Charging and Family Attorney Real Property Liens: Procedures and Ethical Obligations
Some divorces quickly become obscenely expensive. Family law lawyers see high cost cases commonly where trial appears to be inevitable (because of little to no cooperation by one or both sides), or there is a business subject to community property rules (necessitating an accounting expert), or high conflict regarding custody/visitation of children (necessitating child therapist experts). Of the several methods available for family law attorneys to accept cases or stay the course where their client presently has inadequate liquid assets to pay for legal services as fees accrue (i.e. a financially "out spouse"), liens can offer the benefit of quickly assuring that the out spouse has the best legal counsel available now regardless of ability to pay immediately.
The sad fact is that some "in" spouses endeavor to outspend the other, in an effort to drive them into accepting less than full-value-settlements. Yes, this is evil. It is intended to drive a wedge between the out-spouse and their legal defender, or to force the attorney to get off the case when the financial risks of continued representation are so great that it becomes fiscally irresponsible to continue. As a wedge it works, if the client transfers their discontent over the expense of the process onto their own attorney. Smart clients who have highly competent attorneys don't fall prey to this form of manipulation. Here are some ideas about how to protect your relationship with your attorney so that you can get the representation you deserve. If you are a lawyer they might help you to stand by your client and assure you receive payment for your dedicated work.
There are two principal types of enforceable liens an attorney may receive from a client in connection with securing the fee provisions in a typical retainer fee agreement: charging liens and real property liens.
Charging liens give the attorney a degree of confidence in being paid when the case finishes. However, when a case presents a situation where there is a substantial amount of net equity in the family residence, rental property, or other realty, a real property lien is a viable option for financing the family law case. A family law real property lien offers a particular advantage in a case involving an "in spouse" opponent party who refuses to contribute to the "out spouse's" legal costs, even where attorney fees are court ordered.
There is a fiduciary relationship between all California attorneys and their clients once the retainer agreement is put into place. Prior to that moment clients and attorneys stand at arms-length and can negotiate whatever financial arrangement they feel is appropriate, subject to the Rules of Professional Conduct (herein "CRPC") and the Family Code (herein "FC").
Charging liens are commonplace in almost every attorney's fee agreement, and is created by the inclusion of a lien provision in the attorney fee agreement (or a subsequent, independent agreement) with language such as "Client agrees to pay Attorney ... and hereby gives Attorney a lien upon any money or property awarded to Client in this proceeding for any sums due under this Agreement." Saltarelli & Steponovich v. Douglas (1995) 40 CA4th 1, 6, 46 CR2d 683, 686–687. A charging lien may be used to secure either hourly or contingency fees (or any other variant of payment for services rendered), including family law cases (except the lien cannot reach child support payments or arrears payments). Fletcher v. Davis (2004) 33 C4th 61, 66, 14 CR3d 58, 61; Hoover Reynolds v. Super.Ct. (County of San Diego) (1996) 50 CA4th 1273, 1277, 1280, 58 CR2d 173, 175, 178.
A charging lien gives the attorney an equitable interest "pro tanto" in the client's claim (the proceeds of the client's recovery, if any) as security, and entitles the attorney to "any available equitable remedy necessary to effect payment" of the fees and costs due the attorney. Epstein v. Abrams (1997) 57 CA4th 1159, 1169, 67 CR2d 555, 561. Since an attorney's charging lien becomes effective upon execution of the contract creating the lien, no "notice of lien" need be filed in the pending action to "perfect" the lien; nor is a judgment on the lien a condition precedent to its existence or viability. Waltrip v. Kimberlin (2008) 164 CA4th 517, 525, 79 CR3d 460, 465. A charging lien is non-possessory, therefore it may be enforced even though the attorney does not have actual possession of the fund (the judgment or settlement) recovered for the client. However, the lien may only be enforced by counsel in an independent action against the client (counsel has no right to intervene in the underlying action to establish the amount of the lien or enforce it), and it may not be enforced during the pendency of a family law proceeding. Bandy v. Mt. Diablo Unified School Dist. (1976) 56 CA3d 230, 234, 126 CR 890, 893.
Since a charging lien creates an adverse financial interest to that of the client, it is subject to compliance with CRPC 3–300. The lien's terms must be "fair and reasonable," the transaction must be fully disclosed in writing to the client, the client must be given a copy of the agreement and the opportunity to seek independent legal advice, and the client must thereafter consent to the charging lien in writing. Fletcher v. Davis, supra, 33 C4th at 71–72, 14 CR3d at 65–66.
A template family law charging lien is provided for review in this blog. It is written as a form independent of a family law retainer fee agreement, although its language may be adapted and incorporated into a fee agreement.
A family law real property lien is distinctly different from a charging lien, primarily in that the former gives the attorney a present possessory interest in real property secured by the lien (as opposed to the equitable interest in a client future recovery that are present in a charging lien). As such, a real property lien comes much closer to potentially violating of the "adverse interest" prohibition found in CRPC 3–300 unless strict compliance with the FC, CRPC, and federal lending laws are followed.
Nevertheless a real property lien, created unilaterally by one party through a promissory note and deed of trust on real property, is expressly allowed by FC sections 2033 and 2034 to reach that party's interest in the subject real property (be it his or her separate property interest or his or her share of the community interest). Pursuant to FC section 2033, either party may encumber his or her interest in community real property to pay "reasonable" attorney fees in order to retain or maintain legal counsel in a dissolution, nullity or legal separation proceeding.
As with charging liens, a real property lien first must comply with CRPC 3-300 such that its terms must be "fair and reasonable," the transaction must be fully disclosed in writing to the client, the client must be given a copy of the agreement and the opportunity to seek independent legal advice, and the client must thereafter consent to the charging lien in writing. Read v. State Bar (1991) 53 C3d 394, 410–411, 279 CR 818, 823–824. Two template rule 3-300 letters of disclosure and acknowledgment, respectively, are provided for use and review with this blog.
Moreover (for disciplinary purposes, at minimum), lawyers are ethically barred from purchasing property at a trustee's foreclosure in an action in which the attorney is acting as counsel for a party. CRPC 4–300(A). This Rule effectively precludes the lawyer from taking advantage of any power of sale granted in the secured instrument and eliminates non-judicial foreclosures. As such, while the template deed of trust provided with this blog contains a power of sale provision, its utilization by the attorney is unethical and would be grounds for discipline before the bar committee.
Another important aspect of enforcing a family law real property lien is compliance with applicable state and federal lending requirements (e.g. Notice of and Right to Cancel within a specific time period; Truth in Lending disclosure requirements). 15 USC § 1601, et seq.; 12 CFR § 226.1, et seq. The template letters and acknowledgments also contain the required compliance provisions at this time, but should be updated by the user as new requirements are made frequently to these code sections.
A Notice of the lien and a Declaration from the lien-granting party must be served personally on the other party (or his or her attorney of record) at least 15 days before recordation of the deed of trust. FC § 2033(b). The declaration must set forth: a full description of the encumbered real property; the encumbering party's "belief" as to the property's fair market value, along with supporting "documentation"; prior encumbrances on the property as of the date of the declaration; a list of community assets and liabilities, plus their estimated values, as of the date of the declaration; and the amount of the family law attorney's lien. FC § 2033(b)(1)-(5). A template Notice of Real Property Lien and a template supporting Declaration are provided with this blog.
The party-opponent my object to the real property lien by ex parte motion so as to stay recording of the deed of trust by stating specific objections and showing why recordation of the deed of trust "would likely result in an unequal division of property" or "otherwise be unjust under the circumstances of the case." Fam.C. § 2033(c)(1)-(3). The family law court will then make a determination of whether the real property lien "would likely result in an unequal division of property because it would impair the encumbering party's ability to meet his or her fair share of the community obligations or would otherwise be unjust under the circumstances of the case"; or (ii) for "good cause," limit the amount of the lien. Fam.C. § 2034(a).
Finally, because of the effect of ATROs created upon the filing and issuance of a family law petition and summons prohibiting sales or encumbrances of property without court order, cautious counsel should seek leave from the court to create and perfect a real property lien before using the foregoing procedures if it is not being utilized at the outset of representation before filing the family law action.
We share herewith some free forms that might be useful to you, whether as an attorney or a client, in navigating this technical area of the law!
Template List:
- Charging Lien Form
- Promissory Note Form
- Deed of Trust Form
- Cover Letter with Acknowledgment Form
- Right to Cancel and Truth in Lending Letter with Acknowledgment Form
Michael C. Peterson, Esq.
Law Firm of Thurman W. Arnold III