Conduct, even when not acting as an attorney per se in the transaction. (See Johnstone v. State Bar (1966) 64 Cal.2d 153, 155-56 [49 Cal.Rptr. 97] where an attorney assumes a fiduciary relationship with a third party and violates his duty in a manner that would justify discipline if that relationship was with a client, he is subject to discipline.) (See also Simmons v. State Bar (1969) 70 Cal.2d 361, 365-66 [74 Cal.Rptr. 915]; Clark v. State Bar (1952) 39 Cal.2d 161, 166 [246 P.2d 1]; Crooks v. State Bar (1970) 3 Cal.3d 346, 355 [90 Cal.Rptr. 600].)

Although the above authorities touch on the issue presented here, none advise an attorney what to do when, as postulated here, the attorney obtains client consent to honor a third party's interest in trust funds under rule 4-210(A)(1), the attorney and client give assurances that the third party's interest will be honored, and then the client demands upon the attorney's receipt of the funds that they be promptly paid over to the client under rule 4-100(B)(4) instead of the third party.

An attorney confronted with this dilemma has five potential alternatives:2

1. The safest course of action when confronted with such conflicting demands in trust funds, is to commence a civil action in interpleader by which the attorney divests him or herself of responsibility for the funds and leaves the resolution of the dispute to the court. (See Code Civ. Proc., sec. 386 et seq.) Such an approach has received judicial approval in certain circumstances. (See Miller v. Rau, supra, 216 Cal.2d at p. 76.)

2. Where consent is obtained from the client and the third party, the attorney may retain the funds in trust pending a resolution of the dispute between the parties. The funds retained must be placed in the client trust account, must be limited to the amounts in dispute, and all other funds should be appropriately distributed. An attorney, however, cannot unilaterally undertake to hold the disputed funds without the permission of the client and the third party. The attorney is authorized to do so only when the dispute over the funds is between the attorney and the client. (See rule 4-100(A)(2).)

3. Normally, disbursing trust funds to a client pursuant to the client's instructions would be an appropriate course of action. However, under our assumed facts, the attorney and client both individually acknowledged the existence of the health care provider's interest in the funds. Under such circumstances, should the attorney pay the funds to the client, it may be found that the attorney did so in degradation of an enforceable third party lien exposing the attorney to potential civil liability to the health care provider. Paying the funds to the client also potentially violates the attorney's fiduciary duties to the health care provider under Johnstone v. State Bar, supra, 64 Cal.2d 153. By individually acknowledging the existence of the health care provider's interest in the funds, the attorney undertook potential civil and fiduciary duties to the health care provider which now conflict with his duty to obey his client's instructions.3 For this reason, paying the funds to the client is a resolution of the dilemma fraught with difficulties.

4. Paying the disputed funds to the health care provider contrary to client instructions would violate an attorney's duties under rule 4-100(B)(4). Rule 4-100(B)(4) requires the attorney to pay to the client only those funds "which the client is entitled to receive." Even though the client under our assumed facts has revoked the authorization initially given to release the funds to the third party, it is risky for the attorney to unilaterally determine the legal effect of the revocation and who is legally "entitled" to the funds. There are, in addition, equitable considerations which bear upon whether an attorney should disburse the funds to the health care provider. The reasons for the client's demand that the health care provider not be paid may be due to a legitimate dispute over the amount allegedly due or with the quality of the services rendered. An attorney is ill-advised to unilaterally prejudge the merits of such disputes and act in favor of one individual or the other.

5. From a practical standpoint, a combination of the first and second alternatives above may be most appropriate. In this circumstance, the attorney contacts both parties to the dispute in writing stating: (a) the existence and nature of the dispute; (b) that the attorney cannot represent either side in the dispute;4 (c) that the attorney will maintain the funds in trust pursuant to the agreement of the parties until the dispute is resolved; and (d) that if the parties do not agree in writing within a set period of time that the attorney may retain the funds in trust pending resolution of the dispute, an interpleader action will be filed at which time the parties will have to proceed to resolve their dispute in court.

This opinion is issued by the Standing Committee on Professional Responsibility and Conduct of the State Bar of California. It is advisory only. It is not binding upon the courts, the State Bar of California, its Board of Governors, any persons or tribunals charged with regulatory responsibilities, or any member of the State Bar.

1 The legal enforceability under California law of a third party's interest in client trust funds held by an attorney is beyond the purview of this Committee. However, attorneys are well-advised when confronted with this issue to consider the potential for civil liability irrespective of pertinent ethical considerations. (See, e.g., Miller v. Rau (1963) 216 Cal.App.2d 68 [30 Cal.Rptr. 612]; Weiss v. Marcus (1975) 51 Cal.App.3d 590 [124 Cal.Rptr. 297]; McCafferty v. Gilbank (1967) 249 Cal.App.2d 569 [57 Cal.Rptr. 695]; Siciliano v. Fireman's Fund Insurance Co. (1976) 62 Cal.App.3d 745 [133 Cal.Rptr. 376]; Skelly v. Richman (1970) 10 Cal.App.3d 844 [89 Cal.Rptr. 556].)

2 The best alternative is to anticipate the problem before it arises and address it in a written fee agreement with the client or in the lien form itself. For example, monetary limits should be placed on the maximum amount of the lien and authority should be obtained from each party for the attorney to hold the funds in trust should a dispute arise between the client and health care provider as here contemplated. The situation addressed here arises when such precautions are not taken.

3 Undertaking such obligations to a third party places the attorney in a potential conflict of interest under California Rule of Professional Conduct 3-310(B). Rule 4-210, however, allows for this conflict of interest, but only where there is full consent by the client.

4 Because the attorney has, by executing the lien document, acknowledged a duty to the third party regarding the funds, a conflict of interest is presented which precludes the attorney from continuing to represent the client in connection with the dispute over the lien. (See Johnstone v. State Bar, supra, 64 Cal.2d 153.) It is because of this potential conflict of interest that rule 4-210 requires full disclosure to the client when the lien agreement is first executed. Such disclosure should advise the client that if a dispute arises regarding the lien, the attorney will be unable to represent the client in the dispute and that if the lien dispute cannot be resolved by any other means, an interpleader action will be commenced in which the client will have to obtain other counsel. The attorney may, of course, continue to represent the client in all other respects.