When a client and a prior lawyer with a perfected lien both claim part of a settlement, what must the lawyer holding the funds do?

Plain-English summary

Lawyer A settled a contingent-fee personal-injury case after the client discharged a prior lawyer, Lawyer B, who had properly perfected an attorney's lien that the client and Lawyer A had acknowledged. When it came time to disburse, the client objected to paying Lawyer B, claiming Lawyer B had committed malpractice. Lawyer A disagrees and believes any malpractice claim is time-barred, but the client is adamant. Lawyer A distributed the undisputed shares and held back the portion claimed by Lawyer B, then asked what to do with it.

The committee applies Rule 1.15(e): when a lawyer holds property in which two or more persons claim interests, the property must be kept separate until the dispute is resolved, and the lawyer must promptly distribute the portions not in dispute. Comment 4 explains that a third party may have a lawful claim (such as a lien on personal-injury recovery), that the lawyer must refuse to surrender the funds to the client when the third party's claim is not frivolous, and that the lawyer should not unilaterally arbitrate the dispute. The committee concludes Lawyer A correctly segregated and held the disputed share, and that even though Lawyer A believes the client's position is legally untenable, that belief does not let the lawyer ignore the client's objection and release the funds.

The committee describes the lawyer's options. The lawyer should advise the client that the position is incorrect and that, under the rules, the funds cannot be released until the dispute is resolved, and must notify both the client and Lawyer B that the funds are held, acting as a fiduciary to the third party as to those funds (Rule 1.15(d), Comment 1). If the parties do not promptly resolve it, the committee suggests, and encourages, filing an interpleader action under 735 ILCS 5/2-409 so a court can decide entitlement and the clerk can hold the funds, removing the lawyer from the middle. A footnote notes that if the third party's claim is not an arguably lawful, valid claim, Rule 1.15(e) may not be implicated and segregation may not be required.

In practice

Under this opinion, a lawyer holding settlement funds subject to a non-frivolous third-party lien must segregate the disputed portion, release the undisputed portions, and decline to follow a client's instruction to pay over the disputed share. The opinion identifies interpleader under 735 ILCS 5/2-409 as the mechanism the committee recommends when the client and the lienholder do not resolve the matter, with the lawyer cautioned by Comment 4 not to assume the role of arbitrator between them.

Common questions

Q: Can the lawyer follow the client's instruction to not pay the prior lawyer's lien?

A: No. The committee says that even if the lawyer believes the client's objection is legally unsupportable, Rule 1.15(e) bars releasing the disputed funds to the client; the lawyer must hold them until the dispute is resolved by agreement or court order.

Q: What does the lawyer do with the undisputed money?

A: Distribute it promptly. Rule 1.15(e) requires the lawyer to keep the disputed portion separate but promptly distribute all portions as to which the interests are not in dispute, which Lawyer A did.

Q: Can the lawyer just decide who is right and pay accordingly?

A: No. Comment 4 to Rule 1.15 says a lawyer should not unilaterally arbitrate a dispute between the client and a third party claiming the funds.

Q: How does the lawyer get out of the middle?

A: The committee recommends an interpleader action under 735 ILCS 5/2-409, after which the court typically has the lawyer transfer the disputed funds to the clerk and decides the parties' rights.

Q: What if the third party's claim is not valid?

A: A footnote notes that if the third party's claim is not an arguably lawful, valid claim, the lawyer may conclude Rule 1.15(e) is not implicated and segregation is not required.

Background and rules framework

The opinion interprets Illinois Rule of Professional Conduct 1.15 (safekeeping property), in particular 1.15(e) on property claimed by two or more persons and 1.15(a)/(d) on segregation and notice, with Comments 1 and 4, and references Rule 1.7 (conflicts). These track Model Rule 1.15. The interpleader remedy comes from 735 ILCS 5/2-409, and the committee cites Illinois authority describing interpleader as a neutral stakeholder's path to a judicial determination of competing claims to a fund.

Citations and references

Rules of Professional Conduct:

• MR 1.15 / IL RPC 1.15(a), (d), (e) (safekeeping property; disputed claims; Comments 1, 4)
• MR 1.7 / IL RPC 1.7 (conflicts of interest)

Statutes:

• 735 ILCS 5/2-409 (interpleader)

Cases:

• Kovitz Shifrin Nesbit, P.C. v. Rossiello, 392 Ill. App. 3d 1059, 911 N.E.2d 1180 (1st Dist. 2009), purpose of interpleader

Other opinions cited:

• ISBA Advisory Opinion 93-03 (holding and interpleading disputed funds)
• Maryland State Bar Association Ethics Op. Docket No. 2018-03 (frivolous third-party claim)

See also

• ISBA Ethics Op. 15-02: Disposition of Unclaimed and Unidentified Client Funds
• NY State Bar Op. 1165: Disputed Fees in a Trust Account and Charging Interest
• NY State Bar Op. 1127: Settlement Funds in the Attorney Trust Account

Source

• Landing page: https://www.isba.org/ethics/opinions/2006