When a pro se plaintiff's former lawyer claims a charging lien on the settlement, must defense counsel hold the disputed funds in trust even though neither claimant is her client?

Plain-English summary

In a civil case, the plaintiff discharged his attorney and proceeded pro se. The defendant later agreed to settle, but defense counsel received notice that the plaintiff's original attorney wished to claim a charging lien in the settlement proceeds for work done before termination. Defense counsel feared that paying the plaintiff directly would leave the former attorney unpaid and expose her to a claim. She believed a fee contract existed between the plaintiff and his former lawyer but had not seen it. She asked whether she could settle and pay the plaintiff, how she must distribute the proceeds, and whether she must hold the disputed portion in trust even though she had no attorney-client relationship with either the plaintiff or the former lawyer.

The committee concluded that defense counsel may not simply pay all the proceeds to the pro se plaintiff. Under Rule 1.15(e), when a lawyer possesses property in which two or more persons claim interests, the property must be kept separate until the dispute is resolved; the former lawyer's claimed charging lien is such an interest. Rule 1.15(e) requires promptly distributing portions not in dispute (see also Rule 1.15(d)) but holding the disputed portion. The committee stressed that Rule 1.15(e) is not limited to disputes in which a client claims an interest: while Comment 4 speaks of protecting funds against the client, the authoritative text reaches property in which "two or more persons" claim an interest, whether clients, creditors of clients, or other third parties. It noted that if, in defense counsel's professional judgment, the former attorney's lien claim were frivolous, the funds would not truly be in dispute and Rule 1.15 would not apply, but that a frivolous charging lien seemed unlikely.

On how to distribute, the committee explained that the text keeps disputed funds separate until resolution but does not mandate how to resolve the dispute; Comment 4 cautions that a lawyer should not unilaterally arbitrate, but may file an action to have a court resolve it. The committee placed the choice of resolution method within defense counsel's reasonable discretion, as long as she does not unilaterally assume to arbitrate, pointing (per Opinions 02-07 and 05-07) to options like declaratory judgment, mediation, arbitration the claimants agree to, or interpleader. On the third question, it answered yes: Rule 1.15(e) does not require an attorney-client relationship with the person claiming an interest. Citing Opinion 95-29 and In re Jackson (lawyer sanctioned for failing to timely pay a court reporter), the committee concluded Rule 1.15 is designed to protect the valid interests of third parties, so the disputed funds must be held until the validity of the lien is resolved.

In practice

Under this opinion, on the facts presented, defense counsel holding settlement proceeds subject to a former attorney's charging-lien claim must, under Rule 1.15(e), keep the disputed portion separate in trust until the dispute is resolved, and may not pay it to the pro se plaintiff, even though she represents neither claimant. The committee held that undisputed portions should be promptly distributed (Rule 1.15(d)-(e)), that the means of resolving the dispute (court action, interpleader, declaratory judgment, mediation, or agreed arbitration) lies in her reasonable discretion so long as she does not unilaterally arbitrate, and that the rule applies regardless of any attorney-client relationship. It noted Rule 1.15 would not apply if the lien claim were frivolous in her professional judgment.

Common questions

Q: Can defense counsel pay the whole settlement to a pro se plaintiff when his former lawyer claims a lien?

A: No. The committee concluded that under Rule 1.15(e) the disputed portion must be kept separate until the dispute is resolved; only undisputed portions may be promptly distributed.

Q: Does Rule 1.15(e) apply when the lawyer has no attorney-client relationship with either claimant?

A: Yes. The committee concluded the rule's text reaches property in which two or more persons claim an interest, with no requirement that a claimant be the lawyer's client.

Q: How should defense counsel resolve the dispute over the disputed funds?

A: The committee placed the choice in her reasonable discretion, so long as she does not unilaterally arbitrate, noting options like a court action, interpleader, declaratory judgment, mediation, or arbitration the claimants agree to.

Q: What if the former lawyer's charging lien is frivolous?

A: The committee stated that if the lien claim is frivolous in defense counsel's professional judgment, the proceeds would not truly be in dispute and Rule 1.15 would not apply, but it viewed a frivolous charging lien as unlikely.

Background and rules framework

The opinion applies South Carolina Rule 1.15(e) (keeping disputed property separate until a dispute is resolved) and Rule 1.15(d) (prompt delivery and accounting), corresponding to Model Rule 1.15. The analysis turns on the authoritative text reaching property claimed by "two or more persons," not only clients, and on Comment 4's caution against unilateral arbitration.

Citations and references

Rules of Professional Conduct:

• MR 1.15 / SC Rule 1.15(d), 1.15(e) and Comment 4 (safekeeping; holding disputed property; not unilaterally arbitrating)

Cases:

• In re Jackson, 365 S.C. 176, 617 S.E.2d 123 (2005), lawyer sanctioned under Rule 1.15 for failing to timely pay a court reporter

Other opinions cited:

• SC Ethics Advisory Opinion 95-29 (lawyer may not disregard a valid third-party assignee or lien holder's interest in proceeds)
• SC Ethics Advisory Opinion 02-07 (means of resolving disputes over funds; declaratory judgment, mediation, arbitration)
• SC Ethics Advisory Opinion 05-07 (interpleader for legal-fee disputes)

See also

• SC Bar Ethics Op. 05-08: Holding disputed settlement funds against a subrogation claim
• SC Bar Ethics Op. 05-07: A charging lien on a client's support payments
• SC Bar Ethics Op. 05-15: A stale, uncashed settlement check in trust

Source

• Landing page: https://www.scbar.org/for-lawyers/quicklinks/legal-resources/ethics-advisory-opinions/ethics-advisory-opinion-06-04/

Original opinion text

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

UPON THE REQUEST OF A MEMBER OF THE SOUTH CAROLINA BAR, THE ETHICS ADVISORY COMMITTEE HAS RENDERED THIS OPINION ON THE ETHICAL PROPRIETY OF THE INQUIRER’S CONTEMPLATED CONDUCT. THIS COMMITTEE HAS NO DISCIPLINARY AUTHORITY. LAWYER DISCIPLINE IS ADMINISTERED SOLELY BY THE SOUTH CAROLINA SUPREME COURT THROUGH ITS COMMISSION ON LAWYER CONDUCT.

Ethics Advisory Opinion 06-04

RULE 1.15

Facts
In a civil lawsuit, the plaintiff discharged his attorney and proceeded throughout the litigation pro se. Sometime later, the defendant agreed to settle the case with the plaintiff; however, the defendant's attorney received notice that the original attorney for the plaintiff wishes to claim a charging lien in the settlement proceeds for work completed prior to termination. The defendant's attorney is afraid that if she pays the plaintiff the settlement proceeds, irrespective of the other attorney's claims, then the original attorney for the plaintiff will not get paid and will allege that the defendant's attorney is liable for the amount owed from the plaintiff.

The defendant's attorney believes a contract between the plaintiff and the plaintiff's former lawyer exists; however, she has not seen the contract.

Questions
May the defendant's attorney settle all claims arising from the lawsuit with the pro se plaintiff and disburse the settlement proceeds to the plaintiff?
How must the defendant's attorney distribute the settlement proceeds?
Must the defendant's attorney withhold the portion of the settlement proceeds in dispute and place them in a trust account until an agreement is reached between the plaintiff and his original attorney, although the defendant's attorney has no client-lawyer relationship with either?

Summary
The defendant's attorney may not settle all claims arising from the lawsuit with the pro se plaintiff and disburse the settlement proceeds to the plaintiff.
The defendant’s attorney must withhold the fees in dispute in her trust account.
The defendant's attorney must withhold the portion of the settlement proceeds in dispute and place them in a trust account until an agreement is reached between the plaintiff and his original attorney, although the defendant's attorney has no client-lawyer relationship with either.

Opinion
Question 1: May the defendant's attorney settle all claims arising from the lawsuit with the pro se plaintiff and disburse the settlement proceeds to the plaintiff?

The Committee advises that defense counsel must "promptly distribute all portions of the property as to which the interests are not in dispute." South Carolina Appellate Ct. Rule 407, Rules of Professional Conduct, Rule 1.15(e); see also Rule 1.15(d). The facts do not state whether the plaintiff disputes his former attorney's charging lien, which would be a reasonable assumption. If the funds are so disputed, and if defense counsel has "received" the funds in dispute, Rule 1.15(e) likely would prohibit defense counsel from distributing the disputed portion of settlement proceeds to the plaintiff.

Rule 1.15(e) provides in part that "[w]hen 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) claims interests, the property shall be kept separate by the lawyer until the dispute is resolved. . . ." In other words, once a "person" claims an interest in the funds, they must be kept separate by the lawyer. Here, a person, the plaintiff's former lawyer, has claimed an interest in a portion of the funds in the form of an alleged charging lien for work completed prior to his termination. Accordingly, the Committee advises that the defendant's attorney should not disburse the disputed portion of the settlement proceeds to the plaintiff until the dispute is resolved; instead, the defendant's attorney should keep the disputed portion of the funds separate until the dispute is resolved.

Even though the defendant apparently does not claim an interest in the funds, the Committee believes that Rule 1.15 would still apply. Comment 4 to Rule 1.15 describes the lawyer's duty in terms of protecting disputed funds against interference by the client; however, it does not limit the application of Rule 1.15(e) to only those situations in which the client claims an interest. Even if the comment could be argued to apply only to those situations in which a client claims an interest, the text of the rule would govern. "The Comments are intended as guides to interpretation, but the text of each Rule is authoritative." Preamble to Appellate Ct. Rule 407, South Carolina Rules of Professional Conduct, Paragraph 21. The text of the rule plainly applies to "property in which two or more persons" claim an interest, whether they be clients, creditors of clients or other third parties.

The facts do not indicate whether or not the plaintiff's former lawyer's claim of a charging lien is believed to be frivolous. Comment 4 to Rule 1.15 can be read to imply that that the rule is designed to apply when "third-party claim is not frivolous under applicable law." As "[t]he Rules of Professional Conduct are rules of reason," as indicated in the Preamble, the Committee opines that if the plaintiff's former attorney's claim is frivolous in the professional judgment of the defendant's attorney, the settlement proceeds would not be truly in dispute and Rule 1.15 would not apply. However, given the "significant risks generally associated with prolonged legal fee disputes," it seems unlikely that the plaintiff's attorney would assert a frivolous charging lien. John Freeman, Ethics Watch: A-B-C's of Legal Fees, 8 S.C. Lawyer 10 (July/August 1996), cited in S.C. Ethics Advisory Opinion 05-07.

Question 2: How must the defendant's attorney distribute the settlement proceeds?

How the dispute over the validity of the plaintiff's former attorney's claim is resolved will determine how the disputed proceeds are to be distributed. Although the text of Rule 1.15(e) indicates that disputed funds must be kept separate by the attorney until the dispute is resolved, the text does not mandate how the dispute is to be resolved. Comment 4 to Rule 1.15, does provide a limit on how the dispute may be resolved and also suggests litigation as a possible solution: "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." Although a technical reading of this language could limit application of the comment to disputes involving clients, the Committee would apply this comment to disputes between two third parties, such as described in the inquiry.

The Committee interprets Rule 1.15(e) and Comment 4 as placing the choice of the means of resolving the dispute in the reasonable discretion of the defendant's attorney, as long as the defendant's attorney does not unilaterally assume to arbitrate the dispute. As noted in S.C. Ethics Advisory Opinion 02-07, "[t]he comments to Rule 1.15 also provide that the lawyer may suggest means to resolve the dispute." For example, "[i]n previous Advisory Opinions involving disputed healthcare provider liens, the Committee has opined that the prudent course for the lawyer would be to retain the disputed funds in trust and seek either declaratory judgment allowing the lawyer to release the funds, or pursue mediation or arbitration." Id. Ethics Advisory Opinion 05-07 also noted the use of interpleader actions for the resolution of disputes over legal fees and costs. The defendant's attorney could even offer to arbitrate the dispute if the defendant's attorney does not "unilaterally" choose this method and the persons claiming an interest in the disputed proceeds agree to such an arbitration. The Committee does not mean to suggest that these are the appropriate options for resolving this particular dispute. Rather, the defendant's attorney should investigate possible options and choose the appropriate means to resolve the dispute using the attorney's best professional judgment and discretion in accordance with the Rules.

Question 3: Must the defendant's attorney withhold the portion of the settlement proceeds in dispute and place them in a trust account until an agreement is reached between the plaintiff and his original attorney, although the defendant's attorney has no client-lawyer relationship with either?

Yes. As indicated previously in this opinion, the application of Rule 1.15(e) does not require an attorney-client relationship between a lawyer and a person claiming an interest in property in the possession of the lawyer: the Committee is unable read into the text of Rule 1.15(e) a requirement that the rule only applies to disputed funds or property in which a lawyer's client claims an interest.

The Committee is unaware of any decision of any jurisdiction applying Rule 1.15(e) to facts identical to those of the inquirer. More often, Rule 1.15 is implicated in situations involving the payment of settlement proceeds by an attorney when there was a dispute between his client and a third party. For example, in South Carolina Ethics Advisory Op. 95-29, the Committee determined that "assuming the lien is valid and the assignment irrevocable, the lawyer may not disregard a third party assignee or lien holder's rights to the proceeds notwithstanding a client's directive to do so because both encumbrances create an interest in the proceeds in the medical provider." The valid interests of certain persons (clients' medical providers) in settlement proceeds do not appear to require less protection than the interests of other persons (creditors of opposing parties).

The Committee notes that Rule 1.15 has been applied to require lawyers to protect rights of third parties in a variety of other circumstances. See, e.g., In re Jackson, 365 S.C. 176, 177-78, 617 S.E.2d 123, 124 (2005) (an attorney failed to timely pay a court reporter and was sanctioned for violating Rule 1.15). It is the Committee's position that Rule 1.15 is designed, ultimately, to protect the valid interests of third parties. If the plaintiff's original attorney's lien is indeed valid, it should not be ignored; accordingly, the dispute must be resolved as to whether the lien is valid. The text of Rule 1.15(e) provides a mechanism for the safekeeping of funds while the dispute is resolved.