When a nonprofit pays into a lawyer's trust account to fund a client's representation, who owns and controls the money, and what must the lawyer tell the client?

Plain-English summary

A third-party nonprofit organization (NPO) wanted to retain a lawyer to represent a client, depositing money into the lawyer's trust account to cover the expenses of that representation. The inquiry asked who owns the funds (the NPO payor or the client), who can direct the lawyer on using them, whether the lawyer must tell the client a third party paid the expenses and keep the client informed, and whether the NPO can place limits on the funds.

The committee concluded that ownership of the funds must be determined by and between the payor and the client, and the lawyer must not arbitrate disputed funds. The lawyer determines how to use the funds to best achieve the goals of the representation and must not allow the third-party payor to direct the representation. The lawyer is obligated to tell the client that a third party is paying the expenses and to keep the client informed of the amount and status of the funds. The NPO may place limits only to the extent of requiring the funds to be used for the client's actual expenses for the particular matter; it cannot direct the lawyer's professional judgment.

The committee anchored these conclusions in several rules. Drawing on Opinion 04-03 (a nonprofit may refer donors to a lawyer for estate plans with full disclosure and the client's written permission), it said the lawyer must assure the client that the NPO's payment will not interfere with the lawyer's independent judgment (Rule 2.1) or the client-lawyer relationship, and must protect confidentiality (Rule 1.6). Rule 1.8(f) requires the lawyer to inform the client that the NPO is paying expenses and to obtain the client's consent, and Rule 1.8(f)(2) bars interference with the lawyer's independent professional judgment or the client-lawyer relationship. Rule 5.4(c) bars a lawyer from letting a person who recommends, employs, or pays the lawyer direct or regulate the lawyer's professional judgment. Rule 1.2(a) requires the lawyer to abide by the client's decisions about the objectives of the representation, so the payor cannot dictate the goal. On ownership, Rule 1.15 and its comment 4 anticipate funds received from third parties and place a duty on the lawyer to protect third-party claims against wrongful interference by the client; if both the NPO and the client demand a refund of the trust money, the lawyer must leave the funds in trust and tell the claimants to work it out between themselves.

In practice

The opinion holds that, under South Carolina Rules 1.8(f), 5.4(c), 1.2(a), and 1.15, a lawyer paid by a third-party nonprofit to represent a client must keep the client as the sole client whose objectives and judgment control: the lawyer obtains the client's Rule 1.8(f) consent, keeps the client informed, and does not let the payor direct the representation or the application of funds beyond limiting them to the client's actual expenses for the matter. On ownership of trust funds, the opinion treats the lawyer as a stakeholder who must not arbitrate a dispute between payor and client; if both demand a refund, the lawyer leaves the money in trust and directs them to resolve it between themselves, while protecting third-party claims against wrongful interference by the client under Rule 1.15 comment 4.

Common questions

Q: Who owns money a nonprofit deposits in trust to fund a client's case?

A: That is for the payor and client to determine. The committee said ownership must be decided between the payor and client, and the lawyer must not arbitrate disputed funds.

Q: Can the nonprofit payor tell the lawyer how to handle the case?

A: No. The committee said the lawyer determines how to use the funds to achieve the goals of the representation and, under Rules 1.8(f)(2), 5.4(c), and 1.2(a), must not let the payor direct the representation or regulate the lawyer's professional judgment.

Q: Does the lawyer have to tell the client a third party is paying?

A: Yes. The committee said the lawyer must inform the client that a third party is paying the expenses, obtain the client's consent under Rule 1.8(f), and keep the client informed of the amount and status of the funds.

Q: Can the nonprofit limit how the money is used?

A: Only narrowly. The committee said the NPO may require the funds to be used for the client's actual expenses for the particular matter, but cannot direct the lawyer's professional judgment on applying the money.

Background and rules framework

The opinion interprets South Carolina Rule 1.8(f) and 1.8(f)(2) (compensation from a third party; no interference with judgment or the relationship), Rule 5.4(c) (no direction of judgment by a payor), Rule 1.2(a) (client controls objectives), Rule 2.1 (independent judgment), Rule 1.6 (confidentiality), and Rule 1.15 with comment 4 (handling third-party funds), which correspond to the like-numbered Model Rules. The analysis separates the lawyer's duty to the client (judgment and objectives) from the lawyer's stakeholder role over disputed funds.

Citations and references

Rules of Professional Conduct:

• MR 1.8 / SC Rule 1.8(f), 1.8(f)(2) (third-party payment; informed consent; no interference)
• MR 5.4 / SC Rule 5.4(c) (payor may not direct professional judgment)
• MR 1.2 / SC Rule 1.2(a) (client controls objectives)
• MR 2.1 / SC Rule 2.1 (independent judgment)
• MR 1.6 / SC Rule 1.6 (confidentiality)
• MR 1.15 / SC Rule 1.15 and Comment 4 (third-party funds; protecting third-party claims)

Other opinions cited:

• SC Ethics Advisory Opinion 04-03 (nonprofit referral of donors with full disclosure and written permission)

See also

• SC Bar Ethics Op. 04-03: Nonprofit Referral of Donors for Estate Plans
• SC Bar Ethics Op. 12-03: Lawyers on Q&A Pay Sites
• SC Bar Ethics Op. 13-02: Paying an Appointed Investigator

Source

• Landing page: https://www.scbar.org/for-lawyers/quicklinks/legal-resources/ethics-advisory-opinions/ethics-advisory-opinion-13-04/
• Original PDF: https://www.scbar.org/media/1csmmvjn/13-04.pdf

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 13-04

Facts

A third-party, nonprofit organization (NPO) wants to retain Attorney to represent Client in a legal matter. The nonprofit deposits money into the Attorney’s trust account to cover the expenses related to Attorney’s representation of Client.

Questions and Summary

1. Who owns the funds in Attorney’s trust account? The NPO payor or Client?

The ownership of the funds in Attorney’s trust account must be determined by and between the payor and client; Attorney must not arbitrate disputed funds.

2. Who can direct Attorney as to how to use the funds in the trust account?

Attorney will determine how to use the funds to best achieve the goals of the representation, and Attorney must not allow the third party payor to direct the representation of Client.

3. Is Attorney obligated to tell the client that a third party has paid for all the legal expenses and keep the client informed as to the amount and status of those funds?

Yes

A. Can the NPO place any limitations on the use of the funds it deposited with Attorney for Client’s benefit?

Only to the extent of requiring funds to be used only for client’s actual expenses for representation as to a particular matter. Attorney cannot allow a third-party to direct his professional judgment.

Opinion

There have been several Ethics Advisory Opinions issued over the years addressing a scenario wherein the attorney is retained by, connected with, or otherwise paid by a third-party for the benefit of the attorney’s client.

In Ethics Advisory Opinion 04-03, we determined that a non-profit organization may refer its donors to a lawyer for purposes of drawing up the estate plans for the donor, “provided that the lawyer makes full disclosure to the donor/client of the relationship with the nonprofit (including the fee payment structure with the nonprofit), and obtains the donor/client’s written permission to proceed” with the representation. So, Attorney must assure the client that the receipt of such payment from the NPO payor will not interfere with Attorney’s independent judgment (See also Rule 2.1) or with the client-lawyer relationship; Attorney must protect the confidentiality of client’s information (See also Rule 1.6).

More specifically, Rule 1.8(f) requires Attorney to fully inform the client that some or all of his expenses related to the representation are being paid by the NPO, and he must receive client’s consent to that arrangement. Even if the expenses for Someone Else are paid to Attorney by NPO, it is Someone Else that is the client and whose interest the lawyer must protect and to whose goals Attorney must attend. Rule 1.8(f)(2) underscores the lawyer’s duty to ensure there be “no interference with the lawyer’s independence of professional judgment or with the client-lawyer relationship”, even when compensation is received from somebody other than the client. Similarly, Rule 5.4(c) states “a lawyer shall not permit a person who recommends, employs, or pays the lawyer to render legal services for another to direct or regulate the lawyer’s professional judgment in rendering such legal services.” So, while the NPO payor can limit the use of the funds to a particular matter involving the client, it may not limit the Attorney’s discretion on the application of the money to that matter.

Likewise, the NPO payor cannot instruct Attorney on the goal of his representation of client. Rule 1.2(a) requires the lawyer to abide by the client’s decisions regarding the objectives of the representation, and must take all necessary precautions to ensure that he does not permit the NPO to direct or regulate his professional judgment in rendering legal services to the client, Someone Else.

Addressing the issue of ownership over the funds paid by a third party for the benefit of a client, Rule 1.15 of the Rules of Professional Conduct gives attorneys direction as to how to handle that money. The comments to the rule anticipate the scenario where a lawyer will receive funds from third parties from which a fee or expenses will be paid. Comment 4 to Rule 1.15 places a duty upon the lawyer to ensure that the client does not misuse funds appropriated by a third party. "A lawyer may have a duty under applicable law to protect such third-party claims against wrongful interference by the client." If the situation arises that both NPO payor and client Client are demanding a refund of the money in trust, Attorney must leave the funds in his trust account and tell the claimants to work it out amongst themselves.