Property of Third Persons

Safekeeping Third-Party Property

Property of Third Persons

A lawyer “shall hold property of clients or third persons that is in a lawyer's possession in connection with a representation separate from the lawyer's own property.”¹ That sentence opens Rule 1.15, the Model Rules provision on safekeeping property,² and the words “or third persons” set the reach of this whole chapter.

Safeguarding entrusted property is one of a lawyer's core fiduciary duties. The duty covers property the lawyer receives from the client or from other sources but that belongs to the client or to third persons.³ A third person, then, is anyone other than the client who owns or has an interest in what the lawyer holds. A lender whose loan proceeds pass through a closing is one. So is a lawyer outside the firm who is owed a share of a divided fee. The rule asks the same care of the lawyer toward them as toward a client who hands over a settlement check.

What the lawyer holds can take many forms. A client may deliver funds to be applied to a transaction, a payment in satisfaction of a judgment or settlement, an advance deposit against attorney's fees, valuable documents to be analyzed, or property of evidentiary value.⁴ The rule reaches objects and documents as well as money, because other property “shall be identified as such and appropriately safeguarded.”⁵ The lawyer must keep it in a secure location and segregate it from the lawyer's own property.⁶

Two conditions trigger the rule, and both appear in its text: the lawyer must possess the property, and must possess it in connection with a representation. The test therefore looks to why the lawyer has the property, not to who owns it. The same lawyer can fall inside the rule for one item and outside it for another.

Change one fact and the result flips. Suppose the jewelry is evidence in a client's pending case and the client hands it to the lawyer for that matter. Both conditions are now met, because property of evidentiary value is among the things a lawyer may receive from a client and must safeguard.⁷

Third-party owners are not hypothetical figures, and institutions appear among them in the case reports. In Credit Union Central Falls v. Groff, the credit union (CUCF) obtained summary judgment, and when an appellant challenged that judgment, the court affirmed it.⁸ A lender in that position is a stranger to the lawyer's engagement, yet it is exactly the kind of person the words “or third persons” bring within the rule.

Another lawyer can also be the third person. Fee division among lawyers who were not associated inside one firm was once tightly restricted, while within a firm lawyers could divide fees on any basis they chose.⁹ Suppose the client has approved a division between lawyers in different firms. The lawyer who receives the client's payment then holds a share that belongs to someone outside the receiving lawyer's firm. That share is third-person property in the lawyer's possession in connection with the representation, so the lawyer must keep it separate from the lawyer's own money. The duties to notify the other lawyer, to deliver the share, and to account for it follow from the same fiduciary relationship and have their own sections below.

Sometimes several people claim the same property, and the lawyer may be one of them. The lawyer then keeps the property separate until the dispute is resolved and promptly distributes any portion that is not in dispute.¹⁰ The sections on disputed property and competing third-party claims develop those rules.

The consequences of mishandling entrusted property are severe. Improperly withdrawing client funds from a trust account is one of the shortest paths toward disbarment. A lawyer who misappropriates unearned funds draws one of the most severe sanctions, presumptively disbarment, even if the lawyer meant to replenish the account by taking a “loan” from it.¹¹ A plan to repay does not avoid the sanction.

The rest of the chapter follows this one duty through its parts: separating and safeguarding the property, giving notice, delivering, and accounting, handling disputed and competing claims, and the discipline that follows misappropriation. Advance fee payments sit at the edge of this topic. Rule 1.15(c) requires them to be placed into the trust account and withdrawn only when fees are earned and expenses are incurred.¹²