Lawyers Mutual Insurance of Kentucky
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We fight for the fighters.

Avoid Malpractice Claims and Third Party Liability by Knowing How to Resolve Disputed Claims for Client Trust Account Funds and Allegations of Improper Disbursement of Funds
Download 2008_newsletter_fall.pdf

The Risk Manager, Fall 2008

There are an increasing number of case and ethics opinions from other jurisdictions concerning disputes over disbursement of funds and funds held in client trust accounts – perhaps another indication of difficult economic times. In Kentucky the rule is clear that if a dispute arises between lawyer and client over disbursement of client funds, the disputed amount must be left in the client trust account until the dispute is resolved.   See Kentucky Rule of Professional Conduct 1.15 and KBA Ethics Opinion 292 (1985).  These disputes usually concern fees and, if not satisfactorily resolved, often lead to a malpractice claim.

Claims by third parties for funds held in client trust accounts or for improper disbursement of funds present a much more difficult problem for lawyers.  Recent questions considered are:

  • Do you always have to follow the client’s instructions on fund disbursement?
    The North Carolina Ethics Committee considered the hypothetical situation concerning a lawyer who represented the corporate buyer of residential property.  After closing the lawyer deposited the check for the purchase price in his client trust account and recorded the deed.  Immediately upon returning to the office the lawyer was instructed by the buyer not to disburse the funds because the buyer had just learned that the property was not suitable for its purposes.  The seller demanded the funds.

    The Ethics Committee opined that “Normally, a client's decision not to proceed with a transaction must be honored by the lawyer and, if necessary, the lawyer must restore the status quo ante by returning documents, property, or funds to the appropriate parties to the transaction….  However, a closing lawyer must also comply with the conditions placed upon the delivery of the deed by the seller absent fraud. If the seller delivered the executed deed to the lawyer upon the condition that the deed would only be recorded if the purchase price was paid, the lawyer has fiduciary responsibilities to the seller even if the seller is not the lawyer's client. …. Because title has passed to the buyer, the lawyer must satisfy the conditions of the transfer of the property by disbursing the sale proceeds. The lawyer must notify the buyer and the buyer can then take appropriate legal action to seek to have the sale rescinded.” (North Carolina Ethics Op. 2008-7, 7/18/08)
  • Can you be liable for a client’s medical bills even though another lawyer disbursed the funds from a settlement?
    The Wyoming Supreme Court considered the situation when a lawyer and his client signed a release of medical records and consent-to lien-form provided by a medical provider. This gave the lawyer authorization to pay outstanding medical bills from the proceeds of claims for the client’s injuries.  A second lawyer joined in the personal injury action and settled it distributing the proceeds to the client, a member of his family, and his lawyers.  The client did not pay the medical providers who promptly sued the lawyer that had signed the consent-to-lien form.

    The Court concluded that the client had assigned his interest in the proceeds from the personal injury action to the medical provider and that by signing the form the lawyer became an obligor who was required to honor the assignment by paying the client’s medical bills. The Court did not address whether the lawyer could proceed against the client or other lawyer. (Winship v. Gem City Bone & Joint, P.C., 185 P.3d 1252 (Wy., 2008)
  • Does client confidentiality trump a fiduciary obligation to disburse funds to a third party?
    A California ethics opinion considered the situation when a lawyer settled the client’s case for $150,000 and then learned that the client had a former lawyer who was entitled to a portion of the lawyer fees as a lienholder.  The client in a handwritten statement authorized $50,000 in lawyer fees, but prohibited payment of any fee to the former lawyer or the disclosure of the amount of the settlement to him.

    The Committee opined that notwithstanding client confidentiality requirements “An attorney cannot follow a client’s direction not to pay a lienholder from settlement proceeds because to do so would be a breach of the attorney’s fiduciary duty to the lienholder.”  The attorney should not, however, when dividing the fee tell the former attorney of the client’s instructions because this is privileged confidential information. (State Bar of California Standing Committee on Professional Responsibility and Conduct Formal Opinion No. 2008-175)

    We conclude with this useful guidance on the difficult problem of third party claims from a recent Ohio ethics opinion that is overall consistent with Kentucky’s requirements.  It is offered here for the purpose of alerting you to the issues.  Further research for specific situations is required.
    • When there is no dispute as to funds in a lawyer’s possession, the lawyer’s ethical duty … is to promptly notify and deliver the funds to which a client or third person is entitled.
    • When a lawyer knows there is a dispute between a client and a third person who has a lawful claim under applicable law to the funds in the lawyer’s possession, the lawyer’s ethical duty … is to notify both the client and the third person and to hold the disputed funds in a trust account until the dispute is resolved.  The lawyer must promptly deliver all portions of funds that are not disputed.
    • When a lawyer is unclear whether a third person has a lawful claim and the client is disputing the third person’s claim, the lawyer’s ethical duty is to notify both the client and the third person and hold the disputed funds in a trust account until the dispute is resolved.  The lawyer must promptly deliver all portions of funds that are not disputed.
    • When a lawyer knows a third person’s claim is not a lawful claim, a lawyer’s ethical duty is to notify the client and to promptly deliver the funds to the client.
  • The opinion includes these examples of lawful claims of third parties to whom a lawyer holding funds has a fiduciary obligation:
    • a valid statutory subrogation right as to the specific funds in the lawyer’s possession.
    • a valid judgment lien or other order of a court regarding the specific funds in the lawyer’s possession.
    • a written agreement signed by a client promising payment or authorizing the lawyer to make payment to the medical provider from the proceeds of a settlement or judgment.  These agreements are known by various names, such as assignments, security agreements, or a doctor’s lien.
    • a letter from a lawyer to a medical provider promising to uphold the client’s agreement to pay the medical provider for services from proceeds of a settlement or judgment.  These letters are known as letters of protection.  These letters in essence promise to honor an assignment made by a client, or as sometimes stated are said to honor a doctor’s lien.
    • a written agreement between an insured individual and a health-benefits provider, entered into prior to the payment of medical benefits, to reimburse the health benefits provider for any amount recovered through settlement or satisfaction of judgment upon claims arising from a third party’s act.
    • a secured claim by a creditor that is specific to the funds in a lawyer’s possession.  It is not a lawyer’s responsibility to pay general unsecured creditors of a client, including judgment creditors who have not attached or garnisheed the funds.  (Ohio Sup. Ct. Bd. Of Comm. On Grievances and Discipline Opinion 2007-7, 12/7/07)

It is recommended that when in any doubt about your obligation to disburse funds that you call the KBA Ethics Hotline -- that could save you money and avoid a malpractice claim.

 

Lawyers Mutual of Kentucky

10503 Timberwood Cir., Ste. 213
Louisville, Kentucky 40223

Phone: 502-568-6100
Fax: 502-568-6103

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Lawyers Mutual of Kentucky

10503 Timberwood Cir., Ste. 213
Louisville, Kentucky 40223

Phone: 502-568-6100
Fax: 502-568-6103

Who We Are
About Us
Staff
Board of Directors

What We Do
Risk Mitigation
Professional Liability Policy
Court Bonds
FAQs

Applications
Quick Quote
Application
New Bar Admit

Applications
Quick Quote
Application
New Bar Admit

Forms
Bar Complaint
Claims Reporting
Make a Payment
Add an Attorney
Remove an Attorney
Firm Name Change
Firm Address Change

Resources
Subjects A-Z
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Disclaimer: The contents of this Web site are intended for general information purposes only and should not be construed as legal advice or legal opinion on any specific facts or circumstances. It is not the intent of this Web site to establish an attorney’s standard of due care for a particular situation. Rather, it is our intent to advise our policyholders to act in a manner which may be well above the standard of due care in order to avoid claims having merit, as well as those without merit. In the event any statement on the Web site differs from a statement in an issued policy the policy will control.

  • Who We Are
    • About Us
    • Staff
    • Board of Directors
  • What We Do
    • Risk Mitigation
    • Professional Liability Policy
    • Court Bonds
    • FAQs
  • Applications
    • Quick Quote
    • Application
    • New Bar Admit
    • Apply by Postal Mail
  • Forms
    • Claims Reporting
    • Policy Changes
      • Adding an Attorney
      • Remove an Attorney
      • Firm Name Change
      • Firm Address Change
    • Make a Payment
    • Future Contact Request
    • Reporting a Bar Complaint
  • Media
    • Newsletter Archive
    • COVID-19
    • Disaster Response Information
  • Resources
    • Site Search
    • Subjects A–Z
    • Subjects by Year
    • Schedule an Ethics CLE
    • OnDemand CLE Courses
    • Practice Management
    • Financial Statements
  • Contact