UTAH STATE BAR ETHICS ADVISORY OPINION COMMITTEE
Opinion Number 11-01
Issued August 24, 2011
1. ISSUE: Two interrelated issues are before the Committee: First, may an attorney representing a plaintiff in a personal injury action indemnify and hold harmless a party being released from any medical expenses and/or liens which might remain unpaid after the settlement funds are fully disbursed? Second, in a personal injury action, may an attorney request another attorney to indemnify and hold harmless a party being released from any medical expenses and/or liens which might remain unpaid after the settlement funds are fully disbursed?
2. OPINION: It is a violation of the Utah Rules of Professional Conduct and improper for a plaintiff’s or claimant’s lawyer to personally agree to indemnify the opposing party from any and all claims by third persons to the settlement funds. As it is professional misconduct for a lawyer to “knowingly assist or induce” another lawyer to violate the Utah Rules of Professional Conduct, it is improper for a lawyer to request a plaintiff’s or claimant’s attorney to indemnify or hold harmless a party being released from third party claims which may remain unpaid after the settlement funds are fully disbursed.
3. BACKGROUND: It has become an increasingly prevalent practice in Utah in recent years, as it has in other states, for lawyers representing plaintiffs to be asked to indemnify the opposing party and counsel from any and all claims by third persons to the settlement proceeds. This obviously arises most commonly, but not necessarily always, in personal injury actions where third party providers of medical services have colorable claims upon the funds derived from settlement of the claimant’s cause of action against a tort-feasor, usually, but not necessarily always, involving settlement funds provided by an insurer.
4. ANALYSIS: Although these specific issues have not previously come before this Committee, it has the benefit of opinions from several other states which have thoroughly analyzed the questions1. All have come to essentially the same conclusion the Committee has reached in this Opinion.
5. The Committee begins its analysis by discussing, at some length, a lawyer’s duty with respect to property held for clients or third parties. It should be clearly understood that this discussion is essentially for background purposes. This Opinion is in no way contingent upon whether a third party actually has a matured equitable or legal claim interest sufficient to trigger the duties stated in Utah Rule of Professional Conduct 1.15.
6. The general duty of a lawyer toward clients and third parties is set forth in Utah Rule of Professional Conduct 1.15, which states as follows:
(a) A lawyer shall hold property of clients or third persons that is in a lawyer’s possession in connection with a representation separate from the lawyer’s own property. Funds shall be kept in a separate account maintained in the state where the lawyer’s office is situated or elsewhere with the consent of the client or third person. The account may only be maintained in a financial institution that agrees to report to the Office of Professional Conduct in the event any instrument in properly payable form is presented against an attorney trust account containing insufficient funds, irrespective of whether or not the instrument is honored. Other property shall be identified as such and appropriately safeguarded. Complete records of such account funds and other property shall be kept by the lawyer and shall be preserved for a period of five years after termination of the representation.
(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 good-faith 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: (more…)
(Approved January 24, 1997)
Issue: What is the ethical obligation of an attorney to a client or former client, when the attorney is unable to locate the client, and the attorney is holding trust funds on behalf of that client?
Opinion: The first obligation of an attorney under these circumstances is to secure the funds on behalf of the client1as against all other possible claimants. In other words, if the funds are still held in the form of a check, the attorney should take care to endorse the check and deposit it into the attorney’s trust account to insure that the funds are not eventually lost to the client simply by the passage of time or the expiration of the client’s right to negotiate the instrument.
Thereafter, the attorney should keep the client’s property in safe keeping, in conformity with the requirements of Rule 1.15 of the Utah Rules of Professional Conduct. Specifically, the attorney should keep the funds in a trust account for the client. If the sum is substantial, or if the period of time during which the lawyer will be unable to locate the client is expected to be lengthy, the funds should be placed in an interest-bearing account. A separate trust account may be warranted when administering these monies.
After securing the funds for the client, the attorney should make all reasonable, diligent efforts to locate the client. This includes contacting all last known addresses and telephone numbers, asking for forwarding addresses, and contacting third parties who are relatives, employees or friends of the client to attempt to reach the client. Under certain circumstances, it may even be appropriate for the attorney to seek the professional help of an investigator to locate the missing person. A rule of reasonableness should apply. Clearly, expending all of the money held in trust to locate the client is not warranted and violates the rule of safely keeping a client’s property. However, for large sums, spending a substantial sum of money to locate the client in order to transfer the remaining balance may be appropriate. (Attorney’s and investigators’ fees associated with the search might appropriately be paid out of the trust fund.2)
If the attorney is still unable to locate the client, then the attorney should hold the funds for a substantial period of time to see if the client or former client voluntarily makes contact with the attorney. Specifically, under Utah law, property may become abandoned or unclaimed property.3After the attorney determines that the client cannot be located, an attorney should, therefore, hold trust accounts unclaimed by a client for the time period set forth in the statute. This Committee is not authorized to decide or interpret matters of law;4thus, a further interpretation of the abandoned property statutes is not proper here.
Once the property has become abandoned and is, therefore, unclaimed property within the meaning of the Utah Code, the attorney should follow the procedure for reporting and submitting abandoned or unclaimed property set forth.5Again, the exact procedure in following this statutory provision is a matter of interpretation of law, which cannot be undertaken in this opinion. (more…)
(Approved May 30, 1997)
Issue: Is a lawyer, acting as a trustee under the United States Bankruptcy Code, required to maintain bankruptcy estate trust funds in a financial institution that complies with check-overdraft reporting requirements described in Rule 1.15?
Opinion: No. A lawyer, acting as a trustee under the United States Bankruptcy Code, is not required to maintain funds in a financial institution that complies with the check-overdraft reporting requirements of Rule 1.15, because the administration of such bankruptcy funds is not the practice of law.
Facts: Pursuant to 11 U.S.C. § 1302, the United States Trustee appointed a lawyer as a Chapter 13 trustee for the District of Utah.1As a Chapter 13 trustee, the lawyer is a fiduciary for Chapter 13 estates created upon filing a petition for relief under Chapter 13 of the Bankruptcy Code. On behalf of the Chapter 13 estate, the trustee receives money from Chapter 13 debtors. The trustee is bonded, submits regular reports and is audited on a regular basis by the United States Trustee.
Analysis: Utah Rule of Professional Conduct 1.15 now requires a lawyer to enter an agreement with any financial institution where that lawyer has client or third-party trust funds. Under the agreement, the financial institution will report any non-sufficient checks or check overdrafts to the Office of Attorney Discipline.2
However, most of the Rules of Professional Conduct govern a lawyer’s actions only in the providing of legal services or in the practice of law. For example, an attorney’s direct-mail advertising of mediation and arbitration services is not prohibited under Rule 7.3 since mediation and arbitration services are not the practice of law.3This is true of Rule 1.15. Rule 1.15 states that the rule applies only to property “in connection with a representation.” The Comment to Rule 1.15 also suggests that Rule 1.15 only applies in the practice of law.4
The administration of a Chapter 13 trust is not the practice of law. The Bankruptcy Code does not require that a bankruptcy trustee be a lawyer.5The bankruptcy trustee has no attorney-client relationship with either the debtor or with any of the creditors. The bankruptcy trustee does not act as an advocate for or represent any of the parties. Therefore, a lawyer practicing as a Chapter 13 trustee is not required to conform with the requirements of Rule 1.15 in maintaining Chapter 13 funds.
Provisions other than Rule 1.15 exist to protect Chapter 13 funds. As a bankruptcy trustee, the lawyer must be bonded.6The United States Trustee regularly audits the lawyer, and the lawyer submits periodic reports to the United States Trustee. Finally, a lawyer acting as a trustee, even a Chapter 13 trustee, is still subject to Rule 8.4 for any misconduct in the handling of trust funds.7
This opinion that Rule 1.15 does not govern the Chapter 13 trustee’s actions applies only to the supervision of bankruptcy trust funds. If the lawyer, acting as a bankruptcy trustee, also maintains a non-bankruptcy estate trust fund for a client or a third party, that fund may be subject to Rule 1.15.
1.Although this opinion involves a Chapter 13 trustee, the analysis and result would be the same for other bankruptcy trustees.
(Approved July 3, 1996)
Issue: May a lawyer choose a law-related charitable institution other than the Utah Bar Foundation to be the recipient of trust-account interest that is generated in such nominal amounts that it is impractical to pay them to individual clients?
Opinion: Because the Utah Supreme Court’s approval of the Utah State Bar’s “interest on lawyers’ trust accounts” (IOLTA) program is specifically limited to the Bar’s original proposal to dedicate small-interest amounts to the Utah State Bar Foundation, a lawyer who remits interest to a different charitable institution would violate Rule 1.15 of the Utah Rules of Professional Conduct unless the Court specifically authorizes another recipient.
Discussion: It is well established that lawyers may not receive for their own purposes interest on clients’ funds that are held in trust for the clients.1Due to difficulties in accounting for and assigning interest payable to clients for small deposits and short deposit times, lawyers traditionally kept such funds in non-interest-bearing accounts.
The only institutions profiting by this arrangement were the financial institutions holding the funds. Accordingly, in 1983 the Utah State Bar petitioned the Utah Supreme Court to implement an IOLTA program to permit lawyers to accrue interest on clients’ trust funds that were otherwise impractical to account for and to remit those monies to the Utah Bar Foundation.
The Utah Supreme Court approved the program in In re Interest on Lawyers’ Trust Accounts.2Prior to this order of the Court, any interest earned on monies deposited in lawyers’ trust accounts had to be paid to the clients whose funds had generated the interest. There were no exceptions, even for small amounts that would require major accounting and allocation efforts.3
In the absence of such accounting, the funds had to be held in non-interest-bearing accounts, so that the lawyer would not be the beneficiary of any interest-both under the Code of Professional Responsibility (before 1988) and the Rules of Professional Conduct (after 1987).
The Supreme Court has provided a singular exception to this general rule by authorizing the Utah State Bar to implement a voluntary IOLTA program, under which clients’ funds that are nominal in amount and expected to be held for a short period of time can be channeled to an interest-bearing account, with interest payable to the Utah State Bar Foundation.
The Ethics Advisory Opinion Committee believes that the Supreme Court’s authorization is for a single exception to the general principle of Rule 1.15 and has not provided a blanket or generic exception to the rule. If an individual lawyer were to have the ability to choose a law-related charitable institution other than one designated by the Supreme Court, then that individual lawyer would be exercising a measure of control over the earned interest. Such an exercise of control would amount to the receipt of a personal benefit by the lawyer, which the ethical rules prohibit. Accordingly, the Committee concludes that, in order to avoid a violation of Rule 1.15, a lawyer would need to obtain specific Supreme Court approval of a proposal to remit trust-account interest to another charity. (more…)