Legal Ethics

Non-clients sometimes make claims to funds that lawyers are holding in trust.  A recent case provides guidance on the unique provisions of the Minnesota Rules of Professional Conduct (MRPC) relating to such claims.

An unmarried couple, Abby and Bob, bought a house together.  Abby and Bob’s relationship ended and they listed the house for sale.  Abby’s lawyer, Cass, understood that Abby had satisfied certain of Bob’s claims to the equity in the house and the large majority of the sale proceeds should go to Abby, with the remainder to Bob. Bob’s lawyer, Dana, told Cass that Bob claimed more of the proceeds than Cass understood, but Dana would not provide detail or substantiation. 

A realtor agreed to receive and disburse the sale proceeds. Shortly before closing, however, the realtor reneged.  Cass volunteered to receive and disburse the proceeds, on the understanding that Dana or the realtor would draft an escrow agreement.  However, no formal agreement was supplied.  Meanwhile, Abby had entered into an agreement to buy a new house and had paid earnest money. Abby needed her share of the proceeds urgently to close on her new house or risk forfeiture of her deposit.

Cass received the sale proceeds, deposited them in trust, and calculated the amounts due Abby and Bob. Because of Bob’s claims to more of the proceeds than Cass calculated, Cass called the Office of Lawyers Professional Responsibility (OLPR) for an advisory opinion.  Rule 1.15(b) provides, in part, “If the right of the lawyer or law firm to receive funds from the account is disputed by the client or third person claiming entitlement to the funds, the disputed portion shall not be withdrawn until the dispute is finally resolved.”  OLPR opined that Rule 1.15(b) did not prohibit Cass from transferring funds to Abby, because the relevant dispute was over Abby’s right to receive funds withdrawn from trust. Because Cass did not claim any of the funds, there was no dispute regarding Cass’s right. 

OLPR’s advisory opinion also noted that Rule 1.15 cmt. 4 states, “A lawyer may have a duty under applicable law to protect such third-party claims against wrongful interference by the client.” However, Cass advised OLPR that Bob’s claims were frivolous and OLPR said that if Bob’s claims were frivolous, comment 4 did not apply.

Relying both on OLPR’s advice and on his own understanding of Abby’s and Bob’s rightful claims, Cass disbursed sale proceeds to Abby and to Bob, in the amounts Cass regarded to be due them. Bob then sued Abby and filed an ethics complaint against Cass.  Bob’s suit against Abby resulted in an award to Bob beyond the amount Cass disbursed to Bob.  Bob’s ethics complaint produced a discipline in the form of OLPR’s private admonition to Cass. The admonition alleged that Cass violated one of the MRPC, Rule 1.15(b). The admonition memorandum argued that Cass could not rely on OLPR’s advisory opinion, because Cass had inaccurately represented that Bob’s claims were frivolous. 

Cass retained ethics lawyer Chuck Lundberg and appealed. Lundberg retained the author to provide an expert opinion. Filings on behalf of Cass with a Lawyers Board Panel made four arguments and averments.

First – and quite obviously – Cass claimed that Rule 1.15(b) did not apply, because the rule expressly applies only when a lawyer’s right to receive trust funds is disputed.  There was no such dispute here.  OLPR’s own advisory opinion reached the same understanding as Cass, and that understanding was not dependent on whether Bob’s claims were frivolous.  OLPR’s filings cited Rule 1.15(b), but OLPR never attempted to explain how Rule 1.15(b) applied when the right of a lawyer to receive funds was not disputed. OLPR’s omission of any argument or even explanation on this subject was puzzling at best, because Mr. Lundberg argued repeatedly that Rule 1.15(b)’s express language simply did not apply.

Second, OLPR argued that Rule 1.15 cmt. 4, quoted above, was “relevant here.”  However – again oddly – OLPR neither claimed that Comment 4 was authoritative nor attempted to explain how the comment was relevant.  Cass’s filings gave four reasons why Comment 4 could not provide a basis for discipline.  Discipline may be based only on MRPC violations. Rule violations must be alleged with specificity in the charging document, but the admonition alleged only violation of Rule 1.15(b). Comments cannot add obligations that are not found in the rules. The Minnesota Supreme Court has repeatedly refused to adopt the comments.

Third, Cass’s filings explained how Comment 4 came to be mistakenly included with the MRPC.  The MRPC generally follow the ABA Model Rules, but there are sometimes important differences.  ABA Model Rule 1.15(e) differs from MRPC Rule 1.15(b) because the ABA “condition precedent” in Model Rule 1.15(e) is a dispute between any two persons as to property in a lawyer’s possession, “When in the course of representation a lawyer is in possession of property in which two or more persons (one of whom may be the lawyer) claim interests, the property shall be kept separate by the lawyer until the dispute is resolved. The lawyer shall promptly distribute all portions of the property as to which the interests are not in dispute.” In contrast, the Minnesota condition precedent is a dispute as to a lawyer’s right to funds.

Over the course of several decades, Minnesota came to believe that its professional discipline system was too often being used as a collection agency for third party claims. This belief apparently was the basis for declining to adopt Model Rule 1.15(e).  However, it also appears that Minnesota carried over ABA Comment 4 to Rule 1.15 without noticing that its reference to third party claims could not interpret Minnesota Rule 1.15.

Fourth, Cass’s filings argued that Cass had acted as a reasonable lawyer would, by seeking and relying on OLPR’s advisory opinion. OLPR countered that Cass’s reliance was unreasonable because Cass had given OLPR inaccurate information.  However, the information whose accuracy was disputed did not relate to whether Rule 1.15(b) applied.

A Lawyers Board Panel carefully considered the filings of OLPR and Cass.  On September 6, 2023, the Panel dismissed the admonition.  The Panel explained, “The plain language of Rule 1.15(b) repeatedly refers to funds belonging to the lawyer or law firm or rights of the lawyer or law firm to receive such funds. Rule 1.15(b) is not applicable because Respondent made no claims [to] any of the Proceeds Disbursement funds . . ..”,

The Panel dismissal stated further, “Further, the MRPC state that comments are intended as interpretation guides so reliance on the text of Comment 4 (as indicated in the advisory opinion) is inappropriate . . . when the Rule’s plain language is dispositive.”  Finally, the Panel noted, “Additionally, Respondent’s office sought the guidance of OLPR prior to making the disbursement and followed that guidance. Respondent’s office was seeking information on how to follow the Rules of Professional Conduct, so the suggestion that key facts were intentionally not supplied or downplayed is not convincing to this Panel.”

Bob filed a petition for discretionary review with the Minnesota Supreme Court. On December 29, 2023, the Court dismissed the petition on procedural grounds. The Order also stated, “Even if we were to reach the merits of the petition for review, petitioner would not be entitled to relief.”[i]

There is no evident explanation for OLPR’s decision to issue an admonition based on a plainly inapplicable rule, after an OLPR attorney had opined that the rule did not apply.

Minnesota lawyers should note that Cass’s case dealt with only one aspect of Minnesota lawyers’ duties regarding third party funds.  Disciplines have been imposed with finality for several kinds of violations involving third party funds.

Lawyers who have held funds pursuant to formal escrow agreements, or under letters of protection, and then disbursed those funds improperly have been disciplined.[ii]  The escrow-related disciplines were based on a charge that the lawyer had a conflict, under Rule 1.7(a)(2) between duties to the client and to the third party. In Cass’s case, there was no formal escrow agreement.

Lawyers have been disciplined for failure to pay third parties for professionally-incurred debts.  However, to avoid becoming a collection agency, OLPR typically requires alleged creditors of lawyers to obtain judgments before filing ethics complaints.[iii]

Lawyers have been disciplined for failure to deposit funds belonging to third parties in trust.  Rule 1.15(a) provides, “All funds of clients or third persons held by a lawyer or law firm in connection with a representation shall be deposited in one or more identifiable trust accounts . . ..” A cautionary note is that the Court has interpreted this rule to prohibit depositing third party funds in trust if the funds are not held in connection with a representation of a client.[iv]  An OLPR article states that if a lawyer acts as an escrow agent for third parties, the escrow funds should not be deposited in trust because they are not held in connection with a representation.[v] However, with appropriate disclosures and consents, a lawyer may act as an escrow agent for both a client and a third party, and in that situation the escrow funds may and must be deposited in trust.