CHAPTER 1 - 1-10 DUTIES RELATED TO CLIENT MONEY OR PROPERTY

• Jurisdiction: United States

1-10 Duties Related to Client Money or Property

1-10:1 General Rule

A lawyer coming into possession of a client's money, property or the property of a third party must keep it separate and not commingle it with the lawyer's property.⁵¹³ Ordinarily, such property must be promptly transferred to the client, with an accounting.⁵¹⁴ If a lawyer knows that two or more persons claim an interest in any funds or property, the lawyer must keep the property separate until all claims are resolved.⁵¹⁵

An "interest" for the purposes of this rule may include a judgment, a statutory or judgment lien, a letter of protection or a written assignment.⁵¹⁶ In cases of competing interests in property held in trust, the lawyer may not unilaterally attempt to mediate the dispute.⁵¹⁷ Lawyers holding property subject to a dispute are advised to employ the statutory interpleader procedures.⁵¹⁸

The provisions governing the preservation of client property for competing claims are a great source of problem for lawyers, especially in some areas of practice such as plaintiffs' contingent fee litigation. The list of possible claimants is long. It includes Medicare, Medicaid, benefits provided by the Federal Employees Health Benefits program, workers' compensation liens, payments by health insurers, payments by self-funded insurance trusts and many others. While most providers of benefits or services may claim a lien or a right of repayment, not all are permitted. Certain "collateral source providers" who provide benefits to plaintiffs in litigation matters may be prohibited from recovery by statute.⁵¹⁹

The best examination of the scope of a lawyer's ethical duty under Rule 1.1.5(f) (formerly Rule 1.15(b)) is the Connecticut Bar Association's Committee on Professional Ethics' Informal Opinion 95-20.⁵²⁰ There, the Committee, in discussing the competing duties inherent in a lawyer's simultaneous representation of a client while at the same time receiving notice or knowledge of a party claiming an "interest" in any potential recovery or funds that may come into the lawyer's possession, defines "interest" for the purposes of the rule as being "legal" interest, limited to judgments, statutory or judgment liens, letters of protection and consensual security agreements. "The mere assertion of a third-party claim to property is insufficient to create a duty to deliver property to that third party. . . . General creditors have no legal interest in the property held by the lawyer, and Rule 1.15(b) does not apply to claims of a client's general creditors."⁵²¹

An excellent treatment of this issue can be found in Justice Berdon's concurring opinion in the matter of Silver v. Statewide Grievance Committee, which dealt with the duty of a lawyer to seek out liens on a client's recovery in the absence of an actual notice.⁵²² Citing, among other authorities, the Connecticut Bar Association Committee on Professional Ethics Informal Opinion No. 95-20, Justice Berdon noted that, though a lawyer may have a duty under applicable law to protect such third-party claims against wrongful interference by the client, and accordingly may refuse to surrender property to the client, the lawyer should not unilaterally assume to arbitrate a dispute between the client and the third party.

Justice Berdon goes on to note that "interest," as used in the rules of conduct, means more than an unsecured claim with respect to a third party. "An interest in the fund or property requires that the third party have a matured legal or equitable lien." An "interest" does not include an inchoate, contingent or not fully matured claim.⁵²³ Even a possibility that the client will abscond with sums released to him is not sufficient, in the opinion of Justice Berdon, to warrant not releasing funds against which cognizable claims have not been perfected.

Often, the settlement of a matter will produce a res against which there are so many competing interests that it is impossible to make every claimant whole. A lawyer holding sums in such a situation is both a fiduciary as well as a professional and, thus, may have both legal and ethical duties to the claimants as well as to her client.

1-10:2 Recognizing an "Interest" for the Purposes of Rule 1.15

The key to determining a lawyer's responsibility in such circumstance is determining whether each, some or all of the claims are "interests" sufficient to trigger the lawyer's duty to sequester and/or transmit the funds. As the Connecticut Bar Association's Committee on Professional Ethics noted in its Opinion 98-22, Rule 1.15 does not create lien rights. It only requires lawyers to recognize rights that otherwise exist or are recognized by law.⁵²⁴

In an attempt to provide guidance to the bar on this question, the Rules Committee adopted commentary to Rule 1.15(f) tracking Opinion 95-20 of the Connecticut Bar Association's Committee on Professional Ethics.⁵²⁵ This opinion, along with subsequent opinions (there are twenty-seven opinions dealing, in some way, with liens) parse through a variety of circumstances where liens may be asserted and offer some direction to lawyers holding client property when faced with competing claims.⁵²⁶

Opinion 95-20 attempted to distinguish between legally cognizable interests which must be recognized and protected and mere claims which do not have such a status.⁵²⁷ Starting from the premise that due process considerations do not allow for a rule that allows or requires a lawyer to divest a client of property without a hearing and the right to judicial relief,⁵²⁸ the Committee then works through four circumstances where claims on the property would be choate enough to allow the lawyer to recognize them over or at least in contradiction to those of his client. These would include a judgment disposing of the client's property, such as divorce judgment or an order of a bankruptcy court, a statutory lien, such as lien for welfare, medical or other benefits from the State of Connecticut,⁵²⁹ or a lien created by assignment or other document signed by the client.

In each of these circumstances, it is clear that the client's rights and interests in the property have been interrupted, and the lawyer may be protected if she attorns to the rights of the claimant. It should be remembered, however, that lien rights are not eternal. An otherwise valid "nonconsensual" judgment lien may be vitiated by a bankruptcy filing.

A different problem is presented when there is the possibility of an equitable lien. In Columbia Federal Savings Bank v. International Site Consultants, the Appellate Court defined an equitable lien as "a right, not existing at law, to have . . . property applied in whole or in part to payment of a particular debt or class of debts. As such, it constitutes a charge or encumbrance upon the thing, so that the very thing itself may be proceeded against in an equitable action."⁵³⁰ At least one court has recognized, in dicta, that a lien may attach to funds retained by an attorney after a settlement of a claim where the plaintiff had previously contracted to repay sums paid on her behalf by an ERISA provider.

In J.P. Morgan Chase Medical Benefits Plan v. Swiatowiec⁵³¹ a trial court found that while an ERISA provider had no direct right of action against either a tortfeasor or her insurance company for benefits paid to an ERISA plan participant who had been injured by the insured, a case known as Sereboff v. Mid Atlantic Services, Inc.,⁵³² would allow such a claim to be made against one holding settlement proceeds generated by a claim the plan participant brought against the insured.⁵³³ In such circumstances, a lawyer holding settlement funds may have fiduciary duties to equitable claimants.

This, of course, creates an interesting potential conflict for the lawyer. As the Connecticut Bar Association's Ethics Committee notes in Opinion 95-20, the lawyer has a duty of loyalty to her client and no duty to seek out claimants. Rule 1.6 may also prevent her from telling others about a client's matter or that it has settled and resulted in a lot of money. However, as an equitable trustee, the lawyer may have a duty to claimants with regard to a res she is holding concerning claims of which she has reasonable knowledge. Such trustee duties may place the lawyer personally at risk if she disburses settlement proceeds to her client to the detriment of a claimant. This would create a conflict under the "personal interest" provision of Rule 1.7.

How much knowledge triggers a Rule 1.15(f) duty was sort of addressed in Ethics Opinion 10-01 where the Committee, while refusing to answer the question, noted that "(a) lawyer needs to receive sufficient information to make a preliminary determination whether the claim is of a valid ERISA lien . . . Suffice it to say . . . that the lawyer is not entitled to demand proof positive, but the lawyer surely needs some sort of documentation [beyond merely 'take my word for it'] with respect to ERISA liens in order to trigger the obligations of Rule 1.15(f)." Contrast, however, Opinion 98-13 where the Committee opined that parenthetical notes on a client's medical records that the bills were being paid by the State did not trigger enough knowledge to require inquiry or notice with regard to a statutory welfare lien.⁵³⁴

Some of the lawyer' uncertainty in determining the bona fides of a claimant's interest in a client's property was resolved in 2015 by the adoption of language now found at 1.15(g), which allows the lawyer to request proof, information or documentation of a claim and to disburse funds without reference to it if the information is not provided within 60 days.

While Sereboff would seem to urge the lawyer to divest herself of settlement proceeds as quickly as possible to avoid being the target of a claim for an equitable lien, Rule 1.15(f) may well require the lawyer to hold the funds if she reasonably knows of such a claim.⁵³⁵ A lawyer holding funds on behalf of putative owners who is...