Ethics Advisory Opinion No. 97-11

Opinions Published in 1997 Ethics Advisory Opinion No. 97-11 Posted on December 18, 1998 by staff (Approved December 5, 1997) Issue: May an attorney finance the expected costs of a case by borrowing money from a nonlawyer pursuant to a non-recourse promissory note, where the note is secured by the attorney s interest in his contingent fee in the case? Conclusion: An attorney s grant of a security interest in a contingent fee from a particular case to secure a loan constitutes the sharing of fees with a non-lawyer in violation of Utah Rules of Professional Conduct 5.4(a). Facts: Attorney has consulted with a private individual who is not an attorney ( Lender ). Lender proposes to loan to Attorney an agreed-on amount to be used for costs and expenses in pursuing a matter on behalf of Attorney s client ( Client ). Attorney and Client have a contingent-fee agreement under which Attorney is responsible for costs, and under which Attorney is entitled to a percentage of the recovery. A promissory note would be executed under which an interest rate would be calculated on the basis of the risk of loss of the case and the fact that Attorney s portion of the recovery would be the only source of repayment of the funds. Funds would be disbursed by Attorney in periodic draws as expenses were incurred. The loan agreement would also state that Attorney would pay Lender the first proceeds of his share of any recovery until the amount of the note, plus interest, was paid. However, the loan would be nonrecourse to Attorney; that is, in the event the loan is not repaid, the Attorney could not be held personally liable by Lender for repayment. As security for the loan, Attorney would assign to Lender his interest in the contingent-fee agreement with Client. A security agreement and financing statement would be signed and proper filings with the appropriate authorities would be made to perfect Lender s security interest. Client would specifically consent to the loan in writing. Lender would agree that he has no right to direct or influence the litigation, that his sole contact with Attorney would be for Attorney to report on the progress of the case, and that Lender could audit expenses paid from loan proceeds for genuineness. Analysis: Except in certain circumstances, none of which apply to the matter before us, Rule 5.4(a) prohibits a lawyer or law firm from sharing legal fees with a nonlawyer.1the Comment to Rule 5.4 states that the rule expresses traditional limitations on sharing fees, and that [t]hese limitations are to protect the lawyer s professional independence of judgment. Lender contends that the proposed arrangement does not involve fees, because it is merely the repayment of costs. We disagree. First, the proposed source of repayment is from Attorney s share of the award under the contingent-fee agreement with Client. Attorney agreed to accept responsibility to pay costs and took the risk that he would not recover them out of his share of the award. For our purposes, all of his receipts are fees. Even if we were to view the first funds coming to Attorney as reimbursement of costs, however, it is clear that, due to the interest factor on the loan, some amounts from the pure fee portion of the recovery could have to be paid to Lender to pay the note in full. Lender also contends that, because Attorney has merely agreed to repay the loan with interest, as

opposed to granting a percentage in legal fees received, the proposed loan is merely like any other non-recourse loan. Again, we disagree.2we are not troubled by the fact that Attorney needs to borrow funds to run his practice. Many attorneys and firms borrow money and grant security interests in their accounts receivable generally as collateral for the loan. Likewise, it is axiomatic that most attorneys primary, if not sole, source of revenue is from fees generated from matters undertaken on behalf of clients. Taken to its logical extreme, a Rule 5.4 prohibition on lawyers meeting their loan repayment obligations from fees received would mean not only the lawyers could not borrow money to run their practices, but that they could not pay for any goods or services on credit.3 However, once a security interest in the recovery of contingent fees from a particular case is granted, Rule 5.4 is implicated.4upon that grant, Lender has an interest in the attorney s contingent-fee award, which Lender has the right to attach upon a default in payment on the loan. That particularized interest in the contingent fees of a case could compromise the lawyer s judgment in a number of ways. For example, the lawyer s judgment may be impaired in drawing up the proposed budget for expenses. He may be influenced in recommending that a client accept a settlement offer because of the impact it may have on the repayment of the debt with Lender. The fact that Lender may agree not to be involved in decisions involving the case or that Client may agree in writing and in advance does not save the proposed arrangement, as Rule 5.4(a) makes no exception for such cases.5 Accordingly, we find that an attorney may not finance the costs of a contingent-fee case in which a non-recourse promissory note is secured by the attorney s interest in the contingent fee. Footnotes 1.(a) A lawyer or law firm shall not share legal fees with a nonlawyer, except that: (1) An agreement by a lawyer with the lawyer s firm, partner, or associate may provide for the payment of money, over a reasonable period of time after the lawyer s death, to the lawyer s estate or to one or more specified persons; (2) A lawyer who undertakes to complete unfinished legal business of a deceased lawyer may pay to the estate of the deceased lawyer that proportion of the total compensation which fairly represents the services rendered by the deceased lawyer; and (3) A lawyer or law firm may include nonlawyer employees in a compensation or retirement plan, even though the plan is based in whole or in part on a profit-sharing arrangement. Utah Rules of Professional Conduct 5.4(a). 2.See In re Van Cura, 504 N.W.2d 610 (Wis. 1993) (unethical fee splitting found when law firm agreed to finance its product-liability litigation with nonlawyer consulting firm in return for which consulting firm would receive half the fees received from such cases). 3.See ABA Formal Op. 320 (1968), which held a financing plan did not constitute a per se violation of Rule 5.4 where a lawyer charged a client a fixed fee, took a promissory note for the fee, and then sold the note to a bank at a discounted price. The note was endorsed to the bank without recourse, and the attorney had the right to repurchase the note prior to the bank s instituting any legal action on it. The plan, however, specifically excluded contingent fees. 4.See Utah State Bar Ethics Advisory Op. No. 139, 1994 WL 579849 ( [P]rovided no other rule of professional conduct is violated, compensation of non-lawyer employees may be based upon a percentage of gross or net income so long as it is not tied to the fees from a particular case. ) 5. If neither Lender nor Client is an attorney, the Rules of Professional Conduct would not apply to them, and a loan transaction between Lender and Client, where Client signs the promissory note and secures the note by granting a security interest in his share of the recovery, would not

violate the Rules. We caution, however, that attorneys should be aware of Rule 8.4(a), which provides that a lawyer may not violate or attempt to violate the Rules of Professional Conduct, knowingly assist or induce another to do so, or do so through the acts of another.

Ethics Advisory Opinions Ethics Advisory Opinion No. 02-01 Posted on January 4, 2002 by staff Issued February 11, 2002 1 Issue: Do the Utah Rules of Professional Conduct preclude a Utah lawyer from financing litigation costs through a loan from a third-party lending institution, if (a) the lawyer is obligated to repay the loan and (b) the client, by separate agreement with the lawyer, is obligated to reimburse the lawyer for such costs? 2 Conclusion: The Utah Rules of Professional Conduct do not preclude such litigationfinancing arrangements, provided the lawyer discloses to the client the terms and conditions of the loan, the client consents, and the lawyer, but not the client, is obligor on the loan. 3 Background: A Utah State Bar lawyer seeks an advisory opinion regarding the ethical propriety under the Utah Rules of Professional Conduct of participating in a recourse loan program,1by which the lawyer would finance the costs of litigation for his client through a thirdparty lending institution offering loans to lawyers for litigation expenses. The primary features of a typical program include: The program allows a lawyer, often a personal-injury lawyer seeking to finance a contingent-fee case, to raise the money at low cost to be invested in litigation expenses. This is accomplished through a low-interest, recourse loan to the lawyer or law firm who uses the potential fees from the case as loan collateral. Under the terms of the loan, the lending institution advances reimbursable litigation costs, as defined in the loan agreement, to the lawyer. The brochure of one such lending institution claims it advances 95% to 100% of the lawyer s case costs. The lawyer pays monthly interest charges on funds advanced under the loan, and remits the loan principal upon settlement or resolution of the case. By a separate agreement with the client, the lawyer ultimately recoups litigation expenses and interest charges from the client if the case is successful. If the case is abandoned or lost, the lawyer is obligated to repay advanced costs and expenses and any outstanding interest to the lender. The lawyer may elect not to receive funding from the lending institution on a particular case if the potential for success is not deemed high enough. The client remains obligated to repay the lawyer for such advanced costs under a separate agreement between the lawyer and the client. The lending institution recommends the lawyer add language to the client fee agreement that discloses the case-financing transaction. A sample client letter discloses, If no recovery is obtained, you will be obligated only for disbursements and charges as described below. Such disbursements include photocopying, messenger service, computerized research, videotape recordings, travel expenses, experts, investigators, etc. In disclosing the financing arrangement, the letter states, You acknowledge and agree that we [the law firm] may borrow funds from time to time to pay certain of the costs referred to above and agree that, in addition to reimbursing us for the amount of such costs, you also will reimburse us for any interest charges and related expenses we incur in connection with such borrowings.

4 Variations of such financing arrangements are possible, but the essential features for purposes of this opinion are that the lawyer is obligated to the lending institution to repay the loan principal, and the client is obligated to reimburse the lawyer for advanced litigation costs, plus any applicable interest. 5 Analysis: The letter requesting our opinion notes a concern with our Opinion 97-11,2 dealing with a non-recourse cost-financing program. In that opinion, we concluded, An attorney s grant of a security interest in a contingent fee from a particular case to secure a loan constitutes the sharing of fees with a non-lawyer in violation of Utah Rules of Professional Conduct 5.4(a). 3In other words, the lender s fee was contingent upon the lawyer s contingent fee. The Committee disagreed with the lender s contention that such an arrangement did not involve fees, but merely a repayment of costs. The opinion added, Once a security interest in the recovery of contingent fees from a particular case is granted, Rule 5.4 is implicated. Upon that grant, Lender has the right to attach upon default in payment of the loan. That particularized interest would compromise the lawyer s judgment in a number of ways, primarily by creating potential conflicts between the lawyer and the lender, thereby undermining the lawyer s duty of independent professional judgment and the duty of client loyalty.4 6 The proposed financing arrangement explained above has none of the objectionable features described in Opinion 97-11. Here, the lending institution has no interest in the lawyer s contingent-fee award because, under the separate loan agreement between the lawyer and the lender, the lawyer is obligated to repay the loan whatever the outcome of the case. Because this obligation is not contingent, the lawyer is not compromised, as was the lawyer under the arrangement described in Opinion 97-11. Similarly, in this case, the client, by separate agreement, remains obligated to the lawyer for payment of litigation costs. The lawyer is not compromised because the client s obligation is not contingent upon the outcome of litigation. The arrangement described above simply makes it easier for clients and attorneys to finance litigation and is mutually beneficial to both. 7 Many other state counterparts to this Committee have considered the professional ethics issues arising under financing arrangements similar to those in this opinion. These advisory opinions have analyzed the proposed financing arrangement in light of their respective rules prohibitions against fee-splitting arrangements and the lawyer s independent judgment. In Utah, these ethical standards are found in Rule 5.4(a).5The various state bar ethics opinions summarized in the Appendix to this opinion have invariably concluded that litigation-financing arrangements similar to those described above are permissible, provided the attorney remains obligated on the loan and there is full disclosure to the client. Our research has not disclosed a contrary opinion, and we generally concur with the reasoning and conclusions of these opinions. APPENDIX Florida Formal Advisory Opinion No. 86-2, State Bar of Florida (April 15, 1986), asks whether [l]awyers may charge a lawful rate of interest on liquidated fees and costs either as provided in advance by written agreement or upon reasonable notice. The com mittee s answer, in its entirety, states, The Committee finds no basis for distinguishing between fees and costs advanced for the purpose of charging interest. Accordingly, the Committee concludes that the Code of Professional Responsibility does not prohibit in advance by written agreement or, in the absence of a written agreement, upon reasonable notice. It is the Committee s view that 60 days would constitute reasonable notice. Georgia

Formal Advisory Opinion No. 92-1, State Bar of Georgia (January 14, 1992), describes a system for payment of certain costs and expenses in contingency-fee cases where the law firm sets up a draw account with a bank, secured by a note from individual firm lawyers. When a client makes a payment toward expenses incurred on the case, the law firm credits the client s account, and if the case is settled or verdict paid, the firm pays off the client s share of the money advanced on the loan. If no verdict or settlement is obtained, the lawyers are contractually obligated to repay the loan, although the client remains ultimately liable to the lawyer, not the bank, to reimburse such expenses. The opinion raises two issues: whether the bank loan to the lawyer compromises the attorney -client relationship and whether it is ethical to charge clients interest. As to the first issue, the opinion concludes there is no ethical impropriety provided the lawyers make sure that the bank understands that its contractual arrangement can in no way affect or compromise the lawyer s obligations to his or her individual clients. The opinion similarly concludes on the second issue, [I]t is permissible to charge interest on such advances only if (i) the client is notified in the contingent fee contract of the maximum rate of interest the lawyer will or may charge on such advances; and (ii) the written statement given to the client upon conclusion of the matter reflects the interest charged on expenses advanced in the matter. Illinois Opinion No. 92-9, Illinois State Bar Ass n (January 22, 1993), posits a different factual arrangement. The question was whether the lawyer may ethically help clients obtain financing. Under the proposed arrangement, the lawyer pays an initial fee of $500 for which he is given the right to submit loan applications from clients. If the loan is approved, the client becomes solely responsible on the loan, but the attorney receives the loan proceeds less a 10% fee. The opinion concluded that an attorney may ethically assist clients in obtaining loans for payment of attorney fees, providing the attorney protects the client s confidences and meets his fiduciary obligation of complete disclosure. Missouri Informal Opinion No. 970066, Missouri Bar Ass n (August 20, 2001), asks, If an Attorney borrows money in order to fund the litigation expenses in a case, may an attorney pass the interest on the loan through to the client? In a terse answer, the Opinion concludes the Code of Professional Responsibility does not prohibit an attorney from charging a lawful rate of interest on liquidated fees and costs, either as provided in advance by written agreement or, in the absence of a written agreement, upon reasonable notice. New Jersey 120 N.J.L.J. 252, N. J. Advisory Comm. on Professional Ethics (July 30, 1987), discusses whether it is appropriate for the firm to advance disbursements in a contingency fee case. The financing arrangements are virtually identical to those described in the Utah inquiry. Consistent with its counterparts, the Committee found nothing unethical or contrary to the letter of the rules of the Court, or Rules of Professional Conduct in the proposed provision. Ohio Opinion 2001-3, The Supreme Court of Ohio, Board of Commissioners (June 7, 2001), addresses the ethical propriety of a law firm borrowing money, using the funds to advance costs and expenses of litigation in a personal injury matter accepted on a contingent fee basis, and then passing the interest fees and costs of the loan to the client as expenses of litigation. Again, the financing arrangements are virtually identical to those described in the Utah inquiry. The Ohio Board found: [T]here is no rule prohibiting a lawyer from obtaining a loan from a third party institution for use in advancing the expenses of litigation provided the loan is not secured by the

client s settlement or judgment. However, the client should be informed. Texas Tex. Comm. on Professional Ethics, Op. 465, V. 54 Tex. B.J. 76 (1991), discusses two issues: whether an attorney may ethically own an interest in a lending institution which loans money to personal injury clients of the attorney, and whether the attorney may borrow money from a lending institution for case expenses... and ethically charge, or pass on, to the client, as part of the expense, the outofpocket [sic] interest or finance charges of the lending institution. The Committee found an attorney may properly own an interest in a lending institution which loans money to personal injury clients of the attorney, and that an attorney may properly borrow money from a lending institution for case expenses for a personal injury client, and charge, or pass on, to the client the actual out-of-pocket interest or finance charges of the lending institution. Tennessee Advisory Ethics Opinion 98-A-659, Board of Professional Responsibility of the Supreme Court of Tennessee (July 9, 1989), draws a similar conclusion from similar facts described in the Utah inquiry. The Board concludes a lawyer may advance or guarantee certain expenses by means of a lending company or recommending such services to clients. Footnotes 1.A recourse loan in this context is one for which the lawyer would be liable to a lending institution irrespective of the outcome of litigation being financed. See Black s Law Dictionary ( recourse loan under loan entries) (7th ed. 1999). 2.Utah Ethics Adv. Op. 97-11, 97 WL 770890 (Utah St. Bar). 3.Id. at 1. 4.Id. at 2. 5. A lawyer or law firm shall not share legal fees with a nonlawyer with noted exceptions, none of which is applicable here. Professional Independence of a Lawyer, Utah Rules of Professional Conduct 5.4(a) (2001).

Ethics Advisory Opinions Ethics Advisory Opinion No. 00-04 Posted on December 30, 2000 by staff (Approved June 2, 2000) Issue: What are a lawyer s ethical duties to a third person who claims an interest in proceeds of a personal injury settlement or award received by the lawyer? Opinion: When a lawyer receives funds or property and knows a third person claims an interest in the funds or property, the lawyer must first determine whether the third person has a sufficient interest to trigger the duties stated in Rule 1.15(b). Only a matured legal or equitable claim-such as a valid assignment, a judgment lien, or a statutory lien-constitutes an interest within the meaning of Rule 1.15 so as to trigger duties to third persons under Rule 1.15. If no such interest exists, the lawyer may disburse the funds or property to the client. If such an interest exists, the lawyer must comply with the duties stated in Rule 1.15. Where the client does not have a goodfaith basis to dispute the third person s interest, the lawyer must promptly notify the third person, promptly disburse any funds or property to the third person to which that person is entitled, and render a full accounting when requested. If the client has a good-faith basis to dispute the third person s interest, and instructs the lawyer not to disburse the funds or property to the third person, the lawyer must promptly notify the third person that the lawyer has received the funds or property and then must protect the funds or property until the dispute is resolved. Background: Lawyers sometimes receive funds or property in which third per-sons, such as medical providers or other creditors of the lawyer s client, claim an interest. The Office of Professional Conduct of the Utah State Bar has advised the Ethics Advisory Opinion Committee that it has received complaints from medical providers alleging that lawyers representing plaintiffs in personal injury matters have not distributed amounts from personal injury settlements or awards to reimburse them for medical services provided to the lawyer s client. In cases of this nature, the medical provider and the patient may have agreed that the patient may defer payment for medical services until the time of a personal injury settlement or award, at which time the provider s invoices will be paid. The medical provider may also rely on a statutory lien or an assignment. Medical providers without a statutory lien or an assignment may demand payment from funds held by the lawyer based on facts such as the client s promise to pay the provider when a settlement or award is received or the lawyer s use of the provider s bill in proving damages. In other cases, non-medical service providers, sellers of goods, or judgment creditors may claim rights in funds or property in a lawyer s possession. The Office of Professional Conduct has requested that the Committee issue a formal opinion regarding matters involving third-party claims to proceeds of a personal injury settlement or award received by a lawyer. Analysis: Rule 1.15 of the Utah Rules of Professional Conduct specifically addresses a lawyer s duties when safekeeping property for clients or third persons. It states, in pertinent part: (b) 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 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.1 Rule 1.15 does not differentiate between the duties a lawyer owes a client and those owed a third person when safekeeping property. The rule addresses three distinct duties. First, if a client or third person has an interest in property or funds received by a lawyer, the lawyer must promptly notify the client or third person. Second, the lawyer must promptly deliver the funds or property to the client or third person who is entitled to receive the funds or property.2third, if requested by the client or third person, the lawyer must promptly render a full accounting regarding the property. Generally, there will be no controversy surrounding who is entitled to the funds or property that the lawyer is safekeeping and application of Rule 1.15 will be simple. When a dispute exists between the client and a third person as to who is entitled to the funds or property in the lawyer s possession, applying Rule 1.15 requires additional analysis. Not every claim made by a third person triggers the duties expressed in Rule 1.15. Rather, these duties are triggered when the lawyer receives funds or property and the lawyer knows3that a third person has an interest in the property or funds. It thus becomes necessary to determine what is meant by has an interest under Rule 1.15. A third person who has an interest is different from a third person who merely claims an interest. Subsection (b) of Rule 1.15 speaks of interests that are claim[ed]. In subsection (c) of Rule 1.15, the drafters of the rule chose the language has an interest. A person who has an interest has something stronger than a mere claim or demand for payment. This interpretation is supported by an official comment to Rule 1.15, which states: Third parties, such as a client s creditors, may have just claims against funds or other property in a lawyer s custody. 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.4 Professors Hazard and Hodes have analyzed the significance of this comment as follows: The fact that a third party expects funds held by the lawyer to be the source of payment would not justify a lawyer s refusal to obey the instructions of his client to turn over the entire amount. The Comment to Rule 1.15 uses the phrases just claims and duty under applicable law to suggest that the third party must have a matured legal or equitable claim in order to qualify for special protection. Only in such cases may it be said that failure to recognize the third-party interest is a species of fraud upon creditors or fraud upon the rendering court.5 Only those claims that rise to the level of a matured legal or equitable claim constitute an interest and trigger the duties owed under Rule 1.15. For example, a valid assignment of the funds in question could be such a claim. Certainly, a statutory or judgment lien that attaches to the specific property or funds in question or a court order requiring that the specific property or funds be turned over to the third party is such an interest. A lawyer s knowledge that the client owes bills, even if the lawyer knows that the creditor expects to be paid out of the proceeds of a settlement or judgment, does not give rise to such duties unless the creditor has an interest in the proceeds within the meaning of Rule 1.15. This conclusion is consistent with prior opinions of this Committee. For example, in Opinion No. 96-03, the Committee stated that [a]bsent dishonesty, fraud, deceit or misrepresentation, [an] attorney has no ethical obligation to honor personally the client s agreements to pay medical providers out of a settlement or judgment. The Committee noted that it was not addressing

agreements that expressly impose an obligation on the attorney or create a lien on the funds that are handled by the attorney. 6In a prior opinion, the Committee applied a similar approach to a lawyer s refusal to pay for services rendered to the lawyer s client at the lawyer s request.7 Even where a third person has a sufficient interest to invoke the duties expressed in Rule 1.15(b), a lawyer ordinarily should not simply hand over the funds or property to the third person against the client s instructions.8the comments to Rule 1.15(b) emphasize that a lawyer should not unilaterally assume to arbitrate a dispute between the client and the third party. 9Where a third person has a sufficient interest to trigger the duties expressed in Rule 1.15(b) and a client in good faith instructs the lawyer not to pay the third person, the lawyer must hold the funds or property until the dispute is resolved, or, if resolution seems unlikely, interplead the funds or property. Retaining and protecting the funds will not be a violation of the lawyer s duty to the client because, under Rule 1.15(b), the lawyer is only required to disburse to the client those funds to which the client is entitled. If there is a third-party interest within the meaning of Rule 1.15(b), the client is not entitled to the funds.10 To summarize, when a lawyer receives funds or property and knows a third person claims an interest in the funds or property, the lawyer must first determine whether the third person has an interest sufficient to trigger the duties expressed in Rule 1.15(b). Only a matured legal or equitable claim-such as a valid assignment, a judgment lien11or a statutory lien-constitutes a sufficient interest to trigger duties to third persons under Rule 1.15(b). If no such interest exists, the lawyer may disburse the funds or property to the client. If such an interest exists, the duties expressed in Rule 1.15 are triggered. If the client does not dispute the third person s interest, the lawyer must promptly notify the third person, promptly disburse any funds or property to the third person to which that person is entitled and render a full accounting when requested. If the client has a good-faith basis to dispute the third person s interest and instructs the lawyer not to disburse the funds or property to the third person, the lawyer must promptly notify the third person that the lawyer has received the funds or property and then must protect such funds or property until the dispute is resolved.12 Application: In the discussion that follows, we apply the foregoing analysis to a number of hypothetical situations posed by the Office of Professional Conduct of the Utah State Bar. Example 1: The medical provider has a written lien which states that the client has agreed that the medical provider will defer payment for the medical services until the time of any settlement or award and then receive payment from the client directly from the settlement funds. In this example, the written lien has been sent to the lawyer. First, the lawyer must determine whether the medical provider has a sufficient interest to trigger the duties expressed in Rule 1.15(b). Such an interest must be a matured legal or equitable claim. A valid assignment of the proceeds of a settlement or award of which the lawyer has knowledge is a sufficient interest. Whether a written lien creates a valid assignment must be determined under applicable law.13if it does, the lawyer must promptly notify the medical provider when the lawyer receives any settlement funds. If the client does not, in good faith, dispute the interest, the lawyer must then promptly disburse the funds to the medical provider and render an accounting if requested. If the client disputes the interest in good faith, the lawyer must protect the funds until the dispute is resolved. Example 2: The medical provider does not have a written lien, but the client has informed the lawyer orally that he received the medical services from the provider. The client informs the lawyer that the client is not paying for the services. The lawyer knows the medical provider expects to be paid out of any settlement or award. The lawyer may have used the charges for the

medical services to compute damages in a settlement demand for special and general pain and suffering damage. In this situation, the medical provider does not have a matured legal or equitable claim to the settlement proceeds or any award. The medical provider might have obtained a statutory lien against the proceeds or a valid assignment of the proceeds, but evidently did not do so.14if the client instructs the lawyer to pay for the services out of the settlement proceeds, the lawyer may do so. If the client instructs the lawyer not to pay the medical provider from the proceeds, the lawyer has no duties to the medical provider and would breach a duty to the client by not following the client s instructions. Example 3: The client has not paid a public utility company for services for six months, and the client stalls any collection effort by promising to pay when the settlement funds come in. Now the company sends a letter to the lawyer demanding payment. The public utility company does not have an interest within the meaning of Rule 1.15(b) and therefore the duties expressed in Rule 1.15(b) do not apply. Example 4: A judgment creditor serves a writ of garnishment on the lawyer and obtains a garnishment lien against the client s fund held in the trust account. Here, the creditor has a matured legal claim in the form of a garnishment lien. The lawyer must notify the judgment creditor when the lawyer receives funds subject to the garnishment lien, and, if the client has no good-faith basis for disputing the validity of the lien, the lawyer must disburse the funds or property in the amount of the lien to the creditor and render a full accounting if requested. If the client has a good-faith basis to dispute the lien, after promptly notifying the judgment creditor that the lawyer has received the funds, the lawyer must protect the funds until the dispute is resolved. Example 5: In a family law matter, the lawyer for one spouse accepts funds as a tender of settlement from the other spouse s lawyer regarding past-due support payments. The receiving lawyer deposits the funds in his trust account, but refuses the settlement. The receiving lawyer then refuses to return the funds to the other lawyer, claiming the funds in the trust account are his client s, whatever the final settlement is. Here, the lawyer has received tendered funds subject to an express condition that the settlement proposed be accepted. The funds belong to the other party to the matter and cannot be paid to the lawyer s client until the condition is satisfied. The lawyer should have returned the funds when the settlement was refused because the condition upon which they were received will not be satisfied.15 Conclusion: Third-party claims to funds or property held by a lawyer, where known to the lawyer, require the lawyer s careful attention to Rule 1.15(b). The lawyer must determine whether the third person has a matured legal or equitable claim sufficient interest to trigger the duties stated in Rule 1.15(b). If no such interest exists, the lawyer may disburse the funds or property to the client. If such an interest exists, the lawyer must comply with the duties stated in Rule 1.15(b). Where the client does not dispute the third person s interest, the lawyer must promptly notify the third person, promptly disburse any funds or property to the third person to which that person is entitled, and render a full accounting when requested. If the client has a good-faith basis to dispute the third person s interest, and instructs the lawyer not to disburse the funds or property to the third person, the lawyer must promptly notify the third person that the lawyer has received the funds or property and then must protect the funds or property until the dispute is resolved. We emphasize that independent ethical considerations and principles of substantive law may

govern circumstances not addressed in this opinion. A lawyer s dishonesty, fraud, deceit or misrepresentation to a third party in connection with a client s obtaining goods or services is a violation of Rule 8.4(c).16For example, a lawyer who knows a client intends subsequently to avoid obligations to creditors but in spite of this knowledge assists the client to obtain goods or services under false pretenses will have committed an ethical violation. Under principles of agency law, a lawyer acting as a client s agent may become personally liable to third parties for goods or services provided to the client. Footnotes 1.Utah Rules of Professional Conduct 1.15(b). 2.A lawyer s violation of the ethical duty to pay over funds to third parties has been held to be a ground for discipline. See In re George McCune, 717 P.2d 701 (Utah 1986) (under former Rule of Professional Conduct II, 3, requiring lawyers to pay or deliver money or property to the person entitled thereto within a reasonable time, lawyer disbarred for failing to pay over to cocounsel and court reporter funds paid by client for payment of their invoices). In Utah, a lawyer s obligation to pay or deliver money or property to the person entitled to it is reinforced by a criminal statute, Utah Code Ann. 78-51-42, which provides: An attorney and counselor who receives money or property of his client in the course of his professional business and who refuses to pay or deliver the same to the person entitled thereto within a reasonable time after demand is guilty of a misdemeanor. 3.Rule 1.15(b) does not specify what level of belief or knowledge a lawyer must have to impose the duties specified in the rule. We agree with the analysis of the State Bar of Arizona that a lawyer must have actual knowledge of a third party s interest before acting under Rule 1.15(b). Arizona Ethics Op. 98-06 (Ariz. St. Bar June 3, 1998), (level of cognition must be inferred when not specified; comments to Rule 1.15(b) concerning just claims, and lawyer s duty under applicable law to protect third-party claims, and lawyer s obligation not to unilaterally assume to arbitrate matters between client and third party strongly infer that a lawyer must have actual knowledge of a third party s interest before acting). Under the Rules of Professional Conduct, knowingly, known, or knows denotes actual knowledge of the fact in question. A person s knowledge may be inferred from the circumstances. Utah Rules of Professional Conduct, Preamble, comment. 4.Utah Rules of Professional Conduct 1.15, cmt. (emphasis added). 5.Geoffrey C. Hazard, Jr. & W. William Hodes, The Law of Lawyering A Handbook on the Model Rules of Professional Conduct 1.15:302, at 460 (2d ed. Supp. 1994). 6.Utah Ethics Advisory Op. 96-03, 1996 WL 227377, n.1 (Utah St. Bar). 7.Utah Ethics Advisory Op. 98, 1989 WL 509364 (Utah St. Bar): Absent dishonesty, fraud, deceit or misrepresentation, disputes resulting from the failure of an attorney to make payment for services rendered by third parties should be treated as questions of substantive law, which should be examined under traditional contract and agency doctrines, rather than questions of the ethical propriety of the attorney s actions. 8.In cases where a court order or statute requires a lawyer to turn funds over to a third party, such as a client s bankruptcy trustee, the lawyer must comply with the court order or statute even if the client directs otherwise. See, e.g., 11 U.S.C. 542(a); Utah Farm Production Credit Ass n v. Labrum, 762 P.2d 1070 (Utah 1988) (affirming contempt sanctions against debtor s lawyer who paid himself out of funds and released remaining funds to client in spite of court order to hold funds for client s bankruptcy trustee). 9.Utah Rule of Professional Conduct 1.15(b), cmt.

10.See, e.g., Leon v. Martinez, 638 N.E.2d 511, 514 (NY 1994); Berkowitz v. Haigood, 606 A.2d 1157, 1158 (N.J. Super. Ct. Law Div. 1992); Herzog v. Irace, 594 A.2d 1106, 1109 (Me. 1991). 11.A judgment which has not become a lien on the proceeds of a personal injury settlement or award is not a sufficient interest under Rule 1.15(b). Kansas Ethics Op. 92-14 (Kan. St. Bar Nov. 5, 1992), www/ksbar.org/ethics. 12.This approach is similar to that adopted by numerous states in addressing the same issue. See, e.g., Alaska Ethics Op. 92-3, (Alaska St. Bar); Arizona Ethics Op. 98-06, (Ariz. St. Bar); Connecticut Informal Ethics Op. 95-20 (Conn. St. Bar), ; District of Columbia Ethics Op. 251 (D.C. St. Bar Oct. 18, 1994); Ohio Ethics Op. 95-12 (Ohio St. Bar Oct. 6, 1995); Rhode Island General Informational Op. 7 (R.I. St. Bar Apr. 10, 1997); South Carolina Bar Advisory Op. 94-20, (S.C. St. Bar); see also Restatement (Third) of the Law Governing Lawyers 57; Lawyer s Manual on Professional Conduct (ABA/BNA) 45:1101-10; Irene M. Ricci, Trust Account: Client Trust Funds: How to Avoid Ethical Problems, 11 Geo. J. Legal Ethics 245, 254-55 (1998). 13.The Committee is not empowered to decide legal, as opposed to ethical, questions. Utah Ethics Advisory Opinion Comm. Rules of Proc. III(b)(3) (1996). 14.Hospitals can create a lien on proceeds of any settlement or judgment under Utah s Hospital Lien Law. See Utah Code Ann. 38-7-1 to -8. State assistance automatically becomes a lien on any proceeds under Utah s Medical Benefits Recovery Act. See Utah Code Ann. 26-19-5. 15.See In re Shannon, 179 Ariz. 52, 876 P.2d 548 (Ariz. 1994) (lawyer for personal injury plaintiffs received from defendant s counsel insurance company check for the amount of the judgment marked full satisfaction of judgment along with a form of satisfaction of judgment and a letter specifying that the check should be cashed only upon the return of the executed satisfaction; lawyer disciplined for violating Rule 1.15 by depositing check without executing satisfaction). 16.Rule 8.4(c) provides: It is professional misconduct for a lawyer to:... (c) Engage in conduct involving dishonesty, fraud, deceit or misrepresentation.