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