When a prior law firm asserts a charging lien on a settlement, how much must successor counsel hold in trust, and does Rule 1.5(e) fee-sharing apply?

Plain-English summary

Clients hired Law Firm A on a contingency fee, then terminated it before any demand or settlement negotiations, and hired Law Firm B. After Firm B began negotiating, the insurer reported that Firm A had asserted a charging lien for costs and 15% of any gross recovery as attorney's fees. Firm B settled, paid the clients their share, and held the disputed amount in trust. Firm A and Firm B never entered a Rule 1.5(e) written fee-sharing agreement, and Firm A demanded Firm B hold its entire contingency fee in trust. Firm B asked what it must do about the lien and how much of its fee it must hold.

The Committee concluded that Firm B's obligations are governed by Rule 1.15(e), which addresses property in which two or more persons claim interests, rather than by Rule 1.5(e) on fee division, citing the last sentence of Comment 8 to Rule 1.5. Under Rule 1.15(e), property in dispute must be kept separate until the dispute is resolved, and the lawyer must promptly distribute portions not in dispute. Because Firm B had already paid the clients their share, the dispute was limited to the 15% Firm A claimed from the balance Firm B held.

On the first question, the Committee held that Firm B's responsibility is to hold an amount equal to Firm A's charging-lien claim in trust until the dispute is resolved, unless Firm B determines the claim is frivolous under applicable law. The Committee anchored this in the text of Rule 1.15(e) ("the property shall be kept separate by the lawyer until the dispute is resolved") and in Comment 4 to Rule 1.15 (when a third-party claim is not frivolous, the lawyer must refuse to surrender the property until the claims are resolved), and noted its prior opinions 06-04 and 16-01 are consistent.

On the second question, the Committee concluded that Firm B need not hold its entire contingency fee in trust. Only the amount equal to Firm A's 15% charging-lien claim must be held, assuming Firm B determines the claim is not frivolous.

In practice

Under this opinion, successor counsel holding settlement funds against a prior firm's charging lien must keep separate, under Rule 1.15(e), only an amount equal to the asserted claim, distributing undisputed portions promptly, and must continue to hold the disputed amount until the dispute is resolved unless the claim is frivolous under applicable law. The opinion treats the dispute as a Rule 1.15(e) property matter rather than a Rule 1.5(e) fee-division question, so the absence of a written fee-sharing agreement does not change the analysis, and the successor firm is not required to hold its entire fee.

Common questions

Q: How much must successor counsel hold in trust when a prior firm asserts a charging lien?

A: The opinion concludes successor counsel must hold an amount equal to the prior firm's charging-lien claim until the dispute is resolved, unless the claim is frivolous under applicable law.

Q: Does the successor firm have to hold its entire fee in trust?

A: No. The opinion concludes only the amount of the prior firm's claim (here, 15%) must be held, not the whole contingency fee, assuming the claim is not frivolous.

Q: Does Rule 1.5(e) fee-sharing apply if the two firms never signed a fee-sharing agreement?

A: The opinion concludes the matter is governed by Rule 1.15(e) on disputed property, not Rule 1.5(e), citing the last sentence of Comment 8 to Rule 1.5, so the absence of a written fee-sharing agreement does not control.

Q: What if successor counsel believes the prior firm's lien claim is frivolous?

A: The opinion ties the holding obligation to a non-frivolous claim; if the lawyer determines the claim is frivolous under applicable law, the duty to hold the disputed amount does not apply.

Background and rules framework

The opinion interprets Rule 1.15(e) (property in which two or more persons claim interests must be kept separate until the dispute is resolved) and distinguishes Rule 1.5(e) (division of fees between lawyers not in the same firm), relying on Comment 8 to Rule 1.5 and Comment 4 to Rule 1.15. South Carolina's Rules 1.15 and 1.5 correspond to the ABA Model Rules. The Committee cited its prior opinions 06-04 and 16-01 as consistent authority on holding disputed third-party claims.

Citations and references

Rules of Professional Conduct:

• MR 1.15 / SC RPC 1.15(e) (safekeeping property; property subject to competing claims)
• MR 1.5 / SC RPC 1.5(e) (division of fees between lawyers; Comment 8)

Other opinions cited:

• S.C. Bar EAC Op. 06-04: holding disputed third-party claims.
• S.C. Bar EAC Op. 16-01: holding disputed third-party claims.

See also

• ABA Formal Op. 475: Safeguarding Fees Subject to Division
• TX Ethics Op. 681: Third-Party Interest in Client Funds in Trust
• CA COPRAC Op. 2009-177: Former-Attorney Lien and Joint Settlement Check

Source

• Landing page: https://www.scbar.org/for-lawyers/quicklinks/legal-resources/ethics-advisory-opinions/ethics-advisory-opinion-19-01/
• Original PDF: https://www.scbar.org/media/imygwmnl/opinion_19_march_6_on_letterhead.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.

The Ethics Advisory Committee renders opinions exclusively to members of the South Carolina Bar concerning ethical issues raised by the inquirer's contemplated conduct not relating to a pending matter. This Committee has no disciplinary authority. Lawyer discipline in South Carolina is administered solely by the South Carolina Supreme Court through its Commission on Lawyer Conduct.

South Carolina Rules of Professional Conduct: 1.15(e)

Factual Background: On or about January 31, 2018, clients entered into a contingency fee agreement with Law Firm A. At some point in August of 2018, clients terminated their relationship with Law Firm A. Law Firm A had not submitted a demand packet to the defendant's insurance company and no negotiations for settlement had commenced prior to clients' terminating Law Firm A.

On or about September 9, 2018, clients entered into a contingency agreement with Law Firm B. Law Firm B commenced negotiations with defendant's insurance company on October 23, 2018. At that time, defendant's insurance company notified Law Firm B of a charging lien asserted by Law Firm A for costs and "15% of any and all gross recovery" for attorney's fees. Law Firm B settled all claims with defendant's insurance company on November 5, 2018, and agreed to keep the funds associated with Law Firm A's charging lien in its trust account.

Law Firm B notified clients of the charging lien being asserted by Law Firm A. Clients requested Law Firm A remove the 15% charging lien relating to attorney's fees. Law Firm A told clients, "The division of the attorney fees will have to be worked out between [Law Firm A] and [clients'] new attorney. It will not cost [clients] more money, and there should be no increase in what [clients] pay in total fees, but there will have to be a division of the attorney's fees amongst the attorneys in this case."

At no time before being terminated did Law Firm A enter into a written fee sharing agreement with Law Firm B that was confirmed by clients pursuant to Rule 1.5(e) of the Professional Rules of Conduct. With the permission of clients, Law Firm B contacted Law Firm A on November 12, 201 8, regarding the charging lien, and Law Firm A requested Law Firm B share a percentage of its contingency fees to satisfy the charging lien. Law Firm B rejected this request but agreed to forward the costs to Law Firm A associated with its representation upon receipt of the settlement funds. Law Firm A authorized Law Firm B to disburse all monies due to the clients to avoid any delay and to hold Law Firm B's contingency fee in trust.

Law Firm A continues to assert a charging lien against Law Firm B based on the contingency agreement clients signed with Law Firm A. Law Firm A continues to demand Law Firm B hold its entire contingency fee in trust.

Questions:

• What is Law Firm B's ethical responsibility regarding Law Firm A's charging lien?

• What is Law Firm B's ethical responsibility regarding holding the entirety of its contingency fee in trust?

Summary: Law Firm B's ethical responsibilities in this matter are governed by Rule 1.15(e) rather than Rule 1.5(e). See the last sentence of Comment 8 to Rule 1.5. Law Firm B must hold in trust an amount equal to the amount being claimed by Law Firm A until the dispute with Law Firm A is resolved, unless Law Firm B determines that Law Firm A's charging lien claim is frivolous under applicable law.

Discussion: As a preliminary matter, while the inquirer has posed two separate questions, the Committee believes that the questions can be considered together for purposes of this opinion, since the same analysis applies to both. Rule 1.15(e) reads, "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." The facts presented imply that Law Firm B has disbursed the clients' portion of the settlement amount to the clients so as to comply with the second sentence of Rule 1.15(e). Thus, the dispute is limited to the fifteen percent (15%) being claimed by Law Firm A as it relates to the balance being held by Law Firm B.

Question 1: Law Firm B's ethical responsibility regarding Law Firm A's charging lien is limited to holding an amount in trust equal to the amount of Law Firm A's charging lien claim until the dispute is resolved, unless Law Firm B determines that Law Firm A's claim is frivolous under applicable law. This result is mandated by the express language of Rule 1.15(e), specifically, "… the property shall be kept separate by the lawyer until the dispute is resolved," and by the following language from Comment 4 to Rule 1.15: "…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." Two of this Committee's prior opinions, 06-04 and 16-01, are instructive and consistent with the foregoing analysis. In this case, the clients have presumably been paid the clients' share of the settlement proceeds, but the quoted language from Comment 4 would nevertheless apply to the remaining amount being held by Law Firm B to the extent of Law Firm A's claim, based on the language of Rule 1.15(e).

Question 2: Consistent with the answer to Question 1, Law Firm B need not hold the entirety of its contingency fee in trust. Only an amount equal to the fifteen percent (15%) charging lien claim of Law Firm A is required to be held, assuming that Law Firm B determines that Law Firm A's claim is not frivolous.