The Risk Manager, Winter 2006

The D. C. Court of Appeals in In Re Midlen (D.C. No. 04-BG-808, 11/10/05) is instructive on a problem often encountered here in Kentucky – a lawyer reasonably believing funds held in a client trust account are earned fees withdraws the funds ignoring what is seen as a frivolous or manipulative client dispute over the lawyer’s entitlement to the fees. The D. C. professional responsibility rules applicable to Milden are virtually identical to Kentucky’s SCR 3.130 (1.15) Safekeeping Property, making this decision an instructive one for our Bar.

This case concerned Midlen’s representation of the Jimmy Swaggert Ministries (JSM) from 1991 to 1998 for the purpose of collecting cable royalties for JSM. The fee agreement in pertinent part provided that Midlen would receive the royalty payments, deduct his fees and costs, and distribute the balance to JSM. Over the course of the representation Midlen paid JSM $341,000 and retained $123,000 in fees and costs.

In 1994 JSM began questioning Midlen’s fees and later asked for an accounting which was not rendered for over 18 months. JSM terminated Midlen in 1998 asking that the file be sent to a succeeding lawyer. Midlen did not comply with this direction for seven months and then only after a bar complaint was filed.

The eye-catching facts of the case are that Midlen’s ultimate entitlement to the deducted fees is not questioned. There was no evidence that Milden ever withheld more in fees and costs than were due. Furthermore, the Court found that it was reasonable for Midlen to believe that JSM’s protestations about billing were merely a tactic to avoid paying Midlen his earned fees because JSM was struggling financially and delaying payments to vendors. Ironically, JSM later made further payments to Midlen in settlement of his suit against it for fees.

Notwithstanding the strength of Milden’s entitlement to the funds withheld from JSM, he was held inter alia to have misappropriated disputed fees by failing to segregate them until the dispute was resolved in violation of Rule 1.15 (c), and to have breached his duty to promptly render the requested full accounting in violation of Rule 1.15 (b).

The Court found while there were inconsistent actions by JSM concerning fee payment, that by late 1998, when Milden withdrew fees from a distribution, there could be no doubt that they were in dispute. In these circumstances Rule 1.15 (c) “…is unambiguous that: an attorney may not withdraw that portion of … deposited funds when the attorney’s right to receive that portion is ‘disputed’ by the client.” The Court “rejected the notion that any dispute over fees has to be ‘genuine’: ‘[T]here is no requirement that the dispute be ‘genuine,’ ‘serious,’ or ‘bona fide’ … [T]he word ‘dispute’ means [merely] to argue about; to debate; to question the truth or validity of ; [or] to doubt.” …. “The fact that, as it turned out, he was contractually entitled to more than the amounts he withdrew ‘does not change the nature of the disagreement … because at the moment [he] withdrew [the funds, the client] had not acknowledged he had earned and was entitled to at least that amount.’”

Poor Milden was suspended from practice for 18 months and only other aspects of the case not reported here keep one from having a certain amount of sympathy for him. It appears that Milden made the crucial error of relying on his contractual right to fees and ignoring his fiduciary duty to his client imposed by Rule 1.15. In this regard the Court observed “[A]ny supposed failure of a client to fulfill a retainer agreement is no defense to a disciplinary charge against an attorney.”

Milden is a good object lesson for Kentucky lawyers. Our Rule 1.15 is as unambiguous as the D.C. rule – it 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. KBA Ethics Opinion 293 (1985) provides:

“… in the absence of an agreement with the client on these matters (the right of the attorney to a specific claimed fee, the amount to which the attorney is entitled, and the time at which payment is expected) a reasonably prudent attorney should not assume that he may withdraw funds ….”

Disputes may be resolved by persuasion, negotiation, private mediation or arbitration, mediation or arbitration under SCR 3.815, and appropriate court proceedings.

For a quick refresher on client trust account professional responsibility we suggest “Client Trust Account Principles & Management for Kentucky Lawyers.” This 56 page guidebook covers the fundamentals of client trust account management and includes the complete text of key KBA Ethics Committee Opinions on client trust accounts. It is yours for the asking by contacting Lawyers Mutual (502.568-6100 or 800.800-6101) or the IOLTA Fund (502.564-3795 or 800.874-6582).