Legal Ethics Corner

Ethics Corner is designed to present ethical issues that practitioners might well face on a daily basis. It is a service of the Legal Ethics Committee of the San Diego County Bar Association for SDCBA members.

Taking an Interest Adverse to the Client: Part Two of Three; A Charging Lien for Hourly Legal Services Must Comply with Rule of Professional Conduct 3-300 

Given the importance of legal ethics, it is nice to have black letter law to follow. Here is one nice clear statement: if you wish to have a charging lien in your fee agreement for hourly legal services, you must comply with Rule of Professional Conduct 3-300 (“Avoiding Interests Adverse to a Client”). (Fletcher v. Davis (2004) 33 Cal.4th 61, 71.) (The Court expressly noted it was not addressing whether 3-300 applies to charging liens in contingency fee agreements. (Id. at 70, Fn.3.) More on that in a future Ethics Corner piece.)    
In Fletcher, client orally agreed to pay attorney an hourly rate and orally agreed to give attorney a lien for the same against client’s recovery in a litigation matter attorney was handling for client. While the litigation matter was pending, client terminated attorney and hired replacement counsel who obtained a sizeable judgment. Shortly thereafter, a third party sued client for collection of an unrelated debt seeking to satisfy the same through client’s recent large recovery. Ultimately, client’s judgment proceeds were used to settle away this debt to the third party creditor. The discharged attorney then sued those involved with the disbursement of client’s judgment claiming that all were on notice of his lien at the time they did so. The trial court sustained all of the defendants’ demurrers, and the attorney appealed seeking to protect his lien.
The California Supreme Court first noted that a “charging lien” is the attorney’s lien "upon the fund or judgment which he has recovered for his compensation as attorney in recovering the fund or judgment ….” (Id. at 66.) A charging lien is a “security interest” in the proceeds of the litigation. In light of 3-300’s directive that lawyers must avoid interests adverse to clients unless 3-300’s requirements are met, the relevant question is whether the charging lien is adverse to the client. In a controlled exercise in foreshadowing, the Court stated, “[i]n making that determination, we must be mindful that in civil cases, there are no transactions respecting which courts ... are more jealous and particular, than dealings between attorneys and their clients." (Id. at 67.) 
The Court held that a charging lien is an adverse interest and that attorney’s failure to obtain client’s consent to the same in writing and per the detailed requirements of 3-300 rendered any supposed lien unenforceable. (Id. at 71.) Consequently, the trial court’s ruling was affirmed. The Court reached this conclusion by observing:
[…][A] charging lien could significantly impair the client's interest by delaying payment of the recovery or settlement proceeds until any disputes over the lien can be resolved. For example, when there is a dispute over the existence or amount of an attorney's charging lien, the attorney can prevent the judgment debtor or the settling party from remitting the recovery to the client until the dispute is resolved. (Ex parte Kyle (1851) 1 Cal. 331, 332 [an attorney with a charging lien "may stop the money in transitu, by giving notice to the opposite party not to pay it, until his claim for costs be satisfied, and then moving the court to have the amount of his costs paid to him in the first instance"]; [Citation]  [charging lien grants attorney "the right to have the court interfere to prevent payment by the judgment debtor to the creditor in fraud of the attorney's right to it"].) Alternatively, when the settlement draft is made jointly payable to the client and the attorney, the attorney may refuse to endorse the check until the dispute is resolved. [footnote omitted] ([Citation].) Even when the proceeds have been deposited in the client's trust account, the attorney may withhold an amount equivalent to the disputed portion. ([Citation].) In each of these instances when the charging lien is disputed, the client's recovery will be " 'tied up until everyone involved can agree on how the money should be divided ... or until one or the other brings an independent action for declaratory relief.' " ([Citation].) (Fletcher, supra, 33 Cal.4th at 69-70.)
The Court also noted that its conclusion was well supported by opinions of certain ethics committees. (Id. at 70.) Also, for states like California where attorney liens can only be created by contract, as opposed to states where the lien is created by operation of law, the Court noted that attorney had failed to identify even one jurisdiction that allows for enforcement of such a lien without it being in writing. (Id. at 70-71.) 
In the present economy, where certain clients’ ability to pay fees might be questionable, attorneys might be more inclined to rely upon charging liens or other security methods of payment of fees, e.g., taking a promissory note with a deed of trust. As one might expect, and as noted in Fletcher, at pp.67-68, 70, such an interest also requires complying with 3-300.  
As the Court noted in its closing comments, requiring compliance with 3-300 for charging liens “is not a great deal more than is now required for most fee agreements: attorneys are required, with limited exceptions, to put most fee agreements in writing and explain fully the terms of the agreement. ([Citations].) […] [W]e do not think that this interpretation of the rule is unduly onerous.” (Id. at 71; internal punctuation omitted.) Of course, it is not onerous…unless you are the attorney who has failed to comply with 3-300 and are now staring at uncollectable fees. Yet, the Court is correct; compliance with 3-300 is not overly difficult, and since courts will be “jealous and particular” in reviewing liens and fee agreements, appropriate detail to 3-300 is the call of the day.   
--Luis E. Ventura
**No portion of this summary is intended to constitute legal advice. Be sure to perform independent research and analysis. Any views expressed are those of the author only and not of the SDCBA or its Legal Ethics Committee.**