CONTRACTUAL ATTORNEY LIENS IN HOURLY FEE MATTERS: PUT THEM IN WRITING AND COMPLY WITH RULE 3-300 – OR RISK LOSING THEM

Contractual Attorney Lien Provisions in Fee Agreements Need to Comply Strictly With Dictates of Fletcher v. Davis.

            Many fee agreements that we see have contractual attorney lien provisions (sometimes called “charging liens”).  Charging liens are liens given by clients to attorneys so that the attorneys can recover fees from settlement or judgment proceeds obtained by clients in underlying cases.

 

            A charging lien is an important weapon for an attorney in collecting a fee.  It is also a “secret lien” created at the time the fee agreement is executed, if compliant with ethical requirements which we discuss below.  See Carroll v. Interstate Brands Corp., 99 Cal.App.4^th 1168, 1172 (2002) (confirming secret lien status).  This means that the charging lien has priority over a subsequent lien filed by a judgment creditor.  Brown v. Superior Court, 116 Cal.App.4^th 320 (2004), rev. den.  The charging lien does not need to be “perfected” by filing a notice of lien, although attorneys frequently do so to provide notice to future claimants to settlement or judgment proceeds in a case.  See Carroll, supra, 99 Cal.App.4^th at 1172.  A settling opponent, having received a notice of attorney lien, is prudent to file an interpleader action to avoid the conflict between client’s desire to obtain the settlement proceeds and a former attorney’s charging lien rights.  See Levin v. Gulf Insurance Group, 69 Cal.App.4^th 1282, 1287-1288 (1999) (interference claim viable where settlement proceeds paid out in disregard of attorney's charging lien).  However, in order to enforce an attorney lien, counsel must file a separate action and cannot resort to adjudication of the lien claim in the underlying case serving as “security” for the lien.  See Brown v. Superior Court, supra, 116 Cal.App.4^th 320; Carroll v. Interstate Brands Corp., supra, 99 Cal.App.4^th at 1173.

   

            However, many attorney lien provisions in hourly fee matters are fairly terse and perfunctory in wording and nature.  This will no longer suffice in light of the California Supreme Court’s holding in Fletcher v. Davis, 33 Cal.4^th 61 (2004), posted in our “Leading Cases” right hand column.

            Fletcher determined that a charging lien in an hourly fee matter creates an adverse interest between attorney and client within the meaning of Rule 3-300 of the California Rules of Professional Conduct (contained in our “Rules of Professional Conduct” column).  In order to render the lien enforceable, attorneys must comply with Rule 3-300 by (1) fully disclosing the acquisition and terms of the lien and transmitting that information to the client in writing in a manner reasonably understood by the client, (2) advising the client in writing that the client may seek the advice of an independent lawyer of the client’s own choosing, and (3) giving the client a reasonable opportunity to seek that advice before the client gives written consent to the lien.  Fletcher v. Davis, supra, 33 Cal.4^th at 67.

            Many fee agreements that we see do not come close to being compliant with Rule 3-300.  It is unlikely that charging liens will be enforceable if attorneys insist on clients’ signing of a retainer agreement at the first meeting; Fletcher appears to require that the client be given a reasonable opportunity to seek independent advice, which cannot occur if the retainer is signed at the first meeting.

            

            Thankfully, the California State Bar has an excellent charging lien provision for hourly matters that can be easily inserted and appears to be enforceable under Fletcher. (See State Bar sample fee agreements).

            Fletcher did not decide whether Rule 3-300 applies to charging liens in contingency matters.  Subsequent State Bar ethical opinions have held that the inclusion of a charging lien in an initial contingency fee contract does not create an “adverse interest” within Rule 3-300’s meaning.  See The State Bar of California Standing Committee on Professional Responsibility and Conduct Formal Opinion No. 2006-170, also accessible on our “Ethics Opinions” link).  Nevertheless, the State Bar—in its commentary to sample fee agreements—has suggested that it would still be prudent to apply Fletcher requirements to contingency matters, also providing an optional charging lien provision to be used for contingency fee agreements. 

            

Contractual Attorney Lien Provisions in Fee Agreements Need to Comply Strictly With Dictates of Fletcher v. Davis.

            Many fee agreements that we see have contractual attorney lien provisions (sometimes called “charging liens”).  Charging liens are liens given by clients to attorneys so that the attorneys can recover fees from settlement or judgment proceeds obtained by clients in underlying cases.

 

            A charging lien is an important weapon for an attorney in collecting a fee.  It is also a “secret lien” created at the time the fee agreement is executed, if compliant with ethical requirements which we discuss below.  See Carroll v. Interstate Brands Corp., 99 Cal.App.4^th 1168, 1172 (2002) (confirming secret lien status).  This means that the charging lien has priority over a subsequent lien filed by a judgment creditor.  Brown v. Superior Court, 116 Cal.App.4^th 320 (2004), rev. den.  The charging lien does not need to be “perfected” by filing a notice of lien, although attorneys frequently do so to provide notice to future claimants to settlement or judgment proceeds in a case.  See Carroll, supra, 99 Cal.App.4^th at 1172.  A settling opponent, having received a notice of attorney lien, is prudent to file an interpleader action to avoid the conflict between client’s desire to obtain the settlement proceeds and a former attorney’s charging lien rights.  See Levin v. Gulf Insurance Group, 69 Cal.App.4^th 1282, 1287-1288 (1999) (interference claim viable where settlement proceeds paid out in disregard of attorney's charging lien).  However, in order to enforce an attorney lien, counsel must file a separate action and cannot resort to adjudication of the lien claim in the underlying case serving as “security” for the lien.  See Brown v. Superior Court, supra, 116 Cal.App.4^th 320; Carroll v. Interstate Brands Corp., supra, 99 Cal.App.4^th at 1173.

   

            However, many attorney lien provisions in hourly fee matters are fairly terse and perfunctory in wording and nature.  This will no longer suffice in light of the California Supreme Court’s holding in Fletcher v. Davis, 33 Cal.4^th 61 (2004), posted in our “Leading Cases” right hand column.

            Fletcher determined that a charging lien in an hourly fee matter creates an adverse interest between attorney and client within the meaning of Rule 3-300 of the California Rules of Professional Conduct (contained in our “Rules of Professional Conduct” column).  In order to render the lien enforceable, attorneys must comply with Rule 3-300 by (1) fully disclosing the acquisition and terms of the lien and transmitting that information to the client in writing in a manner reasonably understood by the client, (2) advising the client in writing that the client may seek the advice of an independent lawyer of the client’s own choosing, and (3) giving the client a reasonable opportunity to seek that advice before the client gives written consent to the lien.  Fletcher v. Davis, supra, 33 Cal.4^th at 67.

            Many fee agreements that we see do not come close to being compliant with Rule 3-300.  It is unlikely that charging liens will be enforceable if attorneys insist on clients’ signing of a retainer agreement at the first meeting; Fletcher appears to require that the client be given a reasonable opportunity to seek independent advice, which cannot occur if the retainer is signed at the first meeting.

            

            Thankfully, the California State Bar has an excellent charging lien provision for hourly matters that can be easily inserted and appears to be enforceable under Fletcher. (See State Bar sample fee agreements).

            Fletcher did not decide whether Rule 3-300 applies to charging liens in contingency matters.  Subsequent State Bar ethical opinions have held that the inclusion of a charging lien in an initial contingency fee contract does not create an “adverse interest” within Rule 3-300’s meaning.  See The State Bar of California Standing Committee on Professional Responsibility and Conduct Formal Opinion No. 2006-170, also accessible on our “Ethics Opinions” link).  Nevertheless, the State Bar—in its commentary to sample fee agreements—has suggested that it would still be prudent to apply Fletcher requirements to contingency matters, also providing an optional charging lien provision to be used for contingency fee agreements.