What must a Tennessee lawyer do with settlement proceeds when a client objects to paying a third party, such as a medical provider, who claims a right to part of the funds?

Plain-English summary

The opinion addressed a lawyer's ethical obligations in handling settlement proceeds for a personal injury client when the client objects to paying medical expenses out of the recovery. It started from the premise that a lawyer holds property of others with the care of a professional fiduciary, and that DR 9-102 requires the lawyer to keep client funds in an identifiable bank account, maintain complete records, render appropriate accounts to the client, and promptly pay over funds the client is entitled to receive. The opinion also noted DR 7-102's bar on assisting a client's fraudulent conduct, including DR 7-102(B)(1)'s requirement that a lawyer counsel a client against perpetrating a fraud on another and, if the client insists, reveal the potential fraud to the affected person, since DR 4-101 affords no confidentiality privilege over proposed fraudulent activity.

Finding no clear Tennessee ethical authority addressing a dispute between a client and a third party over funds the lawyer holds, the opinion looked to the Idaho Supreme Court's decision in Bonanza Motors, Inc. v. Webb, which held a lawyer liable to a creditor after paying a judgment award to the client despite having received an instrument assigning part of the award to the creditor and directing payment to the creditor directly. Drawing on that reasoning, the opinion held that a lawyer with notice that a client's creditor has a lien on or assignment of funds the lawyer holds on the client's behalf is ethically obligated to segregate and retain the disputed funds until the dispute is resolved, and that paying the disputed amount into court for resolution is permissible once the parties have had a reasonable opportunity to resolve the dispute on their own.

Currency note

This opinion was issued in 1987, before Tennessee's adoption of the 2003 Rules of Professional Conduct, which replaced the former Code of Professional Responsibility. 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 Treat this page as historical context, not current guidance.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: Could a lawyer pay the full settlement to the client when a medical provider claimed a lien on part of it?

A: No. The opinion held that once the lawyer has notice of the creditor's lien or assignment, the lawyer must segregate and retain the disputed amount rather than disburse it to the client.

Q: What case did the opinion rely on for this duty?

A: The Idaho Supreme Court's decision in Bonanza Motors, Inc. v. Webb, which held a lawyer liable to a creditor for paying the full judgment to the client after receiving notice of the creditor's assignment to part of the award.

Q: How could the dispute over the funds eventually be resolved?

A: The opinion permitted the lawyer to pay the disputed amount into court for resolution, but only after the parties had a reasonable opportunity to resolve the dispute themselves.

Background and rules framework

The opinion applied former DR 9-102 (safekeeping of client property and funds), DR 7-102(B)(1) (duty regarding client fraud), and DR 4-101 (no confidentiality privilege for proposed fraudulent activity). The modern analogs are Model Rule 1.15 / Tennessee RPC 1.15 (safekeeping property, including disputed funds) and Model Rule 1.6 / Tennessee RPC 1.6 (confidentiality and its exceptions for client fraud).

Citations and references

Rules of Professional Conduct (former Code):

• DR 9-102 (safekeeping client funds and property; accounting and prompt payment). Modern analog: Model Rule 1.15 / Tennessee RPC 1.15
• DR 7-102(B)(1) (duty to counsel against, and disclose, client fraud). Modern analog: Model Rule 1.6 / Tennessee RPC 1.6
• DR 4-101 (no confidentiality privilege over proposed fraudulent activity)

Cases:

• Bonanza Motors, Inc. v. Webb, 104 Idaho 234, 657 P.2d 1102 (1983), lawyer liable to a creditor for paying a judgment to the client after notice of the creditor's assignment

See also

• AL Ethics Op. 1990-48: Interpleading Disputed Trust Funds Into Court
• AL Ethics Op. 2003-02: Attorney Must Honor Commitment to Pay a Client's Creditors
• NY State Bar Op. 567: Retaining Lien and Fee Dispute Litigation

Source

• Landing page: https://www.tbpr.org/ethic_opinions/87-F-109

Original opinion text

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

87-F-109 - Attorney handling of Settlement Proceeds and client objects to payment of medical expenses

BOARD OF PROFESSIONAL RESPONSIBILITY OF THE SUPREME COURT OF TENNESSEE

FORMAL ETHICS OPINION 87-F-109

Inquiry is made concerning the ethical obligations of a lawyer in the handling of settlement proceeds on behalf of a personal injury client when the client objects to the payment of medical expenses.

A lawyer should hold property of others with the care required of a professional fiduciary. Disciplinary Rule 9-102 of the Code of Professional Responsibility requires the lawyer to keep funds of the client in an identifiable bank account, maintain complete records thereon, render appropriate accounts to the client, and promptly pay and deliver to the client the funds which the client is entitled to receive.

Disciplinary Rule 7-102 of the Code prohibits the lawyer from assisting the client in fraudulent conduct. DR 7-102(B)(1) specifically requires the attorney to counsel the client against

perpetration of a fraud upon another and, if the client insists on fraudulent conduct, to reveal the potential fraud to the affected person. The client has no privilege of confidentiality with respect to proposed fraudulent activity. See DR 4-101.

There is no clear ascertainable ethical authority concerning the lawyers ethical duties when there is a dispute between the client and third-party concerning the right to funds held by the lawyer on behalf of the client. The Idaho Supreme Court in the case of Bonanza Motors Inc. v. Webb, 104 Idaho 234, 657 P2d 1102 (1983) in a legal issue held that a lawyer must not deliver funds to a client when the lawyer has notice that a third-party has a superior right to the funds. The lawyer was found liable in an action by the creditor when the lawyer paid the entire judgment to the client after having received a copy of an instrument by which the client had assigned part of his judgment award to a third-party creditor, and provided that the lawyer should pay the creditor directly when the funds were received.

This ethics opinion holds that a lawyer who has notice that a creditor of the client has a lien or assignment to the funds held on behalf of the client is ethically obligated to segregate and retain the disputed funds until the dispute is resolved. Payment of the disputed amount into court for a resolution of the matter is permissible after the parties have had a reasonable opportunity to resolve the dispute.

This 16th day of September, 1987.

ETHICS COMMITTEE:

W. J. Flippin

Henry H. Hancock

Edwin C. Townsend

APPROVED AND ADOPTED BY THE BOARD