Handling Disputes Over Client Funds: How to Hold, Document, and Resolve a Trust Account Dispute

By Tammy Hoang, Certified QuickBooks ProAdvisor

Occasionally, disagreements arise over who is entitled to funds held in a client trust account. A lienholder questions the amount owed, a client contests a fee, or a condition on a settlement is still unmet. In these situations attorneys must act with care. The portion of the funds in dispute stays in the trust account until the issue is resolved. It cannot be released to either party prematurely. Only the undisputed funds may be distributed.

The rule behind this is simple. The practice is not, because every dispute puts pressure on the books at the same time as the attorney's judgment, which makes it as much a law firm bookkeeping task as a legal one. This guide walks through the process in order: split the funds, hold the disputed portion, document it, move toward resolution, and release only when the dispute is finally resolved. It uses California's Rule 1.15, and the principle is the same under the ABA Model Rule that most states follow: property claimed by more than one person is kept separate until the dispute is resolved, and the undisputed portions are distributed promptly.

Step One: Split the Funds Into Disputed and Undisputed

A dispute rarely covers every dollar. The first task is to identify exactly which portion is contested and which is not. Under California's rule, if a client or other person disputes the lawyer's right to receive a portion of trust funds, the disputed portion is not withdrawn until the dispute is finally resolved, while the lawyer must still promptly distribute any undisputed funds the client or other person is entitled to receive.

For illustration: a $60,000 settlement clears the IOLTA account, and a lienholder claims $12,000 while the client contests the amount. Once the attorney's fee and the client's share of the remainder are fixed and uncontested, those amounts can be distributed promptly. The contested $12,000 stays in that client's ledger as a held balance. Splitting the funds this way protects everyone: the client receives what is clearly theirs without waiting for the whole matter to close, and the contested amount stays exactly where it is.

Step Two: Hold the Disputed Portion, and Do Not Touch It

Held means held. The disputed portion cannot leave the IOLTA account for the client, the lienholder, or the attorney's own operating account while the dispute is open. That includes the lawyer's own claimed fee: if the client disputes the lawyer's right to a portion, the lawyer does not withdraw it until the dispute is finally resolved. This is where commingling client funds becomes a real risk, because moving disputed money early, even with good intentions, is exactly the mixing the rule prohibits.

Holding also has a bookkeeping side. Because the held money sits in a pooled account, the client's ledger balance must never fall below the held amount, or other clients' funds are effectively covering the gap. A monthly three-way reconciliation will catch a ledger that dips below a held amount, and sound law firm trust accounting treats that held figure as untouchable. And where a lienholder has given notice, disbursing against the lien carries separate risk: the rule's comments note that a lawyer who has notice of a lien and disburses funds in contravention of it may be civilly liable, although civil liability by itself does not establish a rule violation.

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Step Three: Document the Dispute in the Ledger and the File

The lawyer is responsible for clearly documenting the disagreement. In practice that means two records. In the file: the date the dispute arose, who raised it, the amount and basis, and every communication since. In the books: the held balance shown clearly on the client's ledger, with the date the dispute began and the reason, so anyone reviewing the law firm trust accounting can see at a glance why those funds have not moved. The State Bar's record standards do not prescribe a special format for held funds, so how a firm shows them is a bookkeeping choice. What matters is that the status and the dates are visible.

This documentation does real work later. Under paragraph (f) of Rule 1.15, the 45-day clock for distributing funds runs from the date they become undisputed, and a lawyer can rebut the presumption of a violation by showing good cause. Dated records are the evidence for both. The rule's comments also require the lawyer to take diligent steps to start and finish resolving the dispute, and a dated log of those steps shows that the funds were held deliberately, not neglected. When choosing a bookkeeper near me for trust work, ask how held balances appear on the client ledger.

Step Four: Communicate Regularly and Move Toward Resolution

Regular communication with all parties maintains transparency and keeps the matter moving. Disputes end in one of a few ways, and the right route depends on what is being disputed:

• Agreement. The parties settle the amount in writing, for example a lienholder confirming a reduced payoff, and the attorney releases funds according to that written agreement.

• Fee arbitration. For disputes over attorney fees or costs in California, Business and Professions Code sections 6200 to 6206 give clients the right to request arbitration through the State Bar's mandatory fee arbitration program. It is voluntary for the client, unless the fee agreement says otherwise, but mandatory for the attorney if the client starts it. An attorney who wants to collect unpaid fees must first give the client written notice of that right, and the client then has 30 days to request arbitration. Fee arbitration decides fee and cost disputes between attorney and client. It does not decide malpractice claims.

• Court proceedings. Where entitlement is contested among several parties, a legal proceeding such as an interpleader action lets a court decide who receives the funds. The rule's comments name interpleader specifically.

Whichever route applies, the funds stay in the client trust account until the dispute is finally resolved, so confirm that an agreement, award, or order is final before releasing anything.

Step Five: Release Funds Only When the Dispute Is Finally Resolved

When the dispute ends, record the resolution date. That date is the moment the held funds become undisputed, and it starts the 45-day clock in paragraph (f) of Rule 1.15. Distribute according to the outcome. A disputed fee moves to operating only now, never before, which keeps the firm clear of commingling client funds. Then update the ledger and confirm that the client's trust balance returns to the expected figure, ideally zero once the matter is fully distributed. Keep every document for at least five years after final distribution, as the rule requires.

Held funds must also show up correctly in the monthly three-way reconciliation. The held balance is part of the client ledger total, and the bank balance must include the money, so a held amount that is recorded in one place but not another will break the reconciliation. A firm that reconciles monthly will see that break immediately. A firm that does not may not find it until the dispute is long over. This is where disciplined law firm bookkeeping pays for itself, and a bookkeeper near me who can show a reconciliation with a held balance in it has done this before.

How Irvine Bookkeeping Handles Disputed Funds

The attorney decides what is disputed and authorizes every disbursement. Our role at Irvine bookkeeping is to record it correctly and keep the dates visible: held balances flagged on the client ledger, a dated record of when each dispute began and ended, undisputed amounts processed promptly once the attorney approves, and a signed monthly three-way reconciliation that proves the held money never moved.

If you have been searching for a bookkeeper near me who understands what a trust dispute does to the books, that is what our law firm bookkeeping delivers. We keep every client trust account and IOLTA account reconciled and your law firm trust accounting review-ready, so a disputed balance is documented, visible, and never a path to commingling client funds. QuickBooks certified.

Make Sure Your Trust Records Can Show Every Step.

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