Over the past month or so, my posts have tended to be devoid of original thought. Instead, I’ve used cases & opinions from other jurisdictions to remind readers of the rules that would apply to analogous situations in Vermont. Today will be more of the same.
I’m a member of the National Organization of Bar Counsel and am on the NOBC’s website committee. There, my role is to find and post examples of “legal ethics in the news.” Today, I came across an article in the Miami Herald. The headline caught my eye:
A Broward attorney received $1.4 million. What he did with it got him suspended.
Aside: I read the article this morning. Looking for it again this afternoon, I found it here . . . on AOL! I had no idea that AOL still existed!!
According to the Herald, the Florida Supreme Court approved a consent judgment in which the lawyer agreed to a six-month suspension of his law license. Per the consent judgment, the lawyer agreed to serve as a “paymaster” for a client. In that role, the lawyer received $1.43 million and held it in trust. Then, at the client’s direction, the lawyer made various disbursements. The consent judgment states that:
“Unbeknownst to [the lawyer], the funds were intended to secure a standby letter of credit for a third party. [Lawyer] breached his fiduciary duty to the third party by failing to apprise himself of the intended purpose of the funds and disbursing them in accordance with his client’s instructions.”
Until I read the article, I’d never heard of a “paymaster.” So, I’m still not clear exactly what happened, including how the lawyer was unaware that someone other than the client had an interest in the $1.43 million. Still, the story reminded me of a related situation that’s not uncommon in Vermont. The situation in which a lawyer holds funds to which more than one person asserts an interest.
In Vermont, Rule 1.15 is titled “Safekeeping Property.” Here are paragraphs (d) and (e):
- (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. 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.
- (e) When in the course of 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 kept 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.
Addressing the paragraphs in reverse, it’s critical to remember that when holding funds in which more than one person asserts an interest, it’s not okay to disburse as directed by the client. I’ve found that this easiest way for lawyer not to forget this point is to visualize themselves as one of the persons who asserts an interest.
That is, in my experience, lawyers who are holding $X in connection with the representation of Client, and expect to take their fee out of $X, never disburse 100% of X to Client merely because Client directs them to. The reaction should be no different when it’s a third person who asserts an interest in the funds. In other words, this is a situation in which a lawyer’s duties flow not only to the client, but to third persons.[1]
What qualifies as an “interest” that triggers the lawyer’s duty to a third person? Good question. Last May, I tried to answer the question in this post: A lawyer’s duties when a third party asserts an interest in funds that the lawyer is holding in trust for the client.
To recap, upon receiving funds in which two or more people assert interests:
- Deposit the funds in trust.
- Promptly notify the people who have an interest in the funds.
- Promptly disburse any portion that is not in dispute.
- Do not disburse disputed portions until the dispute is resolved.
As always, let’s be careful out there.
Related Videos & Posts
- Collecting & Disbursing Funds (33 minutes)
- Disbursing without collected funds
- Teddy KGB on prompt notification and delivery
- A lawyer’s duties when a third-party asserts an interest in client funds
All of my posts and videos on trust accounting and fees are here.
[1] See, V.R.Pr.C. 1.15, Cmt. [4] (“Paragraph (e) also recognizes that third parties may have lawful claims against specific funds or other property in a lawyer’s custody, such as a client’s creditor who has a lien on funds recovered in a personal injury action. 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.”)