I hold settlement funds that both my former client's bank (now in receivership) and I claim. Must I notify the bank, and can I keep the funds for my fees?

Plain-English summary

The inquiring attorney represented A in the settlement of a lawsuit, payable as an initial lump sum plus monthly payments. A executed a direct payment authorization empowering the attorney to pay a financial institution all monies due to A from the settlement, and that authorization was forwarded to the institution. The attorney received the initial lump sum and a monthly payment, and deposited the lump sum into the client trust account. A then terminated the attorney's services and executed a release authorizing the attorney to retain the funds as partial payment for counsel fees and costs. The financial institution is now in receivership. The attorney asked whether he must notify the institution's receiver that funds have been received, whether he must inform A if he notifies the receiver, and whether he may keep the funds toward attorney's fees.

The opinion applies Rule 1.15. Rule 1.15(b) requires a lawyer holding funds in which a client or third person has an interest to promptly notify that person and to deliver funds the person is entitled to receive. Rule 1.15(c) requires that when a lawyer possesses property in which both the lawyer and another person claim interests, the property be kept separate until an accounting and severance, and that any disputed portion be kept separate until the dispute is resolved.

On these facts, the opinion finds the financial institution has an interest in the funds by virtue of A's direct payment authorization, and the attorney has an interest by virtue of the release. The opinion states the Panel cannot resolve the rights of the parties to the funds. It concludes, however, that the attorney must notify the financial institution that he holds the funds under Rule 1.15(b), and must deposit all monies received relative to the settlement in a client trust account under Rule 1.15(c) until the parties' rights to the funds are determined.

In practice

Under this opinion, the attorney faces competing interests in the same settlement funds -- the bank's, arising from the direct payment authorization, and the attorney's, arising from the release. The opinion does not decide who is entitled to the money. It resolves only the conduct duties: notify the financial institution under Rule 1.15(b), and hold all settlement monies in the client trust account under Rule 1.15(c) until the competing rights are determined.

Common questions

Q: Can the attorney keep the settlement funds for unpaid fees?

A: The opinion does not decide that. It states the Panel cannot resolve the rights of the parties and directs that the disputed funds be held in the client trust account under Rule 1.15(c) until those rights are determined.

Q: Must the attorney notify the bank (now in receivership) that he holds the funds?

A: Yes. The opinion concludes the attorney must notify the financial institution under Rule 1.15(b) that he is in possession of the funds.

Q: Where must the funds be held in the meantime?

A: In a client trust account. The opinion directs the attorney to deposit all monies received relative to the settlement in the trust account under Rule 1.15(c) until the dispute is resolved.

Background and rules framework

The opinion interprets Rhode Island Rule of Professional Conduct 1.15 (safekeeping property), the analog of Model Rule 1.15. Rule 1.15(b) requires prompt notice to and delivery of funds owed a client or third person; Rule 1.15(c) requires a lawyer holding property claimed by both the lawyer and another to keep it separate until an accounting and severance, with any disputed portion kept separate until the dispute is resolved.

Citations and references

Rules of Professional Conduct:

• MR 1.15 / RI RPC 1.15(b) (prompt notice and delivery to a third person)
• MR 1.15 / RI RPC 1.15(c) (property claimed by the lawyer and another kept separate until the dispute is resolved)

See also

• RI EAP Opinion 93-55: reporting an escrow lawyer's Rule 1.15(b) delay under 8.3
• RI EAP Opinion 93-57: keeping a lawyer's own funds in a trust account under 1.15

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%2093-64.pdf

Original opinion text

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

(FINAL)
ETHICS ADVISORY PANEL
OPINION #93-64, REQUEST #403
Issued September 14, 1993

The inquiring attorney represented A in the settlement of a lawsuit. The settlement was to be paid in an initial lump-sum payment with monthly payments. A executed a direct payment authorization empowering the inquiring attorney to pay a financial institution all monies due to A that were obtained from the settlement. The direct payment authorization was forwarded to the financial institution. The inquiring attorney received the initial lump-sum payment, as well as a monthly payment. The inquiring attorney deposited the initial lump-sum payment into his/her client trust account. Subsequently, A terminated the inquiring attorney's services and executed a release authorizing the inquiring attorney to retain the funds as partial payment for counsel fees and costs. The financial institution is now in receivership. The inquiring attorney asks whether he/she must notify the financial institution's receiver that funds have been received, whether he/she must inform A if he/she notifies the receiver, and whether he/she may keep the funds as payment toward attorney's fees.

When a lawyer is in possession of funds or property of others, Rule 1.15 entitled "Safekeeping Property" applies. The Rule states in pertinent part as follows:

(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 and, upon request by the client or third persons, shall promptly render a full accounting regarding such property.

(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.

Subsection (b) imposes a duty on a lawyer who is in possession of funds in which a client or third person has an interest to promptly notify the client or third person. The Rule further requires a lawyer to forward to the client or third person any funds that the client or third person is entitled to receive. If a dispute arises concerning property in which another person and the lawyer claim interest, the property shall be kept separate by the lawyer until the dispute is resolved.

Under the facts as presented, it is apparent that the financial institution has an interest in the funds by virtue of the direct payment authorization executed by A. The inquiring attorney similarly possesses an interest in the same funds pursuant to the release. In this situation, the Panel cannot undertake resolving the rights of the parties to the funds. However, the Panel opines that the inquiring attorney must notify the financial institution that he/she is in possession of the funds under Rule 1.15(b), and shall deposit all monies received relative to the settlement of A's lawsuit in a client trust account pursuant to Rule 1.15(c) until the rights of the parties to the funds are determined.