Can a North Carolina lawyer keep disputed legal fees in the trust account when the client demands return of entrusted estate funds?

Plain-English summary

A lawyer represented the estate of a deceased North Carolina lawyer, work that included winding up the decedent's solo PLLC. The estate funds (about $3,000) and the PLLC funds (over $100,000) were deposited in the firm's general trust account on separate ledgers. After the administrator terminated the representation and demanded return of all the funds, the lawyer claimed his firm was owed $29,000 in fees for the PLLC work, which the administrator contested, and asked whether he could hold back $29,000 in trust and remit only the balance until the fee dispute was resolved.

The opinion answers no: the funds must be returned to the administrator, and the lawyer may file a claim with the estate for his services. It reads Rule 1.15-2(g)'s disputed-funds provision narrowly. That provision lets a lawyer withhold only funds to which the lawyer has a claim of entitlement, such as a client's advance payment of a fee or a contingent fee that, by prior agreement, is built into a settlement. Funds placed in the lawyer's control only to be safeguarded, managed, or disbursed in a transaction, and not otherwise designated as fee funds, may not be retained as disputed funds. The opinion quotes Comment [14] to Rule 1.15: a lawyer is not required to remit funds the lawyer reasonably believes represent fees owed, but may not hold funds to coerce a client into accepting the lawyer's contention.

Whether labeled estate funds or PLLC funds, the opinion treats all of the money as the property of the estate (the PLLC dissolved by statute and its assets passed to the estate) and as subject to legal restrictions on estate assets. Payment of an estate's administrative expenses, including attorney's fees, requires an order of the clerk of superior court entered in the clerk's judicial discretion, and the personal representative must petition for that order. Because of those restrictions, the lawyer had no claim of entitlement to the funds, and on termination was obliged to deliver all of them as the administrator directed, per Rule 1.15-2(m).

The opinion closes with a recordkeeping observation: estate funds, given their size or the length they are held, should in most cases be deposited in a fiduciary account (Rule 1.15-1(e)) rather than the general trust account, so they can be invested as prudent management of fiduciary funds requires. The Rule 1.15 comment lists the factors that determine whether there is a duty to invest.

In practice

Under the North Carolina rules as they stood at the time of the opinion, holding entrusted funds in trust as "disputed" to secure an unpaid fee is permitted only where the lawyer has a claim of entitlement to those specific funds, such as an advance fee deposit or a contingent fee built into a settlement. Per the opinion, funds delivered only to be safeguarded or managed must be returned when the client directs, and the lawyer's remedy is to assert a claim for the fee (here, against the estate).

Per the opinion, the bar against holding funds to coerce a client (Rule 1.15 Comment [14]) and the statutory limits on paying attorney's fees from an estate (which require a clerk's order) together meant the lawyer had no entitlement to the entrusted money. The opinion also observes that estate funds of this size should generally go in a fiduciary account rather than the general trust account.

Common questions

Q: Can a lawyer hold disputed fees in the trust account until a fee dispute is resolved?

A: Only if the lawyer has a claim of entitlement to those funds. The opinion concludes that funds entrusted merely to be safeguarded or managed, and not designated as fee funds, must be returned; the lawyer may file a separate claim for the fee.

Q: Does Rule 1.15-2(g)'s "disputed amounts shall remain in the trust account" language let a lawyer keep any contested money?

A: No. The opinion reads that provision to cover only funds the lawyer is or may become entitled to, such as an advance fee payment or a contingent fee included in a settlement by prior agreement, not general entrusted funds.

Q: Could the lawyer pay his fee out of estate funds in the trust account?

A: No. The opinion notes that paying attorney's fees from an estate requires an order of the clerk of superior court, obtained on the personal representative's petition, so the lawyer had no claim of entitlement and had to deliver the funds as directed.

Q: Where should estate funds be deposited?

A: The opinion states estate funds should in most instances go in a fiduciary account maintained for that purpose (Rule 1.15-1(e)) rather than the general trust account, because their amount or holding period generally creates a duty to invest.

Background and rules framework

The opinion applies North Carolina Rule 1.15 (safekeeping property, the analogue of Model Rule 1.15), specifically Rule 1.15-2(g) on funds in which the lawyer and others share an interest, Rule 1.15-2(m) on promptly delivering entrusted property the client is entitled to, Rule 1.15-1(e) defining a fiduciary account, and Comment [14] on not holding funds to coerce a client. It layers in North Carolina estate and entity law (the PLLC dissolution and estate-administration statutes) to show the funds were the estate's property and not subject to the lawyer's unilateral fee claim.

Citations and references

Rules of Professional Conduct:

• MR 1.15 / NC Rule 1.15-2(g) (handling funds in which the lawyer claims an interest; disputed amounts)
• NC Rule 1.15-2(m) (prompt delivery of entrusted property the client is entitled to)
• NC Rule 1.15-1(e) (definition of "fiduciary account")
• NC Rule 1.15, Comment [14] (lawyer may not hold funds to coerce a client)

Statutes:

• N.C. Gen. Stat. 57C-6-01(4) (PLLC dissolves by statute on the 90th day after the sole member's death)
• N.C. Gen. Stat. 57C-6-05(1); N.C. Gen. Stat. 28A-19-6 (claims of creditors against the entity and the estate)

Cases:

• Wachovia Bank & Trust Co. v. Waddell, 237 N.C. 342, 75 S.E.2d 151 (N.C. 1953), payment of estate administrative expenses requires the clerk's order and judicial discretion.
• In re Estate of Longest, 74 N.C. App. 386, 328 S.E.2d 804 (N.C. App. 1985), a personal representative must petition the clerk for an order to pay attorney's fees from an estate.

See also

• NC State Bar 2011 FEO 7: Online Banking for Trust
• ABA Formal Op. 475: Safeguarding Divided Fees
• CA Op. 2009-177: Charging Lien, Joint Settlement Check

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/2011-formal-ethics-opinion-13/

Original opinion text

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

Inquiry:

Attorney agreed to represent the Estate of E. E was a North Carolina lawyer who conducted his practice through a professional limited liability company (PLLC), in which he was the sole member. Attorney’s representation included collecting the assets and paying the claims of the PLLC with the intention that the PLLC would eventually be dissolved and any remaining assets of the PLLC would be distributed to the estate.

The funds of the estate, approximately $3,000, were deposited in the general trust account for Attorney’s law firm and a ledger card for the estate was established. The funds of the PLLC, in excess of $100,000, were also deposited in the trust account and a separate ledger for the PLLC was established. Attorney billed his work for the PLLC separately from his work for the estate in order that the legal fees for the resolution of the PLLC issues would be paid from funds of the PLLC.

Administrator recently terminated the representation and demanded return of the remaining funds of the estate (approximately $2,500) and of the PLLC (approximately $100,000) held in the general trust account of Attorney’s law firm.

Attorney contends that his firm is owed $29,000 in legal fees for the representation of the PLLC. Administrator contests these legal fees and did not authorize Attorney to pay the fees from any of the money held in trust.

Rule 1.15-2(g) states:

[w]hen funds belonging to the lawyer are received in combination with funds belonging to the client or other persons, all of the funds shall be deposited intact. The amounts currently or conditionally belonging to the lawyer shall be identified on the deposit slip or other record. After the deposit has been finally credited to the account, the lawyer may withdraw the amounts to which the lawyer is or becomes entitled. If the lawyer's entitlement is disputed, the disputed amounts shall remain in the trust account or fiduciary account until the dispute is resolved.

May Attorney retain $29,000 in his firm’s trust account and transfer only the difference to Administrator until the dispute over the legal fees is resolved?

Opinion:

No, the funds must be returned to Administrator and Attorney may file a claim with the Estate for payment for his legal services.

Rule 1.15-2(g) permits a lawyer to withhold only funds to which the lawyer has a claim to entitlement such as funds deposited as a client’s advance payment of a legal fee or funds from a settlement negotiated by the lawyer that, by prior agreement, include a contingent fee. However, client funds or the funds of a third party that are placed in the lawyer’s control for the purpose of being safeguarded, managed, or disbursed in connection with a transaction, but which were not otherwise designated or identified as funds for the payment of legal fees, may not be retained in the trust account as disputed funds pursuant to Rule 1.15-2(g). As explained in Comment [14] to Rule 1.15, “[a] lawyer is not required to remit to the client funds that the lawyer reasonably believes represent fees owed. However, a lawyer may not hold funds to coerce a client into accepting the lawyer's contention.”

Regardless of whether the funds are identified as funds of the Estate of E or funds of the PLLC, the funds in this inquiry are the property of the Estate of E1 and were delivered to Attorney for the purpose of being managed by Attorney as a part of his legal services to the estate. The funds are subject to legal requirements to pay the claims of the creditors of the PLLC and of the estate.2 Moreover, payment of administrative expenses of an estate from estate assets, including attorney’s fees, is only permitted on the issuance of an order of the clerk of superior court and requires the clerk to exercise judicial discretion in such matters.3 A personal representative must file a petition seeking an order from the clerk enabling the payment of attorney’s fees by an estate.4 These legal restrictions on the assets of an estate demonstrate that Attorney had no claim of entitlement to the funds. Therefore, when the representation ended, Attorney was obliged to deliver all of the funds as directed by Administrator. Rule 1.15-2(m)(a lawyer shall promptly pay or deliver to the client, or to third persons as directed by the client, any entrusted property belonging to the client and to which the client is currently entitled).

Rather than deposit the funds of an estate in a general trust account, estate funds should, in most instances, be deposited in a fiduciary account maintained solely for the deposit of fiduciary funds or other entrusted property of a particular person or entity. Rule 1.15-1(e)(defining “fiduciary account”). In a fiduciary account, the funds can be invested as usually required for prudent management of fiduciary funds. The comment to Rule 1.15 explains that:

[c]lient funds must be deposited in a general trust account if there is no duty to invest on behalf of the client. Generally speaking, if a reasonably prudent person would conclude that the funds in question, either because they are nominal in amount or are to be held for a short time, could probably not earn sufficient interest to justify the cost of investing, the funds should be deposited in the general trust account. In determining whether there is a duty to invest, a lawyer shall exercise his or her professional judgment in good faith and shall consider the following:

a) The amount of the funds to be deposited;

b) The expected duration of the deposit, including the likelihood of delay in the matter for which the funds are held;

c) The rates of interest or yield at financial institutions where the funds are to be deposited;

d) The cost of establishing and administering dedicated accounts for the client's benefit, including the service charges, the costs of the lawyer's services, and the costs of preparing any tax reports required for income accruing to the client's benefit;

e) The capability of financial institutions, lawyers, or law firms to calculate and pay income to individual clients;

f) Any other circumstances that affect the ability of the client's funds to earn a net return for the client.

Generally, the funds of an estate are of sufficient quantity or will be held for a sufficiently long period of time that deposit in a fiduciary account is required.

End Notes

• N.C. Gen. Stat. §57C-6-01(4) provides that E’s PLLC dissolved by statute on the 90th day following E’s death. E’s PLLC and all of its assets are assets of the estate.

• See N.C. Gen. Stat. §57C-6-05(1) and N.C. Gen. Stat. §28A-19-6.

• See Wachovia Bank & Trust Co. v. Waddell, 237 N.C. 342, 75 S.E. 2d 151 (1953).

• See In re Estate of Longest, 74 N.C. App. 386, 328 S.E. 2d 804, cert. denied and appeal dismissed, 314 N.C. 330, 333 S.E. 2d 488 (1985).