If a lawyer receives a check and cannot tell whether it belongs to a client, a third party, or the firm, can the firm treat it as its own and divide it with the other payee?

Plain-English summary

The opinion addressed a firm that received a $3,700 check made out jointly to one of its lawyers and a fire insurance company. The check came from the liquidation of a bankrupt insurer eight to ten years earlier, and the firm could not determine whether the funds belonged to a client, to a third party, or to the firm. The firm inquired of the deputy liquidator's office, the bankruptcy court, and the fire insurance company without resolving the question. Its best reconstruction was that the check satisfied a subrogation claim the insurer had filed, in which case the proceeds belonged to the insurer rather than a client. The insurer proposed to split the check with the firm.

The opinion concluded that the firm could share the check, conditioned on diligence. The firm could treat the funds as not belonging to a client or third party only if it had made a reasonable effort to investigate the background of the check and, having done so, held a good-faith belief that the check did not belong to a client or a third party. The opinion grounded that conclusion in Rule 10.1(c).

Currency note

This opinion was issued in 1996, before the North Carolina State Bar's adoption of the 2003 revisions to the Rules of Professional Conduct. Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Can a North Carolina lawyer keep or divide funds when it is unclear whether they belong to a client?

A: Only after a reasonable investigation. The opinion concluded that the firm could treat the funds as its own to share only if it had reasonably investigated the source of the check and held a good-faith belief that no client or third party owned the money.

Q: What counts as enough effort to investigate an unidentified check?

A: The opinion did not set a fixed checklist, but it treated the firm's inquiries to the deputy liquidator's office, the bankruptcy court, and the insurance company as the kind of reasonable effort Rule 10.1(c) required before concluding the funds were not client or third-party property.

Background and rules framework

The opinion applied North Carolina's then-current Rule 10.1(c), the trust-account and safekeeping-of-property provision, which corresponds to Model Rule 1.15. That rule governs a lawyer's handling of funds that may belong to a client or third person and required the firm to resolve ownership through reasonable inquiry before treating disputed or unidentified funds as its own.

Citations and references

Rules of Professional Conduct:

• MR 1.15 (safekeeping property; funds of clients and third persons)
• North Carolina Rule 10.1(c)

See also

• NC Ethics Op. 2006 FEO 15: dormancy fee on unclaimed funds
• NC Ethics Op. 2006 FEO 8: disbursement of trust funds

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/rpc-226/

Original opinion text

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

Inquiry:

Law Firm received a check for $3,700 made out to Attorney A, a member of the firm, and Fire Insurance Company. The check is a payment from the liquidation of National Insurance Company which filed for bankruptcy approximately eight to ten years ago. Attorney A and the other lawyers in Law Firm are unable to determine whether the funds represented by the check belong to a client, to a third party, or to the firm. They have inquired of the chief deputy liquidator's office, the office of the court where National's bankruptcy action was filed, and Fire Insurance Company, but to no avail. The lawyers believe that the most logical explanation for the payment is as follows: when National went bankrupt, Law Firm made an uninsured motorist claim for a client under the client's insurance policy with Fire Insurance Company. The claim was settled and Fire Insurance Company required the client to sign a subrogation agreement for the amount of the settlement. Using that agreement, Fire Insurance Company filed a proof of claim with the bankruptcy court. If the check is being paid in satisfaction of this claim in the bankruptcy proceeding, the proceeds of the check would belong to Fire Insurance Company and not to the client or third party.

Fire Insurance Company would like to split the check with Law Firm. May Law Firm conclude that the funds do not belong to a client and share the check with Fire Insurance Company?

Opinion:

Yes, if Law Firm has made a reasonable effort to investigate the background of the check to determine whether the check belongs to a client or a third party and, having undertaken that investigation, now has a good faith belief that the check does not belong to a client or a third party. See Rule 10.1(c).