What are a lawyer's ethical obligations when the lawyer receives notice of a lien or assignment of client funds to a third party?
Answer: Rule 1.15(b) provides that “a lawyer shall promptly deliver 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 promptly render a full accounting regarding such property.” The comment to Rule 1.15 states:
Third parties, such as a client's creditors, may have just claims against funds or other property in a lawyer's custody. A lawyer may have a duty under applicable law to protect such third-party claims against wrongful interference by the client, and accordingly may refuse to surrender the property to the client. However, a lawyer should not unilaterally assume to arbitrate a dispute between the client and the third party.
If a third person is “entitled to receive” funds or property that the lawyer is holding, the lawyer must take the following steps: Notify the client that payment will be made to the third party of the amount of third party's claims. If the client does not object, make the disbursement to the third party. If the client does object, the lawyer should notify the third party and hold the funds in trust until the dispute between the client and third party is resolved. However, the lawyer is not to “unilaterally assume to arbitrate a dispute” between the client and another person such as a creditor of the client.
The duties listed above apply if the third party is “entitled to receive” funds or property held by the lawyer. When a third party is entitled to receive funds or property is a legal question that the Committee does not have authority to resolve. However, opinions of the Ethics Committee have identified the following as situations in which duties to third parties may apply: (1) when the engagement agreement with the client authorizes the attorney to make disbursements to creditors or medical providers of the client; (2) when the client has expressly authorized such disbursements; (3) when the client has made an assignment to a third party of funds held by the lawyer, whether in the form of express assignment, doctor's lien, or similar contractual obligation and the lawyer has knowledge of such assignment; (4) when the third party is subrogated to the rights of the client either by contract or equitably and the lawyer has knowledge of such subrogation rights; and (5) when the third party has a statutory right to payment and the attorney knows of the existence of such a creditor. This list is not exhaustive and lawyers must determine based on the facts of each case whether the third party is entitled to receive funds or property held by the lawyer.
By contrast, if the attorney is simply aware that the client has creditors or medical providers, but has not received notice of a claim, the committee has advised that the third party is not entitled to receive funds or property. In this situation, the lawyer may properly disburse to the client although the lawyer should counsel the client regarding the client's obligations to creditors or medical providers.
SCRPC Rule 1.15
South Carolina Bar Ethics Advisory Opinions: 93-14 , 93-31 , 94-20 , 95-29