“Paradox, how are you?” Ethox asked, answering the telephone.
“Very good,” Paradox responded. “But I have a question for you.”
“I would be happy to help,” Ethox said.
“I settled a contingency-fee case, and we are about to get a $300,000 payment from the insurance company. I have some questions about distributing the money.”
“Go ahead. . . .”
“First,” Paradox explained, “the client would like a distribution now that the settlement has been signed. I don’t have the settlement funds, but I know the insurer will pay. Can I advance some of the funds?”
“No, absolutely not,” Ethox answered. “This is a common problem. Clients want to receive a payment right away. But ABA Model Rule 1.8(e) prohibits a lawyer from advancing funds to a client, except to use on ‘litigation expenses,’ which is not what your client is seeking.
“Also, if you did advance funds from your trust account, you would be advancing someone else’s money to the client. This would be a misappropriation of funds, which could result in serious discipline.”
“OK,” Paradox agreed. “No advances. But when the funds do arrive, I need to divide them up, correct?”
“Yes, some states require, and in others it’s considered a best practice, to prepare a settlement statement that tells the client how much the client will receive, how much you will receive in attorney fees and expense reimbursements, and how much will be held or disbursed to third parties,” Ethox explained. “Then, when the client approves and signs the settlement statement, and when the funds become ‘good,’ you need to disburse the funds as the statement indicates.”
“Good?” Paradox queried.
“Yes, in some states you need to wait for the funds to actually reach your trust account. Not just ‘available’—when the bank is basically extending credit to the lawyer—but actually at the bank. So you need to check your state Rules of Professional Conduct carefully.”
“I have not heard about ‘good’ funds,” Paradox admitted.
“Most lawyers have not,” Ethox agreed. “That is why lawyers often fall for a scam in which the scammer delivers a false check, and the lawyer wires funds out once the funds become available, only to owe the wired funds back to the bank when the check is rejected as a fraud.”
“Oh. Wow.” After a moment, Paradox asked, “Do I have to take out all my fees at once?”
“Yes,” Ethox emphasized. “You need to sweep all your earned fees out at once. If earned fees sit in your trust account, you would be commingling funds.”
“You mentioned holding funds for third parties?” Paradox asked. “Why would I hold funds from a settlement?”
“If you know of a lien, you must hold the funds subject to the lien,” Ethox answered. “Your client may want you or another lawyer to negotiate what amount the third party will accept for the lien. If an agreement is reached, you should then disburse the agreed funds to the third party and pay any remaining funds to the client.”
“What should I do if the client and third party do not agree on a distribution?” Paradox asked.
“You continue to hold the funds for a while, and then—if there is still no agreement—ordinarily you would need to interplead the funds and let the court decide how to resolve the dispute.”
“What if the client disputes only part of a third party’s bill?” Paradox asked. “Do I hold all of that third party’s funds until the dispute is resolved?”
“No,” Ethox answered. “Under Rule 1.15(d), you need to promptly disburse whatever portion of the funds are not subject to dispute.”
“I really appreciate this help,” Paradox said. “Let’s grab lunch sometime. My treat.”
