When a landlord and the lawyer's own client both claim money held in the lawyer's trust account, may the lawyer release it, and to whom?

Plain-English summary

An attorney represented a tenant against her landlord for failing to make repairs. After that suit was filed but before trial, the landlord filed an eviction action for unpaid rent. The parties agreed to continue the eviction and try both cases together. Before the joint hearing, the attorney collected one month's rent from the client and deposited it in the trust account. At the hearing the judge ruled for the landlord on the tenant's damages claim but did not rule on the rent owed. The landlord then asked the attorney to release the month's rent from trust; the client instructed the attorney not to, arguing the rent issue was never decided and no separate action to recover the rent had been filed, and asked that the funds be returned to her.

The committee concluded that, under Rule 1.15, the attorney must keep the funds in trust if the landlord's claim is not frivolous. Rule 1.15(e) provides that when a lawyer holds property in which two or more persons claim interests, the property must be kept separate until the dispute is resolved, with any undisputed portions distributed promptly. Comment [4] states that when a third-party claim is not frivolous under applicable law, the lawyer must refuse to surrender the property to the client until the claims are resolved.

The committee explained that a "claim" under Rule 1.15(e) need not be a formal lawsuit; it need only be an assertion of an interest in the specific property. But the mere assertion of a claim does not by itself freeze the funds, because Comment [4] limits the rule to non-frivolous claims; quoting Black's Law Dictionary, the committee described a frivolous claim as one lacking legal basis or merit. As to how a dispute is resolved, Comment [4] says the lawyer should not unilaterally arbitrate between the client and the third party but, where there are substantial grounds for dispute over who is entitled to the funds, may file an action to have a court resolve it. Applying the rule, the committee held that if the landlord's claim to the rent is not frivolous, the attorney has a duty to retain the funds in trust until that claim is resolved.

In practice

The opinion holds that, under South Carolina Rule 1.15(e) and Comment [4], a lawyer who holds funds claimed by both the client and a third party must keep the funds in trust until a non-frivolous dispute is resolved and may not release them to the client. The opinion treats any assertion of an interest in the specific property as a "claim," without requiring a formal lawsuit, but limits the duty to non-frivolous claims. Where there are substantial grounds for dispute over who is entitled to the funds, the opinion states the lawyer should not unilaterally arbitrate and may instead file an action for a court to resolve the dispute.

Common questions

Q: A landlord and my client both claim money in my trust account. Can I give it to my client?

A: Not if the landlord's claim is non-frivolous. The committee concluded that under Rule 1.15(e) and Comment [4] the lawyer must refuse to surrender the property to the client and keep it in trust until the dispute is resolved.

Q: Does a third party have to file a lawsuit before the funds are frozen?

A: No. The committee said a "claim" under Rule 1.15(e) need only be an assertion of an interest in the specific property, not a formal lawsuit.

Q: Does any assertion by a third party require me to hold the funds?

A: No. The committee said Comment [4] limits the rule to non-frivolous claims, describing a frivolous claim (quoting Black's Law Dictionary) as one lacking legal basis or merit.

Q: How can the dispute be resolved if the parties cannot agree?

A: The committee said that under Comment [4] the lawyer should not unilaterally arbitrate, but where there are substantial grounds for dispute the lawyer may file an action to have a court decide who is entitled to the funds.

Background and rules framework

The opinion interprets South Carolina Rule 1.15 (safekeeping property), specifically Rule 1.15(e) and Comment [4], which correspond to Model Rule 1.15. The analysis turns on whether the third party's assertion of an interest in the specific funds is a non-frivolous "claim," in which case the lawyer must hold the funds separate until the dispute is resolved and may file an action for a court to decide entitlement.

Citations and references

Rules of Professional Conduct:

• MR 1.15 / SC Rule 1.15(e), Comment [4] (safekeeping property; funds claimed by two or more persons; non-frivolous third-party claims)

Other authority:

• Black's Law Dictionary 303 (3d pocket ed. 2006) (definition of "frivolous")
• 20 C.J.S. Costs § 17 (2009) (a claim is frivolous if its proponent can present no rational argument to support it)

See also

• SC Bar Ethics Op. 09-08: Paying a Special Referee's Fee
• SC Bar Ethics Op. 08-10: Trust Funds Over FDIC Limit

Source

• Landing page: https://www.scbar.org/for-lawyers/quicklinks/legal-resources/ethics-advisory-opinions/ethics-advisory-opinion-09-13/
• Original PDF: https://www.scbar.org/media/jfukspmx/09-13.pdf

Original opinion text

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

UPON THE REQUEST OF A MEMBER OF THE SOUTH CAROLINA BAR, THE ETHICS ADVISORY COMMITTEE HAS RENDERED THIS OPINION ON THE ETHICAL PROPRIETY OF THE INQUIRER’S CONTEMPLATED CONDUCT. THIS COMMITTEE HAS NO DISCIPLINARY AUTHORITY. LAWYER DISCIPLINE IS ADMINISTERED SOLELY BY THE SOUTH CAROLINA SUPREME COURT THROUGH ITS COMMISSION ON LAWYER CONDUCT.

Ethics Advisory Opinion 09-13

SC Rule of Professional Conduct: 1.15

Facts

Attorney represented Client in an action against Landlord for Landlord’s failure to make repairs to her apartment. After that action was filed, but before it came up for trial, Landlord filed an eviction action against Client for failure to pay rent. At the eviction hearing, the parties agreed to continue the eviction proceedings and have both actions heard at the same time. Prior to the second hearing, Attorney collected one month’s rent from Client and deposited it in Attorney’s trust account. At the hearing, the judge ruled in favor of Landlord on Client’s action for damages, but did not rule on the issue of rent owed to Landlord.

Landlord has requested that Attorney release the one month’s rent from Attorney’s trust account to Landlord. Client has instructed Attorney not to disburse the funds to Landlord because (1) the issue of unpaid rent was not ruled upon at the hearing, and (2) Landlord has not filed an action to recover unpaid rent from Client. Client has requested that Attorney release the funds to her.

Questions

Should Attorney release the funds at issue from his trust account? If so, to whom? If not, how long must Attorney hold the funds in his trust account?

Summary

Pursuant to Rule 1.15 of the South Carolina Rules of Professional Conduct, if Landlord’s claim to the rent funds in Attorney’s trust account does not appear to be frivolous, then Attorney has an affirmative duty to retain those funds in trust until Landlord’s claim is resolved.

Opinion

Rule 1.15 of the South Carolina Rules of Professional Conduct (“Safekeeping Property”) provides guidance in this situation. Rule 1.15(e) states:

When in the course of representation a lawyer is in possession of property in which two or more persons . . . 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.

SCRPC 1.15(e). Comment [4] explains that “when the third-party claim is not frivolous under applicable law, the lawyer must refuse to surrender the property to the client until the claims are resolved.” SCRPC 1.15, comment [4]. A “claim” for purposes of Rule 1.15(e) need not be a formal “claim” in the way of a lawsuit; rather, a “claim” need only be an assertion of an interest in the specific property at issue. However, the mere assertion of a claim by a third party is not in and of itself enough to freeze the property in the lawyer’s possession. Comment [4] clearly limits the application of Rule 1.15(e) to non-frivolous claims. Black’s Law Dictionary defines “frivolous” as “[l]acking a legal basis or legal merit; not serious; not reasonably purposeful.” Black’s Law Dictionary 303 (3d pocket ed. 2006); see also 20 C.J.S. Costs § 17 (2009) (“A claim . . . is frivolous if its proponent can present no rational argument to support it or failed to make a reasonable inquiry into its basis . . . .”). Additionally, if there is a “claim” within the scope of Rule 1.15(e), the question arises as to how that claim may be resolved. Comment [4] states: “A lawyer should not unilaterally assume to arbitrate a dispute between the client and the third party, but, when there are substantial grounds for dispute as to the person entitled to the funds, the lawyer may file an action to have a court resolve the dispute.” SCRPC 1.15, comment [4].

Applying Rule 1.15(e) here, if Landlord’s claim to the rent funds is not frivolous under applicable law, Attorney has a duty to retain those funds in trust until such time as that claim is resolved.