As we know from a prior blog in which I paraphrased Teddy KGB, upon receiving funds in which a client or third person has an interest, a Vermont lawyer has a duty to promptly notify the client or third person. Then, the lawyer has a duty to deliver funds to which the client or third person is entitled.
When there is no dispute that a specific client or third person is entitled to the funds, compliance with the duties isn’t difficult. However, confusion can arise when more than one person asserts an interest in the funds that the lawyer is holding.
Let’s start with the rule that governs: Rule 1.15 – Safekeeping Property. Specifically, paragraphs (d) and (e).
The relevant section of paragraph (d):
- (d) 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.
The entirety of paragraph (e) is relevant:
- “(e) When in the course of a representation a lawyer is in possession of property in which two or more persons (one of whom may be the lawyer) claim interests, the property shall be held separate by the lawyer until the dispute is resolved. The lawyer shall promptly distribute all portions of the property as to which the interests are not in dispute.
When does a third party have an interest in funds that a lawyer is holding in trust for a client? In other words, (1) when must a lawyer notify someone other than the client that the lawyer received funds; and (2) when would a dispute over funds prohibit disbursement?
Often, the comments to the rules are helpful. Comment  to Rule 1.15 says:
- “Paragraph (e) recognizes that third parties may have lawful claimsagainst specific funds or other property in a lawyer’s custody, such as a client’s creditor who has a lien on funds collected. A lawyer may have a duty under applicable law to protect such third-party claims against wrongful interference by the client. In such cases, when the third-party claim is not frivolous under applicable law, the lawyer must refuse to surrender the property to the client until the claims are resolved. A lawyer should not unilaterally assume to arbitrate a dispute between the client and the third party, but, when there are substantial grounds for dispute as to the person entitled to the funds, the lawyer may file an action to have a court resolve the dispute.”
Ummm, ok. But again: what are the “interests” and “claims” that trigger the rule?
In 2012, the Virginia State Bar issued this advisory opinion. I find pages 1-4 particularly helpful.
Aside: here in Vermont, I do not know how disciplinary counsel, a hearing panel, or the Supreme Court would approach or resolve the issue. However, I think the opinion from the Virginia State Bar is useful in formulating the appropriate thought process.
Some key quotes from the Virginia opinion:
- “In the absence of a valid third-party interest in the funds, the lawyer owes no duty to a creditor of the client and must act in the best interests of the client.”
This is important. In other words, when it comes to funds, a lawyer’s primary loyalty remains to the client and the conflict rules continue apply.
- “The mere assertion of an unsecured claim by a creditor does not create an ‘interest’ in the funds held by the lawyer. Therefore, claims unrelated to the subject matter of the representation, though just, are not sufficient to trigger duties to the creditor without a valid assignment or perfected lien.”
This is consistent with how I’ve approached the issue. Standing alone, “Hey, your client owes me money” isn’t enough. Even if it’s true. For example:
- Lawyer’s Client was injured skiing.
- The ski area’s insurer settled for $100,000 that’s in Lawyer’s trust account.
- Client’s injuries resulted in treatment from, among others, Physical Therapist.
- Lawyer and Client know that Physical Therapist has a lien on any recovery.
- Meanwhile, shortly before Client was injured in the skiing accident, Painter painted Client’s house. Client disputed the bill and has yet to pay it in full. Painter has never sued Client or obtained a judgment against Client. Somehow, Painter found out about the ski injury settlement. Painter called Lawyer and directed Lawyer to hold in trust the amount that Painter contends is owed by Client.
To me, Physical Therapist has “an interest” that triggers the rule, Painter does not.
The Virginia opinion lists things that trigger a lawyer’s duties to a third-party creditor:
- statutory liens
- judgment liens
- court order or judgments that affect the funds.
Then, the opinion says:
- “Likewise, agreements, assignments, lien protection letters, or other similar documents in which the client has given a third party an interest in specific funds trigger a duty under [the rules]even though the lawyer is not a party to such agreement or has not signed any document, if the lawyer is aware that the client has signed a document.” (emphasis in the original).
And, to me, here’s the key statement:
- “In other words, a third party’s interests in specific funds held by the lawyer is created by some source of obligation other than Rule 1.15 itself.”
This makes perfect sense to me. The mere fact that Lawyer is holding the money is not enough to give a third party “an interest” in or “claim” to the funds. That’s the “Painter” example from above.
A few years ago, Professor Bernabe blogged about an advisory opinion from Texas that reaches conclusions like those reached by the Virginia State Bar. Professor Bernabe’s post is here and the Texas opinion here.
With all of this said, the Virginia opinion makes a critical point that cannot be ignored. While the general rule is that a lawyer must have “actual knowledge” of a third party’s interest or claim to trigger the duties under the rule:
- “In some situations, under federal and state law, the lawyer need only be aware that the client received medical treatment from a particular provider or pursuant to a health care plan. In those instances, notice of lien or lien letter may not be required in order for that third party to claim entitlement to funds held by [the] lawyer.”
In other words, the duty of competence includes knowing whether, by law, a treatment provider has a valid interest, claim, or entitlement that may not need to be formally asserted.
Finally, remember, a lawyer’s duty is to recognize the existence of valid claims and interests to funds in connection with a representation. Rule 1.15 does not require a lawyer to resolve the claims and, in fact, prohibits a lawyer from doing so unilaterally.
Where’s that leave us? I’m not sure. It’s an issue rarely brought to my attention. If you’re ever unclear, contact me and we’ll work through it.
As always, let’s be careful out there.
Related Videos & Posts
Start with this post: Don’t Overcomplicate Trust Accounting
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- When a third-party asserts an “interest” in funds held in trust
- Trust Account Tuesday: (generally) don’t disburse absent collected funds.
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