Lawyers faced with third-party claims to client funds often are confronted with deciding whether a particular third-party has an interest sufficient to impose an obligation on a lawyer to refrain from disbursing funds to the client.
Intending to clarify a lawyer’s ethical obligations, the Texas Bar Ethics Committee published Opinion 681.
The opinion addresses the question: “Under the Rules of Professional Conduct, when does a third party have an interest in client funds sufficient to trigger a lawyer’s duty to disburse or safeguard those funds for the third party’s benefit?”
And as is often the case, the answer is, “it depends.”
The opinion presents the following hypothetical:
As a result of the settlement of a client’s personal injury lawsuit, settlement proceeds are deposited into a lawyer’s trust account. The lawyer is made aware of a series of third-party claims and proceeds to discuss them with the client. After the discussion, the client refuses to honor any of the third-party claims and instructs the lawyer to turn over the entire share of settlement funds. After the lawyer informs the client that the Rules of Professional Conduct may prohibit disbursement of some or all of the funds to the client, the client terminates the lawyer and again instructs the lawyer to pay the client the entire share of settlement funds without deduction of any third-party claims.
The Committee concluded that, “if a lawyer is aware that a third-party claimant has an interest in client funds in the lawyer’s possession, the lawyer must pay the funds to the third party unless the claim is disputed by the client, in which case the lawyer must withhold the disputed portion from both the client and the third party until the dispute is resolved or the lawyer has interpleaded the disputed funds.” Moreover, if a lawyer is obligated under the Rules to withhold client funds from the client due to the claim of a third party with a matured legal or equitable interest , “the lawyer’s obligation to the third party survives and is unaffected by the client’s termination of the lawyer-client relationship.”
However, the Committee emphasized that a lawyer’s primary duty is disperse funds to the client unless the lawyer is aware of a valid third-party interest that is not disputed by the client.
For purposes of the Rule, a third-party claimant has a valid “interest” in client funds held by a lawyer only when the third party has a matured legal or equitable interest in the funds. A matured legal or equitable interest in particular client funds exists when the interest is based on: (1) a statutory lien; (2) a judgment that adjudicates ownership or disposition of the funds in question; (3) a court order regarding the funds in question; (4) a written assignment conveying an interest in the funds in question; (5) a right of subrogation regarding the funds in question; or (6) a signed letter of protection or comparable agreement which promises payment upon collection.
The Committee’s opinion also lists a number of third-party claims that are not valid in this context and cites to other states’ professional ethics committees’ opinions that have interpreted a lawyer’s obligation regarding third-party claims.
Read Texas Advisory Opinion 681 here.
