MARYLAND STATE BAR ASSOCIATION, INC.
COMMITTEE ON ETHICS
ETHICS DOCKET NO. 2018-03
Duty of Attorney Under Rule 1.15 With Respect to Settlement Proceeds
You request an opinion regarding an attorney’s duties under Rules 1.15 and 1.6 with respect to the handling of settlement proceeds. Your specific question contained a factual pattern involving a client and third party that we will generalize to avoid disadvantage to yourself or your client. In essence, you explain that the client had a debt obligation that is governed by legislation and regulation as to the debt itself and how the debt can be settled and collected. You advise that, under that law and regulatory regime, the client and the third party entered into an agreement that provides for installment payments on the debt. After a period of time, and if the installments are made timely, the debt is extinguished regardless of the full amount that has been paid in relationship to the total debt. In the course of pursuing the debt and consistent with the regulatory framework, the third party filed a Notice of Lien but did not renew the notice timely. You advise us that, by operation of law the lien has expired and, within the coming year, the statute of limitations will bar further collection activity absent affirmative action by the creditor to either toll the statute of limitations or otherwise move to collect. You advise that you represented the client in the debt resolution proceedings and also represented the client in a suit where, through confidential settlement, the client has recently recovered sufficient monies to pay the full debt to the third party. You ask us how Rule 1.15 and Rule 1.6 might interact and apply to direct your course of action in disbursing the settlement proceeds that you now have in your possession.
You point to disciplinary actions against attorneys for violating Rule 1.6 after disclosing client confidences and disciplinary actions for violating Rule 1.15 by disbursing settlement proceeds without honoring liens or interests of third parties. You are concerned that the competing requirements of these two Rules may put you in jeopardy if you do not navigate their course successfully.
This Committee does not address questions of law and, for that reason, cannot interpret the requirements of law that apply to repayment of the debt, but we will discuss the duty of an attorney with respect to the settlement proceeds depending on how those questions of law can be answered.
Maryland’s version of Rule 1.15 offers specific guidance where a third party claims an interest in property that a lawyer holds for a client:
(d) Upon receiving funds or other property in which a client or third person has an interest, an attorney 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, an attorney shall deliver promptly 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 render promptly a full accounting regarding such property.
(e) When an attorney in the course of representing a client is in possession of property in which two or more persons (one of whom may be the attorney) claim interests, the property shall be kept separate by the attorney until the dispute is resolved. The attorney shall distribute promptly all portions of the property as to which the interests are not in dispute.
Clearly, what constitutes “an interest” under either paragraph can be open to question. The Rules attempt to resolve that question in Comment 5 by implying that the interest must be substantial such as a lien:
[5] Section (e) of this Rule also recognizes that third parties may have lawful claims against specific funds or other property in a attorney’s custody, such as a client's creditor who has a lien on funds recovered in a personal injury action. An attorney may have a duty under applicable law to protect such third-party claims against wrongful interference by the client. In such cases, when the third-party claim is not frivolous under applicable law, the attorney must refuse to surrender the funds or property to the client until the claims are resolved. An attorney should not unilaterally assume to arbitrate a dispute between the client and the third party, but, when there are substantial grounds for dispute as to the person entitled to the funds, the attorney may file an action to have a court resolve the dispute.
In an earlier opinion, Ethics Docket 08-03, this Committee discussed the application of Rule 1.15 to an assignment of claim to a physician and concluded that there as here the legal issue of whether the physician had a claim on the proceeds of a settlement dictated the result under the Rule. The legal conclusion of what constitutes “an interest” under the Rule informs the requirements of the Rule on the attorney’s duties under Rule 1.15.
In trying to find the answer to what “an interest” means, your citation to authority from other states helps in addressing the question. Of particular help was the concurring opinion of Judge Robert Berdon in a Connecticut case that was essentially dismissed as moot but where Judge Berdon discussed the ethical requirements of Rule 1.15 as adopted in Connecticut:
An interest as used in the rules 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. See 1 G. Hazard & W. Hodes, The Law of Lawyering: A Handbook on the Model Rules of Professional Conduct (2d Ed. 1996) § 1.15:302, p. 460 ("the Comment to rule 1.15 uses the phrases 'just claims' and 'duty under applicable law' to suggest that the third party must have a matured legal or equitable claim in order to qualify for special protection [under the rule]" [emphasis added]); see also Alaska Bar Association Ethics Committee, Opinion No. 3 (1992) ("in order to trigger an obligation on the part of the attorney to pay a creditor's claim, in contravention of a client's instructions, the creditor's claims must be a valid assignment on its face or statutory lien which has been brought to the attorney's attention"); Colorado Bar Association Ethics Committee, Formal Opinion Nos. 94 and 95 (1994) ("where the third party does not hold an interest as a result of a statutory lien or a contract or a court order, the property should be promptly distributed to the client"); Connecticut Bar Association Committee on Professional Ethics, Informal Opinion No. 20 (1995) ("the mere assertion of a third party claim to property is insufficient to create a duty to deliver property to that third party").
Indeed, the attorney's ethical duty is made abundantly clear in an illustrative case presented by Professors Hazard and Hodes in their treatise on the Model Rules of Professional Conduct. The following hypothetical, pertaining to the handling of funds when a client and a third party have competing claims, parallels the facts in the present case. "Lawyer L has been representing Client C in two matters simultaneously: As plaintiff in a tort action and in negotiations with a creditor who claims that the client owes him $ 5,000 on a supply contract.
"Settlement is reached in the tort action, and L deposits the settlement draft for $ 125,000 in his trust account. C jubilantly demands his share of the proceeds (over $ 90,000) and states that he intends to move to another jurisdiction. He admits that he owes his creditor the disputed $ 5,000, but says he will not pay unless the creditor follows him to his new domicile and sues." 1 G. Hazard & W. Hodes, supra, § 1.15:303, p. 460.
Hazard and Hodes conclude in their hypothetical case: "L must disburse C's entire settlement share immediately without withholding the $ 5,000 which he knows the creditor 'is entitled [***16] to receive.' Furthermore,L may not reveal to the creditor either the fact of settlement or C's plan to abscond.
"While the creditor may be morally 'entitled to receive'; the money, C's position is legally sound: 'Absconding' under these circumstances is neither a crime or a fraud. If the creditor fears such an occurrence, it is up to him to take legal action to prevent it, such as by garnishing L's account. A court may or may not grant such relief, but certainly L cannot sua sponte perform such a service against the interests of his own client." (Emphasis added.) Id., p. 461.
Silver v. Statewide Griev. Comm., 242 Conn. 186, 195-96, 699 A.2d 151, 155-56 (1997).
Although the Virginia version of Rule 1.15 differs from the Maryland Rule, the Virginia Committee’s advice regarding the application of the Rule seems instructive:
All ethics opinions and legal authorities agree that an “interest” in the funds held by the lawyer include a statutory lien, a judgment lien and a court order or judgment affecting the funds. Likewise, agreements, assignments, lien protection letters or other similar documents in which the client has given a third party an interest in specific funds trigger a duty under Rules 1.15 (b)(4) and (5) even though the lawyer is not a party to such agreement or has not signed any document, if the lawyer is aware that the client has signed such a document. In other words, a third party’s interest in specific funds held by the lawyer is created by some source of obligation other than Rule 1.15 itself. [Footnotes omitted.]
Virginia State Bar, LEO 1865 (November 2012).
From this discussion, it seems the answer to your inquiry rests on the resolution of the legal question of whether the creditor has a valid interest in the funds in your possession. In terms of the Rules of Professional Conduct, if the third party has a lawful claim such as a lien on the specific funds then you must segregate those funds and either pay them over to the party entitled to them or if the interest is disputed by the client, you must act to resolve that dispute which may include filing an interpleader action in court if no other resolution can be reached. If you have notice of a statutory lien on the proceeds you are required to comply with that statute and pay the funds as required by law. (See: Colorado Bar Ethics Opinion 94 as updated in 2006). For example, in Roberts v. Total Health Care, Inc., 349 Md. 499, 709 A.2d 142 (1998) the Court of Appeals discussed the statutory lien applicable to the proceeds of causes of action involving Medicaid beneficiaries recognizing the constitutionality of the lien and the statutory requirement for the state to give notice of the lien to the attorney. Under that statute the attorney was required to give notice to the state that the cause of action had been filed. If you conclude the creditor has a legal interest in the funds, then you must consult with your client regarding your legal conclusion and determine if your client disputes the creditor’s claim to such funds. This Committee agrees with the Colorado Bar Committee’s Opinion No. 94 regarding statutory liens and court judgments:
Where a third party has an interest in the property a result of a statutory lien or court order, and the client demands that the lawyer not disclose to the third party that the lawyer is holding the property, Rule 1.15(b) requires the lawyer to distribute the funds to the third party notwithstanding the client’s instructions. Because the third party is legally entitled to receive the property, Rule 1.15(b) requires the lawyer promptly to distribute the property to the third party, and to render an accounting, if requested. The lawyer’s duties under Rule 1.15(b) may conflict with the lawyer’s duty of confidentiality under Rule 1.6. Under the circumstances discussed in this subsection, however, the Committee believes that the objectives of Rule 1.15(b) take precedence; thus the lawyer should distribute the property notwithstanding the client’s request for confidentiality. [Footnote omitted.]
If the client has filed proceedings contesting a statutory lien or court judgment, then the attorney should hold the funds pending the outcome of those proceedings if agreeable to the parties, or interplead the funds for disposition by the court.
Under the factual scenario you lay out, if you conclude that the third party no longer holds a lien on (or no longer has a valid interest in) funds of the client, then after consultation with the client and upon your client’s direction to do so, you must disburse the proceeds to the client. Rule 1.6 requires that you maintain confidentiality of your actions regarding disbursement. What we said in summary to our opinion in MSBA Ethics Opinion 08-03 applies here as well: “In summary, the issue is whether you are able to make the determination that no person other than your client is entitled to the funds. Until that determination is made, you must keep the funds in compliance with Rule 1.15” and by extrapolation, if you determine no other person is entitled to the funds, you must disburse them as directed by the client.
The Committee hopes it has addressed your inquiry and thanks you for your interest.