When a client owes settlement money to a third party, must the lawyer withhold the proceeds from the client, or pay them over as the client directs?

Plain-English summary

A divorce decree obligated H to pay W half of any recovery from H's civil action against a business buyer, less costs and a debt to X Company; a later mediated agreement had H promise to pay the X Company debt and a child-support arrearage from those proceeds. H's lawyer (L), who also handled the civil action, settled it, deducted his fee, and on the client's instruction (without knowing H intended to violate the agreement and without notifying W's lawyer) paid the balance to H. The Commission addressed four variations on these facts.

On Question #1, L's actions did not violate the Bar Rules. The decree imposed obligations only on the clients, not the attorney; H owned the cause of action, and under Rule 3.6(f)(2)(iv) L was both permitted and obligated to promptly deliver the funds to his client. Assuming L reminded H of his obligations under the decree, nothing more was required, and Rule 3.6(e) did not apply because L did not counsel or assist H in violating a law, rule, or order. On Question #2 (L reasonably believing H did not intend to pay W), the answer was the same: H's stated intention not to pay was a confidence protected by Rule 3.6(l), and the crime or risk-of-harm exceptions did not apply, since no crime was occurring and the risk-of-harm exception cannot extend to every activity with a negative economic impact on a third person. On Question #3 (L promised W's lawyer he would hold and disburse the funds, but H had not authorized the promise), the analysis was no different, because the property remained the client's; the Commission made no comment on L's possible civil liability for his ill-considered promise.

Question #4 differed: where the client authorized the promise to hold and disburse the funds, Rule 3.6(f)(2) does not necessarily govern, because the property may no longer belong only to the client (citing Model Rule 1.15, which extends a lawyer's obligations to funds held for third persons). The Commission noted the lawyer's position is a legal question of agency and contract law beyond its jurisdiction (citing Opinion 27), and that the lawyer may seek judicial guidance under Rule 24, M.R.Civ.P. Whatever the legal obligations, the Commission concluded that if the lawyer cannot persuade the client to change his mind, the lawyer must notify the other party of the change in instructions, because under Rule 3.6(c) a failure to do so would constitute a fraud on the other person.

Currency note

This opinion was issued in 1991, before Maine's replacement of the former Maine Bar Rules with the Maine Rules of Professional Conduct (effective August 1, 2009). 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: Must a lawyer pay settlement proceeds to a client who owes the money to a third party?

A: The opinion concluded yes where the client owns the claim. Under Rule 3.6(f)(2)(iv), the lawyer is obligated to promptly deliver the funds to the client, and the decree imposed obligations only on the clients, not the lawyer.

Q: Does the lawyer have to tell the third party's counsel before paying the client?

A: The opinion concluded no on the basic facts; the lawyer has no such obligation and the client's stated intention not to pay is a protected confidence under Rule 3.6(l).

Q: Does the client's stated intent not to pay trigger a disclosure exception?

A: The opinion concluded no. The crime and risk-of-harm exceptions did not apply, because no crime was occurring and the risk-of-harm exception cannot extend to every act with a negative economic impact on a third person.

Q: What changes if the lawyer made a client-authorized promise to hold the funds?

A: The opinion held that the funds may no longer belong only to the client (citing Model Rule 1.15), and if the lawyer cannot persuade the client to honor the promise, the lawyer must notify the other party of the change, because under Rule 3.6(c) failing to do so would be a fraud on that person.

Background and rules framework

The opinion interprets Maine Bar Rule 3.6(f)(2)(iv) (prompt delivery of property the client is entitled to receive), Rule 3.6(c) (no fraud on another person), Rule 3.6(l) (preserving client confidences and secrets), and Rule 3.6(e) (not assisting a client's violation of law or a tribunal's order). It references Model Rule 1.15 for funds held for third persons. These correspond to ABA Model Rule 1.15 (safekeeping property; third-party claims) and Model Rule 1.6 (confidentiality).

Citations and references

Rules of Professional Conduct:

• Model Rule 1.15 (safekeeping property; third-party claims); Model Rule 1.6 (confidentiality)
• Maine Bar Rule 3.6(f)(2)(iv), 3.6(c), 3.6(l), 3.6(e)

Other opinions cited:

• Maine Professional Ethics Commission Op. 27: the lawyer's position as agent is a legal question beyond the Commission's jurisdiction; Op. 60

See also

• Maine Ethics Op. 127: Disbursing Settlement Funds the Client Has Assigned Away
• Maine Ethics Op. 141: Real-Estate Escrow Accounts as Trust Accounts
• ABA Formal Op. 471: Surrendering Papers and Property to a Former Client

Source

• Landing page: https://mebaroverseers.org/attorney_services/opinion.html?id=89879

Original opinion text

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

Issued by the Professional Ethics Commission

Date Issued: June 6, 1991

Question #1

The Grievance Commission of the Board of Overseers of the Bar has requested an Advisory Opinion based upon the following facts. H and W are divorced. H was represented by Attorney L, and W was represented by Attorney M. H has commenced an action against a party who had previously bought a business from him in which there is a potential recovery of $9,000 in damages. L represents H in that action also.

The divorce decree states "Husband hereby agrees to pay Wife Fifty Per Cent (50%) of any sum recovered in said action, after making a deduction for reasonable costs of such action, and further deducting $800 owed to X Company for a debt relating to said business."

Later, after H had failed to comply with the divorce decree with respect to child support and payment of certain debts of the marriage, W, now represented by Attorney N, sought to have him held in contempt of court. As a result a mediation was held, and an amended settlement agreement was signed by the parties. In the amended agreement H agreed to pay off the debt to X Company and satisfy the arrearage in child support payments out of his share of proceeds of the pending civil action referred to above. H received a judgment by default in that action.

W, when advised of offers of settlement that H received on the judgment, although not a party to the action, indicated she did not "approve" them. Nevertheless, H finally settled the matter for $2500. After deducting $400 for his legal fee incurred in collecting the judgment, and without notifying Attorney N, Attorney L at the instruction of his client and having no knowledge that H intended to violate the terms of the agreement above, gave the balance of the cash to his client. When W complained, H gave her $1250.

Question #2

Assume the same facts as above except that Attorney L reasonably believes that H does not intend to comply with the terms of the agreement because H so indicates to him.

Question #3

Assume the same facts as Question #1 except that Attorney L promised Attorney N he would hold the funds when collected and disburse them in accordance with the agreement, but H in fact did not authorize L to make that promise; and when funds arrive, H tells Attorney L to give the funds to him.

Question #4

Assume the same facts as Question #3 except that the promise of attorney L had been authorized by his client; but shortly before the funds arrive, he instructs Attorney L to turn the proceeds over to him when they are collected.

Opinion

As to Question #1 the actions of Attorney L do not violate any Bar Rules. Nothing in the hypothetical decree imposed any obligations upon the attorney, only the clients. Client H owned the cause of action against X Company. Under Bar Rule 3.6(f) 2), L not only is permitted but is obligated to turn the funds over to his client: "A lawyer shall . . . (iv) promptly pay or deliver to the client, as requested by the client, the funds, securities or other properties in the possession of the lawyer which the client is entitled to receive." While this Commission has no authority to interpret court decrees, it is obvious that the decree did nothing to alter the ownership of the cause of action. It only created an obligation on the part of H to pay a sum of money to W that was to be based upon the net amount H recovered from the claim. Assuming, as we do, that Attorney L reminded his client of his obligations under the decree, nothing more is required from L. He has no obligation to inform Attorney N under these facts of what has transpired. Bar Rule 3.6(e) is inapplicable because the lawyer has not counseled or assisted his client in the violation of any law, rule, or order of a tribunal. The turning over of the funds to the client does not constitute "assistance" within the meaning of the rule in that the order necessarily requires that the client receive the money before he has any obligation to W, and the order also did not attempt to modify the obligations of Attorney L to his client.

As to Question #2, the answer is the same for the reasons stated above. Certainly the client would consider the communication that he did not intend to pay W as a confidential communication, and under Bar Rule 3.6(1) a lawyer "shall not, without the informed written consent of the client, knowingly reveal a confidence or secret of his client." The exceptions to the rule which permit disclosure when a client intends "to commit a crime . . . or to avoid subjecting others to risk of harm" are not applicable in this case. No crime is being committed, and the risk of harm" exception cannot be extended to include every activity that would have some negative economic impact upon a third person. To do so would reduce one of the jealously protected expectations of a client to an illusion. Rule 3.6(e) is no more involved in this situation than in Question #1 even if Attorney L was advised by his client of his intention to disregard the order. The mere act of carrying out his obligation to his client with respect to his client's property is not in itself a violation of an order of the tribunal. As long as the attorney advises the client of his obligations and counsels compliance, that is all he can do in the circumstances. cf. Opinion #60.

Question #3 must be answered no differently from Question #2. Indeed, the analysis is no different from Question #2 since the property remained that of Attorney L's client. No comment, of course, is being made as to the attorney's civil liability to third parties as a result of his ill considered promises.

As to Question #4 Attorney L has assumed a different role as between the parties; and Bar Rule 3.6(f)(2) does not necessarily govern the result. The property may no longer belong only to the client (cf. Model Rule 1.15 where the obligations of lawyers dealing with client funds are extended to funds held for third persons.) As Opinion 27 has previously pointed out, the lawyer's position vis a vis the parties is a legal question of agency and contract law that is beyond this Commission's jurisdiction. Indeed the lawyer may be obligated to carry out what he has promised since the client authorized the disbursement, and the third party relied upon that authorization. If the lawyer is in doubt as to his obligations in this matter, he can seek judicial guidance under Rule 24, Maine Rules of Civil Procedure. Whatever his legal obligations in this instance, the Commission concludes that the lawyer, if he is unable to persuade his client to change his mind, must notify the other party of the change in instructions, for under Rule 3.6(c) a failure to do so would constitute a fraud upon the other person.