Can a firm pay its unpaid fees out of trust funds left by a corporate client that has since been dissolved?

Plain-English summary

A firm had served a corporate client for nearly 20 years. Years earlier the client wired funds into the firm's trust account for a transaction that never closed, directing the firm to hold the funds until further notice; no further instructions came. The client later ceased business and was involuntarily dissolved by the Illinois Secretary of State. The client owed the firm fees exceeding the trust balance, and the firm believed it had a common-law retaining lien.

The Committee began with Rule 1.15(c): because the firm (and likely remaining creditors and former shareholders) claimed an interest in the funds, the firm had to keep the entire amount segregated until the dispute was resolved. Surveying its prior opinions, it confirmed the general rule that a lawyer may apply trust funds to fees only after notice to the client and the client's consent (Opinions 88-15 and 93-17), and noted that In re Ushijima favored written authority. But the ARDC Client Trust Account Handbook's notice-and-no-objection approach (drawn from In re Smith) presupposed a client able to respond, which a dissolved corporation might not be.

The Committee concluded that the firm held a retaining lien (citing Upgrade Corp.), but that before paying fees from the trust account it should transform the retaining lien into a judgment and obtain a court order directing payment of the trust funds to the firm. It added a caveat: if the firm knew or believed the client had filed bankruptcy, the trust funds would be assets of the debtor's estate, and the firm would have to disclose them to the trustee before asserting its lien.

Currency note

This opinion was issued in 2002, before Illinois adopted its current Rules of Professional Conduct, effective January 1, 2010. The Illinois Rules cited here use the pre-2010 numbering. The ISBA notes the opinion was affirmed by its Board of Governors in January 2010 as generally consistent with the 2010 Rules (it points to current Rule 1.15 and Dowling v. Chicago Options Associates, Inc.), though the specific standards may differ. Verify against current rules before relying on any specific rule cited here.

In practice

Under the Illinois rules as they stood at the time, the opinion holds that a lawyer holding disputed trust funds must keep the whole amount segregated under Rule 1.15(c) until the competing interests are resolved, and may apply the funds to unpaid fees only with the client's consent after notice. Where the client is a dissolved corporation that cannot meaningfully consent, the opinion identifies two paths: obtain written consent through a former officer, or reduce the fee claim to judgment and obtain a court order against the funds. It also notes that a known or suspected client bankruptcy converts the funds into estate assets that must be disclosed to the trustee before the lien is asserted.

Common questions

Q: Can a firm simply move trust funds to pay overdue fees if the client cannot be reached?

A: No. The Committee concluded that disputed funds must stay segregated under Rule 1.15(c), and fees may be taken only with the client's consent after notice; a dissolved client that cannot consent requires a court order.

Q: What should the firm do when the client is a dissolved corporation?

A: The opinion concludes the firm should either obtain written consent through a former officer, or reduce its fee claim to judgment and obtain a court order setting off its judgment lien against the trust funds.

Q: Does it matter whether the client may have filed bankruptcy?

A: Yes. The Committee concluded that if the firm knows or believes the client filed bankruptcy, the trust funds are assets of the debtor's estate that the firm must disclose to the trustee before asserting its retaining lien.

Background and rules framework

The opinion applied Illinois Rule 1.15 (safekeeping property, especially 1.15(c) on disputed funds) and Rule 1.5(a) (reasonable fees), corresponding to ABA Model Rules 1.15 and 1.5, against the common-law retaining lien recognized in Upgrade Corp. and the ARDC Client Trust Account Handbook.

Citations and references

Rules of Professional Conduct:

• Illinois Rules 1.5, 1.15(a)-(d) (Model Rules 1.5, 1.15)

Statutes:

• Uniform Disposition of Unclaimed Property Act, 765 ILCS 1025/1 et seq.

Cases:

• In re Smith, 63 Ill.2d 250, 347 N.E.2d 133 (1976)
• In re Ushijima, 119 Ill.2d 51, 518 N.E.2d 73 (1987)
• Upgrade Corp. v. Michigan Carton Co., 87 Ill.App.3d 662, 410 N.E.2d 159 (1980), retaining lien

Other opinions cited:

• ISBA Advisory Opinion Nos. 93-17, 88-15, 845, 703

See also

• ISBA Ethics Op. 15-02: Disposition of Unclaimed and Unidentified Client Funds
• ISBA Ethics Op. 20-06: Lawyer's Possession of Disputed Settlement Funds

Source

• Landing page: https://www.isba.org/ethics/opinions/0202