Handling Fee Disputes: Returning Funds to Client Trust Accounts

Trust Account Bookkeeping
June 10, 2024

In the legal profession, handling client funds is one of the most critical aspects of ethical practice. Recently, a formal opinion by the State Bar of California sheds light on attorneys' obligations when withdrawing fees from client trust accounts. More specifically, it outlines how to navigate the return and withdrawal of funds when a client disputes a fee charge.

As we have discussed before on the SmartBean® Trust Account Bookkeeping blog, if a client disputes funds, they must not leave the account. 

But what about if the client disputes a fee after the funds are removed? This article will explore the hypotheticals behind this occurrence. 

Hypothetical Scenario: Client Disputes After Fee Withdrawal

It is perhaps the most basic knowledge among attorneys that before offering legal services to a client, a fee agreement outlining the contingent fee arrangement. It must be agreed upon and signed by both parties.

Let’s say, for this hypothetical, that the attorney and the client make the agreement that in the event of a win in the litigation, the client agrees to pay the attorney a percentage of the “net recovery” or winnings. The 'net recovery' refers to the amount of money the client actually receives after deducting all costs and expenses related to the case.

The fee agreement terms state that the attorney is entitled to 25% of the Client's net recovery if the matter is resolved before the filing of a lawsuit and 33 1/3 % of the Client's net recovery if the matter resolves afterward. The agreement includes the charging lien and states that the attorney is entitled to his fee from the Client's recovery, whether he earns it from judgment, award, or settlement. Therefore, it is compliant with section 6147 of the California Business and Professions Code. 

When the case settles, the client walks away, having recovered $100,000. The client and attorney are jointly issued a check for the above amount. Upon receiving the funds, and in congruence with outlining prevention of commingling violation, Rule 4-100(B)(1), the attorney withdraws their fee from the settlement and writes a check for their fee services and one for the client.

The numbers look like this: 

If the client receives their $61,000 and decides they want more from the settlement amount, are they entitled to request those funds back from the attorney?

Let’s explore further. 

California Trust Accounting Regulations for Attorneys: What Do They Say? 

Understanding the trust accounting rules and Rules of Professional Conduct is crucial. These regulations define what constitutes a commingling violation, how quickly an attorney should remove any funds that belong to them from the client trust account, how much of firm money is allowed to be held in the client trust account, and the appropriate amount of time to notify clients of an awarded settlement. They also emphasize that any funds that are being disputed must be held in the account and may not move to any parties until the dispute is dissolved. 

When a client disputes a fee properly withdrawn from the client trust account, it's important to ensure fairness in the resolution process. The first step is to verify whether the protocol was followed from the beginning, including the creation of an agreement that appropriately states the percentage fee the attorney would earn in the event of winning the case. 

Upon withdrawal from the client trust account, the funds do not belong to the client, are not being held by the attorney as part of the subject representation, and aren’t subject to the joint interest of the attorney and client or client and a third party. Therefore, they are in a state equivalent to that of an attorney being paid by the client, and the funds do, in fact, fully belong to the attorney. As the attorney is obligated to withdraw funds as soon as possible and as the funds are legally the attorney’s, they are permitted to do as they will. The client expressing their dissatisfaction with the amount the attorney earned is to be solved differently.

Thus, there is no obligation to return the funds to the client trust account. 

SmartBean®: Trust Account Bookkeeping Services for Orange County Attorneys

At SmartBean®, our commitment is to help firms stay in compliance with client trust accounting rules and regulations. We understand the importance of your focus on your clients, and our dedicated, knowledgeable bookkeepers are ready to assist you.

Call SmartBean® today for a consultation and experience the peace of mind that comes with our trusted services!

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