What must a lawyer do when a third party claims part of the client's settlement funds and the client says pay only me?

Plain-English summary

The Committee addressed several real situations in which a third party claimed an interest in client funds held by the client's attorney while the client directed the attorney to pay the funds to the client alone. The examples included a hospital with an assignment of settlement proceeds, a prior attorney with a recorded charge of lien, settlement funds the client wanted returned to retain criminal counsel, and an assignee on a real-estate down payment. The opinion observed that entitlement to such funds is generally a question of law, and that the ethical question is whether the attorney must follow the client's direction to disburse.

The opinion concluded that if a dispute arises concerning third-party rights to the client's funds, the attorney must segregate the disputed amount until the dispute is resolved, and if it cannot be resolved amicably, the attorney may pay the funds into court and ask the court to determine legal entitlement. It grounded this in DR 9-102(B)(4) (prompt payment of funds the client is entitled to receive) and in Model Rule 1.15(c) and its comment, which require keeping disputed property separate and caution that a lawyer should not unilaterally arbitrate a dispute between the client and a third party. The opinion noted that a written instruction from the client will probably not absolve the attorney, and that disbursing to the client with knowledge of a lien can expose the attorney to liability for conversion, citing ABA Informal Opinion 137 and decisions from other jurisdictions.

Applying this to the hospital scenario, the opinion concluded that whether a lien had been established is a question of law it could not decide, and that the attorney who unilaterally pays the wrong party may be personally liable; if there is no dispute over entitlement, the attorney must pay the client on demand, but if there is a dispute the attorney should seek to resolve it amicably and, failing that, may seek judicial resolution. The same reasoning applied to the assignment scenario. The opinion vacated the portion of Alaska Ethics Opinion 80-1 dealing with an attorney's ethical responsibility to pay known medical bills.

Currency note

This opinion was issued in 1986, before the Alaska Bar Association's adoption of the 2009 revisions to the Alaska Rules of Professional Conduct (and before Alaska adopted the Rules of Professional Conduct at all; it applies the former Code of Professional Responsibility while discussing the then-current Model Rule 1.15). It vacated part of Alaska Ethics Opinion 80-1. Subsequent rule amendments or later opinions may have changed the analysis, and the cited lien statutes may have been amended. 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: A third party claims part of my client's settlement, but the client says pay only me. What do I do?

A: The opinion concluded the attorney must segregate the disputed amount until the dispute is resolved, and if it cannot be resolved amicably, may pay the funds into court for a determination of entitlement.

Q: Can I just follow the client's written instruction to ignore the third party?

A: The opinion concluded a written instruction probably will not absolve the attorney, and disbursing to the client over a known lien or assignment can expose the attorney to personal liability, including for conversion.

Q: Does the attorney decide who is legally entitled to the funds?

A: No. The opinion concluded entitlement is generally a question of law; the attorney should not unilaterally arbitrate the dispute and may seek judicial resolution if the claimants cannot agree.

Background and rules framework

The opinion applied DR 9-102(B)(4) of the former Alaska Code of Professional Responsibility, on prompt delivery of funds the client is entitled to receive, together with Model Rule 1.15(c) and its comment on segregating disputed property and not unilaterally arbitrating disputes. The analysis turned on the client's "entitlement" to the funds, which the opinion treated as a legal question outside the Committee's province, and surveyed ABA and sister-bar authority on third-party claims and attorney liability.

Citations and references

Rules of Professional Conduct (former Code; cf. Model Rules):

• DR 9-102(B)(4) (prompt delivery of funds the client is entitled to receive) (cf. Model Rule 1.15)

Cases:

• Unigard Insurance Co. v. Tremont, 37 Conn. Super. 596, 430 A.2d 30 (1981), conversion for disbursing over a lien
• In re Cassidy, 89 Ill. 2d 145, 432 N.E.2d 274 (1982), delaying disbursement where creditors may have superior claim

Other opinions cited:

• ABA Informal Opinion 137 (1976); Delaware Opinion 1981-3; South Carolina Opinion 81-14; Greater Cleveland Bar Opinion 85-2 (1985); vacates Alaska Ethics Opinion 80-1 in part

See also

• Alaska Ethics Op. 92-3: Third-Party Claims to Client Funds
• Alaska Ethics Op. 90-3: Funds for a Client Who Cannot Be Located

Source

• Landing page: https://alaskabar.org/ethics-discipline/ethics-opinions/adopted-ethics-opinions-chronological/
• Original PDF: https://alaskabar.org/wp-content/uploads/86-4.pdf

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

Ethics Opinion No. 86-4
Attorney's Duty when Dispute Arises Concerning the Rights of Third
Parties to Client Funds in the Possession of Attorney, and Vacating
Opinion No. 80-1 in Part.
The Committee has been asked about, or has been involved in, several
situations recently involving disputes concerning the rights of third parties to
client funds in the hands of the client's attorney. All the situations faced by the
Committee have dealt with disputes between the client and a third party over
entitlement to the funds. Disputes could also arise, however, between two third
parties. These situations involve potentially grave ethical, legal, and practical
consequences for the attorney, as illustrated by some of the situations in which
the Committee has been involved.
The Committee has recently been asked about, or involved, in the
following four situations:
(1) The client suffered significant personal injury in an accident, was
treated at a hospital, and incurred substantial medical expenses. The client
paid the hospital for only a portion of the amount due on discharge. The client
gave the hospital a specific assignment, on a standard hospital form, assigning
client's proceeds from settlement or judgment to the hospital in the amount of
the balance due.
Thereafter, the client retained the attorney to represent the client's
interests in litigation as against possible responsible defendants. Settlement
was reached after approximately one year of litigation. Settlement terms
included payment of three installments of settlement funds over a two-year
period. On specific written instruction from client, attorney disbursed the first
two installments of settlement proceeds belonging to client to other assignees.
Thereafter, the hospital notified the attorney of the existence of the signed
assignment form. Attorney then contacted client to inquire of client as to how
proceeds were to be distributed, advising client as to client's liability for unpaid
hospital bills. The client specifically instructed the attorney to pay the final
settlement proceeds directly to the client, and not to pay the hospital bill,
notwithstanding the specific assignment.
(2) Client changed attorneys in the middle of a proceeding. The client
apparently agreed to an attorney's lien to secure compensation to the first
attorney, and the first attorney filed a claim of lien in the court file in accord
with AS 34.35.430. The second attorney subsequently settled the client's case.
The client requested payment of the full amount of the settlement proceeds
from the second attorney. The second attorney turned over the funds to the
client, in accord with the client's request. Litigation brought, by the first
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attorney against the second attorney for failure to recognize the attorney's lien
is presently pending.
(3) An attorney representing a tort defendant had retained money in his
trust account for the purpose of funding a settlement with the plaintiff.
Settlement negotiations had taken place, and draft settlement agreements had
been prepared. At this point, the client was arrested on a felony charge in
another jurisdiction, and requested that his attorney send him the funds which
were intended to fund the settlement, so that the client could retain counsel to
defend himself against the criminal charge. The attorney sent the funds to the
client in accord with the client's request, so that the client could retain
counsel. Subsequently, a dispute arose as to whether or not there was a
settlement, and whether the funds should have been retained by the attorney
in trust to fund the settlement rather than returned to the client. This matter
became the subject of an extended investigation by the Alaska Bar Association.
(4) Attorney represents client in a personal injury action. Prior to
settlement, client assigned a portion of the settlement proceeds to a third party
as down payment on a house. The attorney has a letter of assignment in his
file. The client has left Alaska, is in default on his house payments, and
foreclosure is likely. The client may have a cause of action against the seller
arising out of the transaction. The personal injury case has settled, and
attorney is holding the proceeds of the settlement. The client has instructed the
attorney to ignore the assignment and pay all funds to the client. If the
attorney recognizes the assignment, client will receive nothing.
The foregoing are actual situations presently existing, and illustrate the
problems in this area and the need for careful consideration by an attorney
when faced with competing demands for funds in the attorney's possession.
Generally, the entitlement to these funds is determined as a matter of law,
rather than as a matter of ethics. The ethical question is whether or not the
attorney must follow the direction given by the client as to the disbursal of
funds. The purpose of this opinion is to provide some guidance to the attorney
faced with this type of problem.
It is the opinion of the Committee that if a dispute arises concerning the
rights of third parties to the client's funds, the attorney must segregate the
amount in dispute until the dispute is resolved. If it is impossible to resolve the
dispute amicably, then the attorney may pay the funds into the court, and
request that the court determine the legal entitlement to the funds.
DR 9-102(B)(4), provides:

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A lawyer shall promptly pay or deliver to the client as requested by a client the
funds, securities, or other properties in the possession of the lawyer which the
client is entitled to receive.
Model Rule of Professional Conduct 1.15 provides:
Rule 1.15 Safekeeping Property
(a) A lawyer shall hold property of clients or third persons that is in a lawyer's
possession in connection with a representation separate from the lawyer's own
property. Funds shall be kept in a separate account maintained in the state where
the lawyer's office is situated, or elsewhere with the consent of the client or third
person. Other property shall be identified as such and appropriately safeguarded.
Complete records of such account funds and other property shall be kept by the
lawyer and shall be preserved for a period of five years after termination of the
representation.
(b) 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.
(c) When in the course of representation a lawyer is in possession of property in
which both the lawyer and another person claim interests, the property shall be
kept separate by the lawyer until there is an accounting and severance of their
interests. If a dispute arises concerning their respective interests, the portion in
dispute shall be kept separate by lawyer until the dispute is resolved.
The Comment to Model Rule 1.15 provides, in part:
Third parties, such as a client's creditors, may have just claims against funds or
other property in a lawyer's custody. A lawyer may have a duty under applicable
law to protect such third-party claims against wrongful interference by the client,
and accordingly may refuse to surrender the property to the client. However, a
lawyer should not unilaterally assume to arbitrate a dispute between the client and
the third party.
The obligations of a lawyer under this Rule are independent of those arising from
activity other than rendering legal services. For example, a lawyer who serves as
an escrow agent is governed by the applicable law relating to fiduciaries even
though the lawyer does not render legal services in the transaction.
The operative factor under both the Code and Model Rules is that the
client be "entitled to the funds." Neither the Code nor Model Rules, however,
provide any guidelines an attorney use to determine whether or not a client is
entitled receive funds or property in the attorney's possession. The American
Bar Association has addressed the issue of when a client is entitled to funds or
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properties under DR 9-102(B)(4). The ABA has suggested that when there is a
conflict between an attorney and a client about who is entitled to funds in an
attorney's possession, and when this conflict is not quickly and amicably
resolved, an attorney may properly file an action for the adjudication of the
rights of all claimants. (ABA Informal Opinion 137 August 10, 1976).
Judicial resolutions of these disputes is sometimes necessary. If the
attorney is legally incorrect in disbursing funds in accord with the client's
request, the attorney may end up paying twice. For example, an attorney may
be liable for conversion when the attorney disburses funds to a client with the
knowledge of the existence of a lien on the funds. (e.g. Unigard Insurance Co. v.
Tremont, 37 Conn. Super. 596, 430 A.2d 30 (1981); In Re Cassidy, 89 Ill. 2d
145, 432 N.E.2d 274 (1982))
A related issue is the lawyer's duty to third-party creditors of client
regarding client's funds. This issue has not directly been addressed by the ABA
Code or the ABA Model Rules. The cases and ethics opinions on this issue,
usually involving outstanding medical expenses, have varied. For instance,
Alaska Opinion 80-1 (1980) held that an attorney did not violate any ethical
obligation by forwarding funds received to the client knowing that the client
had outstanding medical bills. A slightly different position was taken in
Delaware Opinion 1981-3 (Apr. 21, 1981), which held that an attorney should
try to persuade the client to pay medical expenses, but may not force the client
to do so. A third position was adopted in South Carolina Opinion 81-14 (1981).
Under this Opinion, an attorney should request permission from the client to
pay outstanding medical expenses. Furthermore, if the client refuses
permission, the attorney will hold the funds for a short designated period of
time without disbursal. See also In Re Cassidy, 89 Ill.2d 145, 432 N.E.2d 274
(1982) (not improper for lawyer to delay disbursement of funds to client when
lawyer reasonably believed client's creditors had superior claim to funds).
The Greater Cleveland Bar Association has recently issued an opinion in
a case in which a woman had hired an attorney to draft a prenuptial agreement
for her, dealing with her real property. The agreement was signed, and the
parties were married. Subsequently, the husband retained the attorney to
prepare a deed to convey to the wife a 1/2 interest in his residential real
property, the marital home. The deed was executed, witnessed, and notarized.
The husband subsequently called and instructed the attorney not to record the
deed until given further instructions. Fifteen months later, the husband
demanded that the attorney give him the deed. The attorney was unable to
contact the wife, and anticipated litigation from the wife if he turned the deed
over to the husband. In this situation, the Greater Cleveland Bar Association
indicated that the attorney's course becomes a mandatory one of disclosure,
notice, and hopefully consent by both husband and wife to the disposition of
the deed. If consent is not possible, then agreed upon arbitration or judicial
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intervention must be obtained. (Greater Cleveland Bar Association Professional
Ethics Committee, Opinion 85-2, December 13, 1985, reported in ABA/BNA
Lawyers Manual and Professional Conduct, January 8, 1986, at page 1121)
With respect to situation (1), involving the hospital bills, the Committee
has been asked the following questions:
Query A: Has hospital established sufficient grounds to enforce a lien for
payment pursuant to AS 34.35.450-34.35.480?
Query B: Should attorney pay the hospital bill pursuant to assignment or
subscribe to the wishes of the client and forward final settlement proceeds to
client directly?
Query C: Is attorney personally liable to either hospital or client for
opting to pay one, and not the other?
Query D: Is written instruction from client directing direct payment to
client sufficient to protect attorney from personal liability under the statute?
Whether or not a lien for payment has been established is a question of
law, upon which the Committee cannot issue an opinion. If the attorney
unilaterally makes an incorrect decision to pay either the hospital or the client,
the attorney may very well be held personally liable for failure to pay the other.
Written instruction from the client will probably not absolve the attorney from
liability for failure to recognize a valid lien or assignment.
If there were no dispute as to the client's "entitlement" to the funds, the
attorney would be ethically obligated to pay the funds to the client upon
demand. If there is a dispute over whether or not the client is "entitled" to the
funds, then it is necessary that the dispute be resolved.
The question of whether a client is "entitled" to funds in the possession of
an attorney is most often a question of law, which will often require findings to
be made which are based on disputed facts. If the attorney has any doubt as to
whether the client is entitled to the funds, or the attorney reasonably
anticipates potential personal liability in a situation where there is a dispute
over the client's funds, then the attorney should ascertain if the dispute can be
resolved amicably between the claimants to the funds. If the claimants cannot
agree, then the attorney may seek judicial resolution of the dispute.
The same reasoning applies to situation (4), except that the legal
question deals with failure to recognize a valid assignment only, without the
additional problem of possible failure to recognize a statutory lien. The attorney
here should also first ascertain whether the dispute can be amicably resolved
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between the conflicting claimants. Failing that, then the attorney may seek
judicial resolution of the dispute.
Based on the foregoing, that portion of Alaska Ethics Opinion No. 80-1
which deals with the ethical responsibility of an attorney to pay known medical
bills (Question 1 and its answer) is vacated.
Adopted by the Alaska Bar Association Ethics Committee this 4th day of
November, 1986.
Approved by the Board of Governors on November 7, 1986.

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