If a lawyer sends a creditor a protection letter promising payment from a settlement, must the lawyer pay the creditor even after the client says not to?

Plain-English summary

The Disciplinary Commission addressed whether a lawyer must honor "protection letters," the written commitments a lawyer sends to a client's creditors (at the client's request or with the client's approval) promising payment from settlement or judgment proceeds in exchange for forbearance, when the client later instructs the lawyer not to pay. The Commission concluded the lawyer is ethically compelled to fulfill the commitment under Rules 4.1(a), 8.4(c), 1.15(b), and 1.2(d).

The opinion reasons that a protection letter is a representation to a third person. Rule 4.1(a) bars a knowing false statement of material fact to a third person, and Rule 8.4(c) bars conduct involving dishonesty or misrepresentation; the opinion notes a lawyer would violate both if, when the letter was sent, the lawyer had reason to believe or even suspect the client did not really intend to pay. Rule 1.15(b) governs funds in which a third person has an interest and requires prompt delivery of funds the third person is entitled to receive, which the opinion reads to obligate a lawyer holding trust funds to pay the creditor. Rule 1.2(d) bars assisting a client's fraudulent conduct; releasing all proceeds to a client after telling creditors the proceeds would pay their debts assists a fraud.

The opinion ties the analysis to RO-90-48, which had approved interpleader of disputed funds when a client revoked an assignment, and modifies it: money the lawyer has promised to pay creditors should not be interpleaded unless there is a dispute over the existence, amount, or reasonableness of the debt. The ethical duty to pay exists only where the debt and its amount are reasonable and undisputed; where a legitimate question exists, the lawyer should interplead the disputed funds for a court to resolve. A footnote notes the predicament can be avoided with the client's irrevocable written authorization to pay creditors, which may be in the employment contract.

In practice

The opinion holds that, under the Alabama rules as they stood at the time, a protection letter creates an ethical commitment the lawyer must honor under Rules 4.1(a), 8.4(c), 1.15(b), and 1.2(d), and that a client's later instruction not to pay does not relieve the lawyer of paying a reasonable, undisputed debt from funds held in trust. The opinion applies RO-90-48 as modified: interpleader is the proper course only where the existence, amount, or reasonableness of the debt is genuinely disputed, not as a way to honor a client's change of heart about an undisputed debt.

Common questions

Q: My client now says don't pay the creditor I sent a protection letter to. Can I follow the client's instruction?

A: No, not for a reasonable, undisputed debt. The opinion concludes the lawyer is ethically obligated to pay the creditor the funds it is entitled to receive under Rule 1.15(b) despite the client's instruction, because the protection letter was a commitment the lawyer must honor.

Q: Which rules require me to honor a protection letter?

A: The opinion grounds the duty in Rule 4.1(a) (truthfulness to third persons), Rule 8.4(c) (dishonesty and misrepresentation), Rule 1.15(b) (delivering funds a third person is entitled to receive), and Rule 1.2(d) (not assisting fraud).

Q: When can I interplead the funds instead of paying the creditor?

A: When the debt is genuinely disputed. The opinion concludes interpleader is appropriate only where there is a dispute over the existence, amount, or reasonableness of the debt, and modifies RO-90-48 to that effect.

Q: How can I avoid this dilemma at the outset?

A: The opinion's footnote describes obtaining the client's written authorization to pay creditors, acknowledging it is irrevocable and that the lawyer is ethically obligated to pay once a commitment is made, which may be included in the employment contract.

Background and rules framework

The opinion interprets four rules together: Rule 4.1 (truthfulness in statements to others, Model Rule 4.1), Rule 8.4 (misconduct, Model Rule 8.4), specifically subsection (c) on dishonesty, fraud, deceit, or misrepresentation, Rule 1.15 (safekeeping property, Model Rule 1.15), specifically subsection (b) on funds in which a third person has an interest, and Rule 1.2 (scope of representation, Model Rule 1.2), specifically subsection (d) on not assisting criminal or fraudulent conduct. It treats Rule 1.2(d) as the successor to former Disciplinary Rule 7-102(A)(7) under the prior Code of Professional Responsibility, the basis of RO-90-48.

Citations and references

Rules of Professional Conduct:

• Model Rule 4.1 / Ala. R. Prof. C. 4.1(a) (truthfulness to third persons)
• Model Rule 8.4 / Ala. R. Prof. C. 8.4(c) (dishonesty, fraud, deceit, misrepresentation)
• Model Rule 1.15 / Ala. R. Prof. C. 1.15(b) (safekeeping property; third-person interests)
• Model Rule 1.2 / Ala. R. Prof. C. 1.2(d) (not assisting client fraud)

Other opinions cited:

• Alabama RO-90-48: approved interpleader of disputed funds after a client revoked an assignment; modified here to limit interpleader to genuinely disputed debts

See also

• AL Ethics Op. 1990-48: Interpleading Disputed Trust Funds Into Court
• AL Ethics Op. 2008-03: Trust Account Obligations for Retainers
• ABA Ethics Op. 471: Surrendering Papers and Property to a Former Client
• 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/2003-02/
• Original PDF: https://www.alabar.org/assets/2019/02/2003-02-1.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain; the linked PDF is authoritative. The attached RO-90-48 reproduces redacted client names that appear as illegible artifacts in the source.

ETHICS OPINION
RO-2003-02

OFFICE OF GENERAL COUNSEL

QUESTION:

Does an attorney have an ethical obligation to honor "protection letters" sent by the attorney to the creditors of a client, either at the client's request or with the client's knowledge and approval, when the client subsequently instructs the attorney not to pay the creditors?

ANSWER:

An attorney is ethically compelled to fulfil commitments made to a client's creditors pursuant to Rules 4.1(a), 8.4(c), 1.15(b) and 1.2(d) of the Rules of Professional Conduct.

DISCUSSION:

It is a frequent occurrence in the legal profession that an attorney will represent a client who has a meritorious cause of action but who has also incurred substantial indebtedness. The client may have incurred medical expenses for treatment of the injuries which form the basis of the cause of action or the indebtedness may be the result of the client's inability to work due to such injuries or it may be that for some other reason the client is unable to meet his or her financial obligations. If the anticipated recovery on behalf of the client would be sufficient to pay the client's debts, the client may ask the attorney to, or agree for the attorney to, contact the client's creditors and request forbearance in collection efforts in exchange for promise of payment upon receipt of settlement or judgment proceeds from the client's pending cause of action. Such written commitments on the part of the attorney are commonly referred to as "protection letters".

It sometimes happens that upon receipt of the proceeds the client will have a change of heart and, despite the previous instruction or authorization, will instruct the attorney not to pay the client's creditors, thus placing the attorney in an ethical dilemma. The attorney is faced with the choice of either disregarding the client's express directive or giving the appearance of having lied to the client's creditors.

However, the Rules of Professional Conduct provide ethical guidance in addressing this dilemma. Rule 4.1(a), for example, provides, in pertinent part, as follows:

"Rule 4.1 Truthfulness in Statements to Others

In the course of representing a client a lawyer shall not knowingly:

(a) Make a false statement of material fact or law to a third person... ."

Of similar import is Rule 8.4(c):

"Rule 8.4 Misconduct

It is professional misconduct for a lawyer to:

(c) Engage in conduct involving dishonesty, fraud, deceit or misrepresentation."

While in many, if not most instances, protection letters are provided in good faith, an attorney would be guilty of violating Rule 4.1(a) and Rule 8.4(c) if, at the time protection letters were sent, the attorney had reason to believe, or even suspect, that the client did not really intend to pay the creditor.

Further guidance is found in Rule 1.15(b) which addresses an attorney's ethical obligations upon receipt of funds or other property in which a third person has an interest.

"Rule 1.15 Safekeeping Property

Upon receiving funds or other property in which a client or third person has an interest from a source other than the client or the third person, 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 that property."

[Footnote: This predicament can be avoided by obtaining from the client written authorization to pay creditors. Such authorization should include language to the effect that the client acknowledges that the authorization is irrevocable and the client understands that, when the attorney has made a commitment to pay the creditor pursuant to that authorization, the attorney is ethically obligated to do so, regardless of whether the client's preference in the matter may change. This language may be included in the attorney's employment contract with the client.]

It is the opinion of the Disciplinary Commission that an attorney who has sent a protection letter to a client's creditor and who is holding in trust, funds to pay the creditor, is ethically obligated by the above-quoted Rule to pay the creditor those funds which the creditor "is entitled to receive".

Perhaps the Rule most relevant to the issues presented here is Rule 1.2(d), which provides, in part, as follows:

"Rule 1.2 Scope of Representation

(d) A lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent ...."

In RO-90-48, the Disciplinary Commission concluded that an attorney who releases all settlement or judgment proceeds to the client, after having told the client's creditors that the proceeds would be used to pay the client's debts, has assisted the client in a fraudulent act as expressly prohibited by Disciplinary Rule 7-102(A)(7), which is the verbatim predecessor, under the previous Code of Professional Responsibility, to the above-quoted Rule 1.2(d). A copy of formal opinion RO-90-48 is attached hereto for reference purposes.

However, the Disciplinary Commission is of the opinion that RO-90-48 is due to be modified in one respect. The inquiry of the attorney requesting that opinion was whether he could ethically interplead the money claimed by a client's creditor when the client refused to authorize payment to the creditor. The Disciplinary Commission opined that he could ethically do so. The Commission wishes to refine this position further by holding that money which an attorney has promised to pay creditors should not be interpled unless there is a dispute between the client and the creditor as to existence of the debt, the amount of the debt or the reasonableness of the debt. Accordingly, RO-90-48 is hereby modified in accordance with this opinion.

In summation, it is the opinion of the Disciplinary Commission that the Rules of Professional Conduct ethically preclude an attorney from failing or refusing to honor his commitment to pay a client's creditors. The attorney is ethically obligated to fulfill his commitment and pay the creditors, despite the client's insistence that he not do so. However, this ethical obligation exists only where the debt, and the amount thereof, is reasonable and undisputed. If there is a legitimate question concerning the debt, or the amount of the debt, the attorney should interplead the disputed funds and let the court reach a determination regarding the creditor's claim.

LGK/vf

8/28/03

[Attachment]

ETHICS OPINION

RO-90-48

QUESTION:

[The requesting attorney's letter, with client names redacted in the source, asks for guidance on a dispute between the attorney's clients and the clients' health care provider. A settlement was agreed to by all parties. Of the settlement sum, $5,047.00 had been assigned by the clients to a chiropractic practice; the assignment had been sent when the attorney requested the chiropractor's records for exhibit purposes. When the settlement proceeds cleared the trust account, the client disallowed the firm from sending the assigned benefits to the chiropractor. The attorney prepared an interpleader naming the law firm as plaintiff and the clients and chiropractor's office as defendants, asking the circuit court to declare where the money should be paid, and requested advice on whether interpleader was the suitable course.]

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