February 16, 1994
A lawyer may not avoid opening a trust account by paying the client's share of the proceeds to the client upon the resolution of a matter out of the lawyer's operating account and then retaining and depositing all proceeds received from the opposing party in the lawyer's operating account. The improprieties of such a procedure are not obviated by disclosure of the procedure to the client in the retainer agreement or by an assignment by the client to the lawyer of the client's interest in the final proceeds.
References: MRPC 1.3, 1.8(e) and (j), 1.15(a), (b) and (d); R-7; RI-92, RI-93.
A lawyer has inquired about the ethical considerations involved in a procedure devised to distribute funds to the lawyer's client upon the settlement or judgment of a matter the lawyer handled on behalf of the client. The lawyer has not established a trust account. Instead, after a matter is settled or a judgment entered, the lawyer pays to the client the client's share of the settlement/judgment out of the lawyer's operating account. Later, when the proceeds are received from the opposing party, the lawyer and the client endorse the check and it is deposited in the lawyer's operating account.
The lawyer inquires as to whether this procedure comports with the ethics rules. The lawyer further inquires as to whether any potential violation of the ethics rules would occur if the procedure were made part of the client's retainer agreement. Finally, the lawyer asks whether any ethical improprieties might be eliminated if, in the retainer agreement, the client assigns the client's interest in the proceeds to the lawyer. The lawyer does not state why a trust account is not desired, and the reasons for such a procedure, practical or theoretical, are not readily apparent.
MRPC 1.15(a) states:
"(a) A lawyer shall hold property of clients or third persons that is in a lawyer's possession in connection with the representation separate from the lawyer's own property. All funds of the client paid to the lawyer or law firm, other than advances for costs and expenses, shall be deposited in an interest-bearing account in one or more identifiable banks, savings and loan associations, or credit unions maintained in the state in which the law office is situated, and no funds belonging to the lawyer or the law firm shall be deposited therein except as provided in this rule. Other property shall be identified as such and appropriately safeguarded. Complete records of such account funds and other property shall be kept by the lawyer and shall be preserved for a period of five years after termination of the representation."
All funds which belong to the client or third party and which are received by the lawyer or law firm, except those funds advanced for costs and expenses, must be placed in an interest-bearing trust account separate and distinct from the lawyer's or firm's business operating account, unless, pursuant to MRPC 1.15(d)(2), there is a separate interest-bearing trust account established for the individual client.
Despite the broad language of MRPC 1.15(a), not all law firms are required to establish interest bearing trust accounts for their client's proceeds. A trust account is not necessary where the "funds of clients and third parties will never come into" the lawyer's possession. RI-93. Emphasis in original. It is indeed a rare occasion, where a lawyer or law firm may be sure that funds belonging to its clients and third parties will never come into their possession.
As opined in RI-93: "Even a lawyer's best laid plans to avoid custody of funds of clients and third parties may be thwarted by the unpredictable case."
What would happen if at the time a lawsuit is resolved, the lawyer's operating account lacks sufficient funds to pay the client the proceeds to which the client is entitled? If the lawyer deposits the check from the opposing party into its operating account and pays the client's share out of that account, the lawyer blatantly violates the very essence of MRPC 1.15. If, on the other hand, the lawyer requests the opposing party to issue two checks, one to the lawyer and one to the client, the lawyer also runs afoul of MRPC 1.15 because third parties may make claims on the amount retained by the lawyer. See RI-93. Additionally, if the lawyer underpays the client, for reasons honest or otherwise, client funds would again be improperly held in an operating account. For other possible problems that may unexpectedly arise and the ethical consequences of those unforeseen situations, see RI-58 (inability to locate client) and RI-61 (dispute as to distribution of proceeds of settlement after client would not respond to requests to execute final release).
A problem also arises upon the law firm's receipt of the check made out to both the client and the law firm. Such checks still constitute client funds. RI-92. Accordingly, the deposit of those checks into the law firm operating fund is unethical as a commingling of funds. R-7.
The procedure followed by the lawyer does not comport with MRPC 1.15 and it is concluded that the lawyer is required to maintain a trust account.
The procedure proposed also appears to violate MRPC 1.8(e) which states:
"(e) A lawyer shall not provide financial assistance to a client in connection with pending or contemplated litigation, except that:
"(1) a lawyer may advance court costs and expenses of litigation, the repayment of which shall ultimately be the responsibility of the client; and
"(2) a lawyer representing an indigent client may pay court costs and expenses of litigation on behalf of the client."
Under the procedure proposed, the lawyer would be advancing not the court costs and expenses, but the very proceeds from the settlement or judgment entered. The lawyer is in essence, providing financial assistance, albeit for the short term between resolution and payment by the opposing party. The general type of financial assistance posted by the lawyer here is proscribed by MRPC 1.8(e) and its two exceptions. Neither of the two exceptions applies here. Also, the fact that the litigation has been settled is irrelevant, otherwise the underlying spirit of MRPC 1.8(j) would be impeded.
The disclosure and assignment provisions proposed by the lawyer would not only fail to vitiate such unethical behavior, the assignment of rights provision in a retainer argument would, itself, violate MRPC 1.8(j) which states:
"(j) A lawyer shall not acquire a proprietary interest in the cause of action or subject matter of litigation the lawyer is conducting for a client, except that the lawyer may:
"(1) acquire a lien granted by law to secure the lawyer's fee or expenses; and
"(2) contract with a client for a reasonable contingent fee in a civil case, as permitted by Rule 1.5 and MCR 8.121."
While a contingency fee is appropriate, here, the lawyer suggests a procedure under which the client assigns the entire interest in the proceeds and not a merely reasonable contingency fee. Such an arrangement is not allowed under MRPC 1.8(j).
Even in the absence of injury to the client or in the absence of conversion, failing to deposit client property or third party property in the trust account is unethical and violates MRPC 1.15(a). Finally, it appears that the procedure is proposed solely to avoid establishing a trust account. See Comment, MRPC 1.3, which states that "[a] lawyer should pursue a matter on behalf of a client despite . . . personal inconvenience to the lawyer." This conclusion is only buttressed by the lack of reason for the procedure proposed.