When a third party claims money a lawyer is holding for a client, when must the lawyer honor that claim instead of paying the client?

Plain-English summary

Responding to questions about the scope of Opinion 86-4, the Committee clarified when an attorney holding client funds may be responsible for failing to honor a third party's claim against those funds. The opinion concluded that an attorney's obligation to pay a creditor's claim against the client's instructions is triggered only by a claim that is a valid assignment on its face, or a statutory lien, which has been brought to the attorney's attention. Where a client executes a valid assignment from settlement proceeds, or a perfected statutory lien exists, that creates a presumption that the client is not "entitled" to those funds within the meaning of DR 9-102(B)(4).

For claims unrelated to the representation, or mere notices of debt, the opinion concluded the lawyer should not unilaterally arbitrate a dispute between client and third party (citing the Comment to Model Rule 1.15). Unless a claim has been reduced to a valid assignment or perfected lien, a creditor has no greater entitlement to the funds than the client, and the creditor's remedies lie elsewhere (such as prejudgment attachment). But where a settlement specifically allocates an amount for a third-party lien, that amount must be used for that purpose.

The opinion also addressed inducing reliance. If a client instructs the lawyer to disregard a valid assignment or statutory lien, the lawyer should promptly tell the client the funds must be withheld and segregated, and, absent amicable resolution or a written waiver from the lienor, deposited with the court. By contrast, on receiving a mere notice such as a medical provider's letter, the lawyer should not stay silent (silence may be read as acceptance) but should respond that payment is a matter between the client and the creditor, shifting the burden back to them.

Currency note

This opinion was issued in 1992, before Alaska'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 referencing the then-pending Model Rule 1.15). 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 Treat this page as historical context, not current guidance.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: Did a lawyer have to pay a creditor who claimed part of the client's settlement?

A: Only if the claim was a facially valid assignment or a statutory lien brought to the lawyer's attention. The opinion concluded a mere notice of debt does not defeat the client's entitlement to the funds.

Q: What should the lawyer do if the client says to ignore a valid lien?

A: The opinion concluded the lawyer must segregate the disputed funds and, absent an agreed resolution or written waiver, deposit them with the court for the judge to decide; the lawyer may not arbitrate the dispute.

Q: Could the lawyer just ignore a medical provider's letter claiming payment?

A: No. The opinion concluded the lawyer should respond that payment is between the client and the provider, because silence might be read as accepting the claim.

Background and rules framework

The opinion was decided under the former Alaska Code of Professional Responsibility, the analog to today's safekeeping-property rule (Model Rule 1.15). It applied DR 9-102(B)(4) (promptly delivering funds the client is entitled to receive) and drew on the Comment to Model Rule 1.15 regarding a lawyer's duty not to arbitrate disputes between a client and a third party, together with case law on assignments and liens.

Citations and references

Rules of Professional Conduct (former Code; cf. Model Rule 1.15):

• DR 9-102(B)(4) (promptly delivering funds the client is entitled to receive)

Cases:

• Bonanza Motors, Inc. v. Webb, 657 P.2d 1102 (Idaho App. 1983)
• Herzog v. Riace, 594 A.2d 1106 (Me. 1991)
• In re Burns, 679 P.2d 510 (Ariz. 1984)

Other opinions cited:

• Alaska Ethics Opinion 86-4: attorney's duty on third-party claims to client funds

See also

• Alaska Ethics Op. 2012-1: Recording an Attorney Lien on Client Property
• Alaska Ethics Op. 2025-2: Safeguarding Trust Funds From Fraud
• Alaska Ethics Op. 98-3: Writ of Execution Against Client Trust Funds

Source

• Landing page: https://alaskabar.org/ethics-discipline/ethics-opinions/adopted-ethics-opinions-chronological/
• Original PDF: https://alaskabar.org/wp-content/uploads/92-3.pdf

Original opinion text

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

ALASKA BAR ASSOCIATION
ETHICS OPINION NO. 92-3
Clarification of Ethics Opinion 86-4
Regarding Attorney's Duty When Dispute Arises
Concerning the Rights of Third Parties
to Client Funds in the Possession of Attorney
A number of questions have arisen regarding the scope of Opinion 86-4, and the circumstances under which an attorney may be held responsible for failing to honor a claim by a third party against client funds in the possession of the attorney. It is the opinion of the Committee that: (1) In order to trigger an obligation on the part of the attorney to pay a creditor's claim, in contravention of a client's instructions, the creditor's claim must be a valid assignment on its face or statutory lien which has been brought to the attorney's attention.1 (2) If a client instructs an attorney to ignore or disregard a valid assignment or statutory lien, the attorney should advise the client that absent an explanation (e.g., a written release, or some other form of written waiver by the lienor or assignee) the attorney will withhold the disputed funds, and, absent some amicable resolution, the funds will be deposited into court where the dispute can be decided by the judge. A. WHAT THIRD PARTY CLAIMS MUST BE HONORED? This is another way of asking the question when is the attorney obligated to deliver to the client funds "which the client is entitled to receive." See DR9102(b)(4) (emphasis added). The Committee believes that when a client executes a valid assignment from settlement proceeds, or there exists a perfected statutory lien against settlement proceeds, it creates a presumption that the client is not "entitled" to those funds. Bonanza Motors, Inc. v. Webb, 657 P.2d 1102 (Id. App. 1983); Herzog v. Riace, 594 A.2d 1106 (Me. 1991). There may be other claims unrelated to the subject matter of the representation; for instance child support, alimony, restitution for criminal conduct and so on. "However, a lawyer should not unilaterally assume to arbitrate a dispute between the client and the third party." See Comment to Model Rule

1 However, practitioners should be aware that under some tax lien statutes, the statutory filing requirements provide the element of notice. See 26 U.S.C. § 6321. 1

1.15.2 A client is capable of and responsible for payment of his or her own obligations. Unless the claim in question has been reduced to a valid assignment or perfected lien, a creditor has no more special "entitlement" to those funds than does the client. The creditor in that situation has other remedies, such as prejudgment attachment. See Alaska R. Civ. P. 89. However, where a settlement includes or references specific allocation for a lien claimed by a third party, the amount designated for satisfaction of the lien must be utilized for that purpose. In re Burns, 679 P.2d 510 (Az. 1984). B. WHEN DOES A DISPUTE ARISE OVER THE CLIENT'S ENTITLEMENT TO HIS OR HER FUNDS, AND HOW SHOULD THOSE DISPUTES BE RESOLVED In the view of the Committee, if a client instructs an attorney to disregard the terms of a valid assignment or statutory lien, the attorney should promptly inform the client that the attorney is obligated to withhold and segregate those funds in question. Unless the client and the creditor are able to amicably resolve their differences, or unless the client provides the attorney with some verification that the lienor or assignee have waived their interest in those funds, the attorney will be required to deposit the funds into court for disposition by the judge. Given the fact that both sides will incur expense and delay in the event this step is taken, it would be appropriate to encourage the client and the creditor to resolve their differences promptly and amicably. C. THE ATTORNEY SHOULD BE CAREFUL NOT TO INDUCE RELIANCE ON THE PART OF THE THIRD PARTY CREDITOR Any number of questions may arise regarding a client's "entitlement" to funds being held by the attorney. The Committee believes that care should be taken to dispel any confusion which might arise regarding the attorney's obligations under these circumstances. If, for instance, an attorney receives a letter from a medical provider to the effect that he or she is owed money for services provided to the client relating to the subject matter in question, that does not, in the Committee's view, create a presumption that the client is not entitled to receive the funds in question at his or her request. However, the Committee believes that the attorney in that instance should respond to the letter and convey to the medical provider the fact that this is a matter between the client and the medical provider. The medical provider should be on notice that the attorney will not be assuming the responsibility for payment of the client's bills relating to the subject matter in question; that is the client's responsibility. The Committee believes it is inappropriate for the attorney to remain silent after having received notice of such a potential claim. While the attorney may believe that his or her silence in the face of receiving such notice is or may be interpreted as a constructive denial of the creditor's position, it is just as likely that the third party creditor may view that silence as implicit or tacit acceptance of the third party claim. The situation is ripe for confusion, and the Committee believes the attorney should take the affirmative step of responding to these claims by shifting the burden back where it belongs, namely on the third party creditor and the client. 2 The Model Rules of Professional Conduct have been approved by the Alaska Board of Governors and are currently pending before the Alaska Supreme Court. 2

In conclusion, the Committee believes that an attorney is not ethically obligated to arbitrate claims between creditors and his or her client. With respect to third party creditors who have not received an assignment from the client, or who have not perfected a statutory lien, and assuming the attorney has followed the recommendations outlined in Section C above and informed the creditor that the claim should be taken up directly with the client, the attorney should be free to follow the client's instructions with respect to return of client property. Even though the attorney may be aware of a potential problem in this regard, the Committee does not believe this vitiates the client's "entitlement" to return of his or her property, pursuant to DR 9-102(B)(4). If a client instructs an attorney to disregard the terms of a valid assignment or statutory lien, the attorney should promptly take the appropriate steps to segregate those funds in question, and to inform the client that, absent a resolution which is satisfactory to all parties concerned, the attorney will be obliged to deposit the funds into court for disposition by the judge. Approved by the Alaska Bar Association Ethics Committee on April 2, 1992. Adopted by the Board of Governors on June 1, 1992. 145WP1MANUL

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