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.




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:

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:

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

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.