MARYLAND STATE BAR ASSOCIATION, INC.
COMMITTEE ON ETHICS
ETHICS DOCKET NO. 2002-32
Safekeeping and disposition of escrowed funds against which a prior attorney’s lien is asserted
Your inquiry indicates that you represent a buyer ("Buyer") that entered into a contract to operate a restaurant and that as part of the transaction, Buyer made a payment of $80,000.00 to be held in the escrow account of the restaurant owner's attorney. Buyer was represented by other counsel in this transaction. Sometime later, Buyer was unable to purchase the business and a dispute arose as to entitlement of the escrow funds. The attorney who represented Buyer in the transaction attempted to negotiate a settlement with the restaurant owner's attorney. The parties did not come to terms and the attorney for the restaurant owner interpleaded the escrow funds into the Court Registry at which time you were retained by Buyer to represent it in the interpleader action.
Upon entry of the interpleader order by the Court, the escrowed funds were paid into the Court Registry. You filed a complaint on behalf of Buyer and a counterclaim was filed by the restaurant owner. A settlement agreement was entered providing that approximately 90 percent of the escrow funds interpleaded into the Court Registry be paid to your client.
At the time you were retained, Buyer's prior attorney had an outstanding bill for services rendered. You presume that most of the bill is for his representation of Buyer in connection with the transaction, and a small portion is for his efforts to negotiate a termination agreement.
Upon being advised of the settlement, the prior attorney wrote a letter to the Registry of the Court purporting to assert an attorney's lien pursuant to Maryland Business Associations and Occupations Code Ann., §10-501. Pursuant to a consent order signed by the Court, the Court Registry released all of the funds in two checks made payable to counsel for the parties as provided in the settlement agreement. Because of the asserted lien, you have kept an amount sufficient to cover the prior attorney's claim in your firm's trust account. You have filed a motion to quash the lien. Your client (Buyer) takes the position that its prior attorney is not entitled to the unpaid balance of the fees because of inadequate representation. Buyer has not authorized you to pay the prior attorney.
You ask our Committee what are the ethical obligations of an attorney who asserts an attorney's lien when the attorney did not represent the client in the case that produced the recovery and his fees relate primarily to his representation of Buyer and the transactions that led to the dispute. Our Committee's Guidelines provides that the Committee does not usually issue opinions regarding the conduct of someone other than the person requesting the opinion, but may do so upon the request of the professional organization of court having jurisdiction over the conduct which is the subject of the request. Furthermore, under our Guidelines, the Committee does not issue opinions on questions of law or on issues likely to be decided by a court or tribunal in existing, or threatened, litigation. Since your first question relates to the propriety of the actions of the other attorney and the issue of the validity of the attorney's lien is squarely before the court in pending litigation, we are unable to answer that question.
Your second question is whether or not you are obligated to retain sufficient funds in your escrow account to cover the lien pending a ruling on the motion to quash and, if so, can you release the funds to your client if the court determines that the attorney's lien is invalid. Rule 1.15 addresses a lawyer's duty in safekeeping property that is in the lawyer's possession. The Rule provides as follows:
A lawyer shall hold property of clients or third persons that is in a lawyer's possession in connection with a representation separate from the lawyer's own property. Funds shall be kept in a separate account maintained pursuant to Title 16, Chapter 600 of the Maryland Rules. Other property shall be identified as such and appropriately safeguarded. Complete records of such account funds and of other property shall be kept by the lawyer and shall be preserved for a period of five years after termination of the representation.
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.
When in the course of representation a lawyer is in possession of property in which both the lawyer and another person claim interests, the property shall be kept separate by the lawyer until there is an accounting and severance of their interests. If a dispute arises concerning their respective interest, the portion in dispute shall be kept separate by the lawyer until the dispute is resolved.
The determination as to whether the prior attorney has an "interest" in the funds requires the determination of a legal issue which this Committee is not empowered to do. The Committee believes, however, since the legal issue is now before the court that it would be advisable for you to retain the funds in your escrow account pending a ruling by the court. If the court determines that the attorney's lien is invalid, then you must make the legal decision as to whether or not the Buyer's prior attorney has an interest in the escrowed funds. If your decision is that no such interest exists, then Rule 1.15 does not prohibit you from disbursing the funds to your client. If you make the legal determination that a claim exists, then you may have a duty under applicable law to protect the previous attorney's claims against wrongful interference by your client and,accordingly, may refuse to surrender the property to your client. (See Comment to Rule 1.15). If that determination is made by you, then it is the Committee's position that the Rule requires you to safeguard the disputed property pending resolution of entitlement to the funds. The Committee has previously opined that the filing of an interpleader action is consistent with an attorney's obligations under Rule 1.15.
The Committee would refer you specifically to Ethics Docket 2000-30, 97-20 and 96-16 addressing Rule 1.15.