State Bar of Arizona Ethics Opinions

04-03: Client Funds and Property; Liens; Collection of Legal Fees; Missing Clients; Creditors of Client
5/2004

An attorney cannot, without the consent of his former client, ethically disburse to himself funds from a former client's share of funds in the attorney's possession, where the former client owes the attorney unpaid fees, but the funds in the attorney's possession are unrelated to the representation of the former client. If the attorney is unable to locate the former client to obtain her consent, the attorney should commence an interpleader action.

FACTS[1]

The inquiring attorney accepted funds from an escrow agent and deposited them into his trust account.  The funds were the proceeds of the sale of a home by the inquiring attorney's former client and her ex-husband.  The former client owes fees to the inquiring attorney and has not disputed the fees.  The inquiring attorney represented the former client in regard to her divorce.  The sale of the home, however, did not occur during the representation of the former client, and the inquiring attorney's services were not used in connection with the sale.  After depositing the funds in his trust account, the inquiring attorney attempted, without success, to contact the former client.[2]

QUESTION PRESENTED

Can the inquiring attorney disburse to himself the fees owed to him by his former client from the former client's share of the funds in his trust account, without the former client's consent?

RELEVANT ETHICAL RULES

ER 1.15.     Safekeeping Property

(a)     A lawyer shall hold property of clients or third persons that is in a lawyer's possession in connection with a representation separate from the lawyer's own property.  Funds shall be kept in a separate account maintained in the state where the lawyer's office is situated, or elsewhere with the consent of the client or third person.  Other property shall be identified as such and appropriately safeguarded.  Complete records of such account funds and other property shall be kept by the lawyer and shall be preserved for a period of five years after termination of the representation.

(d)     Upon receiving funds or other property in which a client or third person has an interest, a lawyer shall promptly notify the client or third person.  Except as stated in this Rule or otherwise permitted by law or by agreement between the client and the third person, 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.

(e)     When in the course of representation a lawyer is in possession of property in which two or more persons (one of whom may be the lawyer) claim interests, the property shall be kept separate by the lawyer until the dispute is resolved.  The lawyer shall promptly distribute all portions of the property as to which the interests are not in dispute.  As to the portion of the property in dispute, the lawyer shall commence an interpleader action if otherwise not able to resolve the dispute.[3] 

ER 4.2.     Communication with Person Represented by Counsel

In representing a client, a lawyer shall not communicate about the subject of the representation with a party the lawyer knows to be represented by another lawyer in the matter, unless the lawyer has the consent of the other lawyer or is authorized by law to do so.

ER 4.3.     Dealing with Unrepresented Person

In dealing on behalf of a client with a person who is not represented by counsel, a lawyer shall not state or imply that the lawyer is disinterested.  When the lawyer knows or reasonably should know the unrepresented person misunderstands the lawyer's role in the matter, the lawyer shall make reasonable efforts to correct the misunderstanding.  The lawyer shall not give legal advice to an unrepresented person, other than the advice to secure counsel, if the lawyer knows or reasonably should know that the interests of such a person are or have a reasonable possibility of being in conflict with the interests of the client.

RELEVANT ARIZONA ETHICS OPINIONS
 
None.

OPINION

The inquiring attorney has a duty to safeguard property belonging to third persons pursuant to ER 1.15.  ER 1.15(d) requires a lawyer, upon receipt of funds or other property in which a client or third party has an interest, to promptly notify the client or third person, and "[e]xcept as stated in this rule or otherwise permitted by law or by agreement with the client . . .  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 inquiring attorney attempted to comply with the notice requirement of the rule with respect to his former client.  He should also attempt to notify the ex-husband (in a manner consistent with ERs 4.2 and 4.3) in order to provide notice that the inquiring attorney has funds in his possession in which the ex-husband may have an interest.  The inquiring attorney has no claim with respect to the ex-husband's share of the funds.  Therefore, he must make reasonable efforts to ascertain the amount of the ex-husband's share of the funds and disburse his share to him.

The inquiring attorney has not been able to "promptly deliver" the escrow funds to the former client or her ex-husband, because the former client is unavailable.  Indeed, the inquiring attorney cannot determine the parties' respective interests in the funds without contacting both the former client and her ex-husband. [4]  Even if the inquiring lawyer were able to ascertain the amount of his former client's interest in the funds, he still could not ethically disburse his fees to himself out of her share of the funds without her consent.  An attorney's "charging lien" attaches only to funds or property related to the attorney's services.  National Sales & Service Co. Inc. v. Superior Court of Maricopa County, 136 Ariz. 544, 667 P.2d 738 (1983); Daniel J. McAuliffe, Arizona Legal Ethics Handbook § 1.16:500 (State Bar of Arizona 2000).  Here, the funds are not related to the inquiring attorney's services.  Whether the inquiring lawyer ethically can pay himself out of the former client's share of the funds, therefore, depends on whether an exception is "stated in [ER 1.15] or [such payment is] otherwise permitted by law or by agreement between the client and the third person . . . ."  ER 1.15(d). 

We are not aware of any agreement that would allow the inquiring attorney to disburse fees to himself out of funds unrelated to the representation.  In addition, there are no exceptions under ER 1.15 that would permit such a disbursement, and, as stated above, "charging liens" do not attach to assets unrelated to a representation.[5]  We conclude, therefore, that the lawyer should not pay himself out of the former client's share of the proceeds unless the client consents, and he should treat all of the funds as disputed pending receipt of additional information as to the parties' respective interests.  ER 1.15(e) requires that, if a dispute arises between a lawyer's and a client's or third person's interests in property held by the lawyer, "the property shall be kept separate by the lawyer until the dispute is resolved."  Here, the inquiring lawyer appropriately segregated all of the funds, including that portion to which he claims an interest.  If the inquiring lawyer is unsuccessful in his attempts to contact his former client and her ex-husband, he should commence an interpleader action.[6]

CONCLUSION
 
The inquiring lawyer is required to segregate the funds until such time as he can ascertain his former client's interest therein and has received her consent to pay himself out of his former client's share.  He should also attempt to contact his former client's ex-husband to provide him with notice that the inquiring attorney has funds in his possession in which the ex-husband may have an interest.  If the inquiring lawyer is unable to contact the parties, he should commence an interpleader action.

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[1] Formal Opinions of the Committee on the Rules of Professional Conduct are advisory in nature only and are not binding in any disciplinary or other legal proceedings.  © State Bar of Arizona 2003

[2] As a cautionary note, the inquiring attorney should have declined to accept the funds until he was certain that he could fulfill the requirement, discussed in the opinion, to provide prompt notice to the former client and her ex-husband and promptly deliver the funds.  If the inquiring attorney had determined in advance whether he could contact these individuals and deliver the funds, he would have avoided the problem of having funds in his trust account that he cannot ethically disburse.  Further, whether the inquiring attorney, by accepting the proceeds of the home sale from the escrow agent, became a fiduciary with respect to such funds, and whether his treatment and disbursement of the funds may be governed by other applicable law, are legal questions outside the scope of the Committee's jurisdiction.  See Ariz. State Bar Comm. on the Rules of Prof'l Conduct, Statement of Jurisdictional Policies, No. 6(a) (Jan. 20, 2000).

[3] As of the date of this opinion, a Rule 28 petition was pending before the Arizona Supreme Court to amend the last sentence of ER 1.15(e).

[4] The inquiring attorney states there may be offsets applicable to the proceeds that would result in the parties'  interests not being equal.  In addition, the parties could have reached an agreement about the proceeds of the home sale after the end of the inquiring attorney's representation.

[5] Although the former client has not expressly disputed the inquiring lawyer's fees, she has not paid them either.  The fact that she has not paid could be interpreted as a dispute.

[6] Cf.  n.3 above.  In Opinion 97-03, we stated that, when a lawyer holds unidentified funds in his/her trust account, "the money should ultimately be disposed of pursuant to the provision of applicable state law."  Under the facts of this case, assuming the inquiring attorney makes a reasonable effort to locate his former client and her ex-husband, an interpleader action may not successfully resolve the issue of the appropriate allocation of the funds, and the funds may ultimately be disposed of pursuant to applicable state law through the interpleader action just as they would have been by the inquiring attorney's own actions without court intervention.  Nevertheless, as of the date of this opinion, commencement of an interpleader action is mandatory if the dispute cannot be resolved.