Mary Lumbar is represented by lawyer, Gabriel Lincoln, in a personal injury case. Gabriel is known as Honest Gabe because he tries to do what's right. Mary has a meritorious case, but she has incurred substantial indebtedness because of her inability to work due to her injuries.

Keeping Client Creditors at Bay

Honest Gabe has been involved in protracted settlement negotiations with Good Neighbor Insurance Company. The insurer won't budge because of complicated causation issues raised by Mary's prior medical history. As prolonged negotiations with Good Neighbor proceed, Mary asks Honest Gabe to contact certain medical providers and insurers and plead with them to forebear their collection efforts in exchange for promises to pay upon receipt of settlement or judgment proceeds from the pending cause of action. Gabe explains to Mary that such written commitments on the part of lawyers are commonly referred to as "protection letters" and that they must honor their word and pay the creditors. Gabe's presentation of these protection letters to Mary's creditors successfully keeps them at bay.

Many months later, the case settles. Even with significant movement from the insurance company in terms of dollars offered, Mary will barely break even after legal fees and expenses are paid. Honest Gabe agrees to reduce his fee, but this does not help much.

Reneging on Protection Letters

Frustrated after doing the math, Mary has a change of heart and demands that Honest Gabe not pay the medical providers and insurance creditors, thus placing Honest Gabe in an ethical dilemma. Honest Gabe firmly reminds Mary that the protection letter was a promise to pay the creditors. Pushing back, Mary questions Honest Gabe's loyalty and insists he pay her the settlement proceeds minus the legal fees and expenses. She further insists she will negotiate with the medical providers and insurers herself and will pay them herself. Thus, Honest Gabe is faced with a choice of either disregarding Mary's expressed directive or giving the appearance of having deceived Mary's creditors. Gabe phones his ethics lawyer for advice.

Gabe is advised that lawyers taking possession of funds claimed by a non-client have a professional obligation to secure the money for the non-client, if the lawyer knows the non-client has a "lawful claim" to the funds1. A "lawful claim" is defined by substantive law, but includes statutory subrogation rights, assertions based on valid judgment liens, and written agreements with the client or the lawyer2. Gabe is further advised that if there is a dispute between a client like Mary and a non-client, such as the medical provider and insurer creditors, the lawyer must hold the disputed funds in trust until the dispute is resolved3.

Duty to Deliver Funds to Rightful Owner

Honest Gabe's duty arises under Ohio Rule of Professional Conduct 1.154. When there is no disagreement about ownership of funds, a lawyer's duty is to promptly notify and deliver the funds to the rightful owner, which may be the creditor5. If the lawyer knows a third person's claim is not a lawful claim, the lawyer has a duty to notify the client and promptly deliver the funds to the client. If there is a valid dispute between the client and the third party claiming a lawful interest, Rule 1.15 obligates the lawyer to notify both parties and hold the disputed funds in a trust account until the dispute is resolved.

The lawyer's duty to hold disputed funds is triggered not only when a lawyer knows about a non-client's lawful claim, but also when the lawyer is unclear about the lawfulness of the non-client's claim. Ideally, the lawyer will anticipate and try to resolve such disputes between a client and a third person before taking custody of disputed funds. For instance, the predicament might be avoided by obtaining from the client irrevocable written authorization to pay lawfully entitled creditors in the fee agreement between the lawyer and the client.

While in most instances protection letters are provided in good faith, a lawyer might run afoul of rules relating to truthfulness and honesty if, at the time the protection letters were sent, the lawyer had reason to believe that the client did not really intend to pay the creditor6. Lawyers are cautioned, however, against unilaterally trying to arbitrate disputes over funds between their clients and third parties.