When a third party pays the lawyer's fees for the client and unused funds remain in the trust account at the end of the case, who gets the refund?

Plain-English summary

The opinion analyzes a dissolution-of-marriage matter in which Spouse's Parent agreed to pay Attorney's hourly fees and costs for Spouse, with all required former-Rule 3-310(F) disclosures and Spouse's informed written consent. Neither agreement addressed the disposition of surplus funds. At the end of the case, Spouse asks for the unused trust balance, and Parent asks for it to be returned to her.

The committee surveys three sister-state opinions taking different paths: Maryland State Bar Committee on Ethics Opinion 2001-6 (returning funds to client absent contrary agreement), North Carolina State Bar 2005 Formal Ethics Opinion 12 (unearned funds belong to the third party), and South Carolina Formal Opinion 02-07 (retain funds until parties agree or court determines).

The committee then turns to California sources. Former Rule 4-100(B)(4) requires an attorney to promptly pay or deliver "any funds ... in the possession of the member which the client is entitled to receive." California State Bar Formal Opinion 2008-175 held that 4-100(B)(4)'s duty extends to delivering funds to third parties entitled to receive them. Former Rule 3-700(D)(2) requires the attorney at the end of the matter to promptly refund any part of a fee paid in advance that has not been earned. The committee notes the rules do not define "refund." Looking to the Merriam-Webster definition ("to return (money) in restitution, repayment, or balancing of accounts"), the committee concludes "the concept of a refund implies that the money is returned to its source, in this case the third-party payor."

The committee then addresses the lien-like analysis from Johnstone v. State Bar (1966), under which an attorney receiving funds on behalf of a third party is a fiduciary as to that third party. The committee concludes the third-party payor is entitled to the funds, and Attorney has a fiduciary duty to advise the payor of the availability of the funds and to turn them over to her. Giving the funds to the client instead could expose the attorney to conversion liability under Johnstone.

The opinion expressly notes that where the payor's entitlement is less clear than in the hypothetical, the attorney may interplead the funds with the court. The opinion does not address situations involving an insurer, payment for a minor child, third-party financing, or payment by a party to the action.

In practice

Under California's rules as they stood at the time of the opinion, the lawyer's path is straightforward: (i) document the third-party payment arrangement in writing with both client and payor under former Rule 3-310(F), and address the disposition of any surplus funds in those writings up front; (ii) at the close of the matter, if no contrary agreement exists, return unused advance funds to the payor and notify the payor of their availability; (iii) if the payor's entitlement is uncertain, consider interpleading; and (iv) treat written instructions from the client to disburse the surplus to the client as insufficient to override the fiduciary duty to the payor. The opinion does not address whether the client can request continued retention for further services after the agreed work concludes, or what to do if the payor questions the refund amount. Verify against current Rules 1.5, 1.8.6, 1.15, and 1.16(e) before relying on this framework.

Common questions

Q: When a third party pays the lawyer's fees for the client, who gets a refund of unused advance funds?

A: Per the opinion, the third-party payor, absent a contrary agreement. The committee reads the term "refund" in former Rule 3-700(D)(2) to mean returning money to its source, which here is the payor.

Q: What if the client tells the lawyer to keep the funds and give them to the client?

A: Per the opinion, the lawyer cannot do so. Following the client's direction would breach the lawyer's fiduciary duty to the payor and could expose the lawyer to conversion liability, citing Johnstone v. State Bar (1966) and California State Bar Formal Opinion 2008-175.

Q: Can the lawyer avoid the issue?

A: Per the opinion, yes, by drafting fee agreements with both the client and the payor that specify in advance where any surplus goes at the end of the case. The committee says the issue "can be avoided by the use of carefully drafted agreements."

Q: What if it is not clear that the payor is entitled to the refund?

A: Per the opinion, the lawyer may interplead the funds with the court. Footnote 10 notes interpleader does not violate the lawyer's ethical duties under any factual scenario in which the lawyer has a good-faith basis for questioning the payor's right.

Q: Does the opinion address insurer-paid defense?

A: Per the opinion, no. Footnote 5 expressly does not address payment by an insurer, payment by a parent for a minor child, or third-party financing of matters.

Background and rules framework

Former Rule 3-310(F) requires informed written consent for a third party to compensate the lawyer for representing the client, with safeguards on independence and confidentiality. Former Rule 3-700(D)(2) requires the attorney at the end of the matter to refund any part of a fee paid in advance that has not been earned. Former Rule 4-100(B)(4) requires the attorney to promptly pay or deliver, as requested by the client, funds the client is entitled to receive. The committee builds on California State Bar Formal Opinion 2008-175 (third-party lien duties). The current California analogues are Rules 1.5, 1.8.6, 1.15, and 1.16(e).

Citations and references

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

• Former California Rule 3-310(A)(1), (F)
• Former California Rule 3-700(D)(2)
• Former California Rule 4-100(B)(4)

ABA Model Rules (referenced for guidance):

• ABA Model Rule 1.8(f)
• ABA Model Rule 1.15 and comments

Statutes:

• California Code of Civil Procedure section 285.1
• California Labor Code section 2802

Cases:

• Johnstone v. State Bar (1966) 64 Cal.2d 153, fiduciary duty to third party
• In the Matter of Riley (Review Dept. 1994) 3 Cal. State Bar Ct. Rptr. 91, medical liens
• Virtanen v. O'Connell (2006) 140 Cal.App.4th 688, escrow holder duties
• Douglas v. Los Angeles Herald-Examiner (1975) 50 Cal.App.3d 449, Labor Code section 2802 indemnification

Other opinions cited:

• California State Bar Formal Opinion 2008-175, attorney lien duties to third parties
• Maryland State Bar Committee on Ethics Opinion 2001-6
• North Carolina State Bar 2005 Formal Ethics Opinion 12
• South Carolina Bar Formal Opinion 02-07

Secondary:

• Merriam-Webster Dictionary, definition of "refund"

See also

• CA COPRAC Op. 2008-175: Third-Party Lien and Successor Counsel
• CA COPRAC Op. 2009-177: Charging Lien Preservation on Settlement Check
• CA COPRAC Op. 2009-178: Settlement With General Release and Civ. Code 1542 Waiver
• CA COPRAC Op. 2007-172: Credit-Card Payments for Earned and Unearned 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/2025-11/CAL%202013-187%20%2803-08-13%29.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. 2013-187

ISSUE: Who is entitled to the refund of remaining advanced fees at the end of a case where fees were paid by a non-client?

DIGEST: Where a third-party pays the attorney's fees for a client and there are funds remaining after the representation is concluded, the attorney must return the balance to the payor, rather than to the client, unless the agreements with the client and the payor specify otherwise.

AUTHORITIES INTERPRETED: Rules 3-310(F), 3-700(D)(2), and 4-100 of the Rules of Professional Conduct of the State Bar of California. Code of Civil Procedure section 285.1. Labor Code section 2802.

STATEMENT OF FACTS

Attorney is retained by Spouse to handle Spouse's dissolution of marriage. Spouse's Parent agrees to pay the attorney's fees on an hourly basis and the attorney's costs, and advances a sum to the lawyer for that purpose. There is no dispute that Attorney made all proper disclosures under rule 3-310(F), including "disclosure" under rule 3-310(A)(1), and Spouse consented in writing after such disclosures. Spouse's Parent also signed an agreement, covering payment arrangements and her acknowledgement of the restrictions specified in rule 3-310(F). Neither agreement addresses the disposition of any surplus funds at the end of the case. Upon termination of the representation, Attorney files a Notice of Withdrawal pursuant to Code of Civil Procedure section 285.1. Spouse insists unused sums in the trust account be disbursed to her, while Spouse's Parent asks for the money to be returned to her.

DISCUSSION

There are several common circumstances in which a third-party may pay the attorney's fees and/or costs for a party to litigation or a transaction. For example, parents may pay the attorney for fees incurred on behalf of their adult child in a domestic relations or criminal matter. Employers often pay the fees for an employee being sued, such as pursuant to Labor Code section 2802. Sometimes the attorney is representing both the employee and the employer. In commercial lending transactions, the borrower sometimes pays the fees of the lender's attorney. In any such case, rule 3-310(F) sets forth that the third-party must not be allowed to interfere with the client-lawyer relationship, or have access to confidential client information. Rule 3-310(F) does not answer the question of what happens to surplus funds when the case ends.

Three state bar ethics committees have opined on this question. The Maryland State Bar Committee on Ethics said in Opinion 2001-6: "absent agreement to the contrary, once the retainer check was made payable to you and deposited in your escrow account as a retainer for your handling the representation, that you were accountable to your client for those funds and not to the client's mother." They went on to say: "the only person who could demand the return of any funds would be the client." The North Carolina State Bar, in 2005 Formal Ethics Opinion 12, analyzed it this way: "The lawyer understands that the legal fees were paid by a third-party for the purpose of Client's representation. See ABA Model Rule 1.8(f). The unearned funds held in trust belong to the third-party, not the client. In the event the payor wants the funds returned, Lawyer is obliged to do so." South Carolina Formal Opinion 02-07 provides the fullest analysis of the issue. It states: "The present case may be reduced to the question of which individual is 'entitled to receive' the funds at issue – client or his brother, the third-party payor."

In California, rule 4-100(B)(4) requires an attorney to "[p]romptly pay or deliver, as requested by the client, any funds . . . in the possession of the member which the client is entitled to receive." This raises the question of whether the client is entitled to receive the money.

This Committee, in Cal. State Bar Formal Opn. No. 2008-175, concluded that rule 4-100(B)(4), although it refers to the duty to deliver funds to the client, also includes the duty to deliver funds to a third-party who is entitled to receive them. Rule 3-700(D)(2) requires an attorney, at the end of the matter, to "[p]romptly refund any part of a fee paid in advance that has not been earned." The rules do not define "refund." The dictionary defines it as "to return (money) in restitution, repayment, or balancing of accounts." The concept of a refund implies that the money is returned to its source, in this case the third-party payor. We conclude that, absent a fee agreement with the payor spelling out the disposition of the surplus funds, the money should be returned to the payor.

Under our hypothetical, the client asked that the balance in the trust account be paid to her. The California Supreme Court discussed a similar issue in Johnstone v. State Bar (1966) 64 Cal.2d 153, 155-156. The court looked at what an attorney does when receiving funds in a settlement that are subject to a third-party lien. The court held that the attorney receiving funds holds the funds as a fiduciary for that third-party. ("When an attorney receives money on behalf of a third-party who is not his client, he nevertheless is a fiduciary as to such third-party. Thus the funds in his possession are impressed with a trust, and his conversion of such funds is a breach of the trust.") While both Johnstone and Riley dealt with medical liens, the issue here is similar – funds held by the lawyer belonging to a third-party. Giving the funds to the third-party complies with this fiduciary duty, but violates the express direction of the client. The lawyer is faced with a quandary. If he delivers the funds to the client, he can be held liable for a conversion. If he gives the funds to the payor, he is violating the direct instructions of his client. Under the facts of our hypothetical, we conclude that the third-party payor is entitled to the funds, and therefore, the attorney has a fiduciary duty to advise the payor of the availability of the funds and to turn them over to her.

The issue of who is entitled to the remaining amount can be avoided by the use of carefully drafted agreements with the paying party and the client.

CONCLUSION

When an attorney receives payment for fees from a third-party payor, any refund of excess fees at the conclusion of the case should be paid to the payor, unless the parties have contracted a different result.

This opinion is issued by the Standing Committee on Professional Responsibility and Conduct of the State Bar of California. It is advisory only.