When a lawyer sends a settlement check to opposing counsel 'in trust' on the condition that release documents be signed first, is the sending lawyer a client, and what happens if the receiving lawyer breaks the condition?

Plain-English summary

The opinion addressed an insurance defense lawyer (Attorney D) who routinely sent opposing counsel (Attorney P) both the settlement documents and the settlement check, with a letter conditionally delivering the check "in trust" so that no proceeds could be disbursed until the executed release and dismissal papers were returned. The six inquiries concerned the nature of that conditional delivery and the reporting duties around any breach.

On the threshold questions, the opinion concluded that Attorney D is not a "client" of Attorney P under Rule 10.1(b)(4) with respect to the conditionally delivered check, and that Attorney P is not required to render accountings to Attorney D for the check or its proceeds. The trust-account rules' duties run to clients, and adverse counsel is not a client.

On breach, the opinion concluded that Attorney P does violate a rule if he disburses in violation of the conditions. Whenever an attorney accepts conditional delivery of settlement proceeds, he implicitly agrees to abide by the prescribed conditions, and a deliberate failure to do so, such as disbursing without first obtaining a signed release, would be dishonest and violate Rule 1.2(c), which prohibits conduct involving dishonesty, fraud, deceit, or misrepresentation. Such conduct would not violate Rules 10.1 or 10.2, because the obligations those rules impose are owed exclusively to clients.

On the duty to report, the opinion concluded that Attorney D need not always report. Rule 1.3(a) requires reporting only violations that raise a substantial question as to the offending lawyer's honesty, trustworthiness, or fitness; a willful failure to satisfy the conditions of tender raises such a question and must be reported, but a failure resulting from mistake rather than knowing disregard need not be, and Rule 1.3 never requires disclosure of confidential information (Rule 1.3(c)). The duty to report a knowing violation is not erased by Attorney P's later efforts to rectify the situation or satisfy Attorney D and his client. Finally, mere awareness that Attorney P is or was under investigation for other trust-account violations does not by itself compel a report, but a pattern of misconduct so pronounced as to warrant the conclusion that a given violation was knowing and intentional does create an obligation to report.

Currency note

This opinion was issued in 1992, before the North Carolina State Bar's adoption of the 2003 revisions to the Rules of Professional Conduct. 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: Is the lawyer who sends a conditional settlement check a "client" of the lawyer who receives it?

A: No. The opinion held that Attorney D is not a "client" of Attorney P under Rule 10.1(b)(4), and Attorney P owes him no accounting for the check or proceeds.

Q: What happens if the receiving lawyer disburses before the conditions are met?

A: The opinion held that accepting conditional delivery is an implicit agreement to the conditions, and a deliberate breach is dishonest conduct under Rule 1.2(c), though not a violation of the client-owed trust rules 10.1 or 10.2.

Q: Must the sending lawyer report a breach to the State Bar?

A: It depends. The opinion held that a willful failure to honor the conditions raises a substantial question of trustworthiness and must be reported under Rule 1.3(a), but a breach caused by honest mistake need not be.

Q: Does the receiving lawyer's later fix or the sender's satisfaction excuse the report?

A: No. The opinion held that if it appears the breach was knowing, the duty to report stands regardless of later rectification or settlement of the sender's concerns.

Q: Does knowing the other lawyer is under investigation change the duty?

A: Not by itself. The opinion held that awareness of other trust-account investigations does not compel a report, unless a pronounced pattern supports the conclusion that the violation was knowing and intentional.

Background and rules framework

The opinion applied North Carolina Rule 1.2(c), barring dishonest conduct (corresponding to Model Rule 8.4(c)); Rule 1.3(a) and (c) on reporting another lawyer's misconduct without disclosing confidential information (corresponding to Model Rule 8.3); and Rules 10.1 and 10.2, the trust-account rules whose duties run only to clients (corresponding to Model Rule 1.15). The analysis turns on the implied agreement created by accepting a conditional tender and on the distinction between willful and mistaken breaches.

Citations and references

Rules of Professional Conduct:

• MR 8.4 (misconduct; dishonesty, fraud, deceit, misrepresentation)
• MR 8.3 (reporting professional misconduct)
• MR 1.15 (safekeeping property; trust accounts)
• North Carolina Rule 1.2(c) (dishonest conduct)
• North Carolina Rule 1.3(a), (c) (duty to report misconduct; confidentiality limit)
• North Carolina Rules 10.1, 10.2 (trust accounts; duties owed to clients)

See also

• NC Ethics Op. RPC 150: linking trust and business accounts
• NC Ethics Op. RPC 159: settlement conditioned on not reporting to a licensing board

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/rpc-127/

Original opinion text

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

Inquiry #1:

Attorney D is regularly employed by an automobile liability insurance company to defend claims or litigation against its insureds, or against the insurance company when the claim is against other coverage that the company has provided (such as uninsured and underinsured motorist insurance coverage). When a settlement of any such claim or litigation is negotiated, Attorney D typically prepares the documents that he and his client or clients will require to conclude the settlement (the settlement documents). The settlement documents usually consist of a release, as well as a consent judgment, or a notice or a stipulation to effect a dismissal of any pending litigation.

Attorney D routinely sends the settlement documents to opposing counsel, Attorney P, with a letter which directs the manner in which the settlement is to be concluded with the use of the settlement documents by Attorney P.

Attorney D also sends the check or checks for the settlement proceeds to Attorney P with a letter stating that each check is conditionally delivered to Attorney P in trust and upon the condition that, while in some instances a check may be deposited in the trust account of Attorney P, no check may otherwise be delivered, and no proceeds from any check may be disbursed by Attorney P until the settlement documents have been executed in the manner directed in the letter and returned to Attorney D.

With respect to this conditional delivery of a settlement check or its proceeds, is Attorney D a "client" of Attorney P as defined by Rule 10.1(b)(4)?

Opinion #1:

No.

Inquiry #2:

Is Attorney P required to render appropriate accountings to Attorney D with respect to the receipt, delivery or disbursement of a settlement check or its proceeds?

Opinion #2:

No.

Inquiry #3:

Has Attorney P violated a rule if he delivers a settlement check or disburses any of the proceeds from a settlement check in violation of any condition under which Attorney P received the settlement check?

Opinion #3:

Yes. Whenever an attorney accepts conditional delivery of settlement proceeds from opposing counsel, the attorney implicitly agrees to abide by the prescribed conditions. Any deliberate failure to abide by those conditions, such as by disbursing the proceeds without first having obtained a signed release, would be dishonest and violative of Rule 1.2(c) which prohibits "conduct involving dishonesty, fraud, deceit or misrepresentation." It does not appear that such conduct would violate any of the provisions of Rules 10.1 or 10.2 since the obligations imposed by those rules are owed exclusively to clients and adverse counsel cannot properly be considered a client.

Inquiry #4:

Is Attorney D required by Rule 1.3(a) to inform the North Carolina State Bar if it comes to his attention that the settlement check has or may have been delivered, or that proceeds from the settlement check have or may have been disbursed, by Attorney P without meeting a condition required for any such delivery or disbursement?

Opinion #4:

Not necessarily. Rule 1.3(a) requires only the reporting of violations of the Rules of Professional Conduct that raise substantial questions as to the offending lawyer's "honesty, trustworthiness or fitness as a lawyer in other respects...." A willful failure on the part of the attorney to whom such funds were entrusted to satisfy the conditions of tender would raise a substantial question about the lawyer's trustworthiness and would necessitate a report of the apparent violation to the State Bar. If, however, it appears that the failure to satisfy the conditions of tender resulted from mistake, as opposed to knowing disregard, a report of the misconduct would not be required. It should be noted that Rule 1.3 does not, in any case, require disclosure of confidential information. Rule 1.3(c).

Inquiry #5:

With respect to any obligation Attorney D might have to inform the North Carolina State Bar of Attorney P's misconduct, does it make any difference whether the conditions upon which a settlement check was delivered to Attorney P are subsequently satisfied, or whether the settlement is otherwise subsequently concluded to the satisfaction of Attorney D and his client or clients?

Opinion #5:

If it appears to the attorney for the adverse party that Attorney P knowingly violated the conditions of tender, there would be a duty to report the apparent misconduct regardless of subsequent actions on the part of Attorney P to rectify the situation or otherwise satisfy Attorney D and his client.

Inquiry #6:

With respect to inquiries 4 and 5, does it make any difference whether Attorney D is also aware that Attorney P is or has been under investigation by the North Carolina State Bar for other alleged violations of Canon X or a rule promulgated thereunder?

Opinion #6:

The mere fact that Attorney D is aware that Attorney P is or has been under investigation by the State Bar for other alleged violations of the trust account rules would not necessarily compel a report of Attorney P's disbursement in violation of the conditions of tender. There may exist circumstances, however, in which an attorney becomes aware of a pattern of misconduct so pronounced as to warrant the conclusion that a similar violation was knowing and intentional. Under such circumstances, an attorney would have an obligation to report the misconduct to the State Bar.