Washington Lawyer

Bar Counsel: What Should You Do With Disputed Entrusted Funds?

From Washington Lawyer, December 2010

By Dolores Dorsainvil

barcounselFee disputes or disputes involving entrusted funds are at the heart of many disciplinary complaints against lawyers. While the D.C. Office of Bar Counsel does not resolve these types of disputes, the ways in which lawyers choose to resolve such issues often implicate, and sometimes even violate, the District of Columbia Rules of Professional Conduct (hereinafter, the Rules) and precipitate the need for discipline.

Comment [1] to Rule 1.151 states, “[a] lawyer should hold property of others with the care required of a professional fiduciary.” As fiduciaries, attorneys can find themselves in situations where they are holding entrusted funds not just for the benefit of a client, but also for the benefit of third parties.[2] In this scenario, attorneys are obligated to safeguard such funds where ownership interests are claimed by both a client and a third party. In a wide range of cases, the D.C. Court of Appeals consistently has sent the message to the Bar that Rule 1.15(c) imposes a duty on attorneys to safeguard funds of third persons.[3]

Given that attorneys should always know who their client is, the first area of concern is, Who is considered a third party to whom the attorney owes fiduciary obligations? Opinion 209 of the D.C. Bar Legal Ethics Committee (Disposition of Property of Clients and Others Where Ownership Is in Dispute, revised 2000) provides guidance on an attorney’s obligation regarding such third parties. The opinion advises that a third party is one that has a “just claim” to the funds in the attorney’s custody. Opinion 293 defines “just claim” as one where an attorney has an affirmative duty under law to protect a third party’s interest, even if the client disagrees with that duty.[4] Id. Examples of what constitutes a “just claim:” are 1) garnishments, of which the attorney has been properly notified; 2) statutory liens such as Medicaid; 3) court orders; and 4) contractual agreements, whereby the client agrees to pay a third party from entrusted funds in the lawyer’s possession.[5] So a creditor of a client could not argue that it has a “just claim” unless the creditor can illustrate that the claim is related to the particular funds in question.

Once it is understood who the third party is, the question becomes, What constitutes “the care required of a professional fiduciary,” especially when a client—to whom an attorney owes the utmost loyalty—simply directs the attorney to not release any settlement (entrusted) funds to a qualified third party, but rather to disburse the funds directly to the client, leaving the onus on the client to resolve the dispute and/or pay the third party. Rule 1.15(d)[6] provides that the correct course of action is for the attorney to maintain possession of the disputed funds and to keep the funds separate until the dispute is resolved. If there is a portion of the funds that is not in dispute, the attorney must disburse the undisputed funds accordingly.

Attorneys should be mindful not to take it upon themselves to unilaterally resolve the dispute, or decide issues of validity of the claims of the client and/or the third party to the entrusted funds. Doing so not only exposes the attorney to possible liability (especially if the attorney is a party to any contractual agreement between the parties), but it also may present problems given that the attorney has a duty of loyalty to the client. Attorneys may, however, with the consent of the client and third party, mediate the issues at dispute between the parties or suggest that the parties agree to arbitrate the matter.[7] In the event that the attorney is unable to successfully mediate the dispute between the parties, then he or she should file an interpleader with the court so that the disputed funds can be properly deposited into the court register while the issues are before and ultimately resolved by a court.

Another situation attorneys should be mindful of is when there is a fee dispute between the attorney and client, where both parties are claiming an interest in the funds. Should attorneys find themselves in such a scenario, they can request that clients submit disputes to the Bar’s Attorney/Client Arbitration Board, an arbitration service that attempts to amicably resolve fee disputes between lawyers and their clients. If attorneys resort to self-help measures and unilaterally resolve a dispute by helping themselves to the portion of funds to which they believe they are entitled, it would be in direct violation of Rule 1.15(d). See In re Haar, 667 A.2d 1350 (D.C. 1995) (Haar I),and In re Haar,698 A.2d 412 (D.C. 1997) (Haar II) (The court held that the attorney engaged in negligent misappropriation when, without the client’s consent, he withdrew monies from the trust account representing his fee although the client disputed his fee).

In any event, the lesson is the same. In the narrow context of a dispute over entrusted funds, an attorney is more of a protector than an advocate.

Dolores Dorsainvil is a senior staff attorney with the Office of Bar Counsel.

[1] As of August 1, 2010, Rule 1.15 has been amended to reflect new subsections to the rule. The text in this article will reflect the new subsections.
[2] Rule 1.15(c) states,

[u]pon 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.

[3] See, e.g., In re Graham, 795 A.2d 51, 52 (D.C. 2002) (per curiam) (respondent publicly censured for Rule 1.15(b) violation resulting from “inadvertent” failure to pay third party); In re Ross, 658 A.2d 209, 211–212 (D.C. 1995) (after receiving notice that a third party had not been paid, respondent could have and should have taken more aggressive steps to make sure the check was sent as soon as possible); see also In re Bailey, 883 A.2d 106, 122 (D.C. 2005) (respondent engaged in negligent misappropriation when he failed to pay a medical provider due to an “honest but mistaken belief” that the authorization did not give the medical provider a “right” to or an “interest” in the settlement funds); In re Anderson, 979 A.2d 1206, 1222–1223 (D.C. 2009) (respondent failed to pay promptly his client’s medical providers); In re Toppelberg,906 A.2d 881 (D.C. 2006) (failure to pay two providers following a personal injury case settlement); In re Bettis, 855 A.2d 282, 285 (D.C. 2004) (respondent agreed that he would ensure that medical provider’s bill for medical treatment would be paid from any funds received in the case); In re Gregory, 790 A.2d 573, 578 (D.C. 2002) (respondent violated Rule 1.15(b) when he failed to notify his client’s medical providers that he had money to which they were entitled); In re Anderson, 778 A.2d 330, 333 (D.C. 2001) (failure to pay client’s outstanding medical bills); In re Shaw, 775 A.2d 1123, 1125 (D.C. 2001) (by signing an authorization and assignment, respondent recognized a medical provider’s right to insurance money); In re Smith, 817 A.2d 196 (D.C. 2003) (attorney disbarred for commingling and misappropriating funds belonging to client’s health care provider).
[4] Comment [7] states, in part, “[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. . . .”
[5] The lawyer can become a party to the contractual agreement or simply ratify the agreement by acknowledging the lien. A common example of this is an agreement known as Assignment and Authorization (also known as an A & A), where an attorney in a personal injury case agrees to honor a lien of a treating medical provider and pay the provider from the proceeds of any monies recovered in the personal injury action on behalf of the client.
[6] Rule 1.15(d) states,

[w]hen in the course of representation a lawyer is in possession of property in which interests are claimed by the lawyer and another person, or by two or more persons to each of whom the lawyer may have an obligation, the property shall be kept separate by the lawyer until there is an accounting and severance of interests in the property. If a dispute arises concerning the respective interests among persons claiming an interest in such property, the undisputed portion shall be distributed and the portion in dispute shall be kept separate by the lawyer until the dispute is resolved. Any funds in dispute shall be deposited in a separate account meeting the requirements of paragraph (a) and (b).

[7] See Comment [6] to Rule 1.15.

Disciplinary Actions Taken by the Board on Professional Responsibility

Original Matters
In re Wayne B. Bryant. Bar No. 957480. September 22, 2010. The Board on Professional Responsibility recommends that the D.C. Court of Appeals disbar Bryant. Bryant was convicted in the United States District Court for the District of New Jersey of six counts of mail and wire fraud in violation of 18 U.S.C. §§ 1341, 1343, 1346 & 2; one count of solicitation and acceptance of a corrupt payment or benefit in violation of 18 U.S.C. § 666(a)(1)(B); and five separate counts of mail fraud in violation of 18 U.S.C. § 1341. Mail and wire fraud, in violation of 18 U.S.C. §§ 1341, 1343, and 1346, are crimes of moral turpitude per se, for which disbarment is mandatory under D.C. Code § 11-2503(a)(2001).

Disciplinary Actions Taken by the District of Columbia Court of Appeals

Original Matters
In re Timothy Brown. Bar No. 366743. September 23, 2010. The D.C. Court of Appeals, after considering its own April 14, 2010, order referring to Bar Counsel’s motion to revoke Brown’s probation to a Hearing Committee, the subsequent report and recommendation of the Ad Hoc Hearing Committee that Brown’s probation be revoked, the lack of any exception by either party, and the entire record, suspended Brown from the practice of law for two years. In December 2006 the court had placed Brown on probation for three years and imposed several conditions on him at that time. In addition to suspending Brown, the court conditioned his reinstatement on a finding of fitness as well as a showing of reasonable progress toward repayment of the amount owed to the Clients’ Security Fund.

In re Anita C. Kanu. Bar No. 448528. September 30, 2010. The D.C. Court of Appeals disbarred Kanu, with reinstatement conditioned upon the attorney paying restitution to one client in the amount of $7,000 and to another client in the amount of $6,000, with interest at the legal rate of 6 percent per year, calculated from January 1, 2004. While representing two clients in immigration matters, Kanu failed to refund fee advances and engaged in conduct involving dishonesty, fraud, deceit, or misrepresentation. With regard to one of the clients, Kanu made false or misleading statements about her services. In addition, the court found that Kanu seriously interfered with the administration of justice. Rules 1.16(d), 7.1, 8.4(c), and 8.4(d).

In re Carol L. Matthews. Bar No. 8698. September 3, 2010. The D.C. Court of Appeals immediately suspended Matthews from the practice of law pursuant to D.C. Bar Rule XI, § 13(c).

Reciprocal Matters
In re Evan Slavitt. Bar No. 358861. September 23, 2010. In a reciprocal matter from Massachusetts, the D.C. Court of Appeals suspended Slavitt for two months.
In re Stephen J. Williams. Bar No. 422088. September 9, 2010. In a reciprocal matter from Connecticut, the D.C. Court of Appeals imposed identical reciprocal discipline and suspended Williams for six months, deemed to run from March 15, 2007. Prior to reinstatement, Williams must satisfy the condition imposed in Connecticut and complete an approved legal ethics course. Williams, who elected to contest a speeding ticket issued in Connecticut, listed his address as a post office box in Hong Kong, rather than use his Connecticut address. Williams, thereafter, closed his Hong Kong post office box, ensuring that he did not receive notice of his scheduled court appearance. Once he did appear in court, Williams sought multiple continuances to obtain counsel, but he never retained one. Williams then sought to subpoena the trial judge, prosecutor, and court clerk. The Connecticut court found that rather than following the normal procedures for seeking reinstatement of his driver’s license, Williams engaged in a vexatious course of conduct that “parlay[ed] a simple motor vehicle hearing into a monumental, unnecessary, time-consuming, labor-intensive and ineffectual attack on the Deputy Clerk of the Court, the Central Infractions Bureau and the Commissioner of Motor Vehicles.” The Connecticut court concluded that Williams’ conduct “constitute[d] a danger to the administration of justice and to the citizens of Connecticut who might unwittingly engage his ponderous services.”

Interim Suspensions Issued by the District of Columbia Court of Appeals

In re Peter A. Allen. Bar No. 369607. September 2, 2010. Allen was suspended on an interim basis based upon discipline imposed in Massachusetts.

In re G. Paul Howes. Bar No. 434709. September 30, 2010. Howes was suspended on an interim basis pursuant to D.C. Bar Rule XI, § 9(g), pending final action on the Board on Professional Responsibility’s July 27, 2010, disciplinary sanction recommendation.

In re John D. Lewis. Bar No. 429449. September 2, 2010. Lewis was suspended on an interim basis based upon discipline imposed in New York.

In re Maryrose O. Nwadike. Bar No. 455695. September 30, 2010. Nwadike was suspended on an interim basis based upon discipline imposed in Maryland.

In re David L. Shurtz. Bar No. 454598. September 30, 2010. Shurtz was suspended on an interim basis based upon discipline imposed in Virginia.

In re Douglas C. Wilson. Bar No. 412722. September 3, 2010. Wilson was suspended on an interim basis based upon discipline imposed in Connecticut.

Disciplinary Actions Taken by Other Jurisdictions

In accordance with D.C. Bar Rule XI, § 11(c), the D.C. Court of Appeals has ordered public notice of the following nonsuspensory and nonprobationary disciplinary sanctions imposed on D.C. attorneys by other jurisdictions. To obtain copies of these decisions, visit www.dcbar.org/discipline and search by individual names.

In re Sandy Yeh Chang. Bar No. 989203. On September 9, 2010, the Court of Appeals of Maryland reprimanded Chang.

Informal Admonitions Issued by the Office of Bar Counsel

In re James M. Fallon Jr. Bar No. 62182. September 1, 2010. Bar Counsel issued Fallon an informal admonition for failing to provide competent representation, failing to serve clients with skill and care commensurate with that generally afforded to clients by other lawyers in similar matters, and failing to represent a client zealously and diligently within the bounds of the law while retained to represent clients in a personal injury matter. Rules 1.1(a), 1.1(b), and 1.3(a).

The Office of Bar Counsel compiled the foregoing summaries of disciplinary actions. Informal Admonitions issued by Bar Counsel and Reports and Recommendations issued by the Board on Professional Responsibility are posted on the D.C. Bar Web site at www.dcbar.org/discipline. Most board recommendations as to discipline are not final until considered by the court. Court opinions are printed in the Atlantic Reporter and also are available online for decisions issued since August 1998. To obtain a copy of a recent slip opinion, visit www.dcappeals.gov/dccourts/appeals/