Ethics Hotline & Opinions

ETHICS DOCKET NO. 2023-01

MARYLAND STATE BAR ASSOCIATION, INC.

COMMITTEE ON ETHICS

ETHICS DOCKET NO. 2023-01

 

What are former counsel’s obligations concerning disposition of crowdfunded donations raised to support the former representation?

 

QUESTION PRESENTED

 This opinion addresses issues associated with the former counsel’s custody of funds in his attorney trust account which were raised through crowdfunding for specific and limited purposes related to anticipated litigation.

 

CONCLUSION

If successor counsel refuses to take custody of the funds in their attorney trust account for the purpose they were donated, then you are advised against making decisions by yourself concerning disposition of the funds. You should promptly petition for a judicial determination as to the future disposition of the funds. In the meantime, we do not believe that you have a Maryland attorney lien on these funds.

 

BACKGROUND

You have requested the advice of the Committee on Ethics with regard to the handling of money donated through a crowdfunding website for the specific and exclusive use of funding the anticipated legal expenses of a case. You were retained by the surviving spouse (and personal representative) of a decedent who is pursuing civil claims arising from her death. You have a written contingency fee retainer agreement with the surviving spouse, who is also personal representative of his late wife’s estate. You have since terminated your representation, and the surviving spouse now has new counsel.

Because the decedent’s death was a matter of some public interest, with the cooperation of the surviving spouse, you initiated and directed a crowdfunding effort to support the substantial anticipated out-of-pocket expenses, which were the client’s responsibility under the retainer agreement. The notification to potential donors advised that the contributions would be used for engaging professionals and other consultants including those with medical, legal and other expertise.

You advised that, after contributions were made to the crowdfunding account, you placed a portion of the proceeds into your attorney trust account and drew upon it for legal expenses of various experts, investigations and examinations, and other similar expenses. You further advised that you did not pay yourself any fee, and you later transferred the remainder of the funds to your attorney trust account where they remain today.

You later terminated your representation. You indicate there is no claim or suggestion that the termination of representation is in any way cause-based, i.e., related to performance, misconduct, lack of legal justification, etc. Significantly, you assisted with the transfer of your client’s file and made yourself personally available to the client’s new counsel, providing representation under the umbrella of a 501(c)(3) organization. You have represented that the work you performed before your withdrawal was substantial and resulted in a large of amount of evidence gathered and/or analyzed, to your former client’s benefit. You have received no compensation to date for this substantial effort, nor did your contingent fee agreement provide for compensation until a recovery occurred.

You advised that, at this time, you continue to hold the crowdfunded money in trust. The client’s new and current counsel, the 501(c)(3) organization, has declined to accept the funds in its own attorney trust account or in the attorney trust account of the individual attorney now retained. The new attorney proposed that you instead transfer the funds to the client himself and that his organization would bill the client for such expenses to the extent of the amount transferred. You declined such proposal because there are no guarantees or protections that the donors’ intent would be realized or protected, and because the funds were donated to fund the legal action, and not as a donation to the surviving spouse personally or for any other purpose.

In your letter, you have requested the guidance of the Committee on the following three issues:

  1. Are the donated funds the client’s property such that I must turn them over to the client?
  2. If the 501(c)(3) organization chooses not to accept or use the funds and finances the litigation on its own, is it my ethical duty to refund the unspent funds in my attorney trust account to the donors?
  3. If there is no resolution reached with the client about the fee, can I treat the funds as disputed and hold them until a court or other body determines the appropriate amount of my fee?

The Committee will attempt to address all three questions to the extent we can within our limited charter. Our role is to provide guidance on questions of ethics and professional responsibility, but otherwise not to opine on legal matters.

Initially, we will observe that crowdfunding is simply a new use of technology to support a well-recognized mechanism to assist with client legal fees and expenses, often referred to as a legal defense fund. There is generally no prohibition on using crowdfunding to raise funds to support a client’s legal fees and expenses as long as the donor(s) do not have a stake in the litigation or impair the lawyer’s independence (which does not seem to be an issue here).  See, e.g., Model Rules of Prof’l Conduct R. 1.8(f), 5.4 (2018). See D.C. Legal Ethics Opinion 375 (2018) (Ethical Considerations of Crowdfunding); Phila. Bar Ass’n Prof’l Guidance Comm., Op. 2015-6; N.Y. State Bar Ass’n Comm on Prof’l Ethics Formal Opinion 1062 (2015).

 

a. Disposition of Crowdfunded Donations.

It is clear that the crowdfund donors here made the donations with the specific intent of paying expenses associated with this case.  It would have been permissible to transfer these funds to the attorney trust account of new counsel consistent with the intent of the donors. But since this proposal was declined, this has now created an issue concerning the future disposition of these funds. You have advised us that a probate court in another state has addressed the issue, in part, in ruling that the funds are not property of the decedent’s estate, and that as a result, the probate court held it had no jurisdiction to order you to do anything with them.

As the former attorney and current custodian of the funds in escrow, you are, of course, subject to the provisions of Maryland Rule 19-301.15 – Safekeeping the Property of Others. But the obvious question is: who are the “Others”? Who, if anyone, can direct the disposition of these funds?

Although the Committee does not express opinions on legal issues, we can say this much: the issues associated with the ownership and control of these funds fall within a murky legal environment, so much so, in fact, that we believe you, as the former counsel and current custodian of the funds, should not seek to make this determination yourself. Rather, we believe the safest ethical approach is to seek judicial review and intervention.

There are a wide variety of potential outcomes here.  For example, courts in other states have ordered refunds to donors. See e.g., Adler v. SAVE, 432 N.J. Super. 101, 74 A.3d 41 (2013); Tenn Div. of the United Daughters of the Confederacy v. Vanderbilt Univ., 174 S.W.3d 98 (Tenn. 2005). But, Maryland law (with exceptions) holds that intervivos gifts are irrevocable, rejecting the “conditional gift” doctrine. Ver Brycke v. Ver Brycke, 379 Md. 669, 691, 843 A.2d 758, 771 (2004).  The court could appoint a trustee to work with plaintiffs’ current counsel to help fund the litigation.  The court has the authority under the cy pres doctrine to order a new purpose of the gift to meet donors’ intent.  Under some circumstances, the property could be considered abandoned. Md. Code Ann., Com. Law §17-301. It is, of course, unclear what the judicial outcome would be here.

Finally, we are not privy to the arguments of your former client as to why these funds should become property of the estate, an argument apparently rejected by the out-of-state probate court.  Given the express nature of the solicitation, there are undoubtedly reasons a court might not allow conversion of these funds to the property of the estate or the surviving spouse, but this would require a judicial determination after exploration of all the applicable law and facts. We express no opinion on the outcome of such an action.

These are surely not an exhaustive list of potential outcomes here. We express no opinion concerning what is the likely or correct outcome.  But, we do express the view that these legal issues are sufficiently unsettled that, as custodian of the funds, it would be ethically unwise to make that determination yourself. This obligation is particularly clear since your former client, the personal representative and surviving spouse, has apparently made an unsuccessful claim of the estate for these funds and presumably objects to alternative dispositions.  At this point, we believe that it would not be advisable disburse the funds to anyone (other than successor counsel), including the surviving spouse, either individually or in his capacity as personal representative, without judicial approval.

As custodian subject to Md. Rule 19-301.15, we believe you should consider petitioning with reasonable promptness to obtain a judicial determination on these issues. We cannot provide advice as to the form of the petition, whether interpleader, declaratory judgment, or otherwise.  The Committee believes it is ethically prudent to keep these funds in your attorney trust account pending judicial determination.

 

b. Attorney Fee Liens or Claims on Crowdfunded Donations.

Because of unusual history here, the attorney fee question is also complex.  You were retained in this matter on a purely contingent fee basis, which, of course, means that there is no fee entitlement until there has been an actual recovery. Somuah v. Flachs, 352 Md. 241, 256, 721 A.2d 680, 687 (1998). However, “if the representation is terminated either by the client without cause or by the attorney with justification, the attorney is entitled to be compensated for the reasonable value of the legal services rendered prior to termination” Skeens v. Miller, 331 Md. 331 (1993).

If your representation concluded in this fashion, you are potentially entitled to a quantum meruit claim for the value of your attorneys’ fees once there has been a recovery.  Soumah, at 258, 721 A.2d at 688. You can also assert a lien now on the pending cause of action for the value of your attorneys’ fees. Md. Code Ann., Business Occupations and Professions §10-501, Sommer v. Rhoads, 171 Md. App. 392, 407, 910 A.2d 514, 523 n.6 (2006).  Whether you can successfully assert such a claim in this situation is ultimately a legal question on which this Committee cannot opine.

The former client can, of course, voluntarily agree to pay some compensation to you now, before any recovery, to compromise and release your potential quantum meruit fee claim, but that is solely within the client’s discretion.  Based on the language of the crowdfunding solicitation, payment of attorneys’ fees would be permissible of the crowdfunded funds that you currently hold in trust, but only if authorized by the client with the advice of independent counsel who can advise the client of all the relevant factors (e.g., value of service, risk of nonrecovery, need for the funds to prosecute the pending action, etc.).

As for retaining these funds in your attorney trust account under an attorney fee lien pending completion of the litigation, we do not believe that such a course of action would be permissible or ethically advisable. In Maryland, attorney fee liens attach only to a cause of action or “a settlement, judgment, or award that a client receives as a result of legal services that the attorney-at-law performs.” See Md. Code Ann., Business Occupations and Professions § 10-501(a). Even then, such a lien attaches only to the extent the client owes money under a specific fee agreement.  None of these elements are present here to the best of our understanding.

Maryland’s attorney fee lien statute is found in § 10-501 of the Business Occupations and Professions Article:

(a)  Subject to subsection (b) of this section, an attorney-at-law has a lien on:

(1) a cause of action or proceeding of a client of the attorney-at-law from the time the cause of action arises or the proceeding begins; and

(2) a settlement, judgment, or award that a client receives as a result of legal services that the attorney-at-law performs.

(b)  A lien under this section attaches only if, and to the extent that, under a specific agreement between an attorney-at-law and a client, the client owes the attorney-at-law a fee or other compensation for legal services that produced the settlement, judgment, or award.

(c)  A lien under this section is subordinate only to:

(1) a prior lien for wages due to an employee of the client for work related to the settlement, judgment, or award; or

(2) a lien for taxes that the client owes the State.

(d)  An attorney-at-law may retain property subject to a lien under this section and bring an action for execution under the lien only in accordance with rules that the Court of Appeals adopts.

See also Md. Rule 2-652 (“The notice shall claim the lien, state the attorney’s interest in the action, proceeding, settlement, judgment, or award, and inform the client or other person to hold any money payable or property passing to the client relating to the action, proceeding, settlement, judgment, or award.”)

As far as we are able to tell, it does not appear that the funds in your attorney trust account would be subject to the Maryland attorney lien statute.  If successor counsel continues to be unwilling to take custody of these funds in their attorney trust account for the purposes they were donated, we believe you should seek a judicial determination as suggested earlier in this opinion, and retain the funds in your attorney trust account pending such a determination.

We hope this response is helpful. Thank you for contacting the Committee on Ethics.

 

Very truly yours,

MSBA COMMITTEE ON ETHICS

REFERENCES:

  • Rules Cited:
    • Rule 19-301.15
    • Rule 2-652
    • Model Rule of Prof’l Conduct R. 1.8
    • Model Rule of Prof’l Conduct R. 5.4
  • Ethics Opinions Cited:
    • C. Legal Ethics Opinion 375 (2018) (Ethical Considerations of Crowdfunding)
    • Bar Ass’n Prof’l Guidance Comm., Op. 2015-6
    • Y. State Bar Ass’n Comm on Prof’l Ethics Formal Opinion 1062 (2015)

DATE APPROVED BY COMMITTEE:  February 20, 2023

 
DISCLAIMER: Opinions of the Maryland State Bar Association (MSBA) Ethics Committee are an uncompensated service of the MSBA. This Committee’s opinions are not binding on the Maryland Court of Appeals, Maryland Attorney Grievance Commission, MSBA or this Committee. The reader is advised that subsequent judicial opinions, revisions to the rules of professional conduct, and future opinions of this Committee may render the Opinions stated herein outdated. As such, the Committee’s opinions are advisory only and neither the Committee nor the MSBA assumes any liability whatsoever with respect thereto. Accordingly, reliance upon the opinions of this Committee is solely at the risk of the user.