What must a New Jersey lawyer do when two people claim the same money the lawyer is holding in trust?

Plain-English summary

The Committee answered inquiries from the attorney ethics research assistance hotline about what RPC 1.15 (Safekeeping Property) requires when a dispute arises over who is entitled to money a lawyer holds, or in what amount. The starting point is RPC 1.15(c): when a lawyer possesses property in which the lawyer and another person both claim interests, the property must be kept separate until there is an accounting and severance of interests, and any disputed portion must be kept separate until the dispute is resolved.

The opinion identifies the dilemma the Rule creates. Paragraph (c) tells the lawyer to hold disputed money "until the dispute is resolved," with no time limit, while paragraph (b) tells the lawyer to "promptly" deliver funds to the person entitled to receive them. The Committee notes the question arises most often in real estate matters, where the lawyer holds a deposit and the parties dispute which side breached the contract, sometimes leaving the client unable to recover a deposit needed to bid on another property.

The Committee sets a graduated procedure. If the dispute raises a colorable claim and cannot be expeditiously resolved, the lawyer should hold the disputed monies in the trust account or initiate an action under Rule 4:57 and deposit the disputed funds in court for the court to decide who is entitled to them. In limited circumstances, where a party's claim is clearly frivolous, the lawyer has made efforts to resolve the dispute amicably, and a good-faith review of the controlling documents clearly demonstrates that release is authorized, the lawyer may turn the monies over to the party entitled to them. In that situation the lawyer must inform the client about the dispute and provide appropriate advice about potential civil liability.

In practice

The opinion holds that, under RPC 1.15, a New Jersey lawyer holding disputed funds must keep the disputed portion separate until the dispute is resolved. Per the opinion, when a colorable claim cannot be expeditiously resolved the lawyer either keeps the funds in the trust account or deposits them in court through a Rule 4:57 action. The opinion permits unilateral release to one claimant only in the narrow case where the competing claim is clearly frivolous, amicable resolution has failed, and the controlling documents clearly authorize release, and even then it directs the lawyer to inform the client and advise about potential civil liability.

Common questions

Q: A buyer and seller both claim the deposit I'm holding in escrow. Can I just give it to my client?

A: Not while the claim is colorable. Per the opinion, the disputed portion must stay separate under RPC 1.15(c); if it cannot be resolved quickly, the lawyer holds it in trust or deposits it in court under Rule 4:57.

Q: How long do I have to keep disputed funds in trust?

A: The opinion notes RPC 1.15 sets no time frame; the funds must be held "until the dispute is resolved." When parties take no steps to resolve it, the opinion points to a Rule 4:57 deposit in court as the way out.

Q: Is there ever a situation where I can release disputed funds without a court order?

A: Yes, in a narrow one. The opinion permits release where a competing claim is clearly frivolous, amicable efforts have failed, and a good-faith review of the controlling documents clearly shows release is authorized, after the lawyer counsels the client about potential liability.

Background and rules framework

The opinion interprets New Jersey RPC 1.15 (Safekeeping Property), the analogue of Model Rule 1.15. RPC 1.15(b) requires a lawyer who receives funds in which a client or third person has an interest to notify that person promptly and to deliver promptly any funds the person is entitled to receive. RPC 1.15(c) requires that property claimed by both the lawyer and another be kept separate until an accounting and severance, and that a disputed portion be kept separate until the dispute is resolved. The procedural outlet the Committee relies on is New Jersey Court Rule 4:57, which allows a party holding a sum of money in dispute to deposit it with the court.

Citations and references

Rules of Professional Conduct:

• Model Rule 1.15 (Safekeeping Property)
• New Jersey RPC 1.15(b) and 1.15(c) (Safekeeping Property)

Court rules:

• New Jersey Court Rule 4:57 (deposit of disputed funds with the court)

See also

• Alabama Ethics Op. 1990-48: interpleading disputed trust funds into court
• NY State Bar Op. 1165: disputed fees in a trust account
• NY State Bar Op. 946: paying settlement proceeds to a third party at client direction
• NJ ACPE Op. 748: a lawyer's obligation to honor liens on funds

Source

• Landing page: https://www.njcourts.gov/notices/acpe-opinion-747-rpc-115-safekeeping-property-procedure-when-disputes-arise-regarding-who
• Original PDF: https://www.njcourts.gov/sites/default/files/notices/2024/09/n241007a.pdf

Original opinion text

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

Issued by the Advisory Committee on Professional Ethics
September 17, 2024

ADVISORY COMMITTEE ON PROFESSIONAL ETHICS
Appointed by the Supreme Court of New Jersey

OPINION 747

RPC 1.15 (Safekeeping Property): Procedure When Disputes Arise Regarding Who is Entitled to Monies Held by a Lawyer

The Advisory Committee on Professional Ethics received several inquiries through the attorney ethics research assistance hotline about Rule of Professional Conduct (RPC) 1.15 (Safekeeping Property) and lawyers' obligations to hold monies until the dispute is resolved. When a dispute arises as to who is entitled to receive monies, or in what amount, the lawyer has an obligation to hold the disputed portion of the monies separately until the dispute is resolved. RPC 1.15(c). If the dispute raises a colorable claim and it cannot be expeditiously resolved, the lawyer should hold the disputed monies in the trust account or may initiate an action under Rule 4:57 and deposit the disputed funds in court. In limited circumstances when the dispute is clearly frivolous and efforts to resolve the dispute are unsuccessful, the lawyer may undertake a good faith review of the controlling documents and, if appropriate, release the monies but should counsel the client about any legal repercussions of such action.

RPC 1.15 (Safekeeping Property), provides, in part:

(b) Upon receiving funds or other property in which a client or third person has an interest, a lawyer shall promptly notify the client or third person. Except as stated in this Rule or otherwise permitted by law or by agreement with the client, a lawyer shall promptly deliver to the client or third person any funds or other property that the client or third person is entitled to receive.

(c) When in the course of representation a lawyer is in possession of property in which both the lawyer and another person claim interests, the property shall be kept separate by the lawyer until there is an accounting and severance of their interests. If a dispute arises concerning their respective interests, the portion in dispute shall be kept separate by the lawyer until the dispute is resolved.

The Rule does not provide a time frame for how long the lawyer must keep the monies in the trust account; the monies must be kept "until the dispute is resolved." This Rule can place an attorney in a dilemma. Under paragraph (c), the attorney has an obligation to continue to hold the money "until the dispute is resolved," but under paragraph (b), the attorney has an obligation to "promptly" deliver the funds to the person who is entitled to receive the monies.

Some hotline callers say that they are holding monies for lengthy periods of time because the parties have not taken any steps to resolve the dispute. The question arises most frequently in real estate matters where the lawyer is holding a deposit and there is a dispute about which party breached the contract. At times, the client is disadvantaged, needing the deposit to be returned so it can be used to place a bid on another property. In such situations, the lawyer should attempt to resolve the dispute amicably. If these efforts are unsuccessful, the lawyer may initiate a Rule 4:57 action and turn the monies over to the court to resolve the dispute and determine who is entitled to receive the monies. If a party's claim to the monies is clearly frivolous; the lawyer has made efforts to resolve the dispute amicably; and the lawyer's good faith review of the controlling documents clearly demonstrates that release of the monies is authorized; the lawyer may turn over the monies to the party entitled to receive them. In such cases, the lawyer must inform the client about the dispute and provide appropriate advice about potential civil liability.

Hence, pursuant to RPC 1.15, when a dispute as to the amount of monies payable or who is entitled to receive the monies arises, the lawyer has an obligation to hold the disputed portion of the monies separately. If the dispute raises a colorable claim and it cannot be expeditiously resolved, the lawyer should hold the monies in the trust account or may initiate an action under Rule 4:57 and deposit the disputed funds in court. In limited circumstances when the dispute is clearly frivolous and efforts to resolve the dispute are unsuccessful, the lawyer may undertake a good faith review of the controlling documents and, if appropriate, release the monies but should counsel the client about any legal repercussions of such action.