One of my clients told me not to pay a third party out of his settlement funds, but the third party says she's owed money out of those same funds. What do I do with the money, and can I keep representing both people?

Plain-English summary

The inquiring attorney represented Mr. A in a negligence claim and separately represented Ms. B, whom Mr. A had brought to the attorney's office in 2008, in a Family Court child support matter. A financial dispute later arose between Mr. A and Ms. B: a document they both signed in February 2011 stated that Mr. A owed Ms. B $3,000, payable out of the proceeds of his pending negligence claim, and directed the attorney to make that payment once the settlement funds arrived. Mr. A's claim settled in May 2011. When the attorney told Mr. A he held the document, Mr. A instructed the attorney not to pay Ms. B anything, while Ms. B insisted the attorney pay her out of Mr. A's settlement.

The panel first addressed disbursement under Rule 1.15. Because Ms. B had given the attorney notice of what purports to be an assignment of part of the settlement, and the attorney does not have Mr. A's consent to pay her, the panel concluded the attorney must notify Ms. B that he holds the disputed amount but lacks authority to release it to her, and then either keep the disputed funds in trust until the dispute is resolved or pay them into the court registry and file an action for a court to resolve entitlement. The panel cited its own Ethics Advisory Panel General Informational Opinion No. 7 (1997) for the rule that a lawyer may not pay a third person out of a client's settlement funds without the client's consent, and that notice of a purported assignment obligates the lawyer to protect the disputed funds and refuse the client's demand for them.

Turning to conflicts, the panel found the Rules of Professional Conduct plainly bar the attorney from representing either Mr. A or Ms. B in their adverse contract and debt dispute. But that is not what the attorney proposed to do. Under Rule 1.7(a)(1), the attorney's continued representation of Mr. A in the negligence matter (specifically, disbursing the undisputed remainder of his settlement) is not directly adverse to Ms. B, and the continued representation of Ms. B in her domestic matter is not directly adverse to Mr. A; their adversity exists only in the separate debt dispute, which the attorney represents neither of them in. Under Rule 1.7(a)(2), the panel did not see a significant risk that the attorney's responsibilities to one client would materially limit the representation of the other, since the disputed funds will be segregated and protected under Rule 1.15 pending resolution. Having found no Rule 1.7 bar, the panel noted the attorney may still choose to withdraw from either or both representations under Rule 1.16, subject to the conditions in Rule 1.16(b), (c), and (d).

In practice

The opinion holds that a lawyer facing a third party's notice of a claim against settlement funds must protect the disputed portion, either by holding it in trust until the dispute is resolved or by depositing it with a court and filing an interpleader-type action, and may not unilaterally pay it to either the client or the claimant. The opinion also holds that representing two clients whose interests are adverse only in a separate, unrelated dispute between them (one the lawyer represents neither of them in) does not create a Rule 1.7 conflict in the lawyer's continued representation of each client in that client's own matter.

Common questions

Q: A third party says part of my client's settlement is theirs, but my client told me not to pay. What do I do with the money?

A: The opinion holds the lawyer must notify the third party that the disputed amount is being held but cannot be released without the client's authority, and must then either keep the disputed funds in trust until the dispute is resolved or pay them into the court registry and file an action for a court to decide entitlement.

Q: Can I keep representing both people even though they're now fighting over money?

A: The opinion holds yes, if the lawyer's actual representations, here a negligence claim for one and a Family Court matter for the other, are not directly adverse to each other and are not materially limited by the lawyer's duties to the other client; the lawyer is barred only from representing either client in their contract and debt dispute against each other.

Q: Do I need my client's consent before paying a third party out of settlement proceeds?

A: Yes. Citing its own Ethics Advisory Panel General Informational Opinion No. 7 (1997), the panel states a lawyer may not pay a third person out of a client's settlement funds without the client's consent, and once on notice of a purported assignment, must protect the disputed funds and refuse the client's demand for them.

Background and rules framework

The opinion applies Rhode Island Rule 1.15 (Safekeeping Property), which requires a lawyer holding funds in which a client or third person has an interest to promptly notify that person and to keep property separate when two or more persons claim an interest in it until the dispute is resolved, disbursing only the portions not in dispute. Comment 4 to Rule 1.15 explains a lawyer may have a duty to protect a non-frivolous third-party claim against a client's settlement funds and, rather than unilaterally arbitrate the dispute, may file an action for a court to resolve it. The opinion also applies Rule 1.7 (Conflict of Interest: Current Clients), which asks whether a representation is directly adverse to another client or carries a significant risk of being materially limited by duties to another client, and Rule 1.16 (Declining or Terminating Representation), which governs a lawyer's option to withdraw.

Citations and references

Rules of Professional Conduct:

• MR 1.15(d) (prompt notice and delivery of funds a client or third person is entitled to)
• MR 1.15(e) (segregating disputed property until resolved; disbursing undisputed portions)
• MR 1.7(a)(1)-(2) (concurrent conflicts: direct adversity and material limitation)
• MR 1.16(b)-(d) (withdrawal from representation)

Statutes:

• None cited.

Cases:

• None cited.

Other opinions cited:

• Rhode Island Ethics Advisory Panel General Informational Op. 7 (1997): a lawyer may not pay a third person out of a client's settlement funds without the client's consent, and on notice of a purported assignment must protect the disputed funds.

See also

• Alabama Ethics Op. 1990-48: Lawyer properly interplead disputed trust funds into court to allow adjudication of clients' and third-party creditors' rights to said funds
• Alabama Ethics Op. 2003-02: Attorney must honor commitment to pay client's creditors even if client objects
• Rhode Island Ethics Advisory Panel Op. 2011-04: Entitlement to and Disbursement of Funds in an Unused Escrow Account

Source

• Landing page: https://www.courts.ri.gov/attorney-resources/Pages/Ethics-Advisory-Panel-default.aspx
• Original PDF: https://www.courts.ri.gov/Opinions/EAP%202011-02.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain; the linked PDF is authoritative.

Final

Rhode Island Supreme Court Ethics Advisory Panel
Opinion No. 2011-02
Issued June 9, 2011

FACTS

The inquiring attorney represents Mr. A, a long-standing client, in a negligence claim that arose in 2010. In 2008, Mr. A accompanied Ms. B to the inquiring attorney's office, and after consulting with Ms. B, the inquiring attorney took on the representation of Ms. B in a child support matter which is pending in Family Court.

During recent months, a dispute over a financial debt ensued between Mr. A and Ms. B. In February 2011, Ms. B delivered to the inquiring attorney a document that purports to set forth an agreement between her and Mr. A concerning the debt. The document, executed by Mr. A and Ms. B in February 2011, states that Mr. A owes Ms. B three thousand dollars, and that the amount owed shall be paid out of the settlement proceeds of Mr. A's pending negligence claim. The document further states that Mr. A shall direct the inquiring attorney to make such payment upon receipt of the settlement funds.

Mr. A's claim settled in May 2011, and the inquiring attorney is prepared to disburse the settlement proceeds. The inquiring attorney informed Mr. A that he/she is in possession of the aforementioned document. Mr. A has instructed the inquiring attorney not to disburse any funds to Ms. B, and Ms. B has told the inquiring attorney she wants him/her to pay what Mr. A owes her out of Mr. A's settlement funds. The inquiring attorney seeks the Panel's guidance on how to proceed.

ISSUES

(1) What are the inquiring attorney's obligations regarding disbursement of Mr. A's settlement funds? (2) Is there a conflict of interest in the continued representations of Mr. A and of Ms. B? (3) Must the inquiring attorney withdraw from one or both representations?

OPINION

(1) The inquiring attorney must either retain the disputed amounts in his/her trust account until resolution of the dispute, or at his/her option, pay the disputed funds into the court registry and file an action to have a court resolve the dispute. (2) Rule 1.7 does not prohibit the continued representations of Mr. A in his negligence matter, and of Ms. B in her child support matter. (3) The inquiring attorney may choose to withdraw from one or both representations pursuant to Rule 1.16, subject to the conditions set forth in Rule 1.16(b)(c) and (d).

REASONING

Rule 1.15 entitled "Safekeeping property" provides in pertinent part as follows:

(d) 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 and, upon request by the client or third person, shall promptly render a full accounting regarding such property. (e) When in the course of representation a lawyer is in possession of property in which two or more persons (one of whom may be the lawyer) claim interests, the property shall be kept separate by the lawyer until the dispute is resolved. The lawyer shall promptly distribute all portions of the property as to which the interests are not in dispute.

Comment [4] to Rule 1.15 is instructive. It states:

Paragraph (e) also recognizes that third parties may have lawful claims against specific funds or other property in a lawyer's custody, such as a client's creditor who has a lien on funds recovered in a personal injury action. A lawyer may have a duty under applicable law to protect such third-party claims against wrongful interference by the client. In such cases, when the third party claim is not frivolous under applicable law, the lawyer must refuse to surrender the property to the client until the claims are resolved. A lawyer should not unilaterally assume to arbitrate a dispute between the client and the third party, but, when there are substantial grounds for dispute as to the person entitled to the funds, the lawyer may file an action to have a court resolve the dispute.

A lawyer may not pay a third person out of a client's settlement funds without his or her client's consent. Ethics Advisory Panel Gen'l Informational Op. 7 (1997). Further, where a lawyer has notice that there is a purported assignment of settlement funds in favor of third persons, absent the client's consent to payment, a lawyer has an obligation to protect the funds in dispute, and to refuse to honor a client's demands for the disputed amounts. Id. In the instant inquiry, the inquiring attorney has notice that Ms. B has what purports to be an assignment of a portion of Mr. A's settlement proceeds, but does not have Mr. A's consent to pay her. The Panel concludes that the inquiring attorney must notify Ms. B that he/she is in possession of the amounts claimed by her, but that he/she does not have Mr. A's authority to disburse the funds to her; and must either retain the disputed amounts in his/her trust account until resolution of the dispute, or at his/her option, pay the disputed funds into the court registry and file an action to have a court resolve the dispute.

The Panel next considers issues of conflict of interest, and the inquiring attorney's continued representations of Mr. A in his negligence claim, and of Ms. B in her domestic matter. One thing is certain: The Rules of Professional Conduct prohibit the inquiring attorney from representing either Mr. A or Ms. B in their adverse contract claims and debt dispute. See Rule 1.7(a)(1).

The Panel is of the opinion that the Rules permit the inquiring attorney to continue the representation of Ms. B in the domestic matter, and to execute the disbursement of Mr. A's settlement funds consistent with Rule 1.15. Although the inquiring attorney's representation of Mr. A in the negligence claim appears complete, the inquiring attorney has yet to disburse Mr. A's settlement proceeds, and the Panel views Mr. A as a current client. Therefore, Rule 1.7 applies. The rule states:

Rule 1.7. Conflict of interest: Current clients. (a) Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if: (1) the representation of one client will be directly adverse to another client; or (2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer's responsibilities to another client, a former client or a third person or by a personal interest of the lawyer. (b) Notwithstanding the existence of a concurrent conflict of interest under paragraph (a), a lawyer may represent a client if: (1) the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client; (2) the representation is not prohibited by law; (3) the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal; and (4) each affected client gives informed consent, confirmed in writing.

Rule 1.7(a)(1) prohibits the representation of one client that is directly adverse to another client. The inquiring attorney's representation of Mr. A in his negligent claim, specifically in the disbursement of the remainder of the settlement funds exclusive of the disputed amounts, is not directly adverse to Ms. B. As well, the representation of Ms. B in her child support matter is not directly adverse to Mr. A. The interests of these two clients are indeed adverse, but in a third matter in which the inquiring attorney represents neither client. Therefore, no conflict of interest exists under paragraph (1) of Rule 1.7(a) for the inquiring attorney to continue to represent Mr. A in his negligence claim and Mrs. B in her domestic matter.

A conflict of interest may also exist under Rule 1.7 if there is a significant risk that the representation of one or more clients will be materially limited by the lawyer's responsibilities to another client. Rule 1.7(a)(2). The bone of contention between Mr. A and Ms. B is the three-thousand dollars which Ms. B seeks out of Mr. A's settlement funds. Consistent with Rule 1.15, those funds will be set apart and protected until the dispute over them is resolved. It is not apparent to the Panel that there will be a significant risk that the continued representation of Mr. A in his negligence claim will be materially limited by the inquiring attorney's responsibilities to Ms. B in her domestic case; or that there will be a significant risk that the continued representation of Ms. B will be materially limited by the attorney's responsibilities to Mr. A. Therefore, a conflict of interest does not exist under Rule 1.7(a)(2) for the inquiring attorney's continued representations of Mr. A in his negligence matter, and of Ms. B in her child support case.

Having concluded that Rule 1.7 does not prohibit the continued representations of each client in their respective matters, the Panel notes that the inquiring attorney may not wish to continue one or both of the representations. Rule 1.16 entitled "Declining or terminating representation," permits the inquiring attorney to withdraw from either or both representations at his/her option, subject to the conditions set forth in Rule 1.16(b),(c) and (d).

Accordingly, the Panel concludes (1) that the inquiring attorney must either retain the disputed amounts in his/her trust account until resolution of the dispute, or at his/her option, pay the disputed funds into the court registry and file an action to have a court resolve the dispute; (2) that Rule 1.7 does not prohibit the inquiring attorney from continuing his/her representations of Mr. A in his negligence claim and of Ms. B in her child support case; and (3) that the inquiring attorney may choose to withdraw from one or both representations pursuant to Rule 1.16, subject to the conditions stated in Rule 1.16(b),(c) and (d).