When a third party such as an insurer claims part of a client's settlement held in trust, may the lawyer disburse the funds to the client after giving 30 days' notice if no suit is filed?

Plain-English summary

An attorney recovered a personal-injury award for her client and deposited the settlement check, signed by both, into her trust account. Before she disbursed the client's share, the client's own insurance carrier asserted a subrogation claim to part of the funds, demanding $13,500 (which the attorney and client valued at most around $4,500). The attorney had already been paid her contingent fee and had no personal stake. The client told her not to interplead, and the attorney and client invited the insurer to litigate; the insurer simply repeated its demand. The attorney proposed sending the insurer a letter stating that, if it did not sue within 30 days, she would disburse the disputed funds directly to the client, and asked whether that plan would violate the rules or be unreasonable under RPC 1.15A(g).

The committee concluded that the plan was not reasonable. It explained that there is no "bona fide" or "reasonable basis" qualifier attached to the word "dispute" in the rule. On the facts described, which the committee viewed as a claim against a common fund the attorney held, RPC 1.15A(g) requires the attorney to keep the money in the trust account until the dispute is resolved, either by agreement with the insurance company or through interpleader.

In practice

Under the Washington rule as it stood at the time of the opinion, the committee read RPC 1.15A(g) to leave the lawyer no self-help route out of a third party's claim to funds held in trust. The committee stressed that the rule's reference to a "dispute" carries no "bona fide" or "reasonable basis" modifier, so the lawyer may not decide that the third party's claim is too weak to honor and then release the funds. Where, as here, a third party asserts a claim against a common fund the lawyer holds, the lawyer must keep the disputed amount in trust until the matter is resolved by agreement or interpleader; a 30-day-notice-then-disburse plan does not satisfy that obligation.

Common questions

Q: Can a lawyer release disputed funds to the client if the third party does not sue within a set time?

A: No. The committee concluded that a 30-day-notice-then-disburse plan was not reasonable; RPC 1.15A(g) requires holding the funds until the dispute is resolved by agreement or interpleader.

Q: Does it matter that the lawyer thinks the third party's claim is weak?

A: The committee said no. It stressed that the rule's term "dispute" has no "bona fide" or "reasonable basis" modifier, so the lawyer cannot release the funds based on her own assessment of the claim's strength.

Q: What are the lawyer's options when a third party claims funds held in trust?

A: Per the committee, the lawyer must keep the disputed funds in the trust account until the dispute is resolved, either by agreement with the claimant or through interpleader.

Background and rules framework

The opinion interpreted Washington RPC 1.15A(g) (within the Model Rule 1.15 family on safekeeping property), which governs funds in the lawyer's possession that a third party claims an interest in. The committee read the rule to require the lawyer to hold the disputed portion in trust pending resolution, without regard to the lawyer's view of how strong the third party's claim is.

Citations and references

Rules of Professional Conduct:

• Model Rule 1.15 / Washington RPC 1.15A, 1.15A(g) (safekeeping property; funds in which a third party claims an interest)

See also

• AL Ethics Op. 1990-48: interpleading disputed trust funds
• CA Op. 1975-36: handling client funds held in trust

Source

• Landing page: https://ao.wsba.org/print.aspx?ID=1606

Original opinion text

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

Advisory Opinion: 2166
Year Issued: 2007
RPC(s): RPC 1.15A(g)
Subject: methods of dealing with a third partys claim to clients portion of funds awarded in a PI action under RPC 1.15A(g)

Facts Presented by the Inquiring Attorney. The initial letter from the inquiring attorney requested an informal opinion based on a hypothetical but detailed set of facts. We subsequently sent an email to the attorney, seeking some further information and the attorney’s response (attached) made it clear that this is not a hypothetical. Accordingly, we are treating this as a non-hypothetical problem of the inquiring attorney.

The attorney posits that an attorney successfully represented her client in an action for personal injuries. The attorney received an award for her client. The award was in the form of a check made out to the attorney and client which both the attorney and client signed. The check was placed into the attorney’s trust account. But before the attorney disbursed the award funds to her client, the client’s insurance carrier made a disputatious claim to the funds. The attorney had no financial stake in the disputed funds because she had already been paid a typical contingent fee from the original award. The insurance company knew of RPC 1.15A(g) and demanded the funds in a letter. The attorney reviewed the RPC section and informed the client that the disputed funds might have to be interpleaded. The client told her attorney not to interplead the funds. The client and attorney invited the insurance company in writing to litigate the matter. In response, the insurance company by letter simply demanded the funds again.

The insurance company demand is for $13,500.00. The insurance company originally demanded $6,000.00. The latter amount was claimed for the company’s medical payments subrogation interest under the PIP portion of its policy after Mahler fees had been subtracted ($9,000.00 minus $3,000.00 for insurance contribution to attorneys 1/3 contingent fee = $6,000.00 interest claimed). The insurance company, however, demanded an additional $7,500.00 for what it claimed was another subrogation interest owed to it for a prior property damage payment made to its insured for her totaled car. The client had in fact previously received $7,500.00 under the collision portion of the policy. The client and attorney pointed out to the insurance company that it had previously settled the opposing driver’s property damage claim for 50% of the total value claimed by the opposing driver. According to the inquiring attorney, the client’s insurance company did so because it viewed the case as involving substantial 50-50 comparative liability. The client and her attorney reasoned that the highest good faith value of any interest of the insurance company would be $4,500.00. This was calculated as follows:

$13,500 (total alleged interest minus $6,750) (the insurance company’s own assessment of 50% comparative liability) minus $2,250.00 (insurance contribution to attorneys 1/3 contingency fee and cost pursuant to Mahler) = $4,500.00. The insurance company, however, has continued to demand $13,500.

The attorney has placed $6,000.00 into the IOLTA account. The remainder was disbursed to the client. Only after the disbursement did the insurance company assert a claim for the additional $7,500.00 for “collision damage subrogation” in another letter. The insurance company claimed that the client and her attorney had reason to know that the $7,500.00 amount would be claimed even though it was not originally claimed in the demand for $6,000.00. The insurance company reasoned that the attorney and client should have known about the $7,500.00 claim because (i) the client had already received $7,500.00 from the company for the total loss of her vehicle and (ii) the insurance policy stated that if the client obtained money for her vehicle from a third party she would have to pay the money to her insurance company as a subrogation payment.

Plan Proposed by Inquiring Attorney. The inquiring attorney suggests that the attorney would send a letter to the insurance company advising them that if they did not initiate suit within 30 days then the attorney would disburse the disputed funds directly to her client. The attorney then asks whether the plan to disburse the funds after 30 days written notice without litigation violated an ethical rule. The attorney also asks whether this constitutes unreasonable action by the attorney under RPC 1.15A(g).

The committee opined as follows: The narrow answer to the question whether the plan stated in your inquiry is reasonable is : No. Regrettably, there is no “bona fide” or “reasonable basis” modifier for the term “dispute”. Under the facts described by the attorney, particularly what appears to the committee to be a claim against a common fund held by the attorney, RPC 1.15A(g) requires the attorney to keep the money in the trust account until the dispute is resolved, by agreement with the insurance company or through interpleader.