Revised on 9/6 for typos.
Scenarios like this one arise every now & then:
- Lawyer represents Client.
- Client was injured in a motor vehicle accident.
- Lawyer recovers funds for Client from the other driver’s insurer.
- Lawyer is aware that 3rd party creditors have claims against Client’s funds.
- Can (or must) Lawyer disburse the funds to Client?
Rules 1.15(a), (d) & (e) apply.
Rule 1.15(a) is the easy one. Funds held in connection with a representation that are not the lawyer’s must be deposited into a trust account.
- “(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.”
And here’s (e):
- “(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 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.”
As suggested by the title, this blog post is limited to one specific issue: when does a third party have “an interest” in funds that a lawyer recovered for client? In other words, this blog post is the 101 equivalent to a topic that has several 500 level courses.
Yet, even as a 101 class, it can get murky.
For example, what if Lawyer knows that Client has unpaid medical bills for treatment of injuries sustained in the auto accident, but has never heard from the treatment provider? Does the provider have “an interest” sufficient to trigger Rules 1.15(d) and (e)? Or, must Lawyer disburse the funds to Client?
Or, what if Client happens to mention “no, I didn’t see the Sox amazing comeback yesterday. Cable prices are outrageous, so I stopped paying four months ago. They cut-off my service.” Does Client’s cable provider have an interest in the funds that Lawyer is holding?
Often, the comments to the rules are helpful. Here, I’m not so sure. Comment  to Rule 1.15 says:
- “Paragraph (e) 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 collected 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.”
Umm . . . ok. But, again: what are the “interests” and “claims” that trigger the rule? When is a third party “entitled” to funds that a lawyer is holding for client?
Today, I found this advisory opinion from the Virginia State Bar. I find pages 1-4 particularly helpful.
Let me be clear: here in Vermont, I do not know how disciplinary counsel, a hearing panel, or the Supreme Court would approach 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 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. This is my cable bill example.
Next, the opinion lists things that certainly 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 sufficient to give a third party “an interest” in or “claim” to the funds.
With all of this said, the Virginia opinion makes a critical point that cannot be ignored. While the general rule is that a lawyer 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, your duty as a lawyer is to recognize the existence of valid claims and interests to funds you are holding for a client. The rule does not require you to resolve the claims and, in fact, prohibits you from doing so unilaterally.
Again, I can’t predict what disciplinary counsel, a hearing panel, or the Supreme Court will do. I will say this though:
Many years ago, when I was still disciplinary counsel, a chiropractor filed a disciplinary complaint against a lawyer. The lawyer had represented a client in a personal injury case. The chiropractor had treated the client and, in addition, had the client sign an agreement that the bill would be paid out of any recovery secured by the lawyer. Chiropractor sent a copy of the agreement to the lawyer.
Eventually, lawyer settled the case. Lawyer paid himself and other treatment providers, but, at his client’s direction, did not pay the chiropractor before disbursing the remaining funds to the client. As you might have guessed, by the time the chiropractor found out, the client had blown through the recovery.
I decided to prosecute the lawyer for violating Rules 1.15(d) and (e). As required by the rules that govern the Professional Responsibility Program, I asked a hearing panel to review my decision for probable cause. The panel concluded that there was no probable cause to conclude that the lawyer should face formal disciplinary charges. As such, the complaint was dismissed.
Over time, I’ll continue to explore related issues. Future blogs will address (1) a lawyer’s duties upon concluding that a third-party has an interest in funds that the lawyer is holding for a client; (2) a lawyer’s duties when asked to guarantee payment to a client’s creditors.