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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May an attorney ethically take promissory notes or liens as security for fees?
An attorney may take a promissory note or obtain a security interest to protect the attorney's fees for services, subject to compliance with rule 5-101 of the Rules of Professional Conduct of the State Bar.
Rules 2-111 and 5-101 of the Rules of Professional Conduct of the State Bar.
American Bar Association Code of Professional Responsibility, Disciplinary Rule 5-104.
The Committee has been asked whether an attorney may ethically use promissory notes or security interests to protect the attorney's fees for services. Given the fact that many clients are unable to advance fees when retaining an attorney, the attorney's concern about insuring full payment is obvious.
It is the opinion of the Committee that, subject to strict compliance with rule 5-101 of the Rules of Professional Conduct, which became effective on January 1, 1975, an attorney may obtain a lien or security device to protect his or her fees. Rule 5-101 provides:
"A member of the State Bar 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 (1) the transaction and terms in which the member of the State Bar acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in manner and terms which should have reasonably been understood by the client, (2) the client is given a reasonable opportunity to seek the advice of independent counsel of the client's choice on the transaction, and (3) the client consents in writing thereto."
Prior to the adoption of rule 5-101 of the Rules of Professional Conduct, case law generally disfavored the use of liens because they may create an interest adverse to the client. (See Ames v. State Bar (1973) 8 Cal.3d 910 [106 Cal. Rptr. 489]; Academy of California Optometrists, Inc. v. Superior Court (1975) 51 Cal.App.3d 999 [124 Cal. Rptr. 668].) This can be so even when the client has come forward initially and offered such security in order to retain the lawyer of his or her choosing. However, when fees are not paid, an adverse interest exists and may continue to exist during the course of representation.
In Ames v. State Bar, supra, 8 Cal. 3d at pages 916-917, the attorneys purchased a note and trust deed on property which was the subject of their clients' litigation. They did so at the clients' request and with honorable motives in seeking to protect their clients' junior interest in the second deed of trust. Nonetheless, they were disciplined under former rule 4 of the Rules of Professional Conduct, which then read as follows: "A member of the State Bar shall not acquire an interest adverse to a client." (Id., at pp. 919, 921.)
In Academy of California Optometrists, Inc. v. Superior Court, supra, 51 Cal.App.3d at pages 1003, 1006, the majority of the California Court of Appeal for the Third Appellate District intimated that, if a lien were asserted against tangible real or personal property, as opposed to the client's case file, such a lien might be valid and enforceable.
Nonbinding guidance is found in American Bar Association Code of Professional Responsibility, Disciplinary Rule 5-103(A)(1) and Ethical Consideration 5-7, which permit liens to secure an attorney's fee if "granted by law." Although the American Bar Association Code of Professional Responsibility states that a lawyer may acquire a lien granted by law to secure his or her fee, nonetheless, the ethical propriety of asserting a lien is far from absolute. However, Disciplinary Rule 5-104 and Ethical Considerations 5-2 and 5-3 all appear strongly to caution the use of such security devices; not only because of the potential for a conflict of interest between attorney and client, but also because of the inherent danger that a lawyer's independent judgment might be influenced by the transaction with the client. Further, there is an expressed concern about attorneys taking unfair contractual advantage of their clients.
American Bar Assocation Committee on Ethics and Professional Responsibility, informal opinion No. 1461 (1980) is instructive. The fact situation in this opinion involves a lawyer who drew up a stipulation and agreement for his client and thereafter was not paid. He asked if he could withhold the partly signed stipulation and agreement in order to place leverage on the client to pay the fee, or at least part of it, thus presenting a situation similar to that in Academy of California Optometrists, Inc., v. Superior Court, supra. The opinion stated that:
"Financial inability of the client to pay the amount owing should also cause the lawyer to forego the lien because the failure to pay the fee is not deliberate and thus does not constitute fraud or gross imposition by the client. The lawyer should forego the lien if he knew of the client's inability at the beginning or if he failed to assure agreement as to the amount or method of calculating the fee." (Id., at p. 4.)
In a more general sense, the opinion addressed the appropriateness of liens themselves, opining:
"The Model Code states that a lawyer may acquire a lien granted by law to secure his fee or expenses, and may protect his right to collect a fee by the assertion of legally permissible liens. DR 5-103(A)(1); EC 5-7. Nonetheless, the ethical propriety of asserting a retaining lien is not absolute under the Model Code. A proper sense of regard for the nature of the profession, and for the Model Code provisions discussed below, should lead a lawyer to evaluate his financial interests in light of the interests of the client when he is making a decision to invoke an attorney's lien to which he may be entitled under law." (Id., at p. 2.)
Based upon the foregoing authorities, the Committee concludes that it is unethical to require a lien or security device unless the member adheres to the provisions of rule 5-101.1
Because a lien or security device may be held by an attorney, so too may a member request that a client execute a promissory note in compliance with rule 5-101 of the Rules of Professional Conduct. Such a note also has been held legally enforceable in Walton v. Broglin (1975) 52 Cal.App.3d 400 [125 Cal. Rptr. 123]. That case involved an action by an attorney to enforce collection of a promissory note given to secure payment of a fee for the defense of a criminal case. The promissory note was signed by the clients midway through their case. The California Court of Appeal for the Third Appellate District upheld the validity of the promissory note without discussion of the Rules of Professional Conduct.
Accordingly, the Committee concludes that an attorney may legally and ethically obtain such notes in order to protect the attorney's fees for services, provided that the attorney comply with rule 5-101 of the Rules of Professional Conduct.
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 Because that issue is not presented, we do not address whether an attorney ethically may institute foreclosure proceedings or exercise rights of sale under the security instrument while continuing to represent the client.
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