Cal. State Bar Formal Opn. No. 2009-178 — Settling Fee Dispute with Former Client

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THE STATE BAR OF CALIFORNIA
STANDING COMMITTEE ON
PROFESSIONAL RESPONSIBILITY AND CONDUCT
FORMAL OPINION NO. 2009-178
ISSUES: Is it ethically proper for an attorney who is settling a fee dispute with a client to
include a general release and a Civil Code section 1542 waiver in the settlement
agreement? Does the existence of a legal malpractice claim against the attorney
alter the ethical propriety of including a general release and section 1542 waiver in
the settlement agreement?
DIGEST: An attorney must promptly disclose to the client the facts giving rise to any legal
malpractice claim against the attorney. When an attorney contemplates entering
into a settlement agreement with a current client that would limit the attorney’s
liability to the client for the lawyer’s professional malpractice, the attorney must
consider whether it is necessary or appropriate to withdraw from the representation.
If the attorney does not withdraw, the attorney must:
1. Comply with rule 3-400(B) by advising the client of the right to seek
independent counsel regarding the settlement and giving the client an
opportunity to do so;
2. Advise the client that the lawyer is not representing or advising the client as to
the settlement of the fee dispute or the legal malpractice claim; and
3. Fully disclose to the client the terms of the settlement agreement, in writing,
including the possible effect of the provisions limiting the lawyer’s liability to
the client, unless the client is represented by independent counsel.
AUTHORITIES
INTERPRETED: Rules 2-100, 3-300, 3-310, 3-400, and 3-500 of the Rules of Professional Conduct
of the State Bar of California.1/
Business and Professions Code section 6068, subdivision (m).
Civil Code section 1542.
STATEMENT OF FACTS
Fact Pattern 1: Client 1 engages Attorney A to represent Client 1. During the representation, a dispute
develops regarding attorneys’ fees. Client 1 and Attorney A decide to settle the attorneys’ fees dispute by
entering into a written settlement agreement. Client 1 and Attorney A intend that Attorney A continue to
represent Client 1 in the ongoing matter. Although Attorney A is not aware of any basis for a legal malpractice
claim, Attorney A is concerned that Client 1 may allege that Attorney A committed legal malpractice at some
future date. To resolve the fee dispute and protect against any future legal malpractice allegation regarding
Attorney A’s completed services, and to allow the continuation of the representation, Attorney A proposes a
settlement of the fee dispute, memorialized by a written settlement agreement including a general release of all
claims known and unknown to the date of the settlement and a provision waiving Civil Code section 1542
1/ Unless otherwise noted, all rule references are to the Rules of Professional Conduct of the State Bar of
California.

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(hereinafter “section 1542”). The proposed settlement agreement is broad enough to release any legal
malpractice claim. Section 1542 provides that:
A general release does not extend to claims which the creditor does not know or suspect to
exist in his or her favor at the time of executing the release, which if known by him or her
must have materially affected his or her settlement with the debtor.
Client 1 is unaware of any legal malpractice by Attorney A, and has not alleged legal malpractice against
Attorney A, formally or informally. Client 1 and Attorney A execute the settlement agreement, including the
section 1542 waiver. Later, Client 1 files a lawsuit for legal malpractice against Attorney A with regard to
services rendered before the settlement agreement was executed. At that time, Attorney A relies upon the
general release and the section 1542 waiver, asserting that Client 1 released the claim for legal malpractice
against Attorney A.
Fact Pattern 2: Attorney B believes that she has committed legal malpractice in a matter that she is handling on
behalf of Client 2. Client 2 is delinquent in payment of attorneys’ fees to Attorney B. Near the end of the
engagement, Attorney B demands payment of all past due attorneys’ fees. Attorney B and Client 2 decide to
mediate their dispute. At the mediation, Client 2 is not represented by independent counsel. Without disclosing
the potential malpractice claim to Client 2, Attorney B settles the fee dispute with Client 2, and the parties enter
into a settlement agreement and mutual general release of all claims, known and unknown. Attorney B and
Client 2 both intend that the settlement agreement resolve any claim for legal malpractice, and the terms of the
settlement agreement are broad enough to do so. The settlement agreement includes a section 1542 waiver.
Fact Pattern 3: Client 3 engages Attorney C to represent Client 3. The representation comes to a conclusion
because the case in which Attorney C represented Client 3 is resolved through a settlement. However, Client 3
has not paid Attorney C’s billings for attorneys’ fees in full. Attorney C sends a letter to Client 3 demanding
payment of the outstanding fees. In response, Client 3 refuses to pay the outstanding attorneys’ fees and asserts
that Attorney C has committed legal malpractice. Attorney C disagrees that he has committed legal malpractice.
Client 3 engages Attorney D to represent Client 3 in reference to the dispute with Attorney C, including the
dispute concerning the payment of attorneys’ fees and Client 3’s legal malpractice claim against Attorney C.
While Client 3 is represented by Attorney D, Client 3 and Attorney C resolve their dispute, memorializing the
resolution in a written settlement agreement and mutual general release of all claims, known and unknown,
which includes a section 1542 waiver. Attorney C intends that the settlement agreement resolve Client 3’s
claim for legal malpractice against Attorney C, and the terms of the settlement agreement are broad enough to
do so.
This opinion discusses the ethical issues raised by the above scenarios. The issues include: (1) whether the
attorney in each factual scenario has a conflict of interest; (2) how the attorney in each scenario must proceed in
order to fulfill his or her fiduciary duties; (3) the duty of the attorney in each scenario to make disclosures to the
client, including disclosure of the facts giving rise to a legal malpractice claim and disclosure fully explaining
the terms and conditions of the proposed settlement; and (4) under what circumstances the attorney must
withdraw from the representation of the client.
The effect of a settlement agreement between a lawyer and a client releasing all claims, known and unknown,
combined with a section 1542 waiver, is a matter of contract law. In some cases, depending on the facts and
circumstances, the precise language of the release, whether the client is represented by independent counsel,
and the intentions of the parties in entering into the settlement agreement, the settlement agreement may result
in the client’s release of the lawyer from all claims, known or unknown, including any claims that the client
may have against the lawyer for legal malpractice. (See, e.g., Winet v. Price (1992) 4 Cal.App.4th 1159, 1168
[6 Cal.Rptr.2d 554];2/ Donnelly v. Ayer (1986) 183 Cal.App.3d 978, 983-984 [228 Cal.Rptr. 764].) The
enforceability of the settlement agreement, depending as it may on whether the client has independent counsel,
2/ Note, however, that a section 1542 waiver may not be effective to support a release where the releaser suffers
from mental incapacity, or where the release is induced by fraud. (Winet v. Price, supra, 4 Cal.App.4th at
p. 1169, fn. 6.)

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whether a viable malpractice claim is concealed by the attorney from the client, and whether the client signed
the release and section 1542 waiver without intending to release the attorney from liability for legal malpractice,
is a legal matter of contract law that is beyond the scope of this opinion. We consider here only the ethical
obligations of a lawyer entering into such an agreement with a present or former client.
DISCUSSION
1. Withdrawal from Representation
A fee dispute between a lawyer and client does not, by itself, require the lawyer to withdraw as counsel. (Los
Angeles County Bar Assn. Formal Opn. No. 521 (2007).) At the initial stages of a fee dispute, withdrawal is
permissive. (Ibid.) Prior to an attorney initiating a suit for the collection of fees against a client, the attorney
should withdraw from the representation of the client. (Rule 3-700(C)(1)(f) [breach of obligation to pay fees is
basis for permissive withdrawal]; Santa Clara County Counsel Attys. Assn. v. Woodside (1994) 7 Cal.4th 525,
548-549 [28 Cal.Rptr.2d 617] [noting in dictum the potential for the duty of loyalty to preclude an attorney’s
lawsuit against a current client]; Los Angeles County Bar Assn. Formal Opn. No. 476 (1994) [“an attorney
should withdraw from all matters in which representation is being provided to the client prior to commencing
litigation for costs or fees”]; Los Angeles County Bar Assn. Formal Opn. No. 212 (1953) [same].)
Before entering into a settlement agreement and obtaining a general release and section 1542 waiver from a
client, the lawyer should consider whether it is appropriate to withdraw from the representation. In making this
decision, the lawyer should consider the circumstances motivating the request for a general release and section
1542 waiver, the level of antagonism between the lawyer and client, and the degree to which withdrawal from
representation would cause prejudice to the client. (Rule 3-700(A)(2).)
2. Settling Claims for Attorney’s Liability
A fee dispute with a client, by itself, also does not create an ethical conflict of interest. (Los Angeles County
Bar Assn. Formal Opn. No. 521.) However, where the fee dispute involves a potential claim of legal
malpractice, and where the lawyer intends through the settlement agreement to obtain a release of that legal
malpractice claim, or where the settlement agreement itself is broad enough to effectively release the client’s
legal malpractice claim against the lawyer, a general release including a waiver of section 1542 from the client
in connection with the resolution of that fee dispute is subject to rule 3-400(B). Rule 3-400(B) provides that an
attorney shall not settle a claim or potential claim for an attorney’s liability to a client for an attorney’s
professional malpractice unless (1) the client is informed in writing that the client may seek the advice of
independent counsel regarding the settlement, and (2) the client is given a reasonable opportunity to seek that
advice. (Rule 3-400(B).)3/
3. Duty of Loyalty and Conflict of Interest
A conflict of interest arises in scenarios involving a lawyer’s settlement of a fee dispute with a client that also
involve the release of a potential or actual legal malpractice claim. A member should not accept or continue
representation of a client without providing written disclosure to the client where the member has or had
financial or professional interests in the potential or actual malpractice claim involving the representation. (Cf.
Rule 3-310(B)(4).) “The primary purpose of this prophylactic rule is to prevent situations in which an attorney
might compromise his or her representation of the client in order to advance the attorney's own financial or
personal interests.” (Santa Clara County Counsel Attys. Assn. v. Woodside, supra, 7 Cal.4th at p. 546.) Written
3/ Rule 3-400(A) provides that an attorney may not contract with a client “prospectively” limiting the attorney’s
liability to the client for malpractice. This provision applies to agreements limiting liability for future acts of
malpractice. Because none of the fact patterns described in this opinion involve an attorney attempting to limit
future liability for legal malpractice, which has not already occurred, rule 3-400(A) is inapplicable here.

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disclosure to the client of the conflict of interest arising from the lawyer’s financial or professional interests in
the dispute should be given. (Cf. Rule 3-310(B).)4/
Although the lawyer does not have a financial interest that creates a conflict of interest in a situation involving
solely a fee dispute (Los Angeles County Bar Assn. Formal Opn. No. 521), once a potential or actual legal
malpractice claim is involved, and once the attorney seeks a release from such a claim, the lawyer has a
financial and professional interest in avoiding a suit for legal malpractice arising from the lawyer’s
representation and in minimizing the lawyer’s exposure to the client. (See People v. Bonin (1989) 47 Cal.3d
808, 835 [254 Cal.Rptr. 298] [“Conflicts of interest broadly embrace all situations in which an attorney's loyalty
to, or efforts on behalf of, a client are threatened by . . . his own interests.”].) Where the attorney’s interest in
securing an enforceable waiver of a client’s legal malpractice claim against the attorney conflicts with the
client’s interests, the attorney must assure that his or her own financial interests do not interfere with the best
interests of the client. (See Ramirez v. Sturdevant (1994) 21 Cal.App.4th 904, 924 [26 Cal.Rptr.2d 554]
[recognizing the conflict of interest inherent in an attorney’s dual representation of the interests of the client and
the attorney in settlement negotiations with a third party].) Accordingly, the lawyer negotiating such a
settlement with a client must advise the client that the lawyer cannot represent the client in connection with that
matter, whether or not the fee dispute also involves a potential or actual legal malpractice claim. (Cf. Rules
3-310(C) and 3-500; Flatt v. Superior Court (Daniel) (1995) 9 Cal.4th 275, 289 [36 Cal.Rptr.2d 537] [“the duty
of loyalty to the client forbids any act that would interfere with the dedication of an attorney's ‘entire energies to
[the] client's interests’”].)
4. Disclosure of Facts Giving Rise to Potential Malpractice Claim to Client
A lawyer has an ethical obligation to keep a client informed of significant developments relating to the
representation of the client. (Bus. & Prof. Code, § 6068, subd. (m); rule 3-500.) Where the lawyer believes that
he or she has committed legal malpractice, the lawyer must promptly communicate the factual information
pertaining to the client’s potential malpractice claim against the lawyer to the client, because it is a “significant
development.” Beal Bank, SSB v. Arter & Hadden, LLP (2007) 42 Cal.4th 503, 514 [66 Cal.Rptr.3d 52]
[“attorneys have a fiduciary obligation to disclose material facts to their clients, an obligation that includes
disclosure of acts of malpractice.”].5/ We previously stated that:
It would, of course, be unethical for an attorney, knowing he/she had committed malpractice,
to attempt to negotiate an arbitration provision into an existing retainer agreement without
fully disclosing the fact of the attorney's negligence to the client.
(State Bar Formal Opn. No. 1989-116, fn. 4.)
5. Inapplicability of Rule 3-300
Rule 3-300 imposes certain requirements before an attorney may “enter into a business transaction with a client;
or knowingly acquire an ownership, possessory, security or other pecuniary interest adverse to a client[.]” The
requirements include: (1) a fair and reasonable transaction or acquisition and terms; (2) full written disclosure of
such terms; (3) a written advisory that the client may seek advice from an independent attorney of the client’s
choice; (4) a reasonable opportunity to obtain such advice from an independent attorney; and (5) written consent
by the client to the terms of the transaction or acquisition. (Rule 3-300(A)-(C).) While no published California
authorities have specifically addressed whether an attorney’s cash settlement of a fee dispute that includes a
general release and a section 1542 waiver of actual or potential malpractice claims for past legal services falls
within the prescriptions of this rule, it is the Committee’s opinion that rule 3-300 should not apply.
4/ “Disclosure” means informing the client or former client of the relevant circumstances and of the actual and
reasonably foreseeable adverse consequences. (Rule 3-310(A)(1).)
5/ Note, however, that there is no ethical obligation to discuss the various types of malpractice recovery the
client may obtain against the lawyer. (Expansion Pointe Properties Ltd. Partnership v. Procopio, Cory,
Hargreaves & Savich, LLP (2007) 152 Cal.App.4th 42, 55 [61 Cal.Rptr.3d 166].)

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First, rule 3-400(B) expressly addresses an attorney’s ability to settle an actual or potential claim for malpractice
by imposing the requirements set forth in Section 2, supra. Specifically, the client must be advised in writing
that he or she may seek advice of an independent attorney of his or her choice regarding the settlement and must
be given a reasonable opportunity to do so. (Rule 3-400(B).) Rule 3-300, however, lacks any reference to the
settlement of such claims.
Second, if the prescriptions of rule 3-300 were to apply to these circumstances, rule 3-400(B) would be
rendered mere surplusage. Rule 3-400(B)’s requirements are more narrow in scope than those in rule 3-300, but
are nonetheless contained within rule 3-300.6/ Consequently, there would be no need for rule 3-400(B)’s
existence if rule 3-300 also applied.7/ (See People v. Hawes (1982) 129 Cal.App.3d 930, 936-937 [181 Cal.Rptr.
456] [“specific statutory provision controls a general one even where the general one standing alone would be
broad enough to include the subject matter of the specific statute”].)
For these reasons, the Committee believes that the prescriptions of rule 3-300 are inapplicable when an attorney
and client are negotiating a cash settlement of a fee dispute in exchange for a section 1542 release of claims,
including malpractice claims for prior services rendered.
6. Application to Fact Patterns
In Fact Pattern 1, where Attorney A and Client 1 have an ongoing attorney-client relationship, and Client 1 has
no independent counsel, Attorney A must advise Client 1 that Attorney A does not represent Client 1 in
reference to that dispute. Attorney A must advise Client 1 in writing that Client 1 may seek the advice of
independent counsel regarding the general release and section 1542 waiver, and must give Client 1 an
opportunity to do so. (Rule 3-400(B).) After Client 1 has filed a lawsuit for legal malpractice against Attorney
A, absent informed written consent, Attorney A should withdraw from representation of Client 1 in the ongoing,
underlying matter.
In Fact Pattern 2, Attorney B has an interest in not only resolving the fee dispute favorably, but also in
obtaining an enforceable release of the legal malpractice claim which Client 2 may have against Attorney B.
Because Client 2’s interest is adverse to that of Attorney B, Attorney B should consider whether it is
appropriate to withdraw from the representation of Client 2. Because the dispute involves a legal malpractice
claim, a matter beyond the compensation and hiring arrangements in the attorney-client relationship, the
settlement agreement including the general release and section 1542 waiver is presumed to involve a breach of
Attorney B’s fiduciary duties to Client 2 (see Ramirez v. Sturdevant, supra, 21 Cal.App.4th at p. 917), subject
to rebuttal by Attorney B. Attorney B is further obliged to fully disclose the facts pertaining to the potential
legal malpractice claim to Client 2. (Rule 3-500; cf. rule 3-310(A)-(B).)
Attorney B must also advise Client 2 in writing of Client 2’s right to seek the advice of independent counsel
regarding the settlement agreement and must give Client 2 a meaningful opportunity to do so. (Rule 3-400(B).)
Where the settlement takes place during a mediation, in order to comply with rule 3-400(B), the parties to the
mediation may have to adjourn the mediation and reconvene in order to permit Client 2 to have a meaningful
6/ The American Bar Association Model Rules of Professional Conduct also contain a provision dealing with
the settlement of an actual or potential malpractice claim that corresponds to the more narrow requirements of
rule 3-400(B). (ABA Model Rules, rule 1.8(h)(2).) Similarly, the Restatement (Third) of the Law Governing
Lawyers requires, “for purposes of professional discipline,” written advice that independent representation is
appropriate when settling a malpractice claim. (Rest.3d, Law Governing Lawyers, § 54(4).) Only in a separate
provision addressing when a client or former client may rescind such a settlement agreement is the lack of a fair
and reasonable settlement paired with the lack of independent representation. Thus, under the Restatement, this
additional requirement affects the enforceability of the contract, not the lawyer’s professional duties.
7/ This opinion does not address the situation where an attorney obtains an interest in a client’s property for
purposes of securing the attorney’s past due fees. Such a situation is expressly intended to be subject to rule
3-300. (See discussion to rule 3-300.)

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opportunity to seek independent counsel, depending upon when the advice required by rule 3-400(B) is given,
and upon Client 2’s desires.
In Fact Pattern 3, because Client 3 and Attorney C have terminated their attorney-client relationship, and Client
3 has independent counsel (Attorney D), the obligation to keep a “client” informed of significant developments
no longer applies. (Bus. & Prof. Code, § 6068, subd. (m); rule 3-500.) Likewise, rule 3-400, which by its terms
is applicable only to “clients,” is not applicable to this factual scenario because Client 3 is no longer a client of
Attorney C. (State Bar Formal Opn. No. 1992-127, fn. 7 [rule 3-400 does not apply where the attorney-client
relationship is terminated]; see Donnelly v. Ayer, supra, 183 Cal.App.3d at p. 984.) Where Client 3 is
represented by Attorney D in connection with the dispute that is the subject of the settlement agreement,
Attorney C may communicate directly with Client 3, even though Client 3 is represented by counsel.
(Discussion to rule 2-100(A) [the rule does not prohibit a member who is also a party from communicating
directly or indirectly on his or her own behalf with a represented party].)
CONCLUSION
Before entering into a settlement agreement with a current client that includes a general release and a section
1542 waiver, an attorney must promptly disclose to the client the facts giving rise to any potential or actual
malpractice claim. The attorney should consider whether it is necessary or appropriate to withdraw from the
representation. If the attorney does not withdraw, the attorney must comply with rule 3-400(B), advise the
client that the lawyer does not represent the client in reference to the fee dispute or legal malpractice claim, and
fully disclose to the client the terms of the settlement agreement, in writing, including the possible effects of the
general release and section 1542 waiver, assuming the client does not have independent counsel.
This opinion is issued by the Standing Committee on Professional Responsibility and Conduct of the State Bar
of California. It is advisory only. It is not binding upon the courts, the State Bar of California, its Board of
Governors, any persons or tribunals charged with regulatory responsibilities, or any member of the State Bar.

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