THE STATE BAR OF CALIFORNIA STANDING COMMITTEE ON PROFESSIONAL RESPONSIBILITY AND CONDUCT
FORMAL OPINION NO. 2002-159
Is it ethically permissible for a lawyer to: (1) to tell a potential client of the possibility of financing the legal representation by taking out a mortgage loan on the client’s real property and (2) to refer the client to an independent broker who might arrange the financing, where the resulting loan funds are placed in an escrow account which is not controlled by the lawyer and from which the funds are disbursed to the lawyer for fees and costs for work performed on behalf of the client?
A lawyer may refer a potential client to a broker for a real property loan to pay for attorney’s fees and costs so long as the lawyer does not provide legal representation or receive compensation with regard to the referral or the resulting loan or escrow transactions, and has no undisclosed business or personal relationship with the broker.
Rules 1-320, 3-300, 3-310, and 4-100 of the Rules of Professional Conduct of the State Bar of California. Business and Professions Code sections 6068, subdivision (e), 6148, and 6200 et seq.
STATEMENT OF FACTS
A lawyer has been consulted by a potential client who seeks representation by the lawyer. The potential client presently is not able to pay for the legal services. The potential client owns real estate which can be encumbered as security for a loan, the proceeds of which could be used to pay for legal services. The lawyer provides the potential client with the name of a licensed broker, who she says might be able to arrange such a loan as one possible method for financing the legal representation. The lawyer also states in writing to the potential client that she neither is advising the potential client concerning alternative methods for financing legal representation nor recommending the use of the particular broker. The lawyer further states in writing that she does not represent the broker, the lender, or the prospective client in the loan transaction, and that she does not represent any of them or the escrow company with regard to the escrow in which the lender and the prospective client agree to place the loan proceeds. None of the participants compensate the lawyer with regard to the referral, the loan, or the escrow. Further, the lawyer does not condition her representing the client on the client having the recommended broker arrange the financing. The lawyer sends statements each billing cycle to the escrow account, seeking disbursements of funds to compensate the lawyer for attorney’s fees and costs during the billing cycle; and the lawyer simultaneously sends a copy of each bill to the client. After the client has a reasonable amount of time to object to the lawyer’s bill, the funds then are released for payment of legal services according to the fee agreement between the attorney and the client.
Rule 3-300 of the Rules of Professional Conduct of the State Bar of California governs a lawyer’s business transactions with a client.  Rule 3-300 prohibits a lawyer from entering into a business transaction with her client, and from knowingly acquiring an ownership, possessory, security, or other pecuniary interest adverse to her client, unless she first complies with the requirements set out in the rule.  Rule 3-300 does not apply to the referral and escrow arrangement described in the hypothetical. First, the lawyer has not entered into a business transaction with the prospective client because she is not a direct or indirect party to the loan, the broker is independent of the lawyer, and the lawyer does not benefit from the loan transaction in violation of rule 3-300. (E.g., Rodgers v. State Bar (1989) 48 Cal.3d 300, 313 [256 Cal.Rptr. 381] [lawyer violated former rule 5-101, the predecessor of current rule 3-300, by not disclosing to client conservator that a third party to whom lawyer recommended conservator loan money was another client and former business partner of lawyer, where proceeds of loan were used to pay off legal fees second client owed lawyer]; Rose v. State Bar (1989) 49 Cal.3d 646, 662-663 [262 Cal.Rptr. 702] [lawyer violated former rule 5-101 where he recommended that the client lend money to a third party for investment in a venture in which lawyer received a 25 percent interest]. See also Cal. State Bar Formal Opn. No. 1995-140 [lawyer paid referral fee by life insurance agent for referring client to agent will be deemed to have entered into a business transaction with the client].) The lawyer in the hypothetical, however, has received no such financial benefit-she has no interest in the broker’s business and is receiving no payment for referring the potential client to the broker.  Moreover, the lawyer has not obtained a “pecuniary interest adverse to a client” merely by the deposit of the loan proceeds in an escrow account. The first sentence of the discussion accompanying rule 3-300 states the rule is “not intended to apply to the agreement by which the member is retained by the client, unless the agreement confers on the member ownership, possessory, security, or other pecuniary interest adverse to the client.”  Here, the lawyer will not acquire any pecuniary interest in the funds until after performing the legal services and after the process for paying the lawyer is completed. The loan and escrow arrangement gives the lawyer assurance that she will be paid her fees and costs; even assuming that this assurance amounts to a “pecuniary interest,” it is not “adverse” within the meaning of rule 3-300. In applying rule 3-300 and its predecessors, the California Supreme Court has held that a lawyer acquires a pecuniary interest adverse to the client where it is reasonably foreseeable that it may be detrimental to the client’s interests. (Hawk v. State Bar (1988) 45 Cal.3d 589, 599-600 [247 Cal.Rptr. 599].) Because almost any financial transaction can be adverse to a client if he or she has to pay money, the California Supreme Court has developed a more precise definition: a lawyer’s pecuniary interest is “adverse” to the client within the meaning of rule 3-300 if the lawyer acquires the ability to extinguish a client’s interest in the property, without the possibility of judicial intervention, whether or not the lawyer ever acts to do so. (Connor v. State Bar (1990) 50 Cal.3d 1047, 1058 [269 Cal.Rptr. 742]; Hawk v. State Bar, supra, 45 Cal.3d at p. 600; In the Matter of Fonte (Review Dept. 1994) 2 Cal. State Bar Ct. Rptr. 752, 759-760.) For example, in Connor, supra, under an agreement with the client, the lawyer took full title to the client’s property. Thus, the lawyer extinguished any rights the client had in the property. (Connor v. State Bar, supra, 50 Cal.3d at p. 1058). Similarly, in Hawk, supra, a lawyer who secured payment of fees by acquiring a note secured by a deed of trust on the client’s property was held to have acquired a pecuniary interest adverse to the client because the deed of trust gave the lawyer the power of sale in a nonjudicial foreclosure procedure. (Hawk v. State Bar, supra, 45 Cal.3d at p. 600.) The statement of facts shows that the lawyer does not have the ability to extinguish the client’s interest without judicial intervention. The mere deposit of funds in escrow does not extinguish the client’s interest. It is the escrow holder, not the lawyer, who is in possession of the funds. The lawyer may only acquire payment for her services or for the costs advanced by her after satisfying the terms of the fee agreement and meeting the escrow requirements. Where the escrow instructions require the lawyer to submit to the client for the client’s review a billing in compliance with Business and Professions Code section 6148, where the client has an opportunity to contest the billing, and where the disputed portion of the billing will remain in escrow or the lawyer’s trust account until the dispute is resolved, there is no violation of rule 3-300 because the lawyer is unable to extinguish the client’s right to control the payment of fees. In summary on the facts presented, unless the lawyer has a financial interest in the broker or receives some form of compensation from the broker for referring a potential client, rule 3-300 does not apply.
Rule 4-100 is the primary professional standard regulating lawyers’ handling of client funds. Rule 4-100(A) requires, with certain exceptions, that any “funds received or held for the benefit of clients” by a lawyer must be deposited in the lawyer’s client trust fund account.  Under rule 4-100(B), “the client’s funds, securities or other properties” which are received by the lawyer or which “come into the possession of the” lawyer are subject to certain requirements regardless of whether the funds, securities, or properties are deposited in a trust account. These requirements include: (1) a notice requirement, (2) a requirement to maintain specified records, and (3) a requirement to render appropriate accounts to a client.  The precise issues here are first whether rule 4-100(A) requires that the loan proceeds be placed in the lawyer’s trust account rather than the escrow account and second, even if the proposed arrangement does not activate rule 4-100(A)’ s deposit requirement, whether it nevertheless triggers rule 4-100(B)’ s notice, record-keeping, and accounting requirements. Under our facts, we do not need to address the rule 4-100 requirements because the loan proceeds are never “received or held” by the lawyer. Instead, they are placed by the lender directly in the escrow account. The lawyer receives funds only after she has performed legal services and has otherwise complied with the terms of her fee agreement with the client. When the lawyer has performed legal services and received fees from the escrow account pursuant to the process agreed upon by client and lawyer, the fees are fixed and earned. Under these circumstances, the earned fees belong to the lawyer and should not be placed in the client trust account.  In summary, we note that because the loan proceeds are not “received or held” by the lawyer and have not “come into the possession of the” lawyer, the proposed escrow arrangement does not appear to violate rule 4-100. We caution, however, that our conclusion rests on the fact that the commercial escrow holder is truly independent from the lawyer. We have assumed that the lawyer cannot access any of the escrow funds until she has earned a fee or accrued costs on the client’s behalf, has properly documented her fees and costs, and has submitted her documented request to the escrow holder with notice to the client. 
III. The Proposed Escrow Arrangement Does Not Require Written Disclosure Under Rule 3-310(A)
Rule 3-310 requires disclosure where the lawyer has a legal, business, financial, professional, or personal relationship with a party in the same matter (rule 3-310(B)(1)) or has a business, financial, or professional interest in the subject matter of the representation (rule 3-310(B)(4)).  Neither of these provisions, however, applies to this independent broker and escrow arrangement. Rule 3-310(B)(1) does not apply to our facts. The lawyer does not have any relationship with the broker. Although the lawyer may refer potential clients to the broker to arrange financing, the lawyer is under no legal obligation to do so. Moreover, there are no facts suggesting that the lawyer and broker are engaged in either a formal or an informal business relationship. The broker is not a witness or a party to the subject matter of the representation, the lawyer receives no compensation from the broker for referring potential clients, and the lawyer does not represent the potential client in the transaction among broker, lender, and client.  Further, rule 3-310(B)(4) is not applicable.
> Our facts are distinctly different from the facts posed in California State Bar Formal Opinion Number 1995-140, where we concluded that an insurance agent’s payment of a commission to an estate planning lawyer as compensation for the lawyer’s referring clients to the agent did trigger rule 3-310(B)(4)’ s disclosure requirements. We reasoned that the lawyer has a business or financial interest in that representation because the lawyer stands to obtain compensation from the insurance agent if the client decides to purchase insurance from the insurance agent with whom the lawyer has made the referral arrangement. Rule 3-310(B)(4)’ s written disclosure requirement is directly implicated because the lawyer in the hypothetical has an interest in the client’s representation and may well compromise that representation “in order to advance the attorney’s own financial or personal interests.” (See Santa Clara County Counsel Attys. Assn. v. Woodside (1994) 7 Cal.4th 525, 546 [28 Cal.Rptr.2d 617].) Unlike the situation presented in Formal Opinion Number 1995-140, the lawyer here is not compensated for the referral.  Finally, rule 3-310(F), which prohibits a lawyer from accepting “compensation for representing a client from one other than the client” unless certain conditions are met, does not apply to this situation. Subdivision (F) applies only where the funds of a third party are being used to pay the lawyer. It is intended to avoid the situation where the lawyer’s duty of undivided loyalty to her client could be affected by the involvement and interests of a third party paying the attorney’s fees and costs. Here, that risk does not appear to exist where the third party is an escrow agent who does not own the loan proceeds, but only is responsible for holding and disbursing the client’s own funds.  In summary, because the lawyer does not represent adverse interests, have a relationship with a party in the same matter, or have an interest in the subject matter of the representation, rule 3-310 is inapplicable. 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.  / Unless otherwise indicated, all rule references are to the Rules of Professional Conduct of the State Bar of California.
 / Rule 3-300 provides: 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.
 / Although the lawyer does receive some benefit from the escrow arrangement–she is assured that there are funds available to pay her fees and costs–this is no different from the benefit the lawyer receives by requiring an advanced fee and placing it in her trust account. The lawyer, by requiring an advanced fee, does not thereby come within rule 3-300. (Rule 3-300, discussion.) The situation would be quite different, however, if the broker were to compensate the lawyer for referring clients to the broker. Then, the lawyer would be “soliciting a client’s transaction in which the lawyer will receive a financial benefit,” and the lawyer will be deemed to have entered into a business transaction with her client to which rule 3-300 would apply. In that case, the lawyer would have to follow a specific protocol, including obtaining written consent from the client. (See Cal. State Bar Formal Opn. No. 1995-140.) Compensation may be in a form other than monetary. For example, the broker could compensate the lawyer by referring clients to the lawyer as a quid pro quo for the lawyer referring business to the broker. In that event, not only would the lawyer’s conduct in referring clients to the broker be governed by rule 3-300, but the lawyer would also violate rule 1-320(B) , which provides that a lawyer “shall not compensate, give or promise anything of value to any person or entity for the purpose of recommending or securing employment of the member . . . by a client, or as a reward for having made a recommendation resulting in employment of the member . . . by a client.” See also Bus. § Prof. Code § 6152 (prohibiting running and capping).
 / See also California State Bar Formal Opinion Number 1995-140, footnote 5, which notes that this is an important exception to the general applicability of the rule.
 / Rule 4-100(A) provides:
(A) All funds received or held for the benefit of clients by a member or law firm, including advances for costs and expenses, shall be deposited in one or more identifiable bank accounts labeled “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 any other jurisdiction where there is a substantial relationship between the client or the client’s business and the other jurisdiction. No funds belonging to the member or the law firm shall be deposited therein or otherwise commingled therewith except as follows:
(1) Funds reasonably sufficient to pay bank charges.
(2) In the case of funds belonging in part to a client and in part presently or potentially to the member or the law firm, the portion belonging to the member or law firm 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 or law firm 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.
 / Rule 4-100(B) provides:
(B) A member shall:
(1) Promptly notify a client of the receipt of the client’s funds, securities, or other properties.
(2) Identify and label securities and properties of a client promptly upon receipt and place them in a safe deposit box or other place of safekeeping as soon as practicable.
(3) Maintain complete records of all funds, securities, and other properties of a client coming into the possession of the member or law firm and render appropriate accounts to the client regarding them; preserve such records for a period of no less than five years after final appropriate distribution of such funds or properties; and comply with any order for an audit of such records issued pursuant to the Rules of Procedure of the State Bar.
(4) Promptly pay or deliver, as requested by the client, any funds, securities, or other properties in the possession of the member which the client is entitled to receive.
 / Rule 4-100(A) provides that, except for “[f]unds reasonably sufficient to pay bank charges” and funds that are subject to a dispute between lawyer and client, “[n]o funds belonging to the member or the law firm shall be deposited” in the lawyer’s trust account “or otherwise commingled” with funds held for the client.
 / Our conclusion on the applicability of rule 4-100 is limited to the facts presented. These facts do not include a situation where the client disputes a disbursement that is received by the lawyer. The ethical obligations of the lawyer in such circumstances, including any obligation to deposit disputed funds into a trust account under rule 4-100(A) or to render an appropriate accounting to the client under rule 4-100(B), are beyond the scope of this opinion.
 / Rule 3-310(B) provides in part:
(B) A member shall not accept or continue representation of a client without providing written disclosure to the client where:
(1) The member has a legal, business, financial, professional, or personal relationship with a party or witness to the same matter; or (4) The member has or had a legal, business, financial, or professional interest in the subject matter of the representation.
 / With respect to this, the lawyer must be careful not to inadvertently mislead the prospective client into believing the lawyer represents the client in the identification of financing alternatives, in deciding to use a particular loan broker, or in the loan or escrow transactions. An attorney-client relationship may result from an express or implied contract. Except when created by court appointment, the attorney-client relationship may be found to exist based on the intent and conduct of the parties and the reasonable expectations of the potential client (Flatt v. Superior Court (1994) 9 Cal.4th 275, 281, fn.1 [36 Cal.App.2d 537]; Hecht v. Superior Court (1987) 192 Cal.App.3d 560, 565 [237 Cal.Rptr. 528]; Fox v. Pollack (1986) 181 Cal.App.3d 954 [226 Cal.Rptr. 532] [absent some objective evidence of an agreement to represent, it is not sufficient that plaintiffs “thought” defendant was their attorney]). Even if the possible client has not paid or promised to pay the attorney, an attorney-client relationship may be found to exist where she has communicated confidential information to the attorney (People ex rel. Dept. of Corporations v. SpeeDee Oil Change Systems, Inc. (1999) 20 Cal.4th 1135, 1148 [86 Cal.Rptr.2d 816]; Miller v. Metzinger (1979) 91 Cal.App.3d 31, 39-40 [154 Cal.Rptr. 22]; Perkins v. West Coast Lumber Co. (1900) 129 Cal. 427; L.A. Cty. Bar Assn. Formal Opn. No. 449). Under our facts, the lawyer has given the prospective client the name of a licensed broker and stated that the broker might be able to arrange a loan to finance legal representation by the lawyer. In such situations, a prospective client might assume from a lawyer identifying a single broker that the lawyer has investigated the broker and in essence is advising the prospective client that it is safe to enter into a loan transaction and to do so through that broker. On the other hand, the fact that the prospective client has had no previous professional relationship with the lawyer, and the absence of any facts indicating that the prospective client has disclosed confidential information to the lawyer, argue against an attorney-client relationship having been formed. Nevertheless, while not necessarily required, to avoid creating a reasonable expectation in the prospective client to the contrary, here the lawyer has stated in writing to the prospective client that she does not represent the prospective client with regard to the identification of financing alternatives, the selection of the broker, or the resulting loan or escrow transactions.
 / California State Bar Formal Opinion Number 1995-140 is further distinguishable because the estate planning lawyer had a financial interest “in the subject matter of the representation.” The lawyer was preparing an estate plan which required the availability of liquid funds to pay estate taxes at the time of the client’s death. Referring clients to an agent for a life insurance policy that would provide those funds was thus central to the actual subject matter of the representation. Unlike that situation, however, financial arrangements for paying the lawyer’s legal fees will usually be independent of the purpose for which the lawyer is retained.
 / Although the lawyer’s duty of undivided loyalty to her client does not appear threatened, there is a possibility that the lawyer’s billing statements could disclose confidential client information to the escrow agent in violation of the lawyer’s duties under Business and Professions Code section 6068, subdivision (e). The lawyer must be careful in submitting the billing statements not to reveal any protected client information without the client’s consent. If the client gives such consent, the lawyer should caution the client concerning the possibility of waiving the attorney-client privilege. (Evid. Code § 912.)
THE STATE BAR OF CALIFORNIA STANDING COMMITTEE ON PROFESSIONAL RESPONSIBILITY AND CONDUCT
FORMAL OPINION NO. 1988-101
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:
A member of the State Bar shall:
(4) Promptly pay or deliver, as requested by the client, any funds, securities, or other properties in the possession of the member which the client is entitled to receive.
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:
Third parties, such as the client’s creditors, may have just claims against funds or other property in a lawyer’s custody. A lawyer may have a duty under applicable law to protect such third-party claims against wrongful interference by the client, and accordingly may refuse to surrender the property to the client. However, a lawyer should not unilaterally assume to arbitrate a dispute between the client and the third party.
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.
LOS ANGELES COUNTY BAR ASSOCIATION PROFESSIONAL RESPONSIBILITY AND ETHICS COMMITTEE FORMAL OPINION NO. 478: July 18, 1994
MEDICAL LIENS – DISBURSEMENT OF CLIENT FUNDS.
An attorney who has notice of a medical lien on funds recovered by a client in a personal injury action should not disburse those funds to the lienholder without the client’s consent. The attorney may not simply disburse the contested funds to the client under such circumstances, however, even where the client so instructs the attorney.
American Bar Association Informal Opinion No. 1295
California Rules of Professional Conduct, Rules 4-100 and 4-210
Crooks v. State Bar, 3 Cal. 3d 346, 90 Cal. Rptr. 600 (1970)
“Interprofessional Guidelines,” A Joint Publication of the California Medical Association and the Standing Committee to Confer With the CMA, State Bar of California (Revised 1991)
In The Matter of Respondent P, 2 Cal. State Bar Ct. Rptr. 622 (Review Dept. 1993)
Johnstone v. State Bar of California, 64 Cal. 2d 153, 49 Cal. Rptr. 97 (1966)
Los Angeles County Bar Association Formal Opinions No. 368 (June 16, 1977) and 454
Miller v. Rau, 216 Cal. App. 2d 68, 30 Cal. Rptr. 612 (1963)
Pearlmutter v. Alexander, 97 Cal. App. 3d Supp. 16, 158 Cal. Rptr. 762 (1979)
State Bar of California Committee on Professional Responsibility and Conduct, Formal Opinion No. 1988-101
FACTS AND ISSUES PRESENTED
The Committee has been asked for an opinion regarding the following facts: A client obtained medical services paid for by a health plan. An attorney filed a personal injury suit on the client’s behalf. Prior to settling the client’s case, the attorney received a notice of lien from the health plan and a copy of a lien acknowledgment form signed by the client. When the case settled, the client instructed the attorney not to pay the lien but, rather, to remit the settlement funds to the client. At the attorney’s request, the client subsequently signed an acknowledgment form acknowledging personal responsibility for the debt.
The issues presented to the Committee are whether an attorney may properly remit settlement funds to a client, in accordance with the client’s instructions or, alternatively, to a third party lienholder, despite the client’s lack of consent, where (1) the attorney has notice of the third party’s interest in those funds; (2) the attorney is aware that the client has executed a lien acknowledgment form; and (3) the client subsequently acknowledges his or her own responsibility to pay the third-party debt.
It should first be noted that the legal enforceability of a third party’s interest in client trust funds held by an attorney is a question of law beyond the purview of this Committee. Thus, we limit our consideration of the issues presented here to their ethical components. The general rule concerning funds received or held by an attorney for the benefit of a client is stated in Rule 4-100 of the California Rules of Professional Conduct. That Rule provides in pertinent part that: “A member shall…[p]romptly pay or deliver, as requested by the client, any funds, securities, or other properties in the possession of the member which the client is entitled to receive.” (Emphasis added.)
Normally, disbursing trust funds to a client pursuant to the client’s instructions would be an appropriate course of action. Under the facts presented here, however, should the attorney disburse the funds to the client without the lienholder’s consent, the attorney may be subject to discipline. Because the attorney received a notice of lien from the health plan, as well as a copy of a lien acknowledgment form executed by the client, certain fiduciary duties to the health plan have arisen which now conflict with the attorney’s duty to obey the client’s instructions regarding disbursement of the funds. See, e.g., Crooks v. State Bar, 3 Cal. 3d 346, 355, 90 Cal. Rptr. 600, 606 (1970) (“When an attorney receives money on behalf of a third party who is not his [or her] client, he [or she] nevertheless is a fiduciary as to such third party. . . .When an attorney assumes a fiduciary relationship and violates [that] duty in a manner that would justify disciplinary action if the relationship had been that of attorney and client, he [or she] may properly be disciplined for [that] misconduct”), quoting Johnstone v. State Bar, 64 Cal. 2d 153, 155-156, 49 Cal. Rptr. 97, 98 (1966). See also In The Matter of Respondent P, 2 Cal. State Bar Ct. Rptr. 622 (Review Dept. 1993) (“An attorney holding funds for a person who is not the attorney’s client must comply with the same fiduciary duties in dealing with such funds as if an attorney-client relationship existed”); LACBA Formal Opinion No. 454 (An attorney’s fiduciary obligation extends to all third-party assets in his or her possession, not only to client funds).
Because the client is not necessarily “entitled to receive” the full sum in his or her account where a third party has what appears to be a legitimate interest in those funds, Rule 4-100 does not require the attorney to remit the full amount to the client upon his or her request. The attorney must, however, release those funds not in dispute to which the client is entitled.
On the other hand, the attorney may not simply disburse the contested funds to the health plan. American Bar Association Informal Opinion No. 1295 reminds us that “[o]bviously the attorney must always keep in mind that his [or her] responsibility is to represent the interests of the client and not of the physician.” Rule 4-210 of the California Rules of Professional Conduct provides that an attorney may pay expenses incurred by the client to third persons out of funds collected for the client as a result of the representation only where the client consents. When the client does not consent, the attorney should not disburse funds to a third party. See also, LACBA Formal Opinion No. 368 (June 16, 1977) (attorney who has notice of physician’s lien on funds recovered by client in personal injury action may not disburse funds to physician without client’s consent).
The attorney has several viable options:
See State Bar of California Committee on Professional Responsibility and Conduct, Formal Opinion No. 1988- 101; “Interprofessional Guidelines,” A Joint Publication of the California Medical Association and the Standing Committee To Confer With The CMA, State Bar of California (Revised 1991). 
This opinion is advisory only. The Committee acts on specific questions submitted ex parte, and its opinions are based only on such facts as set forth in the questions submitted.
 Nevertheless, attorneys would be well-advised to consider the potential for incurring civil liability to the third-party lienholder under such circumstances. See, e.g., Pearlmutter v. Alexander, 97 Cal. App. 3d Supp. 16, 158 Cal. Rptr. 762 (1979); Miller v. Rau, 216 Cal. App. 2d 68, 30 Cal. Rptr. 612 (1963).
 The fact that, at the attorney’s request, the client subsequently signed an acknowledgment form acknowledging personal responsibility for the debt does not alleviate these concerns, inasmuch as an agreement between the attorney and client cannot serve to alter or eliminate the attorney’s fiduciary duties to the lienholder.
 Although outside the purview of this opinion, it should be noted that commencement of an interpleader action may create a conflict of interest between the attorney and his or her client.
 Alternatively, the Interprofessional Guidelines provide as follows: “[T]he attorney may contact both parties to the dispute in writing advising them:
a. Of the existence and nature of the dispute;
b. That the attorney cannot represent either side in the dispute;
c. That, if the parties agree in writing, the attorney can maintain the funds in trust until the parties resolve the dispute between themselves;
d. That, if the parties do not agree in writing within a set period of time, an interpleader action may be filed and the parties will be required to resolve their dispute in court.”