Oregon State Bar Bulletin — JANUARY 2011

Bar Counsel
Disbursing Disputed Funds:
Understanding RPC 1.15-1(d)(e)
By Scott Morrill

Lawyers often receive money from third parties to settle disputes, satisfy judgments or consummate deals. For instance, insurance companies usually send settlement checks to a party’s lawyer. A lawyer who receives funds that belong to others should deposit the funds into their lawyer trust account and disburse them as required. The benefit of lawyers receiving funds is that it creates a paper trail to prove receipt and allows lawyers to get paid more easily. However, there are downsides. This column is intended to address some of those downsides and provide some guidance when things go awry.

Problem Number One
You and your own client disagree over who should get all or part of the money. You have worked hard and your outstanding bill is significant. Your client really needs (wants) the money and is not as impressed by your work as you are. Your client instructs you to turn over the entire amount without regard to your bill.

What can you do?

What you cannot do is deposit the funds and then pay yourself before your client finds out in an effort to short circuit any dispute. At the outset, Oregon RPC 1.15-1(d) requires lawyers to promptly notify the client of receipt of funds in which the client has an interest. Therefore, you should first notify your client that you have received the funds and that you must wait for the check to clear before disbursing payment.1 Next, RPC 1.15-1(d) requires lawyers to promptly deliver to the client any funds the client is “entitled to receive.” Where both the lawyer and client claim an interest in funds, the funds should be kept separate until the dispute is resolved. See Oregon RPC 1-15-1(e). Thus, if your client demands the entire amount without regard to your interest in getting paid, you must keep the disputed amount in trust until the dispute is resolved and send the undisputed amount, if any, promptly to your client. You should then take steps to try and resolve the dispute. Discussing it with your client should be the first step. If that does not work, consider using the bar’s fee arbitration process, which is affordable and designed to be user friendly. Ultimately you may have to litigate the dispute. If the amount of money in controversy is significant and if the dispute drags on, put the money in a separate interest-bearing account. See Oregon RPC 1.15-2(c).

If you have already paid yourself before your client objects, you do not have to put the money back into your trust account. But, you may do so without fear of commingling. See Oregon Formal Ethics Op No 2005-149.

Problem Number Two
You receive a settlement check for your client. A third party asserts a claim to the funds, but your client instructs you not to pay the third party.

Who do you pay, if anyone?

This raises several issues, but Oregon RPC 1-15-1(d) and (e) still apply. If there is a legitimate dispute, you must keep the disputed amount in trust until the dispute is resolved, but send any undisputed amount promptly to your client or third party. See OSB Formal Ethics Op No 2005-52. The same holds true if two clients have a dispute over funds held by their lawyer. See OSB Formal Ethics Op No 2005-68 (where lawyer represents insurer and insured who disagree about how settlement funds should be disbursed, lawyer should keep the disputed funds in trust until the dispute is resolved).

Difficulty with disputes between clients and third parties often arises when the lawyer tries to determine who is “entitled to receive” the funds and whether the client and third party have legitimate claims to the funds. OSB Formal Ethics Op No 2005-52 is particularly instructive on this issue. Essentially, the lawyer must sort out whether the third party has a legitimate claim against the specific funds in trust, or whether the third party simply has a claim against the client.

If a third party asserts a legitimate claim to the funds, you may have to disregard your client’s instructions and protect the legitimate claim of the third party. What constitutes a legitimate claim is a question of substantive law. A properly noticed and perfected lien is one good example of a claim against funds, but there may be other ways to create a legitimate claim that you should consider before deciding how to disburse. If your client has previously agreed to pay third parties out of the funds you receive, that may also be considered a legitimate claim. On the other hand, while a simple contractual obligation between the client and third party might be a claim against the client, it would not be a legitimate claim against the funds in trust.

In any event, where there is a doubt about who is entitled to receive the funds in the lawyer’s possession, RPC 1.15-1(e) makes clear that the lawyer may (and should) hold the funds in trust until the dispute is resolved.2

Problem Number Three
You represent a client in a personal injury action and have been asked by the client’s medical providers to enter into an agreement to indemnify or protect the third party out of funds that the lawyer receives.

Can you do it?

Entering into indemnification or protection arrangements implicates Oregon RPC 1.7, which says that a conflict of interest exists where “there is a significant risk” that the lawyer’s representation of a client will be “materially limited” by the lawyer’s own personal interests or by the lawyer’s responsibilities to another client or third person. The basic proposition of Oregon RPC 1.7 is that you cannot serve two masters with adverse interests. Agreeing to protect a third party is adverse to your duties to protect your client, and a third party cannot obligate you to take any action adverse to your client. Your client may agree to sign an indemnification agreement, but you may not. It would be best practice to get your client’s instructions in writing to save arguments later.

It seems that the best way to keep third party claimants at bay while helping and protecting your client is to advise your client that she should acknowledge that a third party has a legitimate claim to the funds, which would allow you to tell the third party that your client acknowledges the claim. This allows you to continue negotiating a reduction in what the third party will take (benefitting your client) without implicating any conflicts of interest. If your client later reneges on the agreement and demands all the money, you are left with a situation covered in problem number two discussed above. If you are ultimately unable to negotiate a resolution satisfactory to your client and the third party, you may have to interplead the disputed funds to the court to let it decide who is entitled to the funds.

In Sum
Ultimately lawyers are responsible for determining if they, their clients or others have legitimate claims to funds they have received. While they are not obligated to act as the arbiter to resolve any good faith disputes, they at least must keep the disputed amounts in trust until the disputes are resolved, whether at the parties’ own initiative, or through an interpleader action initiated by the lawyer. As always, maintaining good communication and managing client expectations may help forego misunderstandings later.

 

Endnotes

1. For information on how long to wait after depositing a check before disbursing funds, see Stevens, “Waiting for Go Dough,” OSB Bulletin (June 2006).

2. For additional discussion and summary of how different states treat this issue, read Tennessee Formal Ethics Opinion NO. 2010-F-154, available online at: www.tbpr.org/Attorneys/EthicsOpinions/Pdfs/2010-f-154.pdf

 

ABOUT THE AUTHOR
Scott Morrill is an assistant general counsel for the OSB Client Assistance Office. He screens complaints about lawyers for ethics concerns and also gives informal ethics advice to lawyers. He can be reached at (503) 431-6344, or toll-free in Oregon at (800) 452-8260, ext. 344, or by e-mail at smorrill@osbar.org.

Ethics opinions are published and updated on the bar’s website here.

An archive of Bar Counsel articles is available here.


© 2011 Scott Morrill

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