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Commonwealth of Massachusetts


January 2005

AT WHAT COST, PAYMENT?
Or Possession is not nine-tenths of your ethical obligations

by
Dorothy Anderson, Assistant Bar Counsel

If you have just received a check representing funds due to your client from a transactional matter or for the resolution of a dispute that did not involve litigation, may you take your fee out of those funds? What if you receive funds due to your client from an unrelated matter or transaction, or if you are holding client trust funds as a fiduciary or as an escrow agent?

Lawyers often expect to be paid from funds that the client is due to receive in connection with the representation. Faced with a client who may not or will not pay the bill, lawyers sometimes look to client funds that are in or come in to their possession, either in connection with the current representation or another client matter. However, without express client consent, or a lien pursuant to G.L. c. 221, § 50 , lawyers should not take or retain funds due to a client, or funds provided by the client for another purpose, to pay outstanding legal bills. Common examples of funds that are not subject to a charging lien include the proceeds of transactional matters, and funds resulting from the resolution of disputes that did not involve litigation, or that involved unrelated litigation. By taking such funds without client consent it is possible to run afoul of several of the Massachusetts Rules of Professional Conduct and expose oneself to civil liability.

Massachusetts Rules of Professional Conduct, 1.15, as amended in July 2004, contain several provisions relevant to the type of situation described above:

(b) (2) (ii) Trust funds belonging in part to a client or third person and in part currently or potentially to the lawyer shall be deposited in a trust account, but the portion belonging to the lawyer must be withdrawn at the earliest reasonable time after the lawyer's interest in that portion becomes fixed. A lawyer who knows that the right of the lawyer or law firm to receive such portion is disputed shall not withdraw the funds until the dispute is resolved. If the right of the lawyer or law firm to receive such portion is disputed within a reasonable time after notice is given that the funds have been withdrawn, the disputed portion must be restored to a trust account until the dispute is resolved. (Formerly 1.15 (d)(2))

(c) Upon receiving trust funds or other trust 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 as otherwise permitted by law or by agreement with the client or third person on whose behalf a lawyer holds trust property, 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. (Formerly 1.15(b))

(d) (2) On or before the date on which a withdrawal from a trust account is made for the purpose of paying fees due to a lawyer, the lawyer shall deliver to the client in writing (i) an itemized bill or other accounting showing the services rendered, (ii) written notice of amount and date of the withdrawal, and (iii) a statement of the balance of the client’s funds in the trust account after the withdrawal. (New as of 7/01/04)

When the attorney and client have a pre-existing agreement that the attorney will be paid from the client’s funds, the attorney certainly may pay himself from the funds. Mass. R. Prof. C. 1.15(c) The attorney should promptly remove his fees from the trust fund, but only after or at the same time providing an itemized bill to the client, specifying the amount paid, the date of payment and the balance of client funds remaining in the lawyer’s possession. Mass. R. Prof. C. 1.15(d)(2) If the client disputes the bill within a reasonable time after receiving it, the lawyer must return the disputed portion to the trust account pending resolution of the dispute. Mass. R. Prof. C. 1.15(b)(2)(ii).

If the attorney and client have a pre-existing agreement that the attorney will be paid from the client’s funds, but the amount of the attorney’s fees is disputed, the attorney must promptly pay the undisputed amount to the client, but must keep the disputed portion in trust until the dispute is resolved. Comment [3] to rule 1.15 advises that:

Lawyers often receive funds from third parties from which the lawyer’s fee will be paid. If there is risk that the client may divert the funds without paying the fee, the lawyer is not required to remit the portion from which the fee is to be paid. However, a lawyer may not hold funds to coerce a client into accepting the lawyer’s contention. The disputed portion of the funds must be kept in trust and the lawyer should suggest means for prompt resolution of the dispute, such as arbitration. The undisputed portion of the funds shall be promptly distributed.

Thus, faced with a fee dispute, an attorney should not simply retain the disputed amount in a trust account, waiting for action by the client. The attorney has an obligation to take affirmative steps to attempt to effect the resolution of the fee dispute in a timely way. In the meantime, the disputed funds are trust funds for which records must be kept and reconciliation reports created, in accordance with the provisions of 1.15(f).

A problem may arise if the attorney assumes that he will be paid from the third-party funds, only to discover that the client never shared that assumption. When there is no agreement, the attorney must promptly deliver the funds to the client. There is no legal authority in Massachusetts to support the right of an attorney, in the absence of an agreement, to appropriate or retain client funds received from a third party, or funds provided by the client for a purpose other than the payment of the legal fees and costs, to pay or to secure payment of the attorney’s fees.

An attorney’s “retaining lien”-- a legal doctrine that, in certain other jurisdictions, gives an attorney the right to withhold property from the client as security for the payment of attorney’s fees and costs-- has never been specifically recognized in Massachusetts. See, Torphy v. Reder, 357 Mass. 153, 156-157 (1970). Inasmuch as Torphy presented a unique set of factual circumstances, and the court acknowledged in its opinion that Massachusetts courts have never been squarely faced with a case that presented the opportunity to establish the “retaining lien”, at least one commentator has suggested that the courts are still waiting for the opportunity to do so.

Presently, however, no such lien exists with respect to money, files or any other client property. (See, Mass. R. Prof. C. 1.16 (e), which specifically requires an attorney who has withdrawn from representation of a client to return the client’s files, regardless of whether the attorney has been paid, except for work product in certain circumstances.) Unless and until the doctrine is conclusively established, an unpaid attorney has no more right to withhold client property without consent than any unsecured creditor, and the attorney has a duty to promptly deliver funds that a client is entitled to receive. Mass. R. Prof. C. 1.15(c)

An attorney’s assertion of a claim against client funds could create a conflict that would potentially violate Mass. R. Prof. C. 1.7 (b). Such a conflict would require the attorney to withdraw from the representation.

Even if retaining liens at some point are recognized in Massachusetts, the lien would not apply to funds delivered to the attorney for a particular purpose. Torphy v. Reder, supra. Jurisdictions that do recognize a “retaining lien” still do not permit it to be applied to client funds held for a specified reason. 7 Am Jr. 2d, Attorneys at Law, § 318 (1980) (property delivered for a specific purpose is not subject to a retaining lien).

In The Florida Bar v. Bratton, 413 So. 2d 754, (1982), the respondent attorney failed to return to his client $10,000 that had been posted as a bond in a foreclosure proceeding, claiming that the money was owed to him in attorney’s fees. The court found that although Florida law allowed an attorney to assert a lien “for payment of agreed fees from the proceeds of transactions or collections,” the provision was inapplicable to the bond funds because, “[a]n attorney must not allow his claim of a fee for past services rendered to conflict with his duties as a trustee when entrusted with money for a specific purpose of his client.” Id. at 755

In the absence of the client’s consent, an attorney’s withdrawal of funds from a client escrow account set up for a specified purpose, and without any client agreement that attorney’s fees will be withdrawn from such an account, is professional misconduct. In Matter of Pemstein, 16 Mass. Att’y Disc. R. 339 (2000), the respondent attorney, without his client’s consent and partly to pay himself outstanding legal fees, withdrew $7000 from an escrow account set up to pay for nursing home care for the client’s husband. The Board of Bar Overseers noted that where the funds held were not a retainer against which fees were to be charged, “it is settled that a lawyer may not set off against escrow funds held for a particular purpose even if he or she is owed a legitimate fee.” Id. at 346. The Board found that Pemstein’s conduct was an intentional misappropriation of client funds with intent to deprive her of the use of her funds, in violation of Canon One, DR 1-102(A) (4) and (6) and Canon Nine, DR 9- 102 (A), (B) and (C). Pemstein was indefinitely suspended from the practice of law.

As is so often the case, the solution to all of these potential problems is to put it in writing. If an attorney expects to be paid from non-retainer client funds, that expectation should be in writing from the outset. If a payment issue arises later in the representation, and the attorney and client achieve a new understanding about the source of the lawyer’s payment, the agreement should be reduced to writing at that time. Oral agreements are, of course, enforceable, but subject to the usual uncertainties of memory and proof. Attorneys may spare themselves lots of trouble -- both ethical and practical -- by putting such agreements in writing.



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