When a client and a third party both claim settlement money in the lawyer's trust account, can the lawyer interplead the funds into court?

Plain-English summary

A law firm settled a personal-injury case for its clients. The clients had earlier assigned $5,047 of the recovery to a chiropractic provider, an assignment the provider had sent the firm when it requested the provider's records. When the settlement cleared the firm's trust account and it was ready to disburse, the client instructed the firm not to pay the assigned amount to the provider. Paying the provider would put the firm at odds with the client; not paying would breach what appeared to be a valid contractual assignment. The firm prepared an interpleader naming itself as plaintiff and the clients and the provider as defendants, asking the circuit court to declare where the money should go, and asked whether interpleader was the proper course.

The Disciplinary Commission concluded that an interpleader action, paying the disputed funds into court and requiring both claimants to appear, is an appropriate and ethical response. It explained that DR 7-102(A)(7) bars a lawyer from counseling or assisting a client in conduct the lawyer knows to be illegal or fraudulent, and DR 7-102(A)(1) bars action the lawyer knows would serve merely to harass or maliciously injure another. Here the client had authorized the assignment in order to obtain the provider's records for the litigation and then, on settlement, revoked it ex parte, in effect attempting to perpetrate a fraud on the provider. The lawyer was justified in not assisting the client by paying the disputed funds over to him, and acted appropriately by interpleading the funds into the circuit court, where the client may establish his right to the money and assert any defenses or counterclaims affecting the provider's claim.

Currency note

This opinion was issued in 1990, under the former Alabama Code of Professional Responsibility (DR 7-102(A)(1) and (7)) and before the Alabama State Bar's January 1, 1991 adoption of the Rules of Professional Conduct and the 2002 Ethics 2000 revisions to the ABA Model Rules. A lawyer's duty regarding funds in which a third party claims an interest is now governed by Rule 1.15, and the bar on assisting client fraud by Rule 1.2(d). Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: What should a lawyer do when a client and a third party both claim trust-account money?

A: Per the opinion, the lawyer may interplead the disputed funds into court, paying them in and requiring both claimants to appear, which the Commission called an appropriate and ethical response.

Q: Must the lawyer follow the client's instruction not to pay an assignee?

A: The opinion concluded the lawyer was justified in not paying the disputed funds to the client, because doing so would assist the client in revoking a valid assignment ex parte and perpetrating a fraud on the provider.

Q: Does the client lose the right to contest the third party's claim?

A: No. The opinion noted that by interpleading the funds, the client may still establish his right to the money in court and assert any defenses or counterclaims affecting the provider's claim.

Background and rules framework

The opinion interpreted DR 7-102(A)(7) (no counseling or assisting illegal or fraudulent conduct) and DR 7-102(A)(1) (no action that serves merely to harass or maliciously injure another) of the former Alabama Code, in the context of disputed funds held in trust. A lawyer's obligations as to property claimed by a third person are now in Rule 1.15, and the prohibition on assisting client fraud in Rule 1.2(d).

Citations and references

Rules of Professional Conduct:

• Former Ala. Code of Prof. Resp. DR 7-102(A)(7) (no assisting illegal or fraudulent conduct); now Model Rule 1.2(d)
• Former Ala. Code of Prof. Resp. DR 7-102(A)(1) (no action merely to harass or injure)
• Disputed funds held by a lawyer now governed by Model Rule 1.15

See also

• AL Ethics Op. 1988-92: unclaimed client trust funds and escheat
• AL Ethics Op. 2003-02: honoring a commitment to pay a client's creditors from trust
• AL Ethics Op. 2008-03: trust-account obligations for retainers and advances
• RI EAP Op. 2008-03: Lawyer Holding a Disputed Medical-Payment Check Must Hold It or Interplead
• RI EAP Op. 2011-02: Disbursement of Disputed Settlement Funds Claimed by a Third Party

Source

• Landing page: https://www.alabar.org/office-of-general-counsel/formal-opinions/1990-48/
• Original PDF: https://www.alabar.org/assets/2019/02/RO-90-48.pdf

Original opinion text

ETHICS OPINION

RO-90-48

Lawyer properly interplead disputed trust funds into court to allow adjudication of clients' and third-party creditors' rights to said funds

QUESTION:

"As per our phone conversation of June 5, 1990, I write this letter to you requesting some guidance pursuant to a dispute between my clients and the clients' health care provider. In the case of Mary and John Doe vs. Mr. Smith, et al. case no CV-0000 & SC-1234 settlement was agreed to by all parties for the sum of $17,000.00. Of this sum, $5,047.00 had been assigned by the clients to Chiropractors, P.C., in Anytown, Alabama. This assignment was sent to us by the chiropractor's office when we wrote the chiropractor's office requesting their records for exhibit purposes.

At the time the settlement proceeds cleared our trust account, we were prepared to disburse funds, and at that time our client, John Doe disallowed us from sending the assigned benefits, $5,047.00 to Chiropractors, P.C. on behalf of he and his daughter, Mary.

Of course, to not send the proceeds would put us in violation of what purports to be a valid contractual assignment between the Does and Chiropractors, P.C. Additionally, to pay the monies to Chiropractors, P.C. against our clients' wishes would also put us at tremendous odds with our client, as well.

Therefore, an interpleader has been prepared wherein the law firm is named as the plaintiff and the clients and chiropractor's office are defendants, wherein we are requesting the circuit court through declaratory judgment to declare where the money should be paid and relinquishing us of responsibility for said proceeds.

Please advise if this is the suitable course to follow, and if interpleader is not the suitable course, please recommend that procedure we should follow to resolve this dispute."

ANSWER:

In our opinion, an interpleader action wherein the disputed funds are paid into court and both parties claiming an interest in the funds are required to appear before the court is an appropriate and ethical response to the dilemma posed.

Disciplinary Rule 7-102(A)(7) provides that a lawyer may not counsel or assist his client in conduct that the lawyer knows to be illegal or fraudulent and Disciplinary Rule 7-102(A)(1) provides that a lawyer shall take no action on behalf of his client when he knows or when it is obvious that such action would serve merely to harass or maliciously injure another. In the present fact situation, your client authorized you to assign certain sums to a firm of chiropractors in order to obtain from those chiropractors records to be used in connection with the client's litigation. Upon settlement, the client revoked, ex parte, that agreement in effect attempting to perpetrate a fraud upon the chiropractor. In our opinion, you were justified in not assisting the client in that action by paying the disputed funds over to him and have taken appropriate action by interpleading the funds into the circuit court, where he may establish his right to the money in question and assert any defenses or counterclaims that might affect the chiropractor's claim.

AWJ/vf

6/15/90