Two Duties When Claims Collide

Rule 1.15(e) packs its whole command into two sentences: “When in the course of representation a lawyer is in possession of property in which two or more persons (one of whom may be the lawyer) claim interests, the property shall be kept separate by the lawyer until the dispute is resolved. The lawyer shall promptly distribute all portions of the property as to which the interests are not in dispute.”¹ Each sentence sets its own duty. The first governs the contested part of the property; the second governs everything else the lawyer holds in the same matter. A lawyer who sets aside the contested amount and then sits on the remainder has obeyed the first sentence and broken the second.

The rule needs both duties because each one guards against a different danger. Without the first, the lawyer could pay the contested sum into the lawyer's own account, or to a claimant who cannot later give it back, and the other claimant would be left with a lawsuit in place of the property. Without the second, any disagreement, however small, could freeze the entire fund, and whoever gains from delay would hold the leverage: the lawyer who controls the trust account, or a claimant with a modest interest in a large fund. Together the duties confine the freeze to the size of the actual disagreement. The lawyer holds the contested slice and pays out the rest.

Keep Disputed Property Separate

The first duty attaches the moment two or more persons, who may include the lawyer, claim interests in property the lawyer holds: the property “shall be kept separate by the lawyer until the dispute is resolved.”² Two features of that sentence control what follows. The duty lasts until the dispute is resolved, so the lawyer cannot end it by privately deciding who is right. And the verb is kept, which makes the lawyer the custodian of the contested property and gives the lawyer no authority to award it. When the property is money, keeping it separate means leaving it in the client trust account, apart from the lawyer's own funds, where it stays available to whichever claimant is ultimately entitled.³

The rule limits the lawyer to custody because of where the lawyer stands. A lawyer who claims a fee has a stake in the answer. A lawyer pressed by a third person is pulled between loyalty to the client and the third person's demand. Neither can weigh the competing claims fairly, so the rule leaves the decision to the claimants or to a tribunal and gives the lawyer one task: preserve what is contested. Preservation also protects the eventual winner, who receives the property itself and not a claim against someone who has already spent it.

Because the lawyer is only the custodian, the duty closes every route by which the lawyer could settle the contest alone. Paying the contested amount to the client may hand over money that a third person can show is theirs. Paying it to the third person ignores the client's competing claim and the lawyer's duty to the client. Paying it to the lawyer lets the claimant who controls the account decide the contest in the claimant's own favor. In each case the payment is itself the decision, and the lawyer has no authority to make it.

The lawyer-claimant receives some security in return for that restraint. A lawyer who disagrees with a client about the fee may keep the disputed amount in the trust account as security for the claim, but may not take personal possession of it.⁴ Two disciplinary decisions show how firmly the line is drawn, and each crosses it differently. In In re Jones, the Louisiana Supreme Court held that placing funds in the lawyer's operating account with knowledge of a fee dispute is conversion of client funds, and it named disbarment as the baseline sanction.⁵ The violation there was the money's destination, since funds in the operating account are no longer separate. In Attorney Disciplinary Board v. Rhinehart, the Iowa Supreme Court found a violation where the lawyer paid settlement funds out of the trust account to himself despite knowing the fee was disputed, and it rejected his excuse that the clients had refused to discuss the matter.⁶ There the money began in the right place, so the violation was the payout. The excuse failed because nothing in the rule lets the lawyer resolve a dispute alone when the other side is unresponsive.

The same custody logic governs when the other claimant is a third person. If a hospital, an insurer, or a workers' compensation carrier has perfected a lien on a client's injury recovery by proper notice, and the claim is not frivolous, the lawyer must retain the claimed funds and may not release them to the client or to the lienholder until the underlying dispute is resolved.⁷ The client's demand for the full amount does not dissolve the hold, because the lawyer cannot disregard an obstacle the law has imposed. The hold does not make the lawyer a judge of the competing claims, however. The lawyer remains answerable to the client and does not act as an impartial arbiter between the client and the third person.⁸ A later section explains how a lawyer tests whether a third person's demand is the kind of claim that triggers the hold.

Exam stems often test this duty through a lawyer who takes a fee out of the trust account. Whether the withdrawal is proper depends entirely on whether anyone disputes the money.

Hypothetical Illustration

After a settlement, the client and the lawyer have agreed in writing that the fee is $12,000, the work is complete, and no hospital, insurer, or other creditor has asserted an interest in the recovery. The lawyer withdraws the $12,000 from the trust account. Nobody else claims the money, so the duty to keep property separate is never triggered, and the withdrawal is simply the collection of an earned fee.

In a different matter, the client insists the fee should be $9,000, and the lawyer, certain that $12,000 is right, moves the $3,000 difference into the operating account to cover payroll. The lawyer's certainty changes nothing. A competing claim to that $3,000 exists, so it had to stay separate until the dispute was resolved, and moving it is a violation. The $9,000 on which the two agree raises the second duty, taken up next.

The instinct this section corrects is the belief that a lawyer who is sure of the fee may pay herself first and sort out the disagreement afterward. Confidence in the merits cannot decide the question, because the rule exists for the case in which one claimant is the lawyer and cannot be trusted to grade the claim. A dispute never entitles the lawyer to keep the property for personal use, and it never entitles the lawyer to pay the property to either side. The lawyer holds the contested slice and waits.

Distribute the Undisputed Portion

The second sentence of Rule 1.15(e) says that the lawyer “shall promptly distribute all portions of the property as to which the interests are not in dispute.”¹⁰ The phrase that carries the rule is all portions. The rule treats the property in the lawyer's hands as divisible, so each competing claim is measured against the property, and only the slice that more than one person claims falls under the freeze in the first sentence. Everything outside that slice has an owner whom nobody contests. The lawyer's reason for holding it has ended, and the lawyer's remaining duty is delivery. The word promptly fixes the timing: the lawyer may not wait for the contested slice to be resolved before releasing the rest.

The first sentence would be dangerous without this one, because a freeze that covers the whole fund hands leverage to whoever controls the account. A client who has just received a recovery often needs the money for medical bills or rent, and a lawyer who holds all of it can release the uncontested part of the client's own money only in exchange for concessions on the contested part. The rule forecloses that bargaining position. It allows the lawyer to keep the disputed amount in the trust account as security, but it does not allow the lawyer to take personal possession of that amount or to hold the entire payment hostage to gain an advantage over the client.¹¹ Prompt distribution of the undisputed portion confines the lawyer's holding power to what is genuinely contested and puts the rest of the money in its owner's hands at once.

The $8,000 was frozen in both matters, so the contested slice was handled identically. The first lawyer's breach is the extra $22,000 frozen beyond anything the hospital's claim reached. That lawyer honored the first sentence of the rule and violated the second.

What “distribute” means depends on who holds the undisputed interest. In a fee dispute between lawyer and client, the lawyer may not withhold the entire amount pending resolution and must distribute to the client the portion that is not in dispute.¹² The same logic sends the part of the fee that the client concedes to the lawyer and sends any share a third person plainly owns to that person, so the lawyer may be a recipient of the undisputed distribution as well as the one who makes it. A check payable jointly to the client and a third person shows the same division in another setting. Both payees have interests in the proceeds, so if they disagree about how much belongs to each, the lawyer holds only the contested amount separate and promptly distributes the portions on which they agree.¹³

Step two does the real work, because a lawyer who cannot say what number a claimant contests will tend to freeze everything. Step four is the one students omit, since a lawyer who completes the first three steps feels finished.

State versions of the rule keep this structure. One state version, quoted in a court opinion, repeats the sentence requiring prompt distribution of all portions in which the interests are not in dispute. It adds a timing rule for the lawyer's own share: the portion belonging to the lawyer or firm must be withdrawn within a reasonable time after it becomes due, unless the lawyer's right to it is disputed, in which case only the disputed portion stays separate.¹⁴ A later section returns to such variations.

An exam stem often shows a lawyer who keeps the contested amount in trust and then withholds the rest to encourage settlement, or until the lawyer's work is paid in full. The first sentence has been honored in that stem and the second violated, so the answer turns on the withheld remainder.