I'm holding an escrow fund that unit owners contributed for a deck repair, but the client no longer wants the deck, the condo association wants the money, and the special assessment was rescinded. Who do I pay?

Plain-English summary

Over roughly twelve years, a dispute developed over about $17,500 in escrowed funds earmarked to replace a deck attached to the inquiring attorney's clients' condominium unit. Six of seven unit owners initially voted a special assessment to rebuild the deck and mailed their contributions to the attorney, who set up a Deck Account. The special-assessment ballot itself stated that if the deck were not approved by the historic commission, or was not replaced for any reason, the money would be returned to each contributing unit owner. Litigation followed: the clients sued the condominium association over the roofing contractor's authorization and lost; the association sought historic-commission approval of a replacement deck design the clients objected to; the commission approved it and the clients' appeal failed; five of seven owners then voted to rescind the special assessment; the clients' own application to the historic commission was rejected after the association declined to support it. The condominium association now demands the fund be transferred to it, while the clients no longer want the deck replaced but insist they are entitled to the fund.

The panel declined to decide who actually owns the money, explaining that resolving entitlement requires answering substantive-law questions outside the panel's jurisdiction over legal ethics and discipline. The panel noted facts it believed pointed toward one answer (the ballot's own return-the-money term, the rescission of the assessment, and the deck's status as a "common element" the unit owners do not individually own), but recognized a genuine dispute exists between the clients and the association. Applying Rule 1.15(e), which requires a lawyer holding property two or more persons claim an interest in to keep it separate until the dispute is resolved and to promptly distribute only the undisputed portions, the panel concluded the attorney must keep the entire disputed fund in the escrow account rather than disburse it to the clients, and may bring a court action to obtain a judicial determination of ownership and a disbursement order.

In practice

The opinion holds that a lawyer holding disputed escrowed funds must keep them segregated under Rule 1.15(e) until the ownership dispute is resolved, and is not obligated, and should not agree, to disburse the funds to a client merely because the client is a party to the escrow arrangement or now asserts entitlement to it; the panel treats the underlying entitlement question as a matter for the parties' agreement or a court, not the attorney's independent judgment, and confirms a court action for judicial determination is an available path to resolution.

Common questions

Q: My client wants me to release a disputed escrow fund directly to them. Can I do that?

A: No, according to the opinion. Rule 1.15(e) requires the attorney to keep disputed funds separate until the dispute is resolved, and the attorney has no obligation to disburse them to the client simply because the client is one of the claimants.

Q: Who decides who actually owns the disputed money?

A: Not the panel. The opinion states that resolving entitlement to the funds requires answering substantive-law questions outside the panel's ethics jurisdiction, and that absent an agreement between the parties, the question must be resolved judicially.

Q: What can the attorney affirmatively do to get the dispute resolved?

A: The opinion holds the attorney may file a court action to seek a judicial determination of ownership and an order governing disbursement of the funds.

Background and rules framework

The opinion applies Rhode Island Rule 1.15(e) (Safekeeping Property), which requires a lawyer holding property in which two or more persons (possibly including the lawyer) claim an interest to keep that property separate until the dispute is resolved, while promptly distributing any portions not in dispute.

Citations and references

Rules of Professional Conduct:

• MR 1.15(e) (segregating disputed property until resolved; distributing undisputed portions)

Statutes:

• None cited.

Cases:

• None cited.

Other opinions cited:

• None cited.

See also

• Rhode Island Ethics Advisory Panel Op. 2012-06: Rule 1.15 Requires Notifying a Medical Provider With an Assignment and Holding Disputed Settlement Funds Absent Client Consent
• 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
• Arizona Ethics Op. 98-06: Liens; Creditors of Clients; Client Funds and Property; Settlements

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%2014-01.pdf

Original opinion text

Final

                        Rhode Island Supreme Court
                      Ethics Advisory Panel Op. 2014-01
                          Issued February 21, 2014

FACTS

    The inquiry concerns the disbursement of escrowed funds which were earmarked

for the replacement of a deck in a condominium building. The deck in question was
attached to the condominium unit owned by the inquiring attorney's clients (Clients).
The inquiring attorney is holding the escrowed funds. The facts relating to the escrowed
funds span some twelve years, and are as follows.

    The Clients' condominium unit had a wooden deck adjacent to their unit. The

deck sat on a tar-and-gravel roof. The deck was removed incident to the replacement of
the entire roof on the condominium building. Clients obtained an estimate from a
contractor to rebuild the deck. Six of seven unit owners voted to replace Clients' deck,
and agreed to a special assessment for its construction in amounts equal to their
respective percentage ownership in the common areas. It was agreed that the owners
would mail checks for their assessments to the inquiring attorney who, upon receiving the
funds, established Clients Deck Account in a local bank. The total amount of the escrow
is about $17,500.

    Meanwhile, conflicts arose. Clients sued the condominium association alleging

that the association had not properly authorized the work by the roofing contractor. A
superior court justice ruled in favor of the association. The condominium association
then sought the historic commission's approval of the design for the replacement of two
decks, one being adjacent to Clients' unit. Clients objected because the design deviated
from the design of the original deck. The historic commission approved the association's
proposed design. Five of seven condominium owners thereafter voted to rescind the
special assessment for the replacement of Client's deck. Clients appealed from the
commission's decision but the decision was affirmed. Their remedies exhausted, Clients
filed an application of certificate of appropriateness with the historic commission for
replacement of the deck. The condominium association refused to submit a letter
supporting Clients' application and the application was rejected. Clients wanted the
construction done by a construction company of their choosing; the condominium
association wanted the job to be put out to bid.

   The condominium association demands that the Deck Fund be transferred to it,

after which time the association will issue a conformance letter for the installation of a
deck adjacent to Clients' condominium unit. Clients no longer want the deck replaced,
but insist that they are entitled to the Deck Fund. The inquiring attorney wonders
Final Op. #2014-01
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  whether the funds should be returned to the individuals who contributed to the fund.
  Additional facts will be included in the Panel's discussion.

  ISSUE PRESENTED

          The inquiring attorney asks whether he/she should transfer the escrowed funds to
  his/her clients, to the condominium association, or to the individual unit owners who
  contributed to the fund.

  OPINION

          Rule 1.15(e) requires the inquiring attorney to protect the disputed funds. The
  inquiring attorney must retain the funds in the Deck Fund account that he/she established,
  until resolution. The inquiring attorney may file a court action to seek a judicial
  determination of the ownership of the funds and an order relating to the disbursement of
  the funds.

  REASONING

          Resolving who is entitled to the Deck Fund requires the resolution of questions
  concerning substantive law outside the area of legal ethics and discipline, and outside the
  jurisdiction of the Panel. Unless the parties come to an agreement, resolution is a matter
  for judicial determination.

          Certain facts should sufficiently guide the parties. The ballot on the special
  assessment states, "In the event [Clients' Unit's] deck is not approved by the Historical
  Commission, or for any reason [Clients' Unit] is not replaced, the monies generated from
  this special assessment will be returned to each unit owner as listed below." The special
  assessment was thereafter rescinded. The deck in question is a "common element" as
  defined in the condominium association's declaration of condominiums. Individual unit
  owners are entitled to exclusive use of the deck adjacent to their units, but they do not
  have individual ownership of the decks.

          Despite facts which in the Panel's view would lead reasonable minds to but one
  conclusion, there exists a dispute concerning who is entitled to the funds. Clients demand
  that the inquiring attorney disburse the monies to them. The condominium association
  demands that the inquiring attorney disburse the funds to it. Pertinent to this inquiry is
  Rule 1.15(e) which state as follows.

                 (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

Final Op. #2014-01
Page | 3

             lawyer shall promptly distribute all portions of the property as
             to which the interests are not in dispute.

          The Panel concludes that Rule 1.15(e) requires the inquiring attorney to protect
  the disputed funds. The inquiring attorney does not have an obligation to disburse the
  disputed funds to his/her clients. He/she must retain the funds in the Deck Fund until
  resolution. The inquiring attorney may file a court action to seek a judicial determination
  of the ownership of the funds and an order relating to the disbursement of the funds.