## **Learning Outcomes**

After reading this article, you will be able to explain a lawyer’s duties when holding funds or property subject to disputed claims, distinguish between client and third-party interests, and apply the correct procedures for safeguarding, notifying, and distributing funds in trust accounts when a dispute arises. You will also be able to identify common MPRE pitfalls involving disputed claims and trust property.

## **MPRE Syllabus**

For the MPRE, you are required to understand the ethical obligations of lawyers regarding client and third-party property, especially when claims to funds are disputed. This article addresses:

- The requirement to keep client and third-party funds separate from lawyer funds in a trust account.
- The duty to promptly notify clients and third parties upon receipt of funds or property in which they have an interest.
- The obligation to deliver undisputed funds or property promptly and to retain disputed portions in trust until the dispute is resolved.
- The proper handling of disputes over lawyer’s fees and third-party claims to property held in trust.
- The procedures for resolving disputes and the prohibition on unilaterally deciding contested claims.

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. When a client and a third party both claim an interest in settlement funds held in a lawyer’s trust account, what must the lawyer do?
   a) Disburse all funds to the client immediately.
   b) Hold the disputed portion in trust until the dispute is resolved and distribute the undisputed portion.
   c) Give the funds to the third party.
   d) Decide who is right and distribute accordingly.

2. If a client disputes the amount of the lawyer’s fee from funds held in trust, the lawyer must:
   a) Transfer all funds to the lawyer’s operating account.
   b) Hold the disputed amount in trust and promptly distribute the undisputed amount.
   c) Pay the client first and resolve the fee dispute later.
   d) Split the funds equally between lawyer and client.

3. A lawyer receives a letter from a medical provider asserting a lien on a client’s settlement proceeds. The client instructs the lawyer not to pay the provider. What should the lawyer do?
   a) Ignore the provider’s claim.
   b) Pay the provider in full.
   c) Hold the disputed amount in trust until the dispute is resolved.
   d) Disburse all funds to the client.

## **Introduction**

Lawyers frequently hold funds or property in which both clients and third parties claim an interest. Disputes may arise over who is entitled to all or part of the property. The Model Rules impose strict duties on lawyers to safeguard such property, notify interested parties, and ensure that disputed claims are handled properly. Failure to follow these procedures can result in discipline, litigation, or even criminal liability.

> **Key Term: Trust Account**
> A separate account in which a lawyer must hold funds or property belonging to clients or third parties, distinct from the lawyer’s own funds.

## Lawyer Duties Regarding Disputed Claims

When a lawyer holds funds or property in which two or more persons (including the lawyer) claim interests, the lawyer must act as a neutral custodian and follow specific procedures to protect all parties.

### Safeguarding Funds and Property

Lawyers must keep client and third-party property separate from their own, typically in a trust account. This prevents commingling and protects the interests of all claimants.

> **Key Term: Commingling**
> The improper mixing of client or third-party funds with a lawyer’s personal or business funds.

### Notification and Delivery

Upon receiving funds or property in which a client or third party has an interest, the lawyer must promptly notify all interested parties. The lawyer must deliver any undisputed portion to the rightful owner without delay.

> **Key Term: Prompt Notification**
> The duty to inform clients or third parties immediately upon receipt of funds or property in which they have an interest.

### Handling Disputed Claims

If there is a dispute over ownership of funds or property, the lawyer must keep the disputed portion in the trust account until the dispute is resolved. The lawyer should promptly distribute any portion not in dispute.

> **Key Term: Disputed Claim**
> A situation where two or more persons (including the lawyer) assert competing rights to funds or property held by the lawyer.

### Fee Disputes

When the dispute concerns the lawyer’s fee, the lawyer must retain only the disputed amount in trust and promptly pay the client any undisputed funds. The lawyer cannot unilaterally decide the dispute in their own favor.

### Third-Party Claims

If a third party (such as a medical provider or lienholder) asserts a claim to funds held for a client, and the client disputes the claim, the lawyer must retain the disputed amount in trust until the parties resolve the dispute, either by agreement or through legal process.

> **Key Term: Third-Party Claim**
> A demand by someone other than the client for funds or property held by the lawyer, often based on a lien or statutory right.

## Procedures for Resolving Disputes

The lawyer should encourage prompt resolution of disputes, such as through negotiation, mediation, or interpleader action if necessary. The lawyer must not release disputed funds to either party until there is a resolution.

### **Worked Example 1.1**

A lawyer receives a \$20,000 settlement check for a client. The client owes \$5,000 to a medical provider who has notified the lawyer of a lien. The client disputes the amount owed and instructs the lawyer not to pay the provider. What should the lawyer do?

> **Answer:** The lawyer must promptly notify both the client and the provider of receipt of the funds. The lawyer should distribute \$15,000 to the client (the undisputed portion) and keep \$5,000 in the trust account until the dispute between the client and the provider is resolved.

### **Worked Example 1.2**

A client disputes the lawyer’s \$2,000 fee from a \$10,000 settlement held in trust. The client believes only \$1,000 is owed. How should the lawyer proceed?

> **Answer:** The lawyer must promptly pay the client \$9,000 (the undisputed portion) and retain \$1,000 (the disputed portion) in the trust account until the fee dispute is resolved.

### **Exam Warning**

> On the MPRE, do not assume the lawyer can decide a disputed claim or pay out all funds to the client if a third party has a legitimate claim. The lawyer must hold the disputed portion in trust until the dispute is resolved.

### **Revision Tip**

> Always distinguish between undisputed and disputed portions. Only the undisputed amount may be released; the disputed portion must remain in trust.

## **Summary**

When a lawyer holds funds or property subject to competing claims, the lawyer must promptly notify all interested parties, deliver any undisputed portion, and retain the disputed portion in trust until the dispute is resolved. The lawyer must not favor one party over another or make unilateral decisions about entitlement.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Lawyers must keep client and third-party funds separate from their own in a trust account.
- Upon receipt of funds or property, prompt notification to all interested parties is required.
- Undisputed funds must be delivered promptly; disputed funds must be held in trust until resolved.
- Fee disputes require the lawyer to retain only the disputed amount in trust.
- Third-party claims must be respected; the lawyer cannot ignore a valid claim or pay out disputed funds.
- Lawyers must not resolve disputes unilaterally and should encourage prompt resolution.

## **Key Terms and Concepts**

- Trust Account
- Commingling
- Prompt Notification
- Disputed Claim
- Third-Party Claim

Trust accounts and property - Disputed claims