Getting Paid: Must a Lawyer's Charging Lien Be in Writing to Be Enforceable?
LACBA Update, March 2004
By Jon L. Rewinski, Esq. Rewinski is a shareholder in the Los Angeles office of Heller Ehrman White & McAuliffe LLP, and a member and former chair of LACBA's Professional Responsibility and Ethics Committee. The opinions expressed are his own.
It is not unusual for attorneys, in lieu of a monetary retainer, to request a lien on the client's recovery to secure the client's payment of legal fees and expenses. This arrangement is commonly referred to as a charging lien. But does a charging lien have to be memorialized in a writing signed by the client to be enforceable? The California Supreme Court has agreed to decide this complicated issue in Fletcher v. Davis (Cal. Sup. Ct. May 14, 2003) 134 Cal.Rptr.2d 50, 68 P.3d 343.
Rule 3-300 of the California Rules of Professional Conduct provides that a member of the bar shall not "knowingly acquire an ownership, possessory, security or other pecuniary interest adverse to a client" unless certain requirements are met, including (a) the terms are fair and reasonable to the client and fully disclosed to the client in writing in a manner reasonably understood by the client; (b) the client is advised in writing that the client may seek the advice of an independent lawyer and given a reasonable opportunity to do so; and (c) the client consents in writing to the terms of the transaction. Failure to satisfy all of these requirements makes an applicable agreement voidable at the option of the client.
In Fletcher, a corporate client retained attorney Freddie Fletcher to represent it in litigation with its landlord. The landlord sued the client for breach of lease. At the same time, the landlord refused to release certain manufacturing equipment belonging to the client and kept on the leased premises. Without the equipment, the client could not operate its business. The client, therefore, also retained attorney Fletcher to assert a conversion claim against the landlord. In lieu of a cash retainer, the corporate client agreed to give attorney Fletcher a charging lien on any judgment or settlement to secure Fletcher's fees. The client's president never signed a memorandum prepared by attorney Fletcher to memorialize the agreement. Thus, the agreement was oral.
The conversion claim against the landlord ended in a mistrial. Thereafter, the corporate client discharged attorney Fletcher and hired a new attorney to handle the retrial. After retrial, the corporation obtained a judgment against the landlord for $504,000 plus interest on the conversion claim. The landlord paid the full amount of the judgment, which was distributed to various people (including the corporation's new attorney and a prior judgment creditor) but not to attorney Fletcher.
Attorney Fletcher sued his former client, its president, and the other recipients of the recovery -- for declaratory relief, conversion, account stated, and money had and received -- for disregarding his charging lien. The defendants claimed, among other things, that attorney Fletcher's charging lien was a security interest adverse to a client that failed to satisfy the requirements of Rule 3-300 and therefore was voidable. The Court of Appeal disagreed, rejecting several authorities to the contrary, including Section 43(2)(a) of the Restatement Third of the Law Governing Lawyers, and Formal Opinion No. 1981-63 by the California State Bar Standing Committee on Professional Responsibility and Conduct. Citing Hawk v. State Bar (1988) 45 Cal.3d 589, the Court of Appeal reasoned (a) that what makes an interest "adverse to the client" within the meaning of Rule 3-300 is acquiring the ability to summarily extinguish a client's interest in property; (b) that because an attorney cannot enforce a charging lien without judicial intervention, a charging lien is not "adverse to the client;" and (c) because a charging lien is not "adverse to the client," Rule 3-300 does not apply. Thus, the Court of Appeal concluded, attorney Fletcher's charging lien did not have to be in writing to be valid. Time will tell whether the Supreme Court agrees with the Court of Appeal's conclusion. The Court of Appeal's analysis of Rule 3-300, however, appears sound and reasonable -- at least with respect to corporate clients.
In its depublished opinion, the Court of Appeal held that "[R]ule 3-300 does not apply [to charging liens as] to either corporate or noncorporate clients." Is it correct that Rule 3-300 does not apply to charging liens against individual clients? Perhaps. It is not clear that the Supreme Court need decide this issue in Fletcher. There was some indication in the Court of Appeal's opinion that attorney Fletcher also performed legal services for individuals (the corporate client's president and a member of the corporate president's family). But is it unclear whether attorney Fletcher's oral charging lien also secured those legal service? If not, the Supreme Court may not need to, or want to, decide the applicability of Rule 3-300 to charging liens against individual clients. But Rule 3-300 does not draw a distinction between corporate and non-corporate clients. Thus, to the extent an attorney cannot summarily extinguish an individual client's rights in property through a charging lien, one can reasonably argue that Rule 3-300 should not apply to charging liens against an individual client.
So we return to the original question: Does a charging lien have to be in writing to be enforceable? Even if not voidable under Rule 3-300, an oral charging lien may be voidable under Business and Professions Code Section 6148(c). Section 6148 provides, as a general rule, that in any case not involving a contingent fee "in which it is reasonably foreseeable that total expense to a client, including attorney fees, will exceed one thousand dollars . . . the contract for services in the case shall be in writing." Bus. & Prof. Code Sec. 6148(a). Section 6148 includes an explicit exception for fee agreements with corporate clients. Bus. & Prof. Code Sec. 6148(d)(4). Therefore, one could reasonably argue that a charging lien against a corporate client need not be in writing pursuant to Rule 3-300 or Section 6148. Because of Section 6148(a), however, it is difficult to argue that a charging lien against an individual client may be oral.
Suffice it to say, until the Supreme Court decides the Fletcher case, the prudent course for an attorney is to memorialize charging liens (and, indeed, all terms of an engagement) -- whether the client is a corporation or an individual -- in a writing signed by the client.