When can a lawyer move disputed fees out of the trust account if the client objects but takes no legal action?

Plain-English summary

A lawyer settles a client's personal-injury case under a 30% contingent fee, deposits the funds in trust, and the client disputes the fee. Under Rule 1.15-2(g) the lawyer must hold the disputed portion in trust until the dispute is resolved, disburse the rest, and give the client notice of the State Bar's Fee Dispute Resolution Program under Rule 1.5(f). The opinion addresses when, across three scenarios, the lawyer may treat the dispute as resolved and move the funds to the operating account without the client's consent.

In the first scenario, the client files a fee petition that the State Bar staff dismisses as not meritorious, but the client keeps objecting. The opinion concludes that because a client who disputes a fee but takes no action would otherwise force the lawyer to hold the funds indefinitely, the lawyer may transfer them after the dismissal, but only if he first gives the client reasonable notice that the funds will be transferred if no legal action is taken by a certain date. The opinion states that 30 days notice should be reasonable; if the client files suit within that time, the lawyer must keep holding the funds in trust.

In the second scenario, the parties take the dispute to mediation through the program but reach an impasse, and the staff closes the file. The opinion concludes the lawyer may transfer the funds on the same terms as the first scenario: adequate notice of intent to transfer, and no lawsuit filed within the notice period.

In the third scenario, the client disputes the fee but never files a fee petition or initiates legal action. The opinion concludes the lawyer may transfer the funds only if (1) he gave the 30-day written notice of the fee-dispute program required by Rule 1.5(f); (2) the client failed to elect fee dispute resolution; (3) the funds are for services rendered and not clearly excessive; and (4) after the 30 days expires with no petition, the lawyer gives a second written notice that the funds will be transferred unless the client initiates legal action within 30 days. If the client elects the program or sues at any point during the 30 days, the lawyer must hold the funds pending resolution.

In practice

Under the North Carolina rules as they stood at the time of the opinion, the analysis turns on whether the fee-dispute process has run its course and whether the lawyer has given the client a clear, time-limited notice before moving the funds. The opinion holds that a lawyer may not move disputed fees out of trust on the strength of a dismissal or impasse alone; a further notice giving the client a set period (generally 30 days) to file suit is required, and a filed lawsuit keeps the funds in trust.

Per the opinion, where the client never invokes the program, the lawyer needs the Rule 1.5(f) notice, the client's failure to elect, fees that are for services rendered and not clearly excessive, and a second 30-day notice before transferring the funds.

Common questions

Q: A client's fee-dispute petition was dismissed but he still objects. Can the lawyer take the fee from trust?

A: Not immediately. The opinion concludes the lawyer may transfer the funds after the dismissal only if he first gives the client reasonable notice (generally 30 days) that the funds will move unless the client files suit; a timely lawsuit keeps them in trust.

Q: What if the fee-dispute mediation ends in an impasse?

A: The same rule applies. The opinion concludes the lawyer may transfer the funds after an impasse closing if he gave adequate notice of intent to transfer and the client did not file a lawsuit within the notice period.

Q: The client disputes the fee but never files anything. When can the lawyer transfer the funds?

A: After a two-notice sequence. The opinion concludes the lawyer must give the Rule 1.5(f) 30-day notice, the client must fail to elect the program, the fee must be for services rendered and not clearly excessive, and the lawyer must then give a second 30-day notice before transferring; electing the program or suing at any point keeps the funds in trust.

Q: How long must the lawyer keep disputed fees in trust?

A: Until the dispute is resolved. The opinion holds that under Rule 1.15-2(g) the lawyer must hold disputed fees in trust until resolution, and the notice procedures it describes are what let the lawyer treat an inactive dispute as resolved.

Background and rules framework

The opinion applies North Carolina Rule 1.15-2(g) (a lawyer must hold disputed funds in trust until the dispute is resolved) and Rule 1.5(f) (notice of the State Bar's Fee Dispute Resolution Program), with reference to comment [13] to Rule 1.15, which track Model Rules 1.15 and 1.5. The procedures the opinion sets out are designed to prevent an inactive dispute from forcing the lawyer to hold funds in trust indefinitely.

Citations and references

Rules of Professional Conduct:

• MR 1.15 / NC Rule 1.15-2(g), cmt. [13] (holding disputed funds in trust until resolution)
• MR 1.5 / NC Rule 1.5(f) (notice of the Fee Dispute Resolution Program)

See also

• NC 2011 FEO 13: Retaining a Disputed Legal Fee in the Trust Account
• NC 2006 FEO 15: Dormancy Fee on Unclaimed Funds

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/2006-formal-ethics-opinion-16/

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

Inquiry #1:

Attorney represents Client in a personal injury matter. Client signs a written fee agreement and agrees to pay Attorney 30% of any recovery made in his case. After negotiations with the insurance carrier, Attorney settles Client's case. Attorney receives the settlement check and release and places the funds in his trust account. Client signs the release but disputes the 30% contingent fee. Pursuant to Rule 1.15-2(g), Attorney holds the disputed fees in his trust account and disburses the remainder appropriately. Attorney then gives Client notice of the State Bar's Fee Dispute Resolution Program as required under Rule 1.5(f). Client elects to participate in the process by filing a petition. After Attorney provides a response to the petition and the State Bar staff reviews the file, it is determined that Client's dispute is not meritorious and the staff issues a dismissal letter.

Notwithstanding the dismissal, Client continues to object to the payment of the fee. Because fee dispute resolution is nonbinding, Attorney continues to hold the funds in his trust account. Attorney would like to transfer the funds from the trust account to his operating account.

When may Attorney consider the dispute resolved and transfer the funds without Client's consent?

Opinion #1:

A lawyer is required to hold disputed legal fees in his trust account until the dispute is resolved. Rule 1.15-2(g) and Rule 1.15, comment [13]. Therefore, a client who continues to dispute a legal fee but takes no action to recover the funds, in effect, forces the lawyer to hold the disputed funds in trust indefinitely. To avoid this anomalous result, the lawyer may transfer the funds from the trust account to his operating account after the dismissal of a petition by the State Bar's Fee Dispute Resolution Program, but only if he has given the client reasonable notice that the funds will be transferred to the operating account if no legal action is taken by a certain date. Providing 30 days notice for the client to take legal action to recover the funds should be a reasonable amount of time. If, within that time frame, the client files a lawsuit to recover the funds, the lawyer must continue to hold them in trust.

Inquiry #2:

Assume the same facts as in Inquiry #1, except that Attorney indicates, in his response to the fee petition, a willingness to reduce his fee to try to resolve the controversy. Attorney and Client agree to have their dispute mediated by the State Bar's Fee Dispute Resolution Program, but they reach an impasse during the mediation process. The State Bar staff sends a letter to Client and Attorney notifying them that the file has been closed due to an impasse.

If Client continues to dispute the fee but takes no legal action, may Attorney transfer the disputed funds from the trust account to his operating account?

Opinion #2:

Yes, so long as Attorney has given adequate notice to Client of his intent to transfer the funds as set forth in Opinion #1, and Client does not file a lawsuit to recover the funds within the notice period.

Inquiry #3:

Assume Client notifies Attorney that he disputes his 30% contingent fee, but fails to file a fee dispute petition or to initiate legal action to recover the disputed funds.

When may Attorney consider the dispute resolved and transfer trust funds to the operating account to pay his fee?

Opinion #3:

In the absence of oversight from the Fee Dispute Resolution program, a lawyer may transfer disputed funds in his trust account only if (1) he has given the client 30-days written notice of the fee dispute program required under Rule 1.5(f); (2) the client fails to elect fee dispute resolution; (3) the funds held in the trust account are for services rendered and are not clearly excessive; and (4) after the 30 days has expired with no fee petition filed by the client, the lawyer gives the client a second written notice, as required in Opinion #1, that the funds will be transferred to the operating account unless the client initiates legal action within 30 days. If, at any point during the 30 days, the client elects to participate in the fee dispute program or initiates legal action to recover the funds, the lawyer must hold the funds in trust pending resolution of the dispute.