Safekeeping of Settlement Proceeds Claimed Both by the Client and
a Third Person
When both the client and a third person claim an interest in settlement
proceeds held by a lawyer in his IOLTA account, the portion of the proceeds
in dispute should not be disbursed to the client if the lawyer reasonably
believes that the third party has a just claim to such portion. These
disputed proceeds should be retained in the account until the dispute
is resolved. Any undisputed portion of the settlement proceeds must
be distributed promptly to the parties entitled to receive such portions.
- Rule 1.15 (Safekeeping Property)
- Rule 1.6 (Confidentiality of Information)
The inquirer represents a client in a personal injury case who was
treated at D.C. General Hospital. The District of Columbia Government
paid the client’s medical expenses. The litigation was settled favorably
for the client and the inquirer has received the settlement monies.
The District Government, under D.C. Code § 3-507, et seq., [Health
Care Assistance Reimbursement Act] has asserted a Medicaid lien over
the settlement proceeds, seeking reimbursement of medical benefits paid
by the District on the client’s behalf. Following settlement, the lawyer
requested the District to reduce the amount of its lien because (1)
some of the amounts reflected in the lien were for charges unrelated
to his client’s accident-related injuries and medical care; (2) some
of the accident-related charges were deemed excessive in a deposition
given by the client’s D.C. General Hospital treating physician; and
(3) the lien is subject to compromise under D.C. Code § 3-507(b).
Either the District has refused, or has not responded to, this request.
Inquirer’s client has asked inquirer to disburse all of the settlement
proceeds directly to him. Inquirer notes that he expects his client
to spend the money once it is received and asks whether he can, under
the rules, hold the funds that are subject to the District’s lien in
his IOLTA account.
Rule 1.15, Safekeeping Property, generally requires a lawyer to
deliver promptly to the client or a third person any funds or other
property that the client or a third person is entitled to receive.1 Comment
 to Rule 1.15 acknowledges that other parties “may have just
claims against funds or other property in a lawyer’s custody.”
The comment states further that the 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.” In the case at issue, the District Government has
asserted a statutory lien over a portion of the settlement proceeds.
District law provides that, after receipt of a notice of a perfected
Medicaid lien (presumably the case here), if certain persons dispose
of funds without paying the amount necessary to satisfy the lien, that
person is personally liable for one year for any amount that the District
is unable to recover.2
Whenever the lawyer holds funds that he reasonably
believes are subject to a perfected statutory lien, the lien should
be considered to be a third party “just claim” against the
funds held in the lawyer’s custody, as that term is used in Comment
 to Rule 1.15. Under such circumstances, the lawyer should refuse
to disburse the contested settlement proceeds to the client. Instead,
the lawyer should hold the disputed funds until the dispute has been
resolved.3 Of course, the uncontested portion of the proceeds should
be promptly delivered to the client pursuant to Rule 1.15(b). Rule
1.15 and the comment thereunder recognize that, although the lawyer
has a paramount obligation to the client, there may also be an ethical
duty to third parties as to funds, in the lawyer’s possession, to which
the third parties may be entitled.4
In cases where the lawyer holds disputed funds,
he may at the client’s request attempt to resolve the dispute by negotiating
with the party asserting the claim to the funds. Pending disposition
of the disputed funds by an agreement of the parties or by court order,
the inquirer must hold the contested proceeds pursuant to Rule 1.15(a).
Upon request of the third party (or the client), the lawyer must render
a full account as to the proceeds, subject to the confidentiality rules
of Rule 1.6.
A lawyer may distribute to a client only those settlement funds
which the client is entitled to receive.
Inquiry No. 93-7-17
Adopted: October 18, 1994
Rule 1.15(b) states:
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 with the client, 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, subject to Rule 1.6.
D.C. Code § 3-507 provides:
If after receiving notice of the
lien under paragraph (2) of subsection (d) of this section a beneficiary,
third party, or an insurer of a third-party tortfeasor disposes of
funds covered by a lien perfected under this section without paying
the District the amount of its lien that could have been satisfied
from those funds after paying off any prior liens, that beneficiary,
third party, or insurer shall, for a period of 1 year from the date
the funds were improperly disposed of, be liable to the District for
any amount that, because of the disposition, it is unable to recover.
See, e.g., In re Cassidy, 89 Ill. 2d 145, 432 N.E.2d 274 (1982).
The court held that the attorney could not be censured where he had
not disbursed to his client settlement proceeds in his trust account
on which third parties had liens.
Rule 1.15(b) and Comment . See also Leon v. Martinez, N.Y. Ct.
App. No. 103 (7/7/94). In Martinez, the court rejected 4 the lawyer’s
argument that he was obligated under DR 9-102 to pay his client the
settlement funds in his possession and permitted the lawyer to be
sued by third parties to enforce their claim for a portion of the
settlement proceeds. The court concluded that the rule explicitly
created ethical duties to third parties with respect to funds, held
by the lawyer, to which the third parties may be entitled.