RI-64

December 17, 1990

SYLLABUS

A separate interest-bearing trust account established for a particular client or client's matter pursuant to MRPC 1.15(d)(2) earns interest for the client on that portion of the monies deposited which are "client funds."

A third party is entitled to the trust account interest accrued on that portion of the proceeds which are "third party funds."

A client is not entitled to interest earned on "funds belonging to the lawyer or the law firm," which funds may include lawyer fees or reimbursements for costs or expenses, nor is a client entitled to interest earned on proceeds which are ultimately distributed to lienholders.

The calculation of the interest proportionate to the respective shares is the responsibility of the lawyer or the financial institution, whichever has responsibility for subaccounting for the trust account.

References: MRPC 1.5(c), 1.15(a), (b), (d)(2); R-7; MCR 8.121(B) and (C); Schwartz v. Cummins, ADB 159-88, 12/5/88; In the Matter of Reibel, ADB #DP 141/80, 7/29/81; Schwartz v. Hunter, ADB #DP 197/84, 1/30/87; Schwartz v. Davey, ADB 27-88, 44-88, 12/6/88.

TEXT

A lawyer receives a certified check for a $100,000 wrongful death settlement. Under a written contingent fee agreement pursuant to MRPC 1.5(c) and MCR 8.121(B), where the client does not dispute the lawyer's portion of the fees generated, upon receipt of the settlement check the lawyer makes the following accounting pursuant to MRPC 1.15(b):

Amount Recovered . . . . . . . . . $100,000

Lawyer Reimbursement for Costs Advanced and Expenses Incurred . . . . . ( 10,000)

Net Sum Recovered . . . . . .. . . . $ 90,000

One-Third Lawyer Fee . . . . . . . ( 30,000)

Client Funds . . . . . . . . . . . . . . . . $ 60,000

In a wrongful death action the lawyer must file a motion in the circuit court for allocation of the proceeds among the decedent's survivors, and for approval of the lawyer fees, costs and expenses. The lawyer reasonably anticipates that the proceeds will generate more than $50 of interest during the period for which it is anticipated that the funds are to be held, i.e., before entry of the circuit court allocation order.

As required by MRPC 1.15(d)(2), the lawyer must deposit the entire $100,000 check into either one of two types of non-IOLTA accounts: (1) a separate interest-bearing trust account permitted by MRPC 1.15(d)(2)(A), or (2) a pooled interest-bearing trust account with subaccounting permitted by MRPC 1.15(d)(2)(B).

MRPC 1.15(d)(2) states:

"All client funds shall be deposited in [an IOLTA account] unless they [are reasonably anticipated to earn more than $50 of interest, in which case they must be] deposited in:

"(A) a separate interest-bearing account for the particular client or client's matter on which the interest will be paid to the client; or

"(B) a pooled interest-bearing trust account with subaccounting by the financial institution or by the lawyer or law firm that will provide for computation of interest earned by each client's funds and the payment thereof to the client."

MCR 8.121(B) and (C) state:

". . . the maximum allowable fee for [wrongful death] claims and actions is one-third of the amount recovered . . . [which] shall be computed on the net sum recovered after deducting from the amount recovered all disbursements properly chargeable to the enforcement of the claim or prosecution of the [wrongful death] action."

The issue facing the lawyer, or the financial institution which must provide the subaccounting, is how to allocate the interest between the lawyer and the client.

MRPC 1.15 is "intended to protect client funds . . . in the possession of the lawyer," Schwartz v. Cummins, ADB 159-88, 12/5/88. Funds held as a fiduciary must be placed in a trust account, Schwartz v. Davey, ADB 27-88, 44-88, 12/6/88.

By the time the circuit court approves the allocation among the decedent's survivors, the $100,000 will have earned $1,000 interest. The money is to be allocated among (1) decedent's survivors; (2) lawyer fees; (3) reimbursement for costs and expenses; and (4) interest earned.

Normally, a lawyer may not commingle personal funds with client or third party funds, MRPC 1.15(a); In the Matter of Reibel, ADB #DP 141/80, 7/29/81; Schwartz v. Hunter, ADB #DP 197/84 1/30/87. MRPC 1.15(a) mandates:

". . . no funds belonging to the lawyer or the law firm shall be deposited [into a trust account] except as provided in this rule . . . ." Emphasis added.

When one check consists of funds belonging to the lawyer and funds belonging to a client or third party, the funds must be first deposited into the lawyer's trust account, then the lawyer may withdraw the portion belonging to the lawyer after accounting, MRPC 1.15(b); R-7. The $100,000 proceeds consist of both "third party funds," i.e., funds of the heirs who benefit from the wrongful death action, and "funds belonging to the lawyer or the law firm." These "third party funds" are placed in the lawyer's custody when the $100,000 settlement proceeds are received; similarly, the "funds belonging to the lawyer or law firm" are placed in the lawyer's custody at that same moment, i.e., when the settlement proceeds are received.

The purpose of MRPC 1.15(d)(2) is to assure that the lawyer fulfills fiduciary duties to invest funds in the lawyer's possession for the benefit of the client or third party. Conversely, nothing in MRPC 1.15(d)(2) is intended to deprive the lawyer of interest earned on "funds belonging to the lawyer or the law firm," or to create a windfall to the client or third party from interest earned on the "funds belonging to the lawyer." In allocating the $1,000 interest earned on proceeds of the wrongful death action, the third party beneficiaries are entitled to receive all interest on "third party funds," while the lawyer is entitled to the interest earned on the "funds belonging to the lawyer or the law firm," i.e., interest accrued on costs and expenses of $10,000 and fees of $30,000.

Where there is a dispute concerning the lawyer's fee, "ownership" of the interest earned on the disputed funds would be determined as the dispute is resolved. If there is a third party claim to the proceeds, i.e., through a former lawyer's charging lien or a lien creditor, the interest attributable to the proceeds due the lienholders should be paid to the lienholders.

It should be noted that a third party is not always entitled to the interest on trust account funds which are ultimately disbursed to the third party. When the client owes a creditor, for instance, for medical bills, goods or services, etc., the amount owed the creditor is the amount incurred for the goods or service, and the interest incurred on those monies in the trust account is the property of the client. The creditor, thus, is not entitled to a windfall simply because the lawyer deposits the funds into a interest-bearing trust account. However, where as in this case the lawyer is holding the funds on behalf of the third party, i.e., the heirs who will benefit from the proceeds of the wrongful death case, the third party is entitled to the interest on the funds held on the third party's behalf.

The calculation of the interest proportionate to the respective shares is the responsibility of the lawyer or the financial institution, whichever has responsibility for subaccounting for the trust account.

Therefore, when funds are deposited in a separate trust account established for a particular client or client's matter pursuant to MRPC 1.15(d)(2), the client is entitled to interest only on that portion of the monies which are "client funds." A third party is entitled to the trust account interest accrued on that portion of proceeds which are "third party funds."

A client is not entitled to interest earned on "funds belonging to the lawyer or the law firm," which funds may include lawyer fees or reimbursements for costs and expenses, nor is a client entitled to interest earned on proceeds which are ultimately distributed to lienholders or other third parties.