If a lawyer suspects the client paid the retainer with fraudulently obtained money, can the lawyer keep the refundable unearned portion in trust instead of returning it, where no one has claimed the funds?
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This page answers the general question as of 2011. Ezel answers yours: whether it's allowed on your facts, under the current Texas Rules of Professional Conduct, with citations.
Plain-English summary
The opinion addresses a criminal-defense lawyer paid a prepaid fee that is earned in stages, deposited in the trust account. While the case is pending, the lawyer comes to suspect the client's payment came from fraud, and a federal prosecutor tells the lawyer the money may have come from criminal activity. No federal charges are filed and the contact ends. The state drops the charges after only limited services, so under the fee agreement part of the prepaid fee must be refunded. Worried about possible liability if a government authority or private party later claims the funds, the lawyer proposes to hold the entire amount and to contact the prosecutor to see whether the government will assert a claim.
The Committee applies Rule 1.14(b), which requires prompt delivery of funds a client is entitled to receive, and Rule 1.14(c), which requires segregating only funds that are actually in dispute when two or more persons claim them. Because no one has asserted a claim, there is no dispute to trigger Rule 1.14(c); the lawyer must promptly return the refundable portion and, on request, account for it. The lawyer may still move earned amounts to his own account under the fee agreement.
On the proposal to contact the prosecutor, the Committee finds nothing in the Rules requires a lawyer to inquire about unasserted claims, and it is aware of no state or federal law requiring it, so the Rule 1.05(c)(4) exception (disclosure required by another Rule or law) does not authorize the lawyer to make such inquiries about the client's confidential information. The Committee limits the opinion to the Disciplinary Rules and expresses no view on other state or federal law.
In practice
Under this opinion, and under the Texas rules as they stood at the time, a lawyer holding a refundable unearned fee cannot keep it past the point the client becomes entitled to it merely because the lawyer suspects the source of the funds. The Committee reads Rule 1.14(b) to require prompt return of the refundable portion and Rule 1.14(c) to require segregation only where an actual claim creates a dispute, which is absent when no one has claimed the funds. The opinion also concludes the lawyer may not reach out to a prosecutor or other possible claimant to discover an unasserted claim, because no Rule or law requires that inquiry and Rule 1.05(c)(4) therefore does not permit revealing the client's confidential information for it. The Committee expressly declines to address the lawyer's exposure under other state or federal law.
Common questions
Q: I think my client paid me with dirty money. Can I hold the refundable retainer instead of returning it?
A: No. Per Opinion 606, where no one has asserted a claim to the funds, Rule 1.14(b) requires you to return the refundable unearned portion to the client; suspicion about the source is not enough to withhold it.
Q: When do I have to segregate disputed funds instead of refunding them?
A: Rule 1.14(c) requires segregating funds only when two or more persons actually claim them. The Committee says that absent any asserted claim there is no dispute, so the segregation requirement does not apply.
Q: Can I contact the prosecutor to find out whether the government will claim the money?
A: No. The opinion concludes no Rule or law requires that inquiry, so Rule 1.05(c)(4) does not permit revealing the client's confidential information to possible claimants to look for an unasserted claim.
Background and rules framework
The opinion interprets Texas Disciplinary Rule 1.14 (safekeeping property of clients and third persons), which corresponds to ABA Model Rule 1.15, including 1.14(b)'s prompt-delivery duty and 1.14(c)'s segregation-of-disputed-funds duty. It also applies Rule 1.05 (confidentiality of information), which corresponds to ABA Model Rule 1.6, and its 1.05(c)(4) exception for disclosures required by another Rule or by law.
Citations and references
Rules of Professional Conduct:
- MR 1.15 (safekeeping property)
- MR 1.6 (confidentiality of information)
- Texas Disciplinary Rule 1.14(b) and 1.14(c)
- Texas Disciplinary Rule 1.05(c)(4)
See also
Source
- Landing page: https://www.legalethicstexas.com/resources/opinions/opinion-606/
- Original PDF: https://tcle-web.s3.amazonaws.com/public/documents/Opinion_606.pdf
Original opinion text
Reproduced from the official source for research purposes. The linked source is authoritative.
QUESTION PRESENTED
Under the Texas Disciplinary Rules of Professional Conduct is a lawyer permitted to continue to hold in the lawyer’s trust account unearned fees paid by a client and otherwise repayable to the client if continuing to hold the unearned fees is based only on the lawyer’s belief, in the absence of a claim asserted, that the client may have improperly or illegally obtained the funds paid by the client?
STATEMENT OF FACTS
A lawyer is retained to defend a client accused of a crime in a state court. The client and lawyer enter into a fee agreement providing for a fee to be paid upon the commencement of the representation and for the fee to be earned in agreed portions as the lawyer provides specified services with respect to the matter. The amount paid by the client is deposited in the lawyer's trust account. While the state criminal matter is pending, the lawyer becomes concerned that the money used by the client to pay the agreed fee may have been obtained fraudulently by the client. Subsequently and while the state criminal matter remains pending, a United States Department of Justice prosecutor advises the lawyer that the money paid to the lawyer by the client may have been obtained through criminal activity. No federal charges are filed against the client and the lawyer has no further contact with the federal prosecutor.
After the lawyer has provided only limited services with respect to the matter, the State drops the charges against the client. Under the terms of the fee agreement between the lawyer and the client, a portion of the amount initially paid by the client is required to be repaid to the client. Because of the lawyer’s concern as to the origin of the funds used by the client to pay the fee and in view of the communication from the federal prosecutor concerning the funds, the lawyer believes he may have civil or criminal liability if funds from the trust account are paid to the client and a claim is later made to the funds by a government authority or private party. Based on this belief, the lawyer proposes to continue to hold in his trust account the full amount paid by the client and to contact the federal prosecutor to determine if the federal government is planning to assert a claim to some or all of the funds.
DISCUSSION
Rule 1.14(b) of the Texas Disciplinary Rules of Professional Conduct requires a lawyer to pay over promptly funds to which a client is entitled:
“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 person, shall promptly render a full accounting regarding such property.”
The basic requirements of Rule 1.14(b) are modified by the requirements of Rule 1.14(c) in cases where two or more persons, which may include the lawyer concerned, assert a claim to the same funds. In such cases, as provided in Rule 1.14(c), the funds or property in dispute must be kept separate until the dispute is resolved:
"When in the course of representation a lawyer is in possession of funds or other property in which both the lawyer and other person claim interests, the property shall be kept separate by the lawyer until there is an accounting and severance of their interest. All funds in a trust or escrow account shall be disbursed only to those persons entitled to receive them by virtue of the representation or by law. If a dispute arises concerning their respective interests, the portion in dispute shall be kept separated by the lawyer until the dispute is resolved, and the undisputed portion shall be distributed appropriately."
Under these provisions of the Texas Disciplinary Rules, unless another person has asserted a claim, the lawyer must promptly deliver to the client that portion of a prepaid fee that is initially deposited into the lawyer’s trust account and that is required to be repaid to the client under the fee agreement between the lawyer and the client.
The requirements of Rule 1.05 of the Texas Disciplinary Rules concerning lawyers’ obligations with respect to clients’ confidential information do not permit a lawyer to make inquiries as to the existence of unasserted claims to funds otherwise belonging to the client. No requirement for such inquiries is imposed by the Texas Disciplinary Rules. Moreover, the Committee is aware of no provision of state or federal law that would require inquiries in these circumstances. Accordingly, the exception provided in Rule 1.05(c)(4) for disclosures of clients’ confidential information when required by another Rule or by other law will not permit the lawyer to make such inquiries.
Thus, in the factual situation here considered, since there has been no claim made by the federal prosecutor’s office or any other person regarding the funds held in the lawyer’s trust account relating to the client’s matter, the lawyer is required to return the portion of the funds to the client as required under the fee agreement. In addition, if requested by the client, the lawyer is required under Rule 1.14(b) to provide a full accounting concerning the funds initially paid by the client and the amount repaid to the client. Rules 1.14(b) and 1.14(c) also permit the lawyer to transfer from the trust account to the lawyer’s own account amounts of the prepaid fee that have been earned under the terms of the fee agreement between the lawyer and the client.
This opinion addresses only a lawyer’s obligations under the Texas Disciplinary Rules of Professional Conduct. Because it is beyond the authority of this Committee to address issues with respect to the application to Texas lawyers of other state or federal laws in the circumstances presented, the Committee expresses no opinion on such matters.
CONCLUSION
Under the Texas Disciplinary Rules of Professional Conduct, a lawyer is not permitted to continue to hold in the lawyer’s trust account unearned fees that are otherwise repayable to a client under the fee agreement between the lawyer and client if continuing to hold the unearned fees is based only on the lawyer’s belief, in the absence of a claim asserted, that the client may have improperly or illegally obtained the funds paid by the client. The lawyer is not permitted to communicate with possible claimants to determine the existence of unasserted claims to funds to which the client is otherwise entitled.
Tex. Comm. On Professional Ethics, Op. 606 (2011)
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