New Requirements Will Affect the Handling of Client Funds and Property in 2023

By Eric R. Deitz

Changes to the Rules of Professional Conduct accompany the coming new year, and consistent with the duty of competence (Rule 1.1)[1], California attorneys must apprise themselves of the same. Two important and related changes take effect January 1, 2023, and affect a lawyer’s obligation to communicate (Rule 1.4) and to safely handle client funds and property (Rule. 1.15).

Under Rule 1.4, subdivision (a)(3), a lawyer must keep a client “reasonably” informed about significant developments relating to the representation. An amendment to Comment [1] to Rule 1.4 provides, in relevant part, “Whether a particular development is significant will generally depend on the surrounding facts and circumstances. For example, a lawyer’s receipt of funds on behalf of a client requires communication with the client pursuant to rule 1.15, paragraphs (d)(1) and (d)(4) and ordinarily is also a significant development requiring communication with the client pursuant to this rule.”

Subdivision (d)(1) of Rule 1.15 has been amended to specify a period within which a lawyer must notify a client of the receipt of funds or other client property. Absent good cause, a client must be notified within 14 days of the attorney’s receipt “of funds, securities, or other property in which the lawyer knows* or reasonably should know* the client or other person* has an interest.”[2] Currently, a lawyer need only provide such notice “promptly.”

Effective January 1st, subdivision (d)(7) of Rule 1.15 deletes the predicate requirement of a client request and obligates a lawyer to “promptly distribute any undisputed funds or property in the possession of the lawyer or law firm* that the client or other person* is entitled to receive.”

Finally, newly added paragraphs (f) and (g) of Rule 1.15 mandate that unless a client and counsel agree in writing that the lawyer may retain funds or property for a longer period of time, they must be distributed within 45 days of the date there is no unresolved dispute regarding the client’s entitlement to receive the same. Paragraph (f) of Rule 1.15 provides:

For purposes of determining a lawyer’s compliance with paragraph (d)(7), unless the lawyer, and the client or other person* agree in writing that the funds or property will continue to be held by the lawyer, there shall be a rebuttable presumption affecting the burden of proof as defined in Evidence Code sections 605 and 606 that a violation of paragraph (d)(7) has occurred if the lawyer, absent good cause, fails to distribute undisputed funds or property within 45-days of the date when the funds become undisputed as defined by paragraph (g). This presumption may be rebutted by proof by a preponderance of evidence that there was good cause for not distributing funds within 45 days of the date when the funds or property became undisputed as defined in paragraph (g).

Paragraph (g) is definitional in nature:

As used in this rule, “undisputed funds or property” refers to funds or property, or a portion of any such funds or property, in the possession of a lawyer or law firm* where the lawyer knows* or reasonably should know* that the ownership interest of the client or other person* in the funds or property, or any portion thereof, has become fixed and there are no unresolved disputes as to the client’s or other person’s* entitlement to receive the funds or property.

Circumstances may affect the commencement of the 45-day deadline to distribute funds or property. Comment [6] to Rule 1.15 makes clear a lawyer must take diligent steps to resolve any dispute regarding an entitlement to funds or property the lawyer holds, while Comment [7] includes an illustrative but not exhaustive list of concerns that must be resolved before a duty to distribute client funds or other property may arise.

These include: “disputes concerning entitlement to funds arising from: medical liens; statutory liens; prior attorney liens; costs or expenses; attorney fees; a bank’s policies and fees for clearing a check or draft; any applicable conditions on entitlement such as a plaintiff’s execution of a release and dismissal; or any legal proceeding, such as an interpleader action, concerning the entitlement of any person to receive all or a portion of the funds or property.”

In addition to impending changes to the Rules of Professional Conduct, the Supreme Court of California recently approved Rule of Court 9.8.5 to implement the Client Trust Account Protection Program (“CTAPP”), which applies to attorneys entrusted with handling client funds and property. Beginning February 1, 2023, California-licensed lawyers must report to the State Bar if they are responsible for compliance with Rule 1.15 and, specifically, the handling of funds held in a client trust account.

Attorneys that have no such responsibility within their practice need only certify to that effect with the State Bar. By contrast, lawyers responsible for client trust accounts are subject to additional reporting requirements.

They must disclose their responsibility for safeguarding client funds to the State Bar; annually register each client trust account with the State Bar; complete a yearly assessment of the practices that apply to the management of any client trust account; and certify their understanding of and compliance with Rule 1.15.

The State Bar will officially publish a new version of the Client Trust Accounting Handbook on January 1, 2023. A video summary of CTAPP is available on YouTube, while the CTAPP webpage and FAQ provide more information.


[1] Unless otherwise indicated, all references are to the Rules of Professional Conduct.

[2] Terms followed by an asterisk are defined in Rule 1.0.1.