Competing Third-Party Claims

Competing Third-Party Claims

When two or more persons claim interests in property a lawyer holds, Rule 1.15(e) commands two things. The property “shall be kept separate by the lawyer until the dispute is resolved,” and the lawyer “shall promptly distribute all portions of the property as to which the interests are not in dispute.”¹ The earlier subsections applied that command to fee disputes, where the lawyer was one of the claimants. Here the claimant is a stranger to the fee arrangement: a hospital that treated the client, an insurer that paid for the treatment, a lender, a creditor holding a judgment. Each says it has a right to money the lawyer holds for the client. The lawyer must first evaluate whether that assertion has legal force, and the answer turns on whether the client's wishes and the claim point the same way.

In the simplest case they do, and nothing needs deciding. A personal injury client may agree in advance that a stated amount or share of the expected settlement will go to a hospital, a medical provider, or an insurer that covered the treatment. The lawyer ordinarily distributes the funds between the client and that third person according to the understanding.² The money is the client's, and the client has directed how to divide it. No one contests the division, so the interests are not in dispute in the sense Rule 1.15(e) uses, and the lawyer pays each person what that person is entitled to receive.

The analysis changes when the two diverge. Suppose the client never agreed to a distribution that includes the third person, or countermands an earlier instruction and tells the lawyer to pay everything to the client. The lawyer then evaluates the competing claim under the substantive law of property rights and security interests.³ Rule 1.15 gives no hospital, lender, or creditor any right in a client's money. It protects interests that other law creates, such as a lien, an assignment of settlement proceeds, or a security interest in specific funds. The lawyer asks whether the third person holds an interest of that kind. The answer comes from the law of liens, contracts, and secured transactions, not from the lawyer's sense of fairness or from how hard the claimant presses.

Evaluating a claim does not make the lawyer a judge. When a third person asserts a claim on funds held in trust, the lawyer does not become an impartial arbiter and remains responsible and answerable to the client, unless the third person confirms a properly presented and secured claim of interest in specific property or funds.⁴ The allocation protects both sides. If a bare assertion could freeze or redirect a client's money, any stranger could tie up a settlement with a letter or a telephone call. Yet a lawyer who brushed aside a claim backed by a valid lien would pay out money in which someone else holds a legally recognized interest. A claim with real footing in the specific funds therefore makes the interests disputed. Rule 1.15(e) then governs: the contested portion stays in trust, and the rest goes out promptly.⁵ A lawyer who cannot tell whether the claim is sound has the same course open, because keeping the contested amount separate preserves every claimant's position until they agree or a tribunal decides.

Exam stems on this rule usually pair a client who demands everything with a third person who says part of it is owed. What backs the third person's claim decides the answer.

One difference separates the two lawyers' conduct: whether the claim has legal footing in the specific funds. The client's attitude is identical in both scenes, a demand for everything, and it controls only where nothing else attaches to the money. A lawyer who pays every claimant who asks has mistaken courtesy for duty. A lawyer who obeys every client demand risks paying away money in which another person holds a recognized interest. The rule avoids both errors by asking what backs the claim.

Credit Union Central Falls v. Groff shows what resolution looks like when claimants compete for a single fund. The money in Mr. Groff's clients' trust account drew claims from the credit union and from a second claimant, whom an earlier decision allowed to intervene to protect her interest in the money.⁶ A Superior Court order entered December 3, 2004 barred distribution of the funds until all potential claimants had been notified and given an opportunity to establish their entitlement at a hearing. The reviewing court then affirmed summary judgment for the credit union.⁷ The decision does not teach how a lawyer should weigh a third person's claim. It shows the end point: the money is held intact, every potential claimant is told of it and may try to prove a right to it, and a court with no stake in the outcome decides among them.

State versions track the model rule with local variations. One version directs that property claimed by two or more persons be treated as trust property. It requires the lawyer to withdraw the lawyer's own portion within a reasonable time after it becomes due, unless the lawyer's right to it is disputed. A disputed portion stays separate until the dispute is resolved, and the undisputed portions are distributed promptly.⁸ That text confirms the structure of the model rule while adding detail about the lawyer's own share.