Attorney Duties to the Third Party: Upholding Trust and Integrity in Orange County's Legal Landscape

Trust Account Bookkeeping
April 8, 2024

Attorneys’ roles are defined mainly by their duties and ethical obligations toward their clients. Due to the nature of the work, the relationship with clients is usually the people on the receiving end of the attorneys' ‘bedside manner,’ if you will. However, situations arise in which attorneys are somehow hooked on working for other individuals who may not be actual clients. Enter the third party. 

What Are Legal Third Parties? 

A third party is any individual, group, or entity that may be indirectly involved in the representation matter and is not privy to the signed attorney-client legal agreement. A third party can be a medical company, other legal entities, or simply individuals tied to the client and event.

Who exactly the third parties are varies depending on the client and the situation in which the client seeks representation. If the client's issue involves a medical claim, the third party could be a medical practitioner or similar. If the case is legal, the third party could be another attorney or legal entity. 

Third-Party Duties in Client Trust Accounting 

The California Rule of Professional Conduct, Rule 1.15, states that the attorney's duties cover the client but also mentions a “third party.”

Section (a) goes on to say the following: 

(a) All funds received or held by a lawyer or law firm* for the benefit of a client or other person* to whom the lawyer owes a contractual, statutory, or other legal duty, including advances for fees, costs, and expenses, shall be deposited in one or more identifiable bank accounts labeled “Trust 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. 
*[1] Whether a lawyer owes a contractual, statutory, or other legal duty under paragraph (a) to hold funds on behalf of a person* other than a client in situations where client funds are subject to a third-party lien will depend on the relationship between the lawyer and the third-party, whether the lawyer has assumed a contractual obligation to the third person* and whether the lawyer has an independent obligation to honor the lien under a statute or other law. In certain circumstances, a lawyer may be civilly liable when the lawyer has notice of a lien and disburses funds in contravention of the lien. (See Kaiser Foundation Health Plan, Inc. v. Aguiluz (1996) 47 Cal.App.4th 302 [54 Cal.Rptr.2d 665].) However, civil liability alone does not establish a violation of this rule. 

This means that, at times, attorneys may be required to extend the same obligations to third-party individuals as they do to their clients. It happens most often if the lawyer or attorney has a contractual obligation to the third party. If you are wondering how or when these situations occur, the answer is simple: lawyers tend to situationally acquire third parties when they acquire clients. When attorneys take on a client issue that involves a third party, they, in many ways, take on that third party as part of the client’s matter.

For example, when a client settles with a third party in a Settlement Agreement, the attorney might be involved in drafting the settlement agreement. In doing so, they assume a contractual obligation to meet the terms. Further, since the role of an attorney requires ethical behavior towards all they serve, they cannot treat anyone unjustly. In this situation, they cannot properly serve as a third-party mediator, as they are obligated in both directions and cannot truly be neutral. 

What is a Statutory Lien? 

A common example of the attorney working with third parties additionally to the client is if an applicable statutory lien is applied to the funds the attorney is holding for a client. A statutory lien is a right guaranteed to someone else’s property as security for an obligation or a debt. Specifically, in the context of Rule 1.15, a statutory lien means that legal rights or claims exist over those same funds being held by the attorney for their client. So, imagine a debt the client owes, setting the scene perfectly for a potential dispute over said funds. 

Attorneys must handle the scenario and the funds in compliance with California law and ethical standards to protect their clients. However, due to the legal obligations of the job, sometimes there are cases when the attorney owes a statutory or legal duty to other parties. Especially since the updated Rule 1.15, if there exists a statutory lien. This may require the attorney to notify the other party when the matter in question has been settled. They cannot be a third-party mediator in this situation as they are obligated in both directions. 

Outside of statutory lien scenarios, on a more general basis, if attorneys are responsible for disbursing funds once multiple parties have reached an agreement, they have an obligation to the third party to adhere to legal and ethical rules. This means the attorney must navigate the scenario in a way that serves or has a legal obligation to all parties involved. Sometimes, the attorney’s obligations require them to hold the settlement funds until further instructions are received.

Naturally, the goal is to ensure total compliance with the agreement and safekeeping of funds regulation while also avoiding a tricky situation with a client. 

Disputes With Third Parties 

When attorneys must pay a third party on behalf of the client, sometimes clients refuse. If the client disputes the payment, the scenario may look like this. If funds become disputed, the funds must remain in the client's trust account until a resolution is reached.

For example, if a client receives medical care from a provider, refuses to pay the provider, and explicitly tells their attorney not to pay the provider, this becomes a dispute. If the provider is the third party and has been notified of a settlement, they will dispute that they are owed this money. The lawyer must then write to the client and third party, informing them of the situation and that the disputed funds will remain in the trust account until a resolution is reached.

This protocol is the sole option, as disputed funds will never be disbursed. Given the circumstances, the State Bar of California would deem that a misappropriation of funds. If they cannot reach an agreement on the dispute, they should request a third-party mediator. The attorney files a request for interpleader action, with both parties made aware of the filing. Interpleader action is a way to get everyone into the same room who is claiming the disputed funds.

It’s similar to a court case, but more so, a third-party mediator or neutral third party can rule to solve the situation. In the suit, the client (considered the “stakeholder” of the funds) and the other claimants (people claiming rights to the funds) are involved.

The interpleader allows for litigation between the attorney’s client and third parties to reach a resolution simultaneously. 

Attorney Duties to Third Parties: Final Thoughts

In conclusion, an attorney's duties to third parties are contractually similar to those of the relationship with the client.

But in special cases, certain factors may pull the relationship in different ways. Balancing obligations to clients and third parties and complying with Client Trust Accounting regulations requires attorneys to remain highly focused.

Let SmartBean® handle your bookkeeping duties in Orange County! Our team is well-versed in the governing duties of the State Bar of California’s CTAPP and Rule 1.15. Call for your free consultation with Orange County bookkeepers today!

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