Ethics Opinon 1976-5

May 19, 1976

SUBJECT: PRESERVING IDENTITY OF FUNDS AND PROPERTY OF CLIENT

I
QUESTION PRESENTED

Attorney formerly represented "X", an individual. At a time subsequent to the attorney-client relationship, X requested the attorney to set up a trust account to hold funds safe from attachment. The attorney set up such a trust account, although he did not believe it was an attorney-client relationship at that point.

Three months later X hires the attorney again. In the meantime, X has borrowed $5,000.00 from the attorney with the agreement that he will pay it back in two months. Six months after the attorney-client relationship is established, the attorney demands repayment. X refuses, and says he will pay when he is able. The attorney thereafter withdraws $5,020.00 from the client's trust account to settle the debt.

Is such conduct a violation of ethical responsibilities on the part of the attorney?

II
SUMMARY

The conduct of the attorney in withdrawing funds from the client's trust account to settle the debt may constitute a violation of Rule 8-101 of the Rules of Professional Conduct of the State Bar and may subject the attorney to disciplinary action by the State Bar.

III
SCOPE OF OPINION

The Committee does not purport to render an opinion as to whether the initial transaction resulting in the establishment of a trust account constituted the creation of an attorney-client relationship. This is a mixed question of fact and law beyond the province of this Committee. For purposes of rendering an opinion, the Committee makes the assumption that an attorney-client relationship existed, and the funds were deposited for the purposes of creating a client trust account. The scope of the opinion is restricted to the evaluation of the attorney's conduct in withdrawing sums from the client trust account to offset a debt personally owed by the client to the attorney.


IV
APPLICABLE RULES

The applicable provision of the Rules of Professional Conduct of the State Bar, as adopted by the Board of Governors and approved by the California Supreme Court effective January 1, 1975, is Rule 8-101 which, is relevant part, reads as follows:

Rule 8-101. Preserving Identity of Funds and Property of a Client.

(A) All funds received or held for the benefit of clients by a member of the State Bar or firm of which he is a member, including advances for costs and expenses, shall be deposited in one or more identifiable bank accounts labelled "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 such other jurisdiction where there is a substantial relationship between his client or his client's business and the other jurisdiction and no funds belonging to the member of the State Bar or firm of which he is a member shall be deposited therein or otherwise commingled therewith except as follows:

(1) Funds reasonably sufficient to pay bank charges may be deposited therein.

(2) Funds belonging in part to a client and in part presently or potentially to the member of the State Bar or firm of which he is a member must be deposited therein and the portion belonging to the member of the State Bar or firm of which he is a member 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 of the State Bar or firm of which he is a member 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.

(B) A member of the State Bar shall:

* * * *

(4) Promptly pay or deliver to the client as requested by a client the funds, securities, or other properties in the possession of the member of the State Bar which the client is entitled to receive.

V
OPINIONS

ABA Informal Opinion No. 859 discusses the propriety of an attorney deducting from escrow funds a sum which he feels is fair and reasonable for his legal services and then remitting the balance of the escrow funds to his client. The opinion states as follows:

Replying to the question in your letter, where local law specifically permits the lawyer to deduct his fee from the escrow funds held by him either to satisfy a lawyer's lien or otherwise, then it is not unethical for the lawyer to do so. On the other hand, in the absence of local law specifically authorizing such deductions, then, if there is no agreement between the attorney and client which would permit the deduction from the escrow funds of the lawyer's suggested fee, the Committee believes it would be unethical for the lawyer to retain even what he believes to be a fair and reasonable fee for his services from such funds. The matter is controlled by local law and, in the absence of local statutory or case law on the subject, there would appear to be no authority to make the deduction, in the absence of a specific agreement between the attorney and the client. (Emphasis supplied)

In arriving at that conclusion, the A.B.A. committee cited New York City Opinion 786 (renumbered 590 in the published opinions) as follows:

The attorney holds the monies deposited in escrow and trust for a specific purpose, and it would be professionally improper for him to divert these monies to any other purpose, and to divert them to himself in payment of his own claim would not only be professionally improper, but highly reprehensible.

Opinion 1970-1 of the Committee on Legal Ethics of the Los Angeles County Bar Association holds that an attorney having a lien granted by a client on money recovered, together with a power of attorney from the client may not ethically enforce the lien for the balance of an unpaid fee without first bringing an action to establish his right to the fee claimed. See also, Formal Opinion No. 1975?36 of the Committee on Professional Ethics of the State Bar of California for a further discussion of the strict requirements surrounding the attorney's handling of a client trust account.

VI
ANALYSIS

Rule 8-101(B)(4) imposes a mandatory duty upon the attorney to promptly pay to the client as requested the funds in the possession of the member of the State Bar which the client is entitled to receive. Although this section may beg the question, Rule 8-101(A)(2) provides that where both the attorney and the client make a claim for funds in possession of the attorney, "the disputed portion shall not be withdrawn until the dispute is finally resolved." This rule, as illustrated by the above-noted opinion, makes it clear that if the attorney wishes to satisfy his claim from funds deposited in a trust account, the dispute between the attorney and client must first be resolved, whether by way of agreement or legal action.

No facts are presented which in any way demonstrate in the present instance that the client agreed to the withdrawal of these funds, or that the attorney commenced and concluded any legal action establishing his right to the funds. To the contrary, if would appear from the client's refusal to pay that a definite and real dispute exists between the attorney and the client such as to prevent the withdrawal of the trust account funds by the attorney. Violation of Rule 8-101, if willful, would subject the attorney to the discipline of the State Bar. California Business & Professions Code § 6077. The question of willfulness, being again a question of fact, will not be passed upon in this opinion.

 

Disclaimer: This opinion was issued by the Legal Ethics Committee of the San Diego County Bar Association. It is advisory only and is not binding upon any member of the SDCBA, any other member of the State Bar of California, the State Bar of California or its Board of Governors, or any persons or tribunals charged with regulatory responsibilities. The SDCBA, its officers, directors, agents, and the Legal Ethics Committee members assume no responsibility or liability in rendering this opinion.