"Irreconcilable Differences" Revisited
LACBA Update, May 2003

By David E. Kenney, Esq., member, LACBA Professional Responsibility and Ethics Committee. The opinions expressed are his own.  The assistance of Ira Spiro, Esq., member, LACBA Professional Responsibility and Ethics Committee, in the preparation of this article is gratefully acknowledged.

A client’s recovery and a lawyer’s lien: Are these irreconcilable differences? No.

Clients and lawyers often have common interests in business and cases, but creating a lien with security forms an adverse interest that mandates compliance with Rule 3-300, “Avoiding Interests Adverse to a Client.”

This rule provides a guidebook or road map and requires that “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.”

The discussion recognizes that Rule 3-300 is not intended to apply to the retainer agreement. Such an agreement is governed, in part, by Rule 4-200 concerning “Fees for Legal Services.” However, if a client enters into a retainer agreement containing or creating an ownership, possessory, security, or other pecuniary interest to secure the lawyer’s past due or future fees, then Rule 3-300 is intended to apply because the client’s interest in his or her own property is now adverse to the lawyer.

Rule 3-300 was recently considered by the court of appeal for the second district in the case entitled Fletcher v. Davis, 130 Cal.Rptr. 2d 696, 106 Cal.App.4th 398. The facts are a nightmare, but the significant concepts involve application of this rule and a charging lien. The oral fee agreement was characterized as a “charging lien”. The trial court ruled “no lien was created because under Rule 3-300 of the Rules of Professional Conduct an attorney’s lien on a client’s recovery must be in writing.”

The court of appeal identified the arrangement as a charging lien, articulated the proposition requiring a writing, and recognized that the State Bar of California agreed (1981 WL 27939), the San Francisco Bar Association disagreed (Formal Opinion No.1997-1) and the Los Angeles County Bar Association had taken contradictory positions on the issue (Formal Opinions, Nos. 416 and 419).

While California Business & Professions Code Section 6148 mandates a written fee agreement in any case not involving a contingent fee “in which it is reasonably foreseeable that the total expense to the client, including attorneys fees, will exceed one thousand dollars”, the statute sets forth the corporate client exception, and a written agreement is not required.

The trial court, however, interpreted Rule 3-300 and concluded that the rule independently requires all agreements that are characterized as charging liens to be in writing. The court of appeal disagreed.

Turning to the California Supreme Court’s decision in Hawk v. State Bar (1988) 45 Cal.3d 589, 247 Cal.Rptr. 599, 754 P.2d 1096, the court of appeal discussed the situation where a lawyer takes a promissory note secured by a deed of trust in real property to secure the payment of a fee. Focusing on the difference between a secured note and an unsecured note, the court highlighted the fact that “acquiring the right to summarily extinguish the client’s interest in property is what makes the acquisition ‘adverse’  [emphasis added].” In other words, a note secured by a deed of trust allows a lawyer to collect disputed fees “without judicial scrutiny.” On the other hand, a note without security (an unsecured note) “gives an attorney only a right to proceed against the client’s assets in a contested judicial proceeding” (the latter providing a safeguard).

The court of appeal concluded that a charging lien was like an unsecured note and, therefore, not subject to Rule 3-300 because the lien does not confer or create a present interest in the client’s property. The court also concluded that Davis, Gilbert, Master Washer, and Scallon (there were far too many players in this case) were proper defendants because “third parties who disburse the proceeds of a settlement or judgment with knowledge of a discharged attorney’s lien claim do so at their own peril.” See Weiss v. Marcus (1975) 51 Cal.App.3d 590, 124 Cal.Rptr. 297; and Levin v. Gulf Ins. Group (1999) 69 Cal.App.4th 1282, 82 Cal. Rptr.2d 228.

Keeping in mind Rule 3-300, if a client enters into a retainer agreement — oral or written — with a lawyer that contains a provision conferring or creating an ownership, possessory, security or other pecuniary interest adverse to a client, the lawyer is well-advised to comply with the requirements set forth in Rule 3-300 for the agreement and security interest covering fees to be enforceable and ethical as a prerequisite to extinguishing a client’s interest in any property without judicial scrutiny.

The bottom line, once again — Follow the rule to create a security interest for fees; make certain the arrangement is fair, reasonable and clear; encourage the client in writing to seek independent counsel; and obtain the client’s written consent to the transaction or acquisition.