By Alex De Grand, Legal Writer, State Bar of Wisconsin
Feb. 18, 2009 – An attorney’s ethical obligation toward a third party asserting an interest in a client’s funds or property is greater than the exposure to civil liability for mishandling those sums.
In a new ethics opinion E-09-01, the State Bar Ethics Committee noted that an attorney is not liable to a medical provider for neglecting to give a promised portion of funds from an expected settlement so long as the client – and not the lawyer – gave the assurances. But this rule, derived from Riegelman v. Krieg, 2004 WI App 85, and Yorgan v. Durkin, 2006 WI 60, did not address a lawyer’s professional responsibility to the third party with a claim in the funds. And in Disciplinary Proceedings against Barrock, 2007 WI 24, the Wisconsin Supreme Court held that a lawyer does have an ethical duty to set aside a portion of funds according to a client’s agreement – whether the lawyer joined the client or not in that assurance.
Accordingly, ethics opinion E-09-01 directs:
“When a lawyer holds in trust funds in which the client and a third party assert an interest identified by lien, court order, judgment or contract, and a dispute arises over ownership or division of those funds, the lawyer must hold funds in trust until the dispute is resolved.”
The ethics committee elaborated on the opinion’s application in a number of aspects.
A lawyer cannot obey a client’s instruction to disregard a “doctor’s lien” signed by the client. When a lawyer is notified that a third party has an ownership interest in trust property that falls within one of the four specified categories (lien, court order, judgment, or contract), the lawyer has a duty of prompt notice, delivery, and accounting. A “doctor’s lien” signed by the client may create a valid contractual interest so the lawyer may not follow a client’s instruction to disregard it. This duty does not change if the lawyer notifies the third party that the lawyer does not intend to honor the lien document.
A lawyer does not have an obligation to attempt to settle the dispute over the funds on behalf of the client. Absent an agreement with the client to the contrary, a lawyer’s representation of a client in one matter does not normally obligate the lawyer to represent the client in ancillary disputes over funds held in trust. Lawyers should be clear with clients about the extent of the assistance the lawyer is willing to provide.
A lawyer need not hold funds indefinitely when the client and third party cannot agree and will not commence litigation or take other steps toward resolution. A lawyer may seek a declaratory action and seek guidance from the court as to who is entitled to the funds.
If a lawyer files a declaratory action, the lawyer is initially responsible for filing fees or other attendant costs. A lawyer can apply the disputed funds toward these costs only if the lawyer has the explicit permission from all parties to the dispute. A lawyer may also apply to the circuit court hearing the matter for reimbursement out of the disputed funds.
These obligations do not change if the person asserting an interest does so for an obligation unrelated to the matter in which the lawyer represents the client. An asserted third-party interest may create an ethical obligation so long as the third party clearly and with particularity identifies the funds and the matter. This excludes general assertions of client indebtedness, even if based upon a lien, court order, judgment, or contract.
Lawyers do not have an obligation to determine if any third parties may have an ownership interest in funds held in trust before distributing them to the client. It is the third party’s responsibility to provide notice of an interest in the property. The lawyer’s duty is not triggered even if the lawyer is aware that medical providers would likely expect payment under the circumstances. A lawyer is also not required to permit a third party who asserts an interest that is not yet perfected time to obtain a court order, judgment, or lien before disbursing the funds to the client.
The lawyer cannot follow the client’s instruction not to notify third parties who have a potential interest in funds when a matter is settled. The ethics committee addressed the conflict between the lawyer’s duty to promptly notify any third party who asserts an interest in the specific funds held in trust with an obligation to keep confidential all information relating to the representation. The committee refers to a series of exceptions within the duty of confidentiality that keep a lawyer from participating in fraud or a crime.
Disputes and assertions of an ownership interest must be non-frivolous. Lawyers can disregard “patently frivolous” claims such as those made despite the existence of an earlier court order determining ownership interests. But a lawyer cannot unilaterally determine the respective merits of any position in a dispute. Therefore, a colorable dispute triggers this rule.
A lawyer should refrain from behavior that would induce or mislead a third party into believing that the lawyer will protect his or her interest in funds when the lawyer does not intend to do so.
Read Ethics Opinion E-09-01
Learn about the effect of State Bar ethics opinions