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Who has the right to funds held in trust?

Assistant Ethics Counsel Columns

The Florida Bar Ethics Hotline frequently receives inquiries regarding a lawyer’s ethical obligation when holding funds or property in trust that third parties claim an interest in. A related dilemma occurs when both the client and the lawyer claim a right to certain funds in the lawyer’s trust account. The lawyer’s ethical obligation in these situations is addressed in Rule 5-1.1, Rules Regulating The Florida Bar, and several ethics opinions issued by the Professional Ethics Committee of The Florida Bar. The lawyer also has obligations to the client under fiduciary law.

Rule 5-1.1(e) requires the lawyer “[u]pon receiving funds or other property in which a client or third person has an interest” to notify those parties of receipt of the funds. Further, the rule requires the lawyer “[e]xcept as stated in this rule or otherwise permitted by law or by agreement with the client” to deliver the funds to the client or third party.

However, disputes often arise between the client and third parties, or between the client and the lawyer, as to the right to funds held in trust. In both situations, Rule 5-1.1(f) is applicable. The rule states:

(f) Disputed Ownership of Trust Funds. When in the course of representation a lawyer is in possession of property in which 2 or more persons (1 of whom may be the lawyer) claim interests, the property must be treated by the lawyer as trust property, but the portion belonging to the lawyer or law firm must be withdrawn within a reasonable time after it becomes due unless the right of the lawyer or law firm to receive it is disputed, in which event the portion in dispute must be kept separate by the lawyer until the dispute is resolved. The lawyer must promptly distribute all portions of the property as to which the interests are not in dispute.

The comment to the rule elaborates:

Lawyers often receive funds from which the lawyer’s fee will be paid. The lawyer is not required to remit to the client funds that the lawyer reasonably believes represent fees owed. However, a lawyer may not hold funds to coerce a client into accepting the lawyer’s contention. The disputed portion of the funds must be kept in a trust account and the lawyer should suggest means for prompt resolution of the dispute, such as arbitration. The undisputed portion of the funds must be promptly distributed.

Third parties, such as a client’s creditors, may have lawful claims against funds or other property in a lawyer’s custody. A lawyer may have a duty under applicable law to protect these third-party claims against wrongful interference by the client. When the lawyer has a duty under applicable law to protect the third-party claim and the third-party claim is not frivolous under applicable law, the lawyer must refuse to surrender the property to the client until the claims are resolved. However, a lawyer should not unilaterally assume to arbitrate a dispute between the client and the third party, and, where appropriate, the lawyer should consider the possibility of depositing the property or funds in dispute into the registry of the applicable court so that the matter may be adjudicated.

Rule 5-1.1(f) is applied in several, commonly-occurring factual situations. Often, the client disputes the lawyer’s right to asserted legal fees. If the client disputes the lawyer’s right to funds held in trust, the lawyer must hold the funds in trust “until the dispute is resolved.” If the client is disputing only a portion of the lawyer’s asserted legal fee that is held in trust, the lawyer should move the undisputed portion of the asserted fee to the lawyer’s operating account and maintain the disputed amount in trust. The Florida Bar offers a Fee Arbitration program aimed at resolving such disputes. For information about this program, contact Sergio Botero at 850-561-5719.

A second common situation involves personal injury type cases where the lawyer is in possession of settlement funds against which third parties such as medical providers claim an interest and the client, and possibly the lawyer as well, dispute the claim. In this situation, Rule 5-1.1(e) and (f) applies. The lawyer should notify third parties with an interest in the funds as to the receipt of settlement funds. If the right to the funds is in dispute between the client and the third party and the lawyer owes a legal duty to the third party, the funds “shall be kept separate by the lawyer until the dispute is resolved.” The Professional Ethics Committee addressed the issue in Florida Ethics Opinion 02-4. The opinion discusses various situations where a third party may have a legal right to funds held in trust, either through statutes, court orders, or contracts. If the third party has a valid legal claim to funds held in trust and the lawyer owes a legal duty to the third party, the lawyer must, pursuant to 5-1.1(f), hold the funds in trust until the dispute can be resolved. Opinion 02-4 makes clear that whether the lawyer owes a legal duty to the third party is a question of law that must be determined by the lawyer. In resolving any dispute as to funds held in trust, the lawyer may serve as a negotiator on behalf of the client, but may not unilaterally arbitrate the matter. Before acting adversely to the client, the lawyer has certain obligations. Ethics Opinion 02-4 states:

The lawyer should take no action which would be against the client’s interests unless fully confident that under the law such action must be taken, and then the action should be taken only after fully advising the client of the intended action and the basis for the intended action. If possible, the client should be given an opportunity to seek independent legal counsel before any action is taken against the clients interests, such as depositing the funds or property into the court registry to allow the court to decide how the funds or property are to be distributed. In any event, the lawyer at all times must act as an advocate for the client in resolving the dispute.

If the lawyer determines that action must be taken that is adverse to the client’s interests, the lawyer should consider the application of Rule 4-1.7, the conflict of interest rule. A conflict of interest may exist which would require the lawyer’s withdrawal from the case. See Rule 4-1.16(a)(1). The dispute must be resolved either by agreement among the parties or by application to a court of competent jurisdiction.

A third situation that implicates 5-1.1 (e) and (f) is where the lawyer represents one of the parties to a real estate transaction and holds funds in trust related to the sale. This type of situation is discussed in Ethics Opinion 02-6. In 02-6, the inquiring lawyer represented the seller and held funds deposited by the buyer. The transaction had not been closed in a timely manner by the buyer. The committee stated that where the lawyer is essentially serving as an escrow agent holding funds related to a real estate transaction, the lawyer may not simply remit the funds to the client. The committee set forth the lawyer’s obligations:

Under the rules regulating trust accounts, the attorney must determine whether the attorney has a legal duty to the purchaser, such as under the escrow agreement. If the attorney does have a legal duty to the purchaser, the attorney may not release the funds to the client. An indemnification agreement signed by the client does not abrogate the attorney’s responsibilities to third parties under the Rules of Professional Conduct. Rather, the attorney should hold the funds in trust until the dispute can be resolved. If the dispute cannot be resolved, the attorney could file an interpleader or declaratory judgment action in a court of competent jurisdiction and deposit the disputed funds in the registry of the court. Rule 5-1.1(f) and Florida Opinion 67-36. Whether a third party has a valid legal claim against the trust funds is a legal question that cannot be answered in an ethics opinion.

Notably, the committee made clear that the lawyer cannot enter into an indemnification agreement with the client allowing the lawyer to disburse to the client and shifting the risk of a lawsuit by the opposing party to the client. Such an agreement is “ethically impermissible” and would violate the Rule 4-1.7, the rule regarding conflicts of interest.

In addition to 02-4 and 02-6, Ethics Opinion 00-2 (Reconsideration) discusses this particular issue. In 00-2R, reconsidered after 02-4 and 02-6 were decided, the Committee addressed the question of whether a lawyer may participate in a settlement agreement that allows an insurance company to place funds directly into a client account, rather than the funds being placed first in the lawyer’s trust account. The committee, citing Rule 5-1.1, stated that such an agreement was possible, under certain restrictions that allow for compliance with the lawyer’s obligations under 5-1.1. In sum, the committee stated that such an agreement is permissible where the only funds going directly from an insurance company to the client are funds owed to the client or a recipient designated by the client. As to the balance of the funds, a separate check must be issued to the lawyer, including amounts for attorney fees, any costs, and amounts owed to third parties “which are subject to lien or other valid legal claim that a lawyer is obligated to protect.” The lawyer should deposit the funds in trust and distribute the funds in accordance with the lawyer’s ethical obligations. The committee concluded:

This agreement gives a lawyer control over that portion of settlement proceeds covering fees, costs, and amounts to which third parties may have valid legal claims that a lawyer is obligated to protect. This permits the lawyer to fulfill his or her ethical duties under Rule 5-1.1 and Comment, Rules Regulating The Florida Bar.

In sum, both The Rules Regulating The Florida Bar and fiduciary law impose obligations on the client regarding funds of the client or funds in which the client has an interest.

The main thrust of 5-1.1(f), and the related opinions, is that the lawyer is obligated to protect trust funds that are legitimately in dispute and in which the lawyer owes a legal duty to the third party claiming an interest. If a dispute exists as to funds held in trust, either between the lawyer and client, the client and a third party, or even between third parties, the lawyer should determine whether there are valid legal claims to the funds. If there are valid claims and the lawyer owes a legal duty to the third party, the lawyer should hold the funds in trust until the dispute can be resolved, either through direct negotiation, mediation or arbitration, judicial disposition, or other valid means.

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