Ethics Opinion 293
Disposition of Property of Clients and Others Where Ownership Is in Dispute
In certain situations, a lawyer is obligated to safeguard funds that come into the lawyer’s possession where ownership interests are claimed by both the lawyer’s client and a third party or parties. If the third party has a “just claim” to the property that the lawyer has a duty under applicable law to protect against wrongful interference by the lawyer’s client, the lawyer must hold any disputed portion of the property until the dispute has been resolved.
Applicable Rule
- Rule 1.15 (Safekeeping Property)
Inquiry
The Ethics Committee has received numerous inquiries from lawyers concerning the proper disposition of settlement funds that a lawyer receives on behalf of a client when persons other than the client assert ownership interests in the funds. The purpose of this opinion is to provide guidance for the lawyer who is unsure how to respond to a third party’s claim or her client’s dispute with that claim.
Discussion
When a lawyer receives property belonging to others, two duties on the part of the lawyer arise: (1) the duty to notify promptly those who have ownership interests in the property of its receipt by the lawyer; and (2) the duty to promptly deliver the property and an accounting, if requested, to its owner. Rule 1.15(b) reads:
Upon receiving funds or other property in which a client or third person has an interest, a lawyer shall promptly notify the client or third person. Except as stated in this rule or otherwise permitted by law or by agreement with the client, a lawyer shall promptly deliver to the client or third person any funds or other property that the client or third person is entitled to receive and, upon request by the client or third person, shall promptly render a full accounting regarding such property, subject to Rule 1.6.
Rule 1.15(c) outlines a lawyer’s duties with respect to the distribution of property where disputes arise as to its ownership:
When in the course of representation a lawyer is in possession of property in which interests are claimed by the lawyer and another person, or by two or more persons to each of whom the lawyer may have an obligation, the property shall be kept separate by the lawyer until there is an accounting and severance of interests in the property. If a dispute arises concerning the respective interests among persons claiming an interest in such property, the undisputed portion shall be distributed and the portion in dispute shall be kept separate by the lawyer until the dispute is resolved. Any funds in dispute shall be deposited in a separate account meeting the requirements of Paragraph (a).
If the text of the rule were all that lawyers had to guide them, the rule would be difficult to interpret. The quoted portions of the rule speak of “interests” in property and “interests” claimed by competing parties. The rules, taken by themselves, do not define what is an interest sufficient to give rise to the safekeeping obligations of the lawyer and what sort of “claim” is sufficient to trigger the lawyer’s obligation to safeguard the property until the dispute is resolved.
Comment [4] to Rule 1.15, however, provides further guidance:
Third parties, such as a client’s creditors, may have just claims against funds or other property in a lawyer’s custody. A lawyer may have a duty under applicable law to protect such third-party claims against wrongful interference by the client, and accordingly may refuse to surrender the property to the client. However, a lawyer shall not unilaterally assume to arbitrate a dispute between a client and the third party.
D.C. R. Prof. Conduct 1.15, comment [4] (emphasis added).
The rules and comments have been further elucidated in decided cases, ethics opinions from this and other jurisdictions, and in the secondary literature. Taken together, these materials offer guidance as to how to handle these matters.
- Client Claims
One set of considerations applies when a dispute arises between a lawyer and the client concerning the property held by the lawyer. Because of the lawyer’s duty of loyalty to the client, the client’s mere assertion of a claim is enough to prevent the lawyer from withdrawing any disputed property: “There is no requirement that the dispute be genuine, serious, or bona fide, . . . The lawyer may not take possession of property the ownership of which is disputed by the client until it is absolutely clear that the dispute with the client has been finally resolved.” In re Haar, 667 A.2d 1350, 1353 (D.C. 1995).1
The lawyer’s obligation is to safeguard the funds in a segregated account until the dispute is resolved. Moreover, the lawyer should take steps to promote a resolution. The lawyer should reason with the client, suggest mediation, and suggest other alternative dispute resolution mechanisms where those steps fail.2 If no other device is effective, the lawyer may ultimately be forced to seek a judicial resolution of the client’s claim.
- Third Party Claims
The claims of third parties to property coming into a lawyer’s possession stand on a quite different footing. For one thing, the mere assertion of a claim by a third party is not enough by itself to freeze property in the lawyer’s possession until the dispute is resolved. Indeed, the imposition of such a requirement by the Rules of Professional Conduct, which are prescribed by the District of Columbia Court of Appeals and hence have the force of law, could raise significant due process issues as constituting, in effect, a prejudgment attachment. See Conn. Informal Op. 95-20 (May 1, 1995) (citing Connecticut v. Doehr, 500 U.S. 1, 11 (1991) (attachment by private party under state aegis constitutes state action); Sniadach v. Family Finance Corp., 395 U.S. 337 (1969) (holding prejudgment garnishment of wages unconstitutional); Fuentes v. Shevin, 407 U.S. 67 (1972) (holding prejudgment seizure of goods unconstitutional where application ruled upon by clerk rather than judge, no requirement for detailed affidavit, and no requirement to show exigent circumstances); North Georgia Finishing, Inc. v. Di-Chem, Inc., 419 U.S. 601 (1975) (holding prejudgment seizure of bank account unconstitutional notwithstanding requirements of bond and showing of exigency). Unlike the claims of a client, which need not be justified even superficially in order to bar the lawyer from making distribution, In re Haar, 667 A.2d at 1353, the claims of the third party must rise to a higher level. The third party must have a “just claim” as to which “applicable law” imposes a duty on the lawyer to distribute the funds to the third party or withhold distribution. D.C. R. Prof. Conduct 1.15, comment [4].
The focus of this opinion is the precise level to which such a third-party claim must rise to trigger a duty of preservation by the lawyer in the face of a demand that she make disbursement to the client.3 To begin with, the rule does not apply to claims of which the lawyer lacks knowledge. Shapiro v. McNeill, 92 N.Y.2d 91, 96, 699 N.E.2d 407, 409 (1998) (interpreting N.Y. DR 9-102); Conn. Informal Op. 95-20, at n. 3 (May 1, 1995). Similarly, if there is no legitimate dispute about who is entitled to part or all of the funds, the lawyer must disburse the undisputed portion accordingly. N.Y. State Op. 717 (Apr. 15, 1999); Arizona Op. 88-06. Further, the lawyer is not required to make ultimate decisions about who is correct in a dispute between the lawyer’s client and a competing third party for property in the lawyer’s possession. D.C. R. Prof. Conduct 1.15, comment [4]. In other words, a lawyer is not called on to decide the merits of the dispute at the lawyer’s peril, thereby exposing the lawyer to suit from the disappointed party. See Heffelfinger v. Gibson, 290 A.2d 390 (D.C. 1972) (lawyer who had contracted to respect medical provider’s lien personally liable for funds disbursed to client in knowing disregard of that lien); Kaiser Foundation Health Plan, Inc. v. Aquiluz, 47 Cal. App. 4th 302, 54 Cal. Rptr. 2d 665 (Ct. App. 1996) (same). As comment [4] makes clear, the “lawyer should not unilaterally assume to arbitrate a dispute between the client and the third party.”
In general, a “just claim” that the lawyer must honor pursuant to Rule 1.15 is one that relates to the particular funds in the lawyer’s possession, as opposed to merely being (or alleged to be) a general unsecured obligation of the client. The problems addressed by this opinion most commonly arise in the context of the disbursement of settlement funds or proceeds of a transaction, such as the sale of real estate. In those cases, several types of claims that frequently are received by lawyers are illustrative of “just claims” that would require the lawyer to give notice, make disbursement promptly where there is no dispute, and safeguard the funds in the event of a dispute until the dispute is resolved. These are:
- an attachment or garnishment arising out of a money judgment against the client (or ordered judicially prior to judgment) and duly served upon the lawyer, regardless of whether the attachment or garnishment is related to the matter being handled by the lawyer, see Phila. Op. 94-9 (June 1994); Conn. Informal Op. 95-20 (May 1, 1995) (“valid judgment concerning disposition of the property”); Cleveland Op. 87-3 (1988);
- a statutory lien that applies to the proceeds of the suit being handled by the lawyer, e.g. D.C. Op. 251 (lawyer must disregard client’s direction to disburse settlement proceeds to client in face of statutory Medicaid lien); see Aetna Casualty Co. v. Gilreath, 625 S.W.2d 269 (Tenn. 1981) (lawyer under duty to recognize statutory lien of client’s employer on workers’ compensation recovery proceeds); Conn. Informal Op. 95-20 (May 1, 1995); R.I. Op. 95-29 (July 13, 1995); Colo. Formal Op. 94 (Nov. 20, 1993);
- a court order relating to the specific funds in the lawyer’s possession, e.g., S.C. Op. 89-13; Colo. Formal Op. 94 (Nov. 20, 1993); and
- a contractual agreement made by the client and joined in or ratified by the lawyer4 to pay certain funds in the possession of the lawyer (e.g., client expenses in consideration of the supplier’s agreement to forebear collection action during the pendency of the lawsuit) to a third party, regardless of whether such an agreement arises from the matter being handled by the lawyer, Heffelfinger v. Gibson, 290 A.2d 390 (D.C. 1972); Florida Bar v. Neely, 587 So. 2d 465 (Fla. 1991); Romero v. Earl, 111 N.M. 789, 810 P.2d 808 (1991); American State Bank v. Enabnit, 471 N.W.2d 829 (Iowa 1991); Calif. Formal Op. 1988-101.5
The last type of agreement, which is commonly known as an “Authorization and Assignment” in this jurisdiction, is frequently utilized in contingent fee personal injury matters. It may be known by other names in other jurisdictions.6 The District of Columbia Court of Appeals has held that a lawyer who signs such an agreement remains liable where successor counsel ends up handling the case, at least where the original lawyer retains an interest in the matter and receives a referral fee from successor counsel when the matter is settled. Heffelfinger, 290 A.2d at 393 & n. 2. The Court of Appeals apparently has not addressed the liability of successor counsel in such a situation. We think that from the standpoint of Rule 1.15, however, successor counsel who is aware of the contractual commitment of her client and of predecessor counsel is prohibited ethically from disbursing the funds to the client.
In a recent decision, the District of Columbia Court of Appeals affirmed disciplinary action against a lawyer who, among other things, failed to retain funds as to which a third party, an insurance carrier, had a statutory lien. In re Thomas, 740 A.2d 538 (D.C. 1999). In the Thomas case, the insurance carrier paid the medical expenses of the attorney’s client and informed the defendant and the lawyer, who represented the plaintiff, that it was asserting its statutory lien for the amount of its medical payments. Upon settlement, the defendant sent a check to the plaintiff’s attorney, made payable to the client, the attorney and the insurance company as the “lienholder.” The attorney prepared and sent to his client a settlement statement apportioning funds to the insurance company, which was not disputed by the client. Thereafter, the client and the attorney endorsed the check from the defendant and the attorney deposited the payment in the attorney’s client escrow fund, without advising the insurance company that he had received the check or that he had deposited it without the insurance company’s endorsement. Ultimately, the attorney wrote checks to himself from that account that effectively depleted the account, paying none of the funds either to the client or to the insurance company.
The Board on Professional Responsibility concluded that the insurance carrier had a statutory lien on some of the funds that came into the lawyer’s possession but that the exact amount was unknown. The Board found that the attorney was liable for, among other things, commingling funds in violation of Rule 1.15(a), misappropriation in violation of Rule 1.15(b) and failing to notify a third party promptly of funds in which the third party had an interest in violation of Rule 1.15(b). The District of Columbia Court of Appeals upheld the Board’s determination that the insurance carrier had a lien in some amount, leaving unresolved the amount of the lien and whether the lien had been waived. Under these circumstances, the court held that the lawyer should not have withdrawn funds from the account while the insurance company’s right to those funds was in legitimate dispute.
We believe that the facts and holding of this case come within standards (2) and (4) above. The insurance carrier was found by clear and convincing evidence to have a statutory lien, although whether it was fully perfected and whether it had been waived were disputed. Further, the lawyer and the client appeared to have had an agreement to recognize the propriety of the third party’s claim and a commitment to pay it. While there is very broad language in the opinion suggesting that any third party claim may be sufficient to freeze client funds in the lawyer’s possession, we believe that the decision should be limited to its facts, namely that (1) the claim related to particular funds that were made payable to the attorney and third party and (2) the third party had a lien that was recognized both by the lawyer and the client. As noted above, a broader reading that would let a third party freeze a client’s funds indefinitely simply by lodging a claim with the client’s attorney would raise significant due process questions. We do not believe that such a reading was intended by the Court.
Where such a “just claim” exists, the lawyer is ethically obliged to disregard her client’s demand for the property. See D.C. Op. 251 (1994); S.C. Op. 95-29; Ohio Op. 95-12 (Oct. 6, 1995); S.C. Op. 93-14. Thus, this rule concerning “just claims” is an exception to the general principle of client loyalty.
On the other hand, a lawyer is not required to pay the general unsecured creditors of her client, including judgment creditors who have not attached or garnished the funds in the lawyer’s possession, where there is not a “just claim” of the type described above. Scharf v. Statewide Grievance Comm., No. Civ. 94-0536033, 1995 Conn. Super. LEXIS 1471, 1996 WL 317090 (Conn. Super. Ct. May 11, 1995) (general unsecured creditor of client does not have interest sufficient to impose duty on lawyer to surrender funds); Conn. Informal Op. 95-20 (1995) (mere assertion of claim insufficient to create duty); Phila. Op. 94-24 (1994) (on lawyer’s representation that clients had personal injury claim, clients’ mortgagee stayed foreclosure sale of clients’ property; lawyer’s representation notwithstanding, no duty on lawyer to pay claim proceeds to mortgagee); Cleveland Op. 87-3 (1988) (mere judgment, without court order directed to attorney, insufficient to require attorney to pay funds to third party). In the words of the California Court of Appeals,
as a general matter, an attorney receiving payment of a judgment or settlement on behalf of his or her client has no obligation to satisfy the client’s debts out of that fund. The attorney is not obligated to pay, for example, the client’s dry cleaning bill or credit card debts even if on notice thereof. It is only when the creditor has some property interest in the fund or a trust relationship exists that such an obligation might arise.
Farmers Ins. Exch. v. Zerin, 53 Cal. App. 4th 445, 459, 61 Cal. Rptr. 2d 767 (Ct. App. 1997).
Commentators have also suggested that comment [4] to Rule 1.15 uses the phrases “just claims” and “duty under applicable law” to suggest that the third party must have a “matured legal or equitable claim in order to qualify for special protection.” 1 Geoffrey C. Hazard, Jr. and W. William Hodes, The Law of Lawyering, § 1.15:302, at 460 (2d ed. 1990). Hazard and Hodes suggest that garnishment of the client’s funds in the lawyer’s possession is a potential means of protecting the third party’s interest, but that the creditor must rely upon a court, rather than the client’s lawyer, for such assistance. Id. § 1.15:303. Further, a comment to the draft Restatement of the Law Governing Lawyers states:
If a lawyer holds property belonging to one person and a second person has a contractual or similar claim against that person but does not claim to own the property or have a security interest on it, the lawyer is free to deliver the property to the person to whom it belongs.
Restatement of the Law Governing Lawyers § 57 comment d. (Prop. Final Draft No. 1, 1996) (emphasis added).
Even more difficult problems arise when the proceeds of the recovery (whether by settlement or judgment) are insufficient to satisfy the “just claims” of various service providers. For example, where the litigation results in a recovery in which, after deduction of the lawyer’s contingent fee,7 the remainder is insufficient to satisfy all the assignments the client has made to his medical providers, the lawyer is faced with difficult questions of how to disburse the funds. An obvious solution would be to pro rate the funds among the various providers but the disbursing lawyer presumably would be obliged to secure the consent of all the providers before doing so. Otherwise, the question may become one of priority of claims, which is a subject beyond the purview of this Committee. In such a case, a lawyer holding disputed funds would have to permit the competing claimants to resolve the matter among themselves. If the competing claimants were unable to resolve the disputed issues among themselves, filing an interpleader action might be the only avenue open to the lawyer.
Inquiry No. 98-7-21
Adopted: July 20, 1999
Revised: February 15, 2000
1. In Haar, the client offered $4,000—less than half the fee the lawyer was claiming—to settle the lawyer’s claim. The lawyer rejected the client’s offer but withdrew $4,000 on the ground that it was no longer disputed because the client had offered it in settlement. The court found that the lawyer’s conduct violated Rule 1.15. Haar was decided under DR 9-103(A)(2) of the former D.C. Code of Professional Responsibility but the Court indicated that Rule 1.15 of the D.C. Rules of Professional Conduct is “similar” to the Code provisions. In re Haar, 667 A.2d at 1352 n.1.
2. Of course, if the client demands arbitration of a fee dispute, District of Columbia law requires the lawyer to consent to arbitration. Rule XIII of Rules governing the Bar of the District of Columbia Court of Appeals.
3. This committee “ordinarily will not respond to questions of law, other than those arising under the Rules of Professional Conduct.” Rule C-4, Rules of the D.C. Bar Legal Ethics Comm. Because comment [4] to Rule 1.15 incorporates by reference the “applicable law” on attorney liability, though, some reference to civil liability standards is unavoidable. The law in the District of Columbia appears to be that where a lawyer disburses to her client funds claimed by another, the lawyer is liable civilly if she has agreed to protect the third party’s interest. Heffelfinger v. Gibson, 290 A.2d 390 (D.C. 1972). The D.C. Office of Bar Counsel has taken the position that the same standard obtains under Rule 1.15. Letter from Leonard H. Becker, Bar Counsel, to Irvin B. Nathan, Chair, D.C. Bar Legal Ethics Comm. at 2 (Aug. 23, 1999). The Court of Appeals also has ruled that a lawyer is not liable where she is aware of the client’s liability to the third party but has made no independent undertaking to protect the third party. Travelers Ins. Co. v. Haden, 418 A.2d 1078 (D.C. 1980). Liability in the former circumstance may continue even after the lawyer has transferred the case to another lawyer unless the creditor has absolved the first lawyer of responsibility. Heffelfinger, 290 A.2d at 393 & n. 2. Further, and as noted above, there may be constitutional limitations upon requiring a lawyer to turn client funds over to a third party—or even to withhold them from the client—absent a matured claim to the particular funds in question. The District of Columbia statutes permit prejudgment attachment only in exigent circumstances, D.C. Code § 16-501(d) (1997), ordinarily require the posting of a bond by the party seeking the writ that is twice the amount of the claim, id. § 16-501(e), and require a postattachment hearing, id. § 16-506. Even in the post-judgment context, no lien is created until a writ of fieri facias or other writ of execution is issued. D.C. Code § 15-307 (1995).
4. Some jurisdictions other than the District of Columbia require the lawyer to withhold funds from a client who has agreed to pay them to a third party, even if the lawyer has not joined in or agreed to adhere to that arrangement. E.g., Advance Finance Co., Inc. v. Clients Security Trust Fund, 337 Md. 195, 652 A.2d 660 (1995); Kaiser Foundation Health Plan, Inc. v. Aguiluz, 47 Cal. App. 4th 302, 54 Cal. Rptr. 2d 665 (Ct. App. 1996); Herzog v. Irace, 594 A.2d 1106 (Me. 1991); Berkowitz v. Haigood, 256 N.J. Super. 342, 606 A.2d 1157 (1992); Leon v. Martinez, 84 N.Y.2d 83, 638 N.E.2d 511 (1994) (lawyer had not executed or acknowledged, but had drafted, assignment agreement); Formal Op. 98-06, Ariz. Comm. on Rules of Prof. Conduct (June 3, 1998); Informal Op. 95-20, Conn. Comm. on Prof. Ethics (May 1, 1995) (requiring withholding but not payment to third party claimant); Op. 93-14, S.C. Bar Ethics Adv. Comm.; Op. 93-31, S.C. Bar Ethics Adv. Comm. (insurer’s subrogation claim); Op. 94-20, S.C. Bar Ethics Adv. Comm. This jurisdiction and others appear to disagree. See Travelers Ins. Co. v. Haden, 418 A.2d 1078 (D.C. 1980) (mere knowledge of insurer’s claim insufficient to create liability on part of lawyer); Farmers Ins. Exchange v. Zerin, 53 Cal. App. 4th 445, 61 Cal. Rptr. 2d 707 (1997) (attorney not liable where he made no promise to protect subrogee’s rights or property); Op. 95-12, Ohio Bd. of Comm’rs on Grievances and Discipline (Oct. 6, 1995); Op. 94-24, Phila. Bar Ass’n Prof. Guidance Comm. (Nov. 1994) (permissible to pay client where lawyer had made no promise to protect third party’s interest); Inquiry 86-134, Phila. Bar Ass’n (no duty to pay medical service provider, or even to withhold funds, where no agreement by client to pay provider from settlement funds).
5. A valid escrow agreement covering funds in the lawyer’s possession conceivably also could be viewed as a “just claim” but such an arrangement involves a fiduciary duty on the part of the lawyer to all the parties to the agreement, not just to her own client. See Janson v. Cozen and O’Connor, 450 Pa. Super. 415, 676 A.2d 242 (1996) (no lawyer liability for third party claim where valid escrow agreement did not exist).
6. See the discussion of “letters of protection” in Ohio Op. 95-12, 11 Law Man. Prof. Conduct 366 (1995); Conn. Informal Op. 95-20 (May 1, 1995).
7. The D.C. Office of Bar Counsel has “taken the position that the attorney’s right to claim a priority for his or her own fees and expenses presents a legal question . . . beyond the scope of [Rule 1.15] to address as an ethical question.” Letter of Leonard H. Becker, Bar Counsel, to Irvin B. Nathan, Chair, D.C. Bar Legal Ethics Comm., at 2 (Aug. 23, 1999) (copy in the files of this Committee).
