Once an attorney has properly withdrawn a fee from the Client Trust Account at the earliest reasonable time after the interest became fixed, does the attorney have to redeposit the fee if the client later disputes it?

Currency note

This opinion was issued in 2006, before the State Bar of California's adoption of the November 1, 2018 revisions to the Rules of Professional Conduct. The opinion interprets former Rule 4-100. Current Rule 1.15 (safekeeping funds and property of clients and other persons) now addresses these issues. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule reference.

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 hypothetical: Attorney represents Client on a contingent fee under a written agreement complying with Business and Professions Code section 6147, providing 25% of net recovery if resolved pre-filing and one-third if resolved later. The case settles for $100,000 after filing. Attorney provides Client a written accounting (settlement $100,000; costs $7,000; fee $31,000 on net recovery of $93,000; client to net $62,000). Client signs off, endorses the settlement check, and Attorney deposits the check in the CTA. After the check clears, reasonably believing the representation concluded and the fee fixed within Rule 4-100(A)(2), Attorney writes two CTA checks: $62,000 to Client (mailed immediately per Client's instructions) and $38,000 to Attorney's general account (deposited immediately). A week later, Client calls Attorney and demands an additional $10,000 because Client believes the fee was too high for the work actually done.

The committee held that the withdrawn funds do not retain or regain trust account status upon the later dispute. Under Rule 4-100(A), trust account status attaches to funds (1) belonging to a client, (2) in which the attorney and client have a joint interest, (3) in which a client and a third party have a joint interest, or (4) which counsel holds as part of the representation though not the client's. At the moment of withdrawal, none of those indicia are present: the funds become the attorney's personal property by operation of Rule 4-100(A)(2). A later client expression of remorse or dissatisfaction is a contract matter to be resolved by analyzing the engagement agreement and respective performance.

The committee distinguished misappropriation. Funds misappropriated from a CTA, or withdrawn before the attorney's fee became "fixed" within the scope of Rule 4-100(B)(2), have never lost their trust account status and remain subject to Rule 4-100. Citing Sternlieb v. State Bar (1990) 52 Cal.3d 317, Bates v. State Bar (1990) 51 Cal.3d 1056, Walker v. State Bar (1989) 49 Cal.3d 1107, Garlow v. State Bar (1988) 44 Cal.3d 689, McKnight v. State Bar (1991) 53 Cal.3d 1025, and Giovanazzi v. State Bar (1980) 28 Cal.3d 465, the committee noted that intent is not required for misappropriation, and in In the Matter of Respondent E (Rev. Dept. 1991) 1 Cal. State Bar Ct. Rptr. 716, a lawyer was disciplined for failing to hold funds in a CTA where a withdrawal was based on a belief later discovered to be erroneous. The committee also referenced the practical problems that would arise if a redeposit obligation existed: withdrawn funds may already have paid staff salaries or office expenses, and disputes may span tax years.

Common questions

Q: Once a contingent fee has been properly withdrawn from a CTA, must the attorney return it if the client later disputes it?

A: Per the opinion, no. At the moment of withdrawal under Rule 4-100(A)(2), the funds become the attorney's personal property and lose trust account status. A later client dispute does not restore that status; the dispute is a contract matter resolved by reference to the engagement agreement and the parties' performance.

Q: Is the analysis different if the disputed funds had instead been paid to the attorney by check or cash?

A: Per the opinion, no. The fact that the funds were withdrawn from a CTA rather than received from the client by check or cash is analytically irrelevant. There is no authority in the text of Rule 4-100 or elsewhere suggesting that properly fixed and withdrawn funds regain trust account status because the client later disputes them.

Q: What if the withdrawal turns out to have been improper, not properly "fixed"?

A: Per the opinion, that situation is misappropriation, not the question addressed. Misappropriated funds (including funds withdrawn before the fee became fixed) never lost trust account status and remain subject to Rule 4-100. The committee cited In the Matter of Respondent E (Rev. Dept. 1991) for discipline where a withdrawal was based on a belief later discovered to be erroneous.

Q: Does the attorney's later use of the withdrawn funds matter?

A: Per the opinion, no. The withdrawn funds may already have been used to pay staff salaries or bona fide office expenses, and the withdrawal may have occurred in one tax year while the dispute arises in the next. The committee cited these practical considerations in concluding that withdrawn funds do not regain trust account status upon a later dispute.

Background and rules framework

The opinion interprets former California Rule 4-100, including Rule 4-100(A)(2) (withdrawal at the earliest reasonable time after the attorney's interest becomes fixed and prohibition on withdrawing disputed portions before the dispute is resolved), Rule 4-100(B)(1) (notice of receipt of funds), Rule 4-100(B)(2) (fixed fee), and Rule 4-100(B)(3) (written accounting). It also references Business and Professions Code section 6147 (contingency fee writing requirements). Functionally, the questions now correspond, in current California numbering, to Rule 1.15.

Citations and references

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

• Former California Rule 4-100, including 4-100(A), 4-100(A)(2), 4-100(B)(1), 4-100(B)(2), and 4-100(B)(3)

Statutes:

• California Business and Professions Code section 6147

Cases:

• Sternlieb v. State Bar (1990) 52 Cal.3d 317, misappropriation discipline
• Bates v. State Bar (1990) 51 Cal.3d 1056, misappropriation discipline
• Walker v. State Bar (1989) 49 Cal.3d 1107, misappropriation discipline
• Garlow v. State Bar (1988) 44 Cal.3d 689, failure to restore misappropriated funds
• McKnight v. State Bar (1991) 53 Cal.3d 1025, misappropriation without conversion intent
• Giovanazzi v. State Bar (1980) 28 Cal.3d 465, misappropriation without conversion intent
• In the Matter of Doran (Rev. Dept. 1998) 3 Cal. State Bar Ct. Rptr. 871, misappropriation
• In the Matter of Bleecker (Rev. Dept. 1990) 1 Cal. State Bar Ct. Rptr. 113, misappropriation
• In the Matter of Respondent E (Rev. Dept. 1991) 1 Cal. State Bar Ct. Rptr. 716, discipline for erroneous-belief withdrawal

Other authorities cited:

• Handbook on Client Trust Accounting for California Attorneys (State Bar of California 2003), page 13 (categories of funds with trust account status)
• State Bar's Sample Written Fee Agreement Form (definition of "net recovery")

See also

• CA COPRAC Op. 2005-169: Client trust account overdraft protection
• CA COPRAC Op. 2006-170: Charging lien in contingency fee agreement
• CA COPRAC Op. 2002-160: Missing client settlement authority and fees

Source

• Landing page: https://www.calbar.ca.gov/legal-professionals/ethics-compliance-practice-resources/ethics/ethics-opinions
• Original PDF: https://www.calbar.ca.gov/sites/default/files/portals/0/documents/ethics/Opinions/CAL_2006-171_05-0008-wpd-PAW.pdf

Original opinion text

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

THE STATE BAR OF CALIFORNIA
STANDING COMMITTEE ON
PROFESSIONAL RESPONSIBILITY AND CONDUCT
FORMAL OPINION NO. 2006-171

ISSUE: Is an attorney who has withdrawn a fee from a client trust account in compliance with rule 4-100(A)(2), ethically obligated to return any of the withdrawn funds to the client trust account when the client later disputes the fee?

DIGEST: Once an attorney has withdrawn a fee from a client trust account in compliance with rule 4-100(A)(2), those funds cease to have trust account status. As such, there is no obligation to return to the trust account amounts that are later disputed by the client.

AUTHORITIES INTERPRETED: Rule 4-100 of the Rules of Professional Conduct of the State Bar of California

STATEMENT OF FACTS

Attorney represents Client in a litigation matter that Client has brought against Adversary. A written fee agreement between Attorney and Client states that Attorney will be paid a contingent fee equal to a percentage of Client's "net recovery" in the matter, if any. Consistent with the State Bar's Sample Written Fee Agreement Form for a contingency fee agreement, Client's "net recovery" is defined as the total of all amounts received by settlement or judgment less certain scheduled costs and disbursements. Under the terms of the fee agreement, Attorney is entitled to 25% of Client's net recovery if the matter is resolved prior to the filing of a lawsuit, and one-third (33 1/3 %) of Client's net recovery if the matter is resolved at any time thereafter. The agreement complies with California Business and Professions Code section 6147 in all respects, and includes a valid charging lien, and states that Attorney is entitled to take his fee from the Client's recovery, whether by judgment, award or settlement.

The case settles after the filing of the lawsuit but before the commencement of trial. Client executes and delivers a settlement agreement with Adversary pursuant to which Adversary agrees to pay Client $100,000. Upon execution and delivery of the settlement agreement, Adversary sends Attorney a check for $100,000 payable jointly to Attorney and Client. As required by rule 4-100(B)(1), Rules of Professional Conduct of the State Bar of California, Attorney notifies the Client of receipt of the funds, and pursuant to rule 4-100(B)(3) Attorney provides Client a written accounting setting forth the following proposed distribution:

1. Total settlement amount of $100,000;

2. Itemized list of costs and disbursements in the aggregate amount of $7,000;

3. Amount to be paid to Attorney as his fee – one-third of the net recovery of $93,000 or $31,000; and

4. Net amount to be paid to Client – the remaining balance of $62,000.

Client comes to Attorney's office, goes over the accounting with Attorney, endorses the settlement check and signs off on the accounting approving the proposed distribution. As required by rule 4-100(A), Attorney deposits the $100,000 settlement check in Attorney's Client Trust Account ("CTA"). Promptly upon confirming that the $100,000 check has cleared, and reasonably believing the representation concluded and the fee "fixed" within the meaning of rule 4-100(A)(2), Attorney writes two checks out of the CTA as follows: a check to Client in the amount of $62,000 and a check payable to Attorney's general account in the amount of $38,000 as reimbursement of $7,000 in costs and payment of $31,000 in fees. Pursuant to Client's instructions, Attorney immediately mails the $62,000 check to Client. Attorney also immediately deposits the $38,000 check into Attorney's general account. A week later, Attorney receives a telephone call from Client who tells Attorney that the $31,000 fee is too high for the amount of work actually performed and that Attorney should send Client a check for an additional $10,000.

DISCUSSION

Trust Account Status

Rule 4-100(A) states that "[a]ll funds received or held for the benefit of clients by a member or law firm, including advances for costs and expenses, shall be deposited in one or more identifiable bank accounts labeled 'Trust Account,' 'Client's Funds Account' or words of similar import . . . ." Money that an attorney holds "for the benefit of clients" includes:

1. Money that belongs to a client;

2. Money in which the attorney and client have a joint interest;

3. Money in which a client and a third party have a joint interest; and

4. Money that doesn't belong to a client, but which counsel is nevertheless holding as part of the subject representation.

Such funds ("trust account funds," or funds having "trust account status") are subject to various requirements regarding disbursement, payment of interest, record keeping and the like as set forth in rule 4-100 and authorities interpreting it. Principal among these restrictions is a flat prohibition on the commingling of trust account funds and an attorney's personal or office funds. In fact, regarding withdrawal of trust account funds for payment of fees, rule 4-100(A)(2) states that any portion of trust account funds that belong to counsel "must be withdrawn at the earliest reasonable time after [his or her] interest in that portion becomes fixed," unless the attorney's portion is disputed by the client for any reason. In such event, rule 4-100(A)(2) further instructs that "the disputed portion shall not be withdrawn until the dispute is finally resolved."

However, rule 4-100 is silent regarding the situation where a fee properly withdrawn from a CTA is later disputed. In that regard, we believe that the inquiry is whether funds properly withdrawn from a CTA under rule 4-100(A)(2) and later disputed by the client retain or regain its trust account status once the dispute is communicated to the attorney. Based on a plain reading of the rule we answer this question in the negative. Attorney, in the situation presented, neither "received" nor "holds" the withdrawn funds for the benefit of the client. Quite the contrary, at the moment of withdrawal, the withdrawn funds are Attorney's personal property by operation of rule 4-100(A)(2). As such, Attorney is both obligated to withdraw the funds from the CTA and free to do with those funds as she or he pleases. At the moment of withdrawal, none of the indicia of trust account status are present: the withdrawn funds do not belong to the client, are not subject to a joint interest of attorney and client, are not subject to a joint interest of the client and any third party, and are not being held by the Attorney as part of the subject representation.

Likewise, the fact that Attorney has withdrawn the fee from a CTA (as opposed to having received it by way of the client's personal check or by accepting cash from the client) is analytically irrelevant. There is no authority in the text of rule 4-100 or elsewhere to suggest that funds with trust account status, properly "fixed" and withdrawn under rule 4-100(A)(2), regain trust account status simply because the client later disputes the fee. Such a conclusion would also create a host of problems for the practical administration of a law office, if, for example, the withdrawn funds were used to pay staff salaries or bona fide office expenses, or, if the withdrawal happens in one tax year while the client's challenge occurs in the next.

As such, absent trust account status, the withdrawn funds are analytically equivalent to money paid by client to Attorney for charged fees by any other means. The fact that the client later expresses remorse, regret or other dissatisfaction with the amount of Attorney's fee is a matter of contract to be resolved by an analysis of the engagement agreement and the respective performance of the parties.

Misappropriation Distinguished

It is worth repeating that the Statement of Facts presupposes a proper withdrawal of the fee. We are mindful of the substantial authority relating to the misappropriation of trust account funds. In that regard, we note simply that funds misappropriated from a CTA, or withdrawn before an attorney's fee becomes "fixed" within the scope of rule 4-100(B)(2), are funds in which the client has a whole or part ownership interest. As such, misappropriated funds are ones that have never lost their trust account status and remain subject to rule 4-100 in all respects.

CONCLUSION

Funds properly withdrawn from a CTA under rule 4-100(A)(2) and later disputed by the client neither retain nor regain their trust account status, and therefore do not need to be re-deposited into the attorney's CTA. Based on a plain reading of rule 4-100, we believe that such funds bear none of the indicia of trust account status at the moment of withdrawal, i.e., the withdrawn funds do not belong to the client, are not subject to a joint interest of attorney and client, are not subject to a joint interest of the client and any third party, and are not being held by the Attorney as part of the subject representation. As such, absent trust account status, the withdrawn funds are analytically equivalent to money paid by Client to Attorney for charged fees by any other means. The fact that Client later expresses remorse, regret or other dissatisfaction with the amount of Attorney's fee is a matter of contract to be resolved by an analysis of the engagement agreement and the respective performance of the parties.

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.