Safekeeping Property · 2-8% of the exam
20.3.2Disputed funds: the distribution rule (Rule 1.15(e))
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- Rule 1.15(e) — Disputed funds
Why
Without a specific rule, a lawyer could hold all disputed funds indefinitely as leverage. The lawyer would sit on the money while the argument ran, and the side able to wait longest would win it. The portions nobody contests would be trapped alongside the portion they do.
Plain English
Think in three buckets. When a dispute arises, move the undisputed client share to the client and the undisputed lawyer share to the operating account immediately. Only the genuinely contested amount stays frozen in trust. Withholding undisputed portions is itself a violation.
The contested slice stays in the client trust account until the dispute is resolved — and the lawyer should not unilaterally assume to arbitrate the dispute (Comment [4], stated there for a third party's claim) but is not stuck waiting: where there are substantial grounds for dispute as to who is entitled to the funds, the lawyer may file an action to have a court resolve it.
Rule
Rule 1.15(e) — Disputed funds
When a lawyer possesses property in which two or more persons (which may include the lawyer) claim an interest:
Distribute promptly all portions as to which interests are not in dispute to the persons entitled to receive them. The lawyer may not hold undisputed funds as leverage.
Keep the disputed portion in the client trust account until the dispute is resolved through negotiation, arbitration, or court order.
Comment [3]: the lawyer should suggest means for prompt resolution of the dispute, such as arbitration.
Comment [4] (stated there for a third party's claim): the lawyer should not unilaterally assume to arbitrate the dispute, but where there are substantial grounds for dispute as to the person entitled to the funds, the lawyer may file an action to have a court resolve the dispute.
Illustration: $100,000 verdict; 30% contingent fee; client disputes $10,000 of that fee:
$70,000 (undisputed client share) → client, immediately.
$20,000 (undisputed portion of lawyer's fee) → operating account, immediately.
$10,000 (disputed) → trust until resolved.
Example 1
Ex. 1
A lawyer recovers $150,000 on a contingent-fee case. The fee agreement entitles the lawyer to one-third ($50,000). The client disputes $15,000 of that fee, claiming the work was duplicative. Rather than distributing, the lawyer deposits all $150,000 into trust and sends a letter that all funds are "held pending dispute resolution."
Violation. The undisputed client share is $100,000 and the undisputed portion of the fee is $35,000. Those amounts must be distributed immediately: $100,000 to the client and $35,000 to the operating account. Only the $15,000 genuinely in dispute may remain frozen. Depositing the entire sum is a violation even if the dispute resolves quickly. Slice the $150,000 into its three amounts before deciding which one stays put.
Trap
Tip
Questions · 1
Q 01ch20-e09
Question 1 of 1 · Rule 1.15(e)
Attorney recovered two hundred forty thousand dollars for Client in a case over a botched grain-silo installation. Under the written contingent-fee agreement Attorney's share was one quarter of the recovery, or sixty thousand dollars. When the money arrived Client wrote to Attorney disputing eighteen thousand dollars of that fee, saying that part of it covered work a second firm had already done. Attorney deposited the whole two hundred forty thousand dollars into the client trust account and wrote to Client that all of the money would stay there until the fee question was settled. Nothing was paid out for five months, when the two of them agreed on a figure. Is Attorney subject to discipline?
Keys 1 to 4 choose.