Where a California attorney holds part of a retainer in trust as security for the final statement, may the attorney withdraw those funds to cover earlier unpaid interim statements, and does holding the funds in trust until earned constitute impermissible commingling?

Currency note

This opinion was issued in 1995, before California's November 1, 2018 adoption of the renumbered Rules of Professional Conduct. Former Rule 4-100 corresponds to current Rule 1.15 (safekeeping funds and property of clients and other persons). 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 Treat this page as historical context, not current guidance.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.

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Plain-English summary

The committee considered a law firm that received a $10,000 retainer under an agreement specifying: (1) the funds would be placed in the firm's client trust account; (2) the firm could draw on the first $5,000 to pay monthly statements; (3) the client agreed to pay further statements within five days; (4) the remaining $5,000 would be held as a security deposit for the last statement; and (5) if the security deposit did not cover the final bill, the client would pay the balance. The first $5,000 of services was paid from the retainer, but subsequent $10,000 in interim statements went unpaid. A final $5,000 statement was rendered; the client objected to the entire final statement, leaving a $15,000 balance.

The committee identified Rule 4-100(A) as requiring all client funds to be deposited in identifiable trust accounts and prohibiting attorney funds from being deposited there except in two enumerated circumstances: funds reasonably sufficient to pay bank charges, and the portion of mixed funds that belongs to the lawyer (which must be withdrawn at the earliest reasonable time after the lawyer's interest becomes fixed, unless disputed).

The committee identified the retainer agreement as ambiguous as to whether the security-deposit $5,000 was to cover only the services in the final billing period or all services on the final statement. Because the interim statements were not the last statement and the client disputed the entire final statement, the committee concluded the firm could not withdraw the remaining $5,000 to pay down the interim statements.

The committee identified Rule 4-100(A)(2)'s requirement that, where the lawyer's right to receive trust funds is disputed by the client, the disputed portion may not be withdrawn until the dispute is finally resolved. Quoting the State Bar's Handbook on Client Trust Accounting, the committee identified that disputed fees are "frozen in the client trust bank account until the fee dispute is resolved."

In a footnote, the committee identified that the result might have been different had the retainer agreement been unambiguous (e.g., expressly authorizing withdrawal for interim statements as rendered, or permitting withdrawal where the balance due exceeds the trust amount and the client does not dispute a portion equal to the trust amount). Citing In the Matter of Fonte, the committee identified that contested funds must be placed in a trust account until the conflict is resolved.

In another footnote, the committee defined commingling as occurring "when a client's money is intermingled with that of his attorney and its separate identity lost so that it may be used for the attorney's personal expenses or subjected to claims of his creditors" (citing Black v. State Bar).

Common questions

Q: Can a California lawyer use a retainer "security deposit" earmarked for the final statement to pay earlier unpaid interim statements?

A: Per the opinion, no, where the retainer agreement designates the deposit for the final statement and there is no unambiguous authorization to apply it earlier.

Q: Is holding a portion of a retainer in trust as security for the last statement impermissible commingling?

A: Per the opinion, no. The committee identified the practice as not commingling; the funds remain client funds in trust until the lawyer's interest becomes fixed.

Q: What if the client disputes the final statement when it is rendered?

A: Per the opinion, the disputed portion must remain in trust until the dispute is finally resolved (Rule 4-100(A)(2); In the Matter of Fonte).

Q: Could a clearer retainer agreement have changed the outcome?

A: The committee identified, in a footnote, that an unambiguous agreement expressly authorizing withdrawal for interim statements as rendered, or permitting withdrawal where the balance due exceeds the trust amount and the client does not dispute the corresponding portion, might have changed the result.

Background and rules framework

The opinion interprets former California Rule of Professional Conduct 4-100(A) (handling of client funds), particularly the two enumerated exceptions for bank-charge funds and mixed-funds withdrawal, and 4-100(A)(2) on disputed funds. The committee referenced Black v. State Bar's definition of commingling and the State Bar's 1992 Handbook on Client Trust Accounting.

Citations and references

Rules of Professional Conduct (former):

• California Rule 4-100(A) (handling of client funds)

Cases:

• Black v. State Bar, 57 Cal.2d 219 (Cal. 1962), commingling definition
• In the Matter of Fonte, 2 Cal. State Bar Ct. Rptr. 752 (Rev. Dept. 1994), disputed funds must remain in trust

Other:

• Cal. Practice Handbook: Attorney Ethics (Matthew Bender 1993)
• State Bar of California, Handbook on Client Trust Accounting for California Attorneys (1992)

See also

• LACBA Opinion 485: Personal Funds in Client Trust Account for Bank Charges
• LACBA Opinion 478: Medical Liens and Disbursement of Client Funds
• LACBA Opinion 496: Liens on Recovery in Unrelated Case

Source

• Landing page: https://lacba.org/?pg=ethics-opinions
• Original PDF: https://lacba.org/docDownload/2010936