Yes, according to a recent decision from the California Fourth Circuit Court of Appeals. See Dickson v. Mann, Super Ct. No. 37-2021-00042299-PR-TR-CTL (July 16, 2024). In Dickson, the court of appeals reaffirmed the principle that “a flat fee paid by a client to a lawyer for future legal services does not belong to the lawyer until the fee is earned through the actual provision of legal services.” See id. at 15. According to the court, absent evidence that the lawyer performed work to earn the funds in trust, the client retains ownership of the funds, and the funds are subject to seizure by the client’s creditors.
Jack Mann served as a trustee of the Dickson Revocable Living Trust. Nicholas Dickson, another trustee, alleged that Mann engaged in misconduct as the trustee. In connection with that litigation, Mann stipulated to the entry of a $12 million judgment in favor of Dickson. Judgment was entered on August 8, 2022.
On August 6, 2022, the law firm Higgs, Fletcher & Mack LLP (HFM) and Jack Mann had entered into a flat fee agreement for the future legal representation. Mann agreed to pay the law firm $585,000 for the future legal services and the firm placed this amount into the client trust account. On August 22, 2022, and prior to the law firm beginning any work on the matter, Dickson served on the law firm HFM a notice of levy for any money it was holding in trust for Mann. HFM objected, claiming that the firm had an ownership interest in the funds pursuant to an engagement agreement between the firm and Mann.
In the district court, Dickson argued that he was entitled to seize the funds because the funds were in HFM’s client trust account, and by virtue of their location, the funds necessarily belonged to the client, Mann. In response, HFM argued that the firm’s ownership interest in the funds became fixed by virtue of the engagement agreement with Mann. Further the firm argued that it had planned to withdraw the funds from its trust account and put into its operating account. However, the firm received the notice of seizure before the firm could transfer the money out of trust. Ultimately, the trial court held that Jack Mann—not the law firm—retained ownership of the funds and ordered the law firm to turn over the funds to Mann’s creditor.
The California Court of Appeals upheld the trial court’s decision denying the law firm HFM’s claim of ownership in the funds held in trust. The Court of Appeals first reasoned that the location of the funds in the clint trust account is not dispositive. The court looked at California Rule of Professional Conduct Rule 1.5, which addresses where a lawyer or law firm should hold funds for the benefit of the client. That rule states, in relevant part, “All funds received or held by a lawyer or law firm for the benefit of a client . . . 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 . . .” (Rule 1.15(a)). The court further noted that the rule does not prohibit a law firm from ever holding its own funds in the client trust account. The rule in fact describes limited circumstances in which a law firm’s own money may be held in the client trust account. Thus, the court refused to find that the location of the funds alone is dispositive of the question of ownership.
The court then concluded that the ownership of the funds held in trust turned on whether the firm had performed work to earn the funds under the engagement agreement. In reaching the conclusion, the court reaffirmed that “a flat fee paid by a client to a lawyer for future legal services does not belong to the lawyer until the fee is earned through the actual provision of legal services.” See id. at 15. Like the trial court, the court of appeals found that the firm presented no evidence that it had performed any legal services under the engagement agreement to earn any of the funds. As there was no evidence that HFM provided any legal services to Mann, the flat fee still belonged to Mann at the time the creditor filed the notice of seizure. The court affirmed the trial court’s dismissal of HFM’s claim of ownership of the funds and ordered the firm produce the funds for seizure by the creditor.
