LOS ANGELES COUNTY BAR ASSOCIATION PROFESSIONAL RESPONSIBILITY AND ETHICS COMMITTEE FORMAL OPINION NO. 478: July 18, 1994

SUMMARY

MEDICAL LIENS - DISBURSEMENT OF CLIENT FUNDS.

An attorney who has notice of a medical lien on funds recovered by a client in a personal injury action should not disburse those funds to the lienholder without the client's consent. The attorney may not simply disburse the contested funds to the client under such circumstances, however, even where the client so instructs the attorney.

AUTHORITIES CITED

American Bar Association Informal Opinion No. 1295

California Rules of Professional Conduct, Rules 4-100 and 4-210

Crooks v. State Bar, 3 Cal. 3d 346, 90 Cal. Rptr. 600 (1970)

"Interprofessional Guidelines," A Joint Publication of the California Medical Association and the Standing Committee to Confer With the CMA, State Bar of California (Revised 1991)

In The Matter of Respondent P, 2 Cal. State Bar Ct. Rptr. 622 (Review Dept. 1993)

Johnstone v. State Bar of California, 64 Cal. 2d 153, 49 Cal. Rptr. 97 (1966)

Los Angeles County Bar Association Formal Opinions No. 368 (June 16, 1977) and 454

Miller v. Rau, 216 Cal. App. 2d 68, 30 Cal. Rptr. 612 (1963)

Pearlmutter v. Alexander, 97 Cal. App. 3d Supp. 16, 158 Cal. Rptr. 762 (1979)

State Bar of California Committee on Professional Responsibility and Conduct, Formal Opinion No. 1988-101

FACTS AND ISSUES PRESENTED

The Committee has been asked for an opinion regarding the following facts: A client obtained medical services paid for by a health plan. An attorney filed a personal injury suit on the client's behalf. Prior to settling the client's case, the attorney received a notice of lien from the health plan and a copy of a lien acknowledgment form signed by the client. When the case settled, the client instructed the attorney not to pay the lien but, rather, to remit the settlement funds to the client. At the attorney's request, the client subsequently signed an acknowledgment form acknowledging personal responsibility for the debt.

The issues presented to the Committee are whether an attorney may properly remit settlement funds to a client, in accordance with the client's instructions or, alternatively, to a third party lienholder, despite the client's lack of consent, where (1) the attorney has notice of the third party's interest in those funds; (2) the attorney is aware that the client has executed a lien acknowledgment form; and (3) the client subsequently acknowledges his or her own responsibility to pay the third-party debt.

DISCUSSION

It should first be noted that the legal enforceability of a third party's interest in client trust funds held by an attorney is a question of law beyond the purview of this Committee. Thus, we limit our consideration of the issues presented here to their ethical components.[1] The general rule concerning funds received or held by an attorney for the benefit of a client is stated in Rule 4-100 of the California Rules of Professional Conduct. That Rule provides in pertinent part that: "A member shall...[p]romptly 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." (Emphasis added.)

Normally, disbursing trust funds to a client pursuant to the client's instructions would be an appropriate course of action. Under the facts presented here, however, should the attorney disburse the funds to the client without the lienholder's consent, the attorney may be subject to discipline. Because the attorney received a notice of lien from the health plan, as well as a copy of a lien acknowledgment form executed by the client, certain fiduciary duties to the health plan have arisen which now conflict with the attorney's duty to obey the client's instructions regarding disbursement of the funds.[1] See, e.g., Crooks v. State Bar, 3 Cal. 3d 346, 355, 90 Cal. Rptr. 600, 606 (1970) ("When an attorney receives money on behalf of a third party who is not his [or her] client, he [or she] nevertheless is a fiduciary as to such third party. . . .When an attorney assumes a fiduciary relationship and violates [that] duty in a manner that would justify disciplinary action if the relationship had been that of attorney and client, he [or she] may properly be disciplined for [that] misconduct"), quoting Johnstone v. State Bar, 64 Cal. 2d 153, 155-156, 49 Cal. Rptr. 97, 98 (1966). See also In The Matter of Respondent P, 2 Cal. State Bar Ct. Rptr. 622 (Review Dept. 1993) ("An attorney holding funds for a person who is not the attorney's client must comply with the same fiduciary duties in dealing with such funds as if an attorney-client relationship existed"); LACBA Formal Opinion No. 454 (An attorney's fiduciary obligation extends to all third-party assets in his or her possession, not only to client funds).

Because the client is not necessarily "entitled to receive" the full sum in his or her account where a third party has what appears to be a legitimate interest in those funds, Rule 4-100 does not require the attorney to remit the full amount to the client upon his or her request. The attorney must, however, release those funds not in dispute to which the client is entitled. On the other hand, the attorney may not simply disburse the contested funds to the health plan. American Bar Association Informal Opinion No. 1295 reminds us that "[o]bviously the attorney must always keep in mind that his [or her] responsibility is to represent the interests of the client and not of the physician." Rule 4-210 of the California Rules of Professional Conduct provides that an attorney may pay expenses incurred by the client to third persons out of funds collected for the client as a result of the representation only where the client consents. When the client does not consent, the attorney should not disburse funds to a third party. See also, LACBA Formal Opinion No. 368 (June 16, 1977) (attorney who has notice of physician's lien on funds recovered by client in personal injury action may not disburse funds to physician without client's consent).

The attorney has several viable options:

1. The attorney may obtain the consent of both the client and the lienholder to hold the funds in trust pending resolution of the dispute between the parties. The funds retained must be placed in the client trust account and must be limited to the amount in dispute. All other funds should be appropriately disbursed. Without the consent of both the client and the lienholder, however, the attorney may not unilaterally undertake to hold the disputed funds: authorization to do so exists only where the dispute over the funds is between the attorney and the client. [See Rule 4-100(A)(2) of the California Rules of Professional Conduct]; or

2. The attorney may commence a civil action in interpleader by which the attorney divests him or herself of responsibility for the funds and leaves resolution of the dispute to the appropriate court.[3] See State Bar of California Committee on Professional Responsibility and Conduct, Formal Opinion No. 1988-101; "Interprofessional Guidelines," A Joint Publication of the California Medical Association and the Standing Committee To Confer With The CMA, State Bar of California (Revised 1991).[4] This opinion is advisory only. The Committee acts on specific questions submitted ex parte, and its opinions are based only on such facts as set forth in the questions submitted.

[1] Nevertheless, attorneys would be well-advised to consider the potential for incurring civil liability to the third-party lienholder under such circumstances. See, e.g., Pearlmutter v. Alexander, 97 Cal. App. 3d Supp. 16, 158 Cal. Rptr. 762 (1979); Miller v. Rau, 216 Cal. App. 2d 68, 30 Cal. Rptr. 612 (1963).

[2] The fact that, at the attorney's request, the client subsequently signed an acknowledgment form acknowledging personal responsibility for the debt does not alleviate these concerns, inasmuch as an agreement between the attorney and client cannot serve to alter or eliminate the attorney's fiduciary duties to the lienholder.

[3] Although outside the purview of this opinion, it should be noted that commencement of an interpleader action may create a conflict of interest between the attorney and his or her client.

[4] Alternatively, the Interprofessional Guidelines provide as follows: "[T]he attorney may contact both parties to the dispute in writing advising them:

a. Of the existence and nature of the dispute;

b. That the attorney cannot represent either side in the dispute;

c. That, if the parties agree in writing, the attorney can maintain the funds in trust until the parties resolve the dispute between themselves;

d. That, if the parties do not agree in writing within a set period of time, an interpleader action may be filed and the parties will be required to resolve their dispute in court."

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EDITOR'S NOTE REGARDING FORMAL OPINION NO. 1984-79:

Regarding the Committee's discussion of contingent fee arrangements with expert medical consultants in medical tort injury claims cases, attorneys are advised to review the case Ojeda v. Sharp Cabrillo Hospital (1991) 8 Cal.App.4th 1.

THE STATE BAR OF CALIFORNIA STANDING COMMITTEE ON PROFESSIONAL RESPONSIBILITY AND CONDUCT FORMAL OPINION NO. 1984-79

ISSUE:

What are the ethical considerations for members of the State Bar who are considering permitting their clients to enter into contractual arrangements with firms which offer the service, on a contingent fee basis, of providing expert medical consultation and of locating and providing expert testimony?

DIGEST:

There are several serious potential obstacles that may preclude an attorney from participating in such arrangements. Members of the State Bar have a professional responsibility to see that contingent fees are not paid for the testimony of witnesses, that the member is not aiding the unauthorized practice of law, and that legal fees are not shared with a lay person. In addition, members must exercise control over and responsibility for the conduct of their cases, must maintain an absolute duty of loyalty to their clients, and must avoid illegal running and capping. Within the foregoing constraints, a member of the State Bar may continue his or her professional activities on behalf of a client who has entered into such a contract.

AUTHORITIES INTERPRETED:

Rules 3-101(A), 3-102(A), 3-103 and 7-107(C) of the Rules of Professional Conduct of the State Bar of California. Business and Professions Code section 6152.

DISCUSSION

The Committee has received a hypothetical inquiry about a company which would offer to attorneys and their clients, on a contingent fee basis, the service of providing expert medical consultation and of locating and providing expert testimony. While aspects of this type of arrangement have previously been considered in American Bar Association Informal Opinions Nos. 1375 (August 10, 1976) and 1445 (February 1, 1980), because the American Bar Association model rules and opinions are not binding in California (See Opinion 1983-71 of the Committee on Professional Responsibility and Conduct) the Committee wishes to review, for the benefit of members of the State Bar, a number of the ethical issues which must be considered by members participating or acquiescing in such arrangements. The facts as stated in ABA Informal Opinion No. 1375 and the hypothetical facts submitted to the Committee are substantially similar: Lawyer and client enter into a contingent fee agreement under which the lawyer is to prosecute a personal injury tort claim (in No. 1375 the matter was a malpractice claim against a doctor). On the lawyer's advice, client also enters into a written agreement with a "medical-legal consulting service" (herein referred to as the "Consulting Service") under which the Consulting Service is to provide technical medical research, investigation, evaluation of medical records, expert witness testimony and assistance to the lawyer in prosecution of the lawsuit. The Consulting Service will contract for and pay the fees of expert witnesses. The agreement with the Consulting Service also contains an "assignment" which is acknowledged by the lawyer and by which the lawyer agrees to pay the fees and expenses of the Consulting Service out of any proceeds received on behalf of the client.

In the facts stated in ABA Informal Opinion No. 1375, the client was dissatisfied with the Consulting Service and instructed the lawyer not to pay. That opinion listed three ethical considerations in such arrangements, which will be considered further below:

1. The contingent fee cannot be payable for the testimony of a witness. 2. The lawyer may not share legal fees with a lay person. 3. The lay person or agency may not engage in the unauthorized practice of law, nor may the lawyer aid in the unauthorized practice of law. Additional ethical considerations are the professional responsibility and duty of loyalty which a lawyer owes to his or her client and the prohibition in California on running and capping contained in Business and Profession Code section 6151.

Within the limits of the foregoing ethical considerations, a member of the State Bar may continue his or her professional activities on behalf of a client who has entered into a contingent fee arrangement with a lay agency like the Consulting Service.

Contingent Fees for Expert Witnesses

Rule 7-107(C) of the Rules of Professional Conduct states that a member of the State Bar shall not:

"... (d)irectly or indirectly pay, offer to pay, or acquiesce in the payment of compensation to a witness contingent upon his testimony or the outcome of his case."

The rule does permit the payment of "a reasonable fee for the professional services of an expert witness." The California rule is based on ABA Disciplinary Rule 7-109(C), and is intended as a protection against an undue incentive for false or slanted testimony by witnesses. In the facts stated in ABA Informal Opinion No. 1375, and in the hypothetical facts presented to the Committee, it is assumed that the prohibition of these rules is avoided because the expert witnesses themselves are not paid on a contingent basis. It should be noted, however, that rule 7-107(C) specifically prohibits acquiescing in the payment of a contingent witness fee. A member of the State Bar may not simply turn a blind eye to the substantial possibility that the arrangement stated may simply be a subterfuge for paying a contingent witness fee. For this reason Informal Opinion No. 1445, which involved similar facts, states that the contract should not contemplate testimony by the employees or agents of the Consulting Service, and testimony by shareholders of the Consulting Service must obviously be barred for the same reason. It must also be recognized that any real business like the Consulting Service is likely to maintain a "stable" of experts upon which it draws for testimony. The arrangements with the experts may be such that the witnesses are provided with a stake in the outcome of the litigation due to their repeated utilization by Consulting Service, and their repeated compensation therefor. Obviously the lawyer must carefully explore these issues against the possibility of surprise disclosure at trial with devastating effect on the client's case. In the event the lawyer discovers that the witnesses' compensation is in essence contingent on either testimony or outcome, this lawyer will violate rule 7-107(C) if he or she should acquiesce in the arrangements by permitting such testimony. The Committee notes that the rule against contingent fees for expert witnesses has provoked some criticism. The constitutionality of the rule was challenged in Person v. Association of the Bar of New York (2d. Cir. 1977) 554 F.2d 534, by an attorney who alleged that he was unable to obtain vital accounting and economic testimony in an antitrust case. The trial court found that access to the courts by less affluent litigants was impaired and held that the rule was too irrational to survive Fourteenth Amendment analysis. The Second Circuit, while conceding that litigation of complex matters might be aided by eliminating the prohibition, reversed on the basis that there is sufficient danger of the inducement of false expert testimony to support the rule against Fourteenth Amendment attack. In particular, the court noted:

"Expert testimony, by its very nature, concerns areas of knowledge with which the ordinary juror and the court are unfamiliar, and perjured expert testimony is particularly difficult for a juror to detect. Id. at 539." A number of commentators have criticized the rule on the basis that there are sufficient checks available against perjured testimony to make a blanket prohibition unnecessary. (See Note, Contingent Fees for Expert Witnesses in Civil Litigation, 86 Yale L.J. 1680 (1977); and Note, The Contingent Compensation of Expert Witnesses in Civil Litigation, 52 Ind. L.J. 671 (1977).) The most substantial criticism leveled against the rule is that the fees of expert witnesses are often de facto contingent upon the outcome for the simple reason that the litigant has no money apart from the potential award in the litigation with which to pay such fees and the witnesses testify with full knowledge of such financial circumstances.

The new ABA Model Rules of Professional Conduct somewhat loosen the absolute prohibition of the DR 7-107(C). New Model Rule 3.4(b) now provides that a lawyer shall not "offer an inducement to a witness that is prohibited by law." The comment to the new rule simply notes that the common law rule in most jurisdictions makes it "improper to pay an occurrence witness any fee for testifying and . . . improper to pay an expert witness a contingent fee."

California case authority, in accord with the common law, has strongly condemned such contingent fee arrangements:

"It is the contingency on the one hand and the agreement to furnish a given set of facts essential to a successful litigation on the other, and both of which in their nature are calculated to induce false charges and the production of perjured testimony, to subvert the truth and pervert justice through fraud, trickery, and chicanery at the hands of unscrupulous private detectives or other conscienceless persons, which has impelled the law, with wisdom, to declare such contracts illegal" Von Kesler v. Baker (1933) 131 Cal. App. 654, 657 citing Hare v. McGue (1918) 178 Cal. 740.

It should also be noted that the codes of several expert professions prohibit contingent fee arrangements. (See Note, supra, 86 Yale L.J. 1680 at 1682, fn. 9 (such professions include doctors, accountants and expert document examiners).) In any event, the arrangement with the Consulting Service under consideration does not involve a direct payment of a contingent payment to a witness and therefore falls outside the safeguards discussed in the scholarly debate cited above.

Sharing Legal Fees with a Lay Person

Rule 3-102(A) of the Rules of Professional Conduct prohibits a member of the State Bar from directly or indirectly sharing legal fees except with a person licensed to practice law, with certain exceptions not here relevant. Whenever a lay person or lay organization plays a part in the attorney-client relationship, lawyers must take care to analyze fee arrangements, both their own and those of the lay organization. Thus, in ABA Informal Opinion 1375 it was held to be unethical for a lawyer to agree to an assignment of the proceeds of litigation to the Consulting Service if, in fact the arrangement is merely a subterfuge for fee-splitting between a lawyer and a lay person. However, if the assignment is made with the understanding of the client and is merely to assure payment to the Consulting Service for its services and expenses, the assignment would not violate the disciplinary rule.

A closely related question was presented in ABA Informal Opinion No. 1445, which addressed the propriety of lawyers' participation in an organization providing litigation support services in the fields of economics and related areas. The opinion noted that the organization could not be retained by a lawyer on a contingent fee basis if any nonlawyer employee of the organization would be paid other than on the basis of a regular salary computed without regard to fees collected. Accordingly, if any person other than a member of the State Bar1 has a proprietary interest in the Consulting Service or will be paid other than a regular salary, it would be improper if the Consulting Service entered into the proposed contingent fee arrangement with the lawyer rather than with the client.

In addition, if the fee payable to the Consulting Service is taken in whole or in part from the lawyer's own fee, the arrangement contemplated would constitute improper fee splitting, particularly in light of the fact that the services are actually rendered to the lawyer. Thus, the contingent fee of the lawyer must be computed without regard to the fee payable to the Consulting Service. In California, this presents a particular problem in medical injury tort cases (the subject of Informal Opinion No. 1375) where, by statute, the lawyer's fee must be computed on the net sum recovered after deducting any disbursements or costs. (See Bus. & Prof. Code, § 6146(a).) Thus, a contingent fee arrangement with the Consulting Service would be improper in medical tort injury claims cases, the very type of case where the services sought to be rendered are likely to be most useful Aiding the Unauthorized Practice of Law

Rule 3-101(A) of the Rules of Professional Conduct prohibits a member of the State Bar from aiding any person, association, or corporation in the unauthorized practice of law. The purpose of this rule is "to protect individual litigants and the public from the mistakes of the untrained and the schemes of the unscrupulous..." (See Annotated Code of Professional Responsibility (American Bar Foundation, 1979) at 132.)

The question of what constitutes the practice of law is generally a question of fact to be determined in the particular circumstances. Thus, ABA Informal Opinion No. 1375 merely assumes, without discussion, that the activities contemplated by the Consulting Service do not constitute the practice of law. This precise issue was analyzed by the Committee on Legal Ethics of the District of Columbia Bar in Opinion No. 55 (1978), which held that the services rendered by the lay organization in finding appropriate medical witnesses, paying them for their consultation and testimony and assuming a portion of the injured party's financial risk of prosecuting the lawsuit, do not constitute the practice of law.

The fact that lawyers themselves frequently perform the function of finding medical witnesses for their client's cases does not make this necessarily a legal service. Many of the various functions performed by lawyers in preparing cases for trial can be performed by others also. As long as the services are not distinctively legal and remain subject to the control of the lawyer who has responsibility for the case, those performing them are not engaged in the unauthorized practice of law. We assume that the lawyer posing this inquiry is free to accept or reject medical witnesses preferred by the lay organization, depending on his evaluation of the contribution they can make to his client's cause.

The Committee agrees with the analysis of the District of Columbia Bar. A member of the State Bar using the services of such an organization will not be aiding the unauthorized practice of law if the member retains control of and responsibility over the case and is free to accept or reject witnesses depending on the member's own evaluation of the witness's contribution to the client's cause.

In addition, a lawyer associated with such an organization must also take care that the services rendered are not distinctly legal and that the organization's activities are conducted in a manner which recognizes the supervision and control of the attorney of record in the matter. Rule 3-103 of the Rules of Professional Conduct prohibits a member of the State Bar from forming a partnership with a person not licensed to practice law if any of the activities of the partnership consist of the practice of law. A lawyer participating in such an organization would also have to maintain separate billing procedures for services which are legal in nature to avoid violation of rule 3-102, discussed above, and rule 3-103. (See also Formal Opinions Nos. 1982-68 and 1982-69 of the Committee on Professional Responsibility and Conduct for a discussion of the responsibilities of members of the State Bar who engage in law-related activities.)

Professional Responsibility

The lawyer owes to his client the primary duties of loyalty and care. The lawyer should retain ultimate professional responsibility2 for evaluating the case or course of action to be followed for the client (see for e.g., ABA Ethical Consideration 5-21 and Disciplinary Rule 5-107) and should exercise on behalf of his or her client "reasonable control over expenses incurred by the lay agency so that neither expenses unauthorized by the lawyer or client nor those of dubious value to the client's cause are expended by the Consulting Service for the client's account." (ABA Informal Opinion No. 1375. See also, rule 7-107(C).)

The acute ethical dilemma presented to the lawyer is amply demonstrated by ABA Informal Opinion No. 1375. The dispute in that opinion arose because the client was dissatisfied with the services of the lay agency and directed the attorney not to pay the disputed fee. However, the lawyer had signed an "assignment" by which he had agreed to pay the fees and expenses of the lay agency out of proceeds from the action received on behalf of the client. Thus, the lawyer could not deliver the disputed funds to his client,3 nor could he contest on behalf of his client the reasonableness of the fee or its value to his client, without breaching his own contractual obligation. The suggestion of the ABA Committee on Ethics and Professional Responsibility for resolving this dilemma was that the lawyer should "file an appropriate action so that the rights of the claimants will be promptly adjudicated." This Committee believes that a member of the State Bar should not abdicate his or her responsibility to act solely on behalf of the client by signing an agreement which effectively prevents the lawyer from representing the best interests of the client.

Running and Capping

Rule 3-102(B) prohibits an attorney from compensating or giving or promising anything of value to a person or entity for the purpose of recommending or securing employment or as a reward for having made a recommendation of employment, and Business and Professions Code section 6152 makes it illegal for any person to act as a "runner or capper" for an attorney. These provisions were recently discussed in the Committee's Formal Opinion No. 1983-75, and that discussion will not be repeated here. However, in considering the issue of why an attorney would recommend to a client the type of arrangement under consideration, particularly in light of the widespread availability of medical expert witnesses, the Committee was concerned that the known willingness of a lawyer to recommend such arrangements to his or her clients would result in the referral of cases to that attorney by the Consulting Service, to whose attention the case might first have been brought. The Committee believes that any understanding, express or implied, that the lawyer will recommend the retention of the Consulting Service, on any fee basis, would violate rule 3-102(B) and section 6152, as well as raising the other ethical considerations discussed above.

The Committee's conclusion is based on the hypothetical facts assumed herein. Although this arrangement is not per se violative of the Rules of Professional Conduct, the arrangement by its nature may place considerable pressure on the participants, particularly, the Consulting Service and the experts it retains, to operate in a fashion which could result in involving the attorney either directly or indirectly in unethical conduct, and could in fact, harm the client's case. Before engaging in such practice, the attorney should thus carefully and prudently consider this opinion. 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 A member of the State Bar may divide a fee for legal services under the circumstances stated in rule 2-108 of the Rules of Professional Conduct, i.e., the client consents in writing, the total fee charged by all is not increased and the payment is not made for recommending employment of the member.

2 The Committee has not attempted to address the issue of the authority of the lawyer vis-a-vis the client to control various aspects of the handling of the case. For a discussion of this issue and a compendium of cases on the subject see, Linsk v. Linsk (1969) 70 Cal.2d 272, 276 [74 Cal.Rptr. 544].

3 The Committee has not considered whether the written agreement with the Consulting Service to provide expert testimony for a percentage of the fee in the medical malpractice action constitutes an assignment of a personal injury action which is prohibited under California law. Causes of action for personal injuries arising out of tort are not assignable nor are those founded upon wrongs of a purely personal nature such as to the reputation or the feelings of one injured. (Goodley v. Wink & Wink, Inc. (1976) 62 Cal.App.3d 898; (legal malpractice action not assignable); Fifield Manor v. Finston, 54 Cal.2d 632, 639 (1960). See also, Civil Code §954.) Although contingency fee contracts involving attorneys are now well accepted in California, the propriety of such arrangements is still debated. (1 Witkin, Cal Proc., Attorneys, §83, at pp. 87-88 (2d Ed., 1970).) While a distinction may be made between an assignment of a cause of action and the assignment of the proceeds thereof as a means of avoiding the prohibition against assignment of personal injury claims, that issue is unresolved in California. (See Annotation, Assignability of Claim for Personal Injuries or Death, 40 ALR2d 500 (1955), §§8, 10.) Therefore, it is an open question in California whether, apart from the ethical considerations discussed herein, the arrangement would be legal under California law.

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THE STATE BAR OF CALIFORNIA STANDING COMMITTEE ON PROFESSIONAL RESPONSIBILITY AND CONDUCT
FORMAL OPINION NO. 2002-159

ISSUE: Is it ethically permissible for a lawyer to: (1) to tell a potential client of the possibility of financing the legal representation by taking out a mortgage loan on the client's real property and (2) to refer the client to an independent broker who might arrange the financing, where the resulting loan funds are placed in an escrow account which is not controlled by the lawyer and from which the funds are disbursed to the lawyer for fees and costs for work performed on behalf of the client?

DIGEST: A lawyer may refer a potential client to a broker for a real property loan to pay for attorney's fees and costs so long as the lawyer does not provide legal representation or receive compensation with regard to the referral or the resulting loan or escrow transactions, and has no undisclosed business or personal relationship with the broker.

AUTHORITIES INTERPRETED: Rules 1-320, 3-300, 3-310, and 4-100 of the Rules of Professional Conduct of the State Bar of California.
Business and Professions Code sections 6068, subdivision (e), 6148, and 6200 et seq.

STATEMENT OF FACTS
A lawyer has been consulted by a potential client who seeks representation by the lawyer. The potential client presently is not able to pay for the legal services. The potential client owns real estate which can be encumbered as security for a loan, the proceeds of which could be used to pay for legal services. The lawyer provides the potential client with the name of a licensed broker, who she says might be able to arrange such a loan as one possible method for financing the legal representation. The lawyer also states in writing to the potential client that she neither is advising the potential client concerning alternative methods for financing legal representation nor recommending the use of the particular broker. The lawyer further states in writing that she does not represent the broker, the lender, or the prospective client in the loan transaction, and that she does not represent any of them or the escrow company with regard to the escrow in which the lender and the prospective client agree to place the loan proceeds. None of the participants compensate the lawyer with regard to the referral, the loan, or the escrow. Further, the lawyer does not condition her representing the client on the client having the recommended broker arrange the financing. The lawyer sends statements each billing cycle to the escrow account, seeking disbursements of funds to compensate the lawyer for attorney's fees and costs during the billing cycle; and the lawyer simultaneously sends a copy of each bill to the client. After the client has a reasonable amount of time to object to the lawyer's bill, the funds then are released for payment of legal services according to the fee agreement between the attorney and the client. >

DISCUSSION
I. The Proposed Escrow Arrangement Does Not Require Compliance With Rule 3-300
Rule 3-300 of the Rules of Professional Conduct of the State Bar of California governs a lawyer's business transactions with a client. [1] Rule 3-300 prohibits a lawyer from entering into a business transaction with her client, and from knowingly acquiring an ownership, possessory, security, or other pecuniary interest adverse to her client, unless she first complies with the requirements set out in the rule. [2] Rule 3-300 does not apply to the referral and escrow arrangement described in the hypothetical. First, the lawyer has not entered into a business transaction with the prospective client because she is not a direct or indirect party to the loan, the broker is independent of the lawyer, and the lawyer does not benefit from the loan transaction in violation of rule 3-300. (E.g., Rodgers v. State Bar (1989) 48 Cal.3d 300, 313 [256 Cal.Rptr. 381] [lawyer violated former rule 5-101, the predecessor of current rule 3-300, by not disclosing to client conservator that a third party to whom lawyer recommended conservator loan money was another client and former business partner of lawyer, where proceeds of loan were used to pay off legal fees second client owed lawyer]; Rose v. State Bar (1989) 49 Cal.3d 646, 662-663 [262 Cal.Rptr. 702] [lawyer violated former rule 5-101 where he recommended that the client lend money to a third party for investment in a venture in which lawyer received a 25 percent interest]. See also Cal. State Bar Formal Opn. No. 1995-140 [lawyer paid referral fee by life insurance agent for referring client to agent will be deemed to have entered into a business transaction with the client].) The lawyer in the hypothetical, however, has received no such financial benefit-she has no interest in the broker's business and is receiving no payment for referring the potential client to the broker. [3] Moreover, the lawyer has not obtained a "pecuniary interest adverse to a client" merely by the deposit of the loan proceeds in an escrow account. The first sentence of the discussion accompanying rule 3-300 states the rule is "not intended to apply to the agreement by which the member is retained by the client, unless the agreement confers on the member ownership, possessory, security, or other pecuniary interest adverse to the client." [4] Here, the lawyer will not acquire any pecuniary interest in the funds until after performing the legal services and after the process for paying the lawyer is completed. The loan and escrow arrangement gives the lawyer assurance that she will be paid her fees and costs; even assuming that this assurance amounts to a "pecuniary interest," it is not "adverse" within the meaning of rule 3-300. In applying rule 3-300 and its predecessors, the California Supreme Court has held that a lawyer acquires a pecuniary interest adverse to the client where it is reasonably foreseeable that it may be detrimental to the client's interests. (Hawk v. State Bar (1988) 45 Cal.3d 589, 599-600 [247 Cal.Rptr. 599].) Because almost any financial transaction can be adverse to a client if he or she has to pay money, the California Supreme Court has developed a more precise definition: a lawyer's pecuniary interest is "adverse" to the client within the meaning of rule 3-300 if the lawyer acquires the ability to extinguish a client's interest in the property, without the possibility of judicial intervention, whether or not the lawyer ever acts to do so. (Connor v. State Bar (1990) 50 Cal.3d 1047, 1058 [269 Cal.Rptr. 742]; Hawk v. State Bar, supra, 45 Cal.3d at p. 600; In the Matter of Fonte (Review Dept. 1994) 2 Cal. State Bar Ct. Rptr. 752, 759-760.) For example, in Connor, supra, under an agreement with the client, the lawyer took full title to the client's property. Thus, the lawyer extinguished any rights the client had in the property. (Connor v. State Bar, supra, 50 Cal.3d at p. 1058). Similarly, in Hawk, supra, a lawyer who secured payment of fees by acquiring a note secured by a deed of trust on the client's property was held to have acquired a pecuniary interest adverse to the client because the deed of trust gave the lawyer the power of sale in a nonjudicial foreclosure procedure. (Hawk v. State Bar, supra, 45 Cal.3d at p. 600.) The statement of facts shows that the lawyer does not have the ability to extinguish the client's interest without judicial intervention. The mere deposit of funds in escrow does not extinguish the client's interest. It is the escrow holder, not the lawyer, who is in possession of the funds. The lawyer may only acquire payment for her services or for the costs advanced by her after satisfying the terms of the fee agreement and meeting the escrow requirements. Where the escrow instructions require the lawyer to submit to the client for the client's review a billing in compliance with Business and Professions Code section 6148, where the client has an opportunity to contest the billing, and where the disputed portion of the billing will remain in escrow or the lawyer's trust account until the dispute is resolved, there is no violation of rule 3-300 because the lawyer is unable to extinguish the client's right to control the payment of fees. In summary on the facts presented, unless the lawyer has a financial interest in the broker or receives some form of compensation from the broker for referring a potential client, rule 3-300 does not apply.

II. The Proposed Escrow Arrangement Does Not Require Compliance with Rule 4-100
Rule 4-100 is the primary professional standard regulating lawyers' handling of client funds. Rule 4-100(A) requires, with certain exceptions, that any "funds received or held for the benefit of clients" by a lawyer must be deposited in the lawyer's client trust fund account. [5] Under rule 4-100(B), "the client's funds, securities or other properties" which are received by the lawyer or which "come into the possession of the" lawyer are subject to certain requirements regardless of whether the funds, securities, or properties are deposited in a trust account. These requirements include: (1) a notice requirement, (2) a requirement to maintain specified records, and (3) a requirement to render appropriate accounts to a client. [6] The precise issues here are first whether rule 4-100(A) requires that the loan proceeds be placed in the lawyer's trust account rather than the escrow account and second, even if the proposed arrangement does not activate rule 4-100(A)' s deposit requirement, whether it nevertheless triggers rule 4-100(B)' s notice, record-keeping, and accounting requirements. Under our facts, we do not need to address the rule 4-100 requirements because the loan proceeds are never "received or held" by the lawyer. Instead, they are placed by the lender directly in the escrow account. The lawyer receives funds only after she has performed legal services and has otherwise complied with the terms of her fee agreement with the client. When the lawyer has performed legal services and received fees from the escrow account pursuant to the process agreed upon by client and lawyer, the fees are fixed and earned. Under these circumstances, the earned fees belong to the lawyer and should not be placed in the client trust account. [7] In summary, we note that because the loan proceeds are not "received or held" by the lawyer and have not "come into the possession of the" lawyer, the proposed escrow arrangement does not appear to violate rule 4-100. We caution, however, that our conclusion rests on the fact that the commercial escrow holder is truly independent from the lawyer. We have assumed that the lawyer cannot access any of the escrow funds until she has earned a fee or accrued costs on the client's behalf, has properly documented her fees and costs, and has submitted her documented request to the escrow holder with notice to the client. [8]

III. The Proposed Escrow Arrangement Does Not Require Written Disclosure Under Rule 3-310(A)
Rule 3-310 requires disclosure where the lawyer has a legal, business, financial, professional, or personal relationship with a party in the same matter (rule 3-310(B)(1)) or has a business, financial, or professional interest in the subject matter of the representation (rule 3-310(B)(4)). [9] Neither of these provisions, however, applies to this independent broker and escrow arrangement. Rule 3-310(B)(1) does not apply to our facts. The lawyer does not have any relationship with the broker. Although the lawyer may refer potential clients to the broker to arrange financing, the lawyer is under no legal obligation to do so. Moreover, there are no facts suggesting that the lawyer and broker are engaged in either a formal or an informal business relationship. The broker is not a witness or a party to the subject matter of the representation, the lawyer receives no compensation from the broker for referring potential clients, and the lawyer does not represent the potential client in the transaction among broker, lender, and client. [10] Further, rule 3-310(B)(4) is not applicable.

> Our facts are distinctly different from the facts posed in California State Bar Formal Opinion Number 1995-140, where we concluded that an insurance agent's payment of a commission to an estate planning lawyer as compensation for the lawyer's referring clients to the agent did trigger rule 3-310(B)(4)' s disclosure requirements. We reasoned that the lawyer has a business or financial interest in that representation because the lawyer stands to obtain compensation from the insurance agent if the client decides to purchase insurance from the insurance agent with whom the lawyer has made the referral arrangement. Rule 3-310(B)(4)' s written disclosure requirement is directly implicated because the lawyer in the hypothetical has an interest in the client's representation and may well compromise that representation "in order to advance the attorney's own financial or personal interests." (See Santa Clara County Counsel Attys. Assn. v. Woodside (1994) 7 Cal.4th 525, 546 [28 Cal.Rptr.2d 617].) Unlike the situation presented in Formal Opinion Number 1995-140, the lawyer here is not compensated for the referral. [11] Finally, rule 3-310(F), which prohibits a lawyer from accepting "compensation for representing a client from one other than the client" unless certain conditions are met, does not apply to this situation. Subdivision (F) applies only where the funds of a third party are being used to pay the lawyer. It is intended to avoid the situation where the lawyer's duty of undivided loyalty to her client could be affected by the involvement and interests of a third party paying the attorney's fees and costs. Here, that risk does not appear to exist where the third party is an escrow agent who does not own the loan proceeds, but only is responsible for holding and disbursing the client's own funds. [12]

In summary, because the lawyer does not represent adverse interests, have a relationship with a party in the same matter, or have an interest in the subject matter of the representation, rule 3-310 is inapplicable. 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] / Unless otherwise indicated, all rule references are to the Rules of Professional Conduct of the State Bar of California.

[2] / Rule 3-300 provides:
A member shall not enter into a business transaction with a client; or knowingly acquire an ownership, possessory, security, or other pecuniary interest adverse to a client, unless each of the following requirements has been satisfied:
(A) The transaction or acquisition and its terms are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner which should reasonably have been understood by the client; and
(B) The client is advised in writing that the client may seek the advice of an independent lawyer of the client's choice and is given a reasonable opportunity to seek that advice; and
(C) The client thereafter consents in writing to the terms of the transaction or the terms of the acquisition.

[3] / Although the lawyer does receive some benefit from the escrow arrangement--she is assured that there are funds available to pay her fees and costs--this is no different from the benefit the lawyer receives by requiring an advanced fee and placing it in her trust account. The lawyer, by requiring an advanced fee, does not thereby come within rule 3-300. (Rule 3-300, discussion.) The situation would be quite different, however, if the broker were to compensate the lawyer for referring clients to the broker. Then, the lawyer would be "soliciting a client's participation in a business transaction in which the lawyer will receive a financial benefit," and the lawyer will be deemed to have entered into a business transaction with her client to which rule 3-300 would apply. In that case, the lawyer would have to follow a specific protocol, including obtaining written consent from the client. (See Cal. State Bar Formal Opn. No. 1995-140.) Compensation may be in a form other than monetary. For example, the broker could compensate the lawyer by referring clients to the lawyer as a quid pro quo for the lawyer referring business to the broker. In that event, not only would the lawyer's conduct in referring clients to the broker be governed by rule 3-300, but the lawyer would also violate rule 1-320(B) , which provides that a lawyer "shall not compensate, give or promise anything of value to any person or entity for the purpose of recommending or securing employment of the member . . . by a client, or as a reward for having made a recommendation resulting in employment of the member . . . by a client." See also Bus. & Prof. Code § 6152 (prohibiting running and capping).

[4] / See also California State Bar Formal Opinion Number 1995-140, footnote 5, which notes that this is an important exception to the general applicability of the rule.

[5] / Rule 4-100(A) provides:

(A) All 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, maintained in the State of California, or, with written consent of the client, in any other jurisdiction where there is a substantial relationship between the client or the client's business and the other jurisdiction. No funds belonging to the member or the law firm shall be deposited therein or otherwise commingled therewith except as follows:
(1) Funds reasonably sufficient to pay bank charges.
(2) In the case of funds belonging in part to a client and in part presently or potentially to the member or the law firm, the portion belonging to the member or law firm must be withdrawn at the earliest reasonable time after the member's interest in that portion becomes fixed. However, when the right of the member or law firm to receive a portion of trust funds is disputed by the client, the disputed portion shall not be withdrawn until the dispute is finally resolved.

[6] / Rule 4-100(B) provides:
(B) A member shall:
(1) Promptly notify a client of the receipt of the client's funds, securities, or other properties.
(2) Identify and label securities and properties of a client promptly upon receipt and place them in a safe deposit box or other place of safekeeping as soon as practicable.
(3) Maintain complete records of all funds, securities, and other properties of a client coming into the possession of the member or law firm and render appropriate accounts to the client regarding them; preserve such records for a period of no less than five years after final appropriate distribution of such funds or properties; and comply with any order for an audit of such records issued pursuant to the Rules of Procedure of the State Bar.
(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.
[7] / Rule 4-100(A) provides that, except for "[f]unds reasonably sufficient to pay bank charges" and funds that are subject to a dispute between lawyer and client, "[n]o funds belonging to the member or the law firm shall be deposited" in the lawyer's trust account "or otherwise commingled" with funds held for the client.
[8] / Our conclusion on the applicability of rule 4-100 is limited to the facts presented. These facts do not include a situation where the client disputes a disbursement that is received by the lawyer. The ethical obligations of the lawyer in such circumstances, including any obligation to deposit disputed funds into a trust account under rule 4-100(A) or to render an appropriate accounting to the client under rule 4-100(B), are beyond the scope of this opinion.
[9] / Rule 3-310(B) provides in part:
(B) A member shall not accept or continue representation of a client without providing written disclosure to the client where:
(1) The member has a legal, business, financial, professional, or personal relationship with a party or witness to the same matter; or

. . .


(4) The member has or had a legal, business, financial, or professional interest in the subject matter of the representation.
[10] / With respect to this, the lawyer must be careful not to inadvertently mislead the prospective client into believing the lawyer represents the client in the identification of financing alternatives, in deciding to use a particular loan broker, or in the loan or escrow transactions. An attorney-client relationship may result from an express or implied contract. Except when created by court appointment, the attorney-client relationship may be found to exist based on the intent and conduct of the parties and the reasonable expectations of the potential client (Flatt v. Superior Court (1994) 9 Cal.4th 275, 281, fn.1 [36 Cal.App.2d 537]; Hecht v. Superior Court (1987) 192 Cal.App.3d 560, 565 [237 Cal.Rptr. 528]; Fox v. Pollack (1986) 181 Cal.App.3d 954 [226 Cal.Rptr. 532] [absent some objective evidence of an agreement to represent, it is not sufficient that plaintiffs "thought" defendant was their attorney]). Even if the possible client has not paid or promised to pay the attorney, an attorney-client relationship may be found to exist where she has communicated confidential information to the attorney (People ex rel. Dept. of Corporations v. SpeeDee Oil Change Systems, Inc. (1999) 20 Cal.4th 1135, 1148 [86 Cal.Rptr.2d 816]; Miller v. Metzinger (1979) 91 Cal.App.3d 31, 39-40 [154 Cal.Rptr. 22]; Perkins v. West Coast Lumber Co. (1900) 129 Cal. 427; L.A. Cty. Bar Assn. Formal Opn. No. 449). Under our facts, the lawyer has given the prospective client the name of a licensed broker and stated that the broker might be able to arrange a loan to finance legal representation by the lawyer. In such situations, a prospective client might assume from a lawyer identifying a single broker that the lawyer has investigated the broker and in essence is advising the prospective client that it is safe to enter into a loan transaction and to do so through that broker. On the other hand, the fact that the prospective client has had no previous professional relationship with the lawyer, and the absence of any facts indicating that the prospective client has disclosed confidential information to the lawyer, argue against an attorney-client relationship having been formed. Nevertheless, while not necessarily required, to avoid creating a reasonable expectation in the prospective client to the contrary, here the lawyer has stated in writing to the prospective client that she does not represent the prospective client with regard to the identification of financing alternatives, the selection of the broker, or the resulting loan or escrow transactions.
[11] / California State Bar Formal Opinion Number 1995-140 is further distinguishable because the estate planning lawyer had a financial interest "in the subject matter of the representation." The lawyer was preparing an estate plan which required the availability of liquid funds to pay estate taxes at the time of the client's death. Referring clients to an agent for a life insurance policy that would provide those funds was thus central to the actual subject matter of the representation. Unlike that situation, however, financial arrangements for paying the lawyer's legal fees will usually be independent of the purpose for which the lawyer is retained.
[12] / Although the lawyer's duty of undivided loyalty to her client does not appear threatened, there is a possibility that the lawyer's billing statements could disclose confidential client information to the escrow agent in violation of the lawyer's duties under Business and Professions Code section 6068, subdivision (e). The lawyer must be careful in submitting the billing statements not to reveal any protected client information without the client's consent. If the client gives such consent, the lawyer should caution the client concerning the possibility of waiving the attorney-client privilege. (Evid. Code § 912.)

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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.