Must a lawyer pay settlement proceeds to a client when those proceeds were already legally assigned to a third party?

Plain-English summary

The Commission was asked to review its Opinion No. 116 (1991) in light of two Law Court decisions, Northeast Bank of Lewiston and Auburn v. Murphy, 512 A.2d 334 (Me. 1986), and Herzog v. Irace, 594 A.2d 1106 (Me. 1991). Opinion No. 116 addressed a lawyer who received settlement proceeds for a client where a divorce settlement agreement directed the proceeds be paid to the client's former spouse. It advised that the lawyer could turn the proceeds over to the client, regardless of the lawyer's knowledge of the client's intentions, unless the client had authorized the lawyer to promise the spouse's lawyer that the proceeds would be turned over and the lawyer so promised (in which case failing to do so would violate Rule 3.6(c) as a fraud on another). Opinion No. 116 also concluded that failing to turn the proceeds over to the client might violate Rule 3.6(f)(2)(iv), which requires a lawyer to promptly deliver to the client property the client is entitled to receive.

The Commission concluded both decisions are consistent with Opinion No. 116. Murphy held that a lawyer's failure to turn over proceeds subject to a court-ordered lien was conversion exposing the lawyer to double damages under 14 M.R.S.A. § 3155, but did not discuss the lawyer's ethical obligations under the Bar Rules, so it has no effect on the Opinion. In Herzog v. Irace, decided two months after Opinion No. 116, the Law Court held that where a client had legally assigned his right to the proceeds, the proceeds were no longer the client's property for purposes of Rule 3.6(f)(2)(iv), so the lawyer had no obligation to turn them over to the client. The Commission found this consistent with Opinion No. 116, which had assumed the client there was not divested of the right to initially receive the proceeds. If, as in Herzog, a court determines the client's interest in the proceeds has been legally terminated, then failing to remit to the client does not violate Rule 3.6(f)(2), because the funds are no longer property the client is entitled to receive. The Commission concluded that the lawyer's task in each such case is to determine whether the client has been legally divested of the right to receive the funds.

Currency note

This opinion was issued in 1992, 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 money to a client who has assigned it to someone else?

A: The opinion concluded no. Once the client legally assigns away the right to the proceeds, the funds are no longer the client's property under Rule 3.6(f)(2)(iv), so the lawyer has no duty to remit them to the client.

Q: How did Herzog v. Irace bear on the analysis?

A: The opinion read Herzog to hold that a valid pre-existing assignment removes the proceeds from the client's property, consistent with Opinion No. 116's assumption that the client there had not been divested of the right to initially receive the funds.

Q: Did the Murphy decision change the lawyer's ethical duties?

A: The opinion concluded no. Murphy addressed conversion liability and double damages under 14 M.R.S.A. § 3155 but did not discuss the Bar Rules, so it had no effect on the Opinion.

Q: What is the lawyer's key task in these situations?

A: The opinion stated the task is to determine whether the client has been legally divested of the right to receive the funds; if so, the funds should not be paid to the client.

Background and rules framework

The opinion interprets Maine Bar Rule 3.6(f)(2)(iv), which requires a lawyer to promptly pay or deliver to the client funds, securities, or other property in the lawyer's possession that the client is entitled to receive, and Rule 3.6(c), which bars conduct involving fraud on another person. These correspond to ABA Model Rule 1.15 (safekeeping property; delivery of funds to clients and third persons with claims).

Citations and references

Rules of Professional Conduct:

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

Statutes:

• 14 M.R.S.A. § 3155 (double damages for conversion)

Cases:

• Herzog v. Irace, 594 A.2d 1106 (Me. 1991), assigned proceeds are not the client's property for the prompt-delivery rule
• Northeast Bank of Lewiston and Auburn v. Murphy, 512 A.2d 334 (Me. 1986), conversion of lien proceeds (no Bar Rules discussion)

Other opinions cited:

• Maine Professional Ethics Commission Op. 116 (1991): obligations regarding client funds owed to a third party

See also

• Maine Ethics Op. 116: Client Funds Owed to a Third Party
• 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=89840

Original opinion text

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

Issued by the Professional Ethics Commission

Date Issued: December 8, 1992

The Commission has received a request that it review the correctness of its Opinion No. 116, issued June 6, 1991, in view of two decisions of the Supreme Judicial Court of Maine, Northeast Bank of Lewiston and Auburn v. Murphy, 512 A.2d 334 (Me. 1986) and Herzog v. Irace, 594 A.2d 1106 (Me. 1991).

In Opinion No. 116, the Commission was faced with the problem of a lawyer who receives, on behalf of a client, the proceeds of a civil lawsuit in a circumstance in which the proceeds were the subject of a settlement divorce agreement directing that they be paid over to the client's former spouse. The question presented was whether the lawyer violated the Bar Rules by paying the proceeds to the client (who subsequently did not pay it to the spouse) under various alternative scenarios concerning the degree of knowledge of the lawyer of the client's intentions and the degree of prior authority given by the client to the lawyer. The Commission advised that it would not violate the Bar Rules for the lawyer to turn the proceeds over to the client, regardless of the lawyer's knowledge of the client's intentions, unless the client had authorized the lawyer to promise the lawyer for the spouse that the proceeds would be turned over, and the lawyer so promised. In this latter circumstance, the Commission advised that the lawyer's failure to turn the money over to the spouse's lawyer would violate Rule 3.6(c), in that such a failure would constitute a fraud upon another person. Absent such an authorized promise, however, the Commission advised that the failure to turn the proceeds over to the spouse's lawyer would not violate the Bar Rules. Moreover, the Commission also concluded that the failure to turn the proceeds over to the client might violate Bar Rule 3.6(f)(2)(iv), requiring a lawyer to "promptly pay or deliver to the client . . . the [property] in the possession of the lawyer which the client is entitled to receive."

The question now presented is whether this conclusion is correct in view of the two decisions of the Supreme Judicial Court of Maine cited above.

With regard to Northeast Bank of Lewiston and Auburn v. Murphy, which predates Opinion No. 116, the Commission is of the view that this case has no effect on its Opinion. In Murphy, the Law Court held that the failure of a lawyer to turn over to an entity holding a court-ordered lien on the proceeds of a civil lawsuit was a tort (conversion) committed by the lawyer against the entity, exposing the lawyer to double damages under 14 M.R.S.A. § 3155. Id. at 348350. The Court's opinion does not discuss the ethical obligations of the lawyer in the circumstances of that case under the Bar Rules.

In Herzog v. Irace, decided only two months after the issuance of Opinion No. 116, the Law Court addressed the applicability of Bar Rule 3.6(f)(2)(iv) to this situation. There, a lawyer had received the proceeds of a civil lawsuit which were the subject of a preexisting assignment by the client. The Court ruled that since the client had legally assigned his right to the proceeds to someone else, the proceeds in effect were no longer the property of the client for purposes of the Rule, and therefore the lawyer was under no obligation to promptly turn it over to the client. Id. at 110910. The question thus becomes whether this holding is consistent with that of the Commission in Opinion No. 116. The Commission believes that it is. In Opinion No. 116, the Commission assumed that the settlement divorce agreement did not divest the client of the right to initially receive the proceeds of the civil lawsuit. That being the case, it concluded that a failure by the lawyer to turn the proceeds over to the client promptly would violate Bar Rule 3.6(f)(2). If, on the other hand, a court determines, as in Herzog, that the client's interest in the proceeds has legally been terminated, then it follows that a failure to remit the proceeds to the client does not violate Rule 3.6(f)(2), since the proceeds are no longer the "funds, securities or other properties [of the client] in the possession of the lawyer which the client is entitled to receive."

In light of Murphy and Herzog, and consonant with Opinion No. 116, the task of the lawyer in each such case is to determine whether the client has been legally divested of his or her right to receive the funds in question.