Lawyer-Client Disputes

Rule 1.15(e) expressly contemplates that the lawyer may be a claimant: the competing interests it covers belong to "two or more persons (one of whom may be the lawyer)."¹ The same two commands therefore bind a lawyer-claimant as they bind any other custodian. The contested property stays separate until the dispute is resolved, and every undisputed portion is promptly distributed. Fees usually start the dispute. A client may have advanced a deposit against future work, or a recovery may have arrived from which the lawyer's share must come, and the two sides disagree about how much the lawyer has earned. The money in trust is then the very thing both want.

This setting puts the most strain on the rule's division between custody and decision. A lawyer who is also a claimant controls the account, knows the numbers, and can end the argument by moving money. The rule therefore gives the lawyer a protected position and withholds the power to act on it alone. A lawyer with a legitimate fee claim may keep the disputed amount in trust, so the claim has something to attach to while the disagreement is pending. The lawyer may not take that amount for personal use, and may not use the hold as bargaining power over the rest of the client's money.

This section first applies the rule to the fee dispute itself. It then turns to the lawyer's lien, the right to hold a client's money or property as security until the lawyer is paid. A lien can look like permission to hold whatever is in hand until the bill is settled, and that impression is wrong in three ways. Each limit answers a different question: which funds a lien can reach, which fees it can secure, and when it can hold a client's file.

Disputed Fees Stay in Trust

A fee dispute is the commonest way for a lawyer to become one of the competing claimants Rule 1.15(e) describes. Where two or more persons, one of whom may be the lawyer, claim interests in property the lawyer holds, "the property shall be kept separate by the lawyer until the dispute is resolved."² Rule 1.15(c) sets the stage by requiring the lawyer to deposit advance fees and expenses in a client trust account and to withdraw them only as the fees are earned or the expenses incurred.³ Until a withdrawal is justified, the money in the account belongs to the client. The conflict arises when the lawyer says an amount has been earned and the client says it has not, or when a recovery arrives and the two disagree about the size of the fee that must come out of it. Both persons then claim the same dollars, and only the lawyer has access to the account.

The rule resolves that conflict by letting the lawyer keep the money but not take it. A lawyer who disputes a fee with a client may retain the funds in the trust account and so keep a degree of security over them, but may not take personal possession of the disputed amount and may not hold the entire payment hostage to gain an advantage over the client in settling the dispute.⁴ Each half has a reason. A lawyer who could settle a fee dispute by paying the contested amount to the lawyer would be judge in the lawyer's own cause, and the client's money would become a bargaining chip. Leaving the money in trust gives the lawyer security without possession: the contested amount stays reachable, so a decision for either side can be carried out in full. The ban on holding the whole payment hostage protects the other end. A client who has just received a recovery may need the undisputed money at once, and a lawyer who holds all of it can trade the client's own money for concessions on the contested part.

Three prohibitions follow. Each blocks a different way a lawyer-claimant might act as though that position carried a decision-maker's authority:

The lawyer may not move the disputed amount into a personal or operating account, or pay it out of trust to the lawyer, because that settles the dispute in the lawyer's own favor.
The lawyer may not withhold the entire payment as leverage, because the undisputed portion belongs to its owner and must be distributed promptly.
The lawyer may not treat the client's unwillingness to discuss the dispute as permission to act alone, because the freeze lasts until the dispute is resolved and silence resolves nothing.

Two disciplinary decisions apply these prohibitions to fee disputes. In re Jones, the lawyer put funds into the operating account while aware of a fee dispute. The Louisiana Supreme Court held that this "amounts to conversion of client funds" and that "the appropriate baseline sanction is disbarment."⁵ The holding turns on the lawyer's knowledge when the money moved. Money known to be contested was not the lawyer's to transfer, and once it sat in the account that pays the lawyer's own expenses it was no longer separate.

In Attorney Disciplinary Board v. Rhinehart, the money began in the right place, because the settlement funds were in the trust account. The lawyer nonetheless disbursed them to himself while knowing that the amount of his fee was disputed, and the Iowa Supreme Court held that he violated Rule 1.15.⁶ His defense was that the clients had been unwilling to engage in a dialog with him about the dispute. The court rejected it as an "attempted rationalization."⁷

The excuse fails because of what ends the freeze. The freeze ends when the dispute is resolved, and a client's silence resolves nothing: the claim is still contested, the lawyer's entitlement is still unestablished, and the lawyer's path to the money still runs through agreement with the client or a decision by a tribunal. A lawyer who could treat unresponsiveness as consent could create the conditions for self-payment simply by waiting, and the rule would return to the very situation it was written to prevent, a lawyer deciding the lawyer's own claim. An exam stem may give the lawyer sympathetic facts, such as a client who ignores letters or a fee the lawyer is sure is owed. Neither changes the analysis, because the rule is triggered by the existence of a competing claim and not by how reasonable or cooperative the claimant is.

Hypothetical Illustration

A client deposits a $20,000 advance fee in trust. When the matter ends, the lawyer's bill claims $15,000 as earned. The client agrees that $9,000 of work was done and objects to the other $6,000. The lawyer withdraws the $9,000 that both sides agree was earned, promptly returns the $5,000 that nobody says the lawyer has earned, and leaves the $6,000 in the trust account while the two work out the difference or take it to a tribunal. Each dollar sits where the rule puts it: the undisputed fee is with the lawyer, the undisputed client money is with the client, and only the contested slice is frozen.

A different lawyer faces the same numbers and tells the client that the $5,000 will be returned only after the client accepts the $15,000 bill. Nobody disputes that the $5,000 belongs to the client, so holding it breaches the command to distribute undisputed portions promptly, however strong the lawyer's claim to the $6,000 may be.

Florida states the prohibition on leverage more bluntly. Its trust-accounting rule provides that money of clients coming into a lawyer's hands is not subject to counterclaim or setoff for attorney's fees, and it deems a refusal to account for and deliver such property on demand a conversion.⁸ Where that language applies, a lawyer cannot satisfy a disputed fee by offsetting it against what the lawyer holds. A later section returns to such state variations.

Discipline for mishandling disputed fee money runs along a spectrum, and two variables place the lawyer on it: the lawyer's state of mind and the client's loss. If the commingling was a negligent mistake, or the client suffered no financial loss, or perhaps the lawyer had a colorable future claim to the funds taken from trust, then some leniency may be appropriate.⁹ If the lawyer has improperly converted client funds to the lawyer's own use, revocation of the license is a likely consequence.¹⁰ Jones sits at the severe end, since a transfer into the operating account with knowledge of the dispute was treated as conversion and disbarment was the baseline. The difference tracks the duty at stake. Rule 1.15(a) requires a lawyer to hold client property separate from the lawyer's own,¹¹ and conversion defeats that duty by decision. A negligent slip that cost the client nothing shows a failure of care but no decision to use someone else's money.

Entrusted Funds and Liens

A lien ties a fee claim to particular funds. It entitles the lawyer to hold or reach the client's money as security until the fee is paid, and because it is the lawyer's own claim to what sits in the account, it carries the restraint Rule 1.15(e) places on every lawyer-claimant. Paragraph (e) expressly allows the lawyer to be one of the persons claiming the property.¹³ A lawyer may assert a lien against funds only when the lawyer has a legitimate claim to payment of fees or expenses for legal services.¹⁴ Even with such a claim, both the retaining lien (a right to keep what is already in the lawyer's hands) and the charging lien (a right against the recovery the lawyer's work produced) face significant limitations.¹⁵ The first limit concerns the purpose for which the client delivered the money.

Funds the client delivers to the lawyer for a designated purpose, such as paying a settlement, paying a judgment, or completing a transaction, are not subject to a lien.¹⁶ The reason lies in what the client did when handing over the money. The client gave it to the lawyer as the means of carrying out a specific, lawful objective, so the money was committed to its destination from the start and was never part of what the lawyer could look to for payment. The lawyer also owes the client a duty to take no action that would prejudice or impede the client's lawful objectives, and applying settlement money to a fee bill would do exactly that.¹⁷ The settlement would go unfunded, the lawsuit the client meant to end would continue, and the client's good-faith delivery of the funds would expose the client to the very risk the funds were meant to remove. If an unpaid bill let the lawyer keep entrusted funds, no client with a balance could safely use the lawyer to channel a payment. The fee claim survives, since the client still owes the money, but the lawyer must pursue it by some other route.

Hypothetical Illustration

A lawyer holds $50,000 that came from the client's own personal-injury recovery. The client delivered it for no particular purpose, and the lawyer's bill for fees already earned is $12,000, which the client disputes. The lawyer has a legitimate claim, so a lien reaches the disputed $12,000, and paragraph (e) keeps that amount in trust until the disagreement is resolved. The remaining $38,000 has no competing claim and goes to the client promptly.

A different client owes the same $12,000 and gives another lawyer $50,000 with instructions to pay it to the opposing party in settlement of a pending suit. The lawyer is aggrieved about the unpaid bill, but the $50,000 was entrusted for a designated purpose. No lien can reach it, so the lawyer must complete the settlement payment and look elsewhere for the fee.

The unpaid $12,000 is identical in both matters, and the lawyer's grievance is equally real. What moved the answer is where the money came from and what the client told the lawyer to do with it. In the first matter the funds were the client's own recovery, so the earned fee had something to attach to. In the second the funds were a conduit for a payment to someone else, so the fee claim had nothing to attach to.

Florida's trust-accounting rule shows the same tension in its text. Client money coming into the lawyer's hands is not subject to counterclaim or setoff for the lawyer's fees, yet the rule does not preclude the lawyer from retaining money or property on which the lawyer has a valid lien for services.¹⁸ Validity of the lien is therefore the question on which a fee claim succeeds or fails. A later section returns to state variations of this kind.

An exam stem that pairs an unpaid fee with money in the lawyer's hands is testing which of these two situations it describes. The tempting answer is that a lawyer who is owed money may hold whatever client funds are at hand as security. The sound analysis asks first whether the lawyer's claim to fees is legitimate and then whether the client delivered the funds for a designated purpose. A lawyer with no legitimate claim has nothing to assert a lien for, and a lawyer with a good claim still cannot reach money the client entrusted to pay a settlement. The next two limits concern competing creditors and the client's file.

Liens Cover Incurred Fees Only

A lawyer's lien meets its sharpest test when another creditor of the client reaches the same money. A judgment creditor may garnish (reach through court process) the funds the lawyer is holding, or a lender may have taken a security interest in them. The result is a priority question, a dispute over whose claim to the fund is paid first, and the lawyer asserting a lien is one of the claimants whose interests Rule 1.15(e) addresses.²⁰ In that contest the lien is available only to secure fees and expenses the lawyer has already incurred. It cannot justify holding the funds as security for fees the lawyer anticipates earning later.²¹ The amount it secures also stops growing at a definite moment, because the amount is fixed when the question of priority between the lawyer and the other claimant arises.²²

The two halves of this limit answer different problems. The incurred-fees half ties the lien to its function. A lien exists to secure payment for work already done, and a fee for work not yet performed is not yet a claim to payment, since the work may never be done, the engagement may end early, or its scope may change. If anticipated fees counted, a lawyer could lock up funds against a competing creditor simply by projecting a large future bill, and the creditor would lose to a claim that nobody had yet earned. The fixing half gives the competing claimant certainty. Once the priority question arises, that claimant can look at the fees incurred on that date and know what it faces, and the lawyer cannot enlarge the secured amount afterward by continuing to bill against the same fund.

The $6,000 and the $15,000 sat in the same fund, held by the same lawyer, facing the same garnishment. The only fact that moved the answer was whether the work had been performed when the creditor arrived. The lawyer's right to be paid for the trial once it is tried is untouched. What the limit removes is the ability to hold this fund against the competing creditor as security for that later fee.

Even the $6,000 may remain contested. If the creditor disputes that the lien outranks its garnishment, two persons, one of them the lawyer, claim interests in the same money, and Rule 1.15(e) controls.²³ The lawyer keeps the contested amount separate until agreement or a tribunal resolves the priority question, and promptly distributes any portion that no one disputes. The lawyer does not decide the contest by paying the $6,000 to the lawyer or to the creditor.

This is the second limit on the lien. The first asked what the client told the lawyer to do with the funds. This one asks what the lawyer's claim covers once another creditor reaches the same money. An exam stem usually presents a lawyer holding client funds, a creditor who garnishes them or holds a security interest in them, and a lawyer who says the whole fund must stay put as a retainer for the trial still ahead. The sound analysis separates what the lawyer has already incurred, which the lien secures in the amount fixed when the priority question arose, from what the lawyer expects to incur, which it does not secure. The tempting error treats an ongoing representation as though the future fees were already earned.

Client Files and Unpaid Fees

A lawyer's lien can reach more than money: it may be imposed against other property, such as the client's file, as well as against funds.²⁵ The third limit governs that second category. A lawyer may not withhold the file against an unpaid fee bill if doing so would prejudice the client in an ongoing matter, as when the client has retained new counsel to handle a pending lawsuit.²⁶ The first limit looked at what the client told the lawyer to do with the money, and the second at what the lawyer's claim covers once another creditor arrives. This one looks at what withholding would do to the client's live case.

A file differs from a disputed sum of money in what it does for the client in the meantime. Money held in trust can sit untouched while lawyer and client work out the fee, and Rule 1.15(e) keeps contested property separate until the dispute is resolved.²⁷ A file in a pending lawsuit is something the client needs now: it holds the pleadings, the discovery, the correspondence, and the notes on which the next deadline and the next argument depend. Replacement counsel who takes over without it cannot readily answer a motion, prepare a witness, or confirm when the next filing is due. Withholding the file would therefore impede the client's lawful objectives, and the lawyer owes a duty to take no action that would prejudice or otherwise impede them.²⁸ The lawyer's claim to be paid survives, since the client still owes the bill, but the lawyer must collect it by some route other than holding the client's case hostage.

The limit sits beside the lawyer's general duty to deliver client property. The delivery duty under Rule 1.15(d) extends to the originals of documents the lawyer generated for the client, such as deeds, mortgages, original notices, pleadings, contracts, and wills, and the client is ordinarily entitled to return of the file or its transfer to new counsel.²⁹ That statement carries a condition: it applies absent the client's permission for the lawyer to keep the documents and on the assumption that the client is current in paying fees.³⁰ The condition explains why an unpaid bill is not irrelevant to the file. Because the general duty is framed for a client who is current, the prejudice limit is the restraint that stays in place when the client is behind.

An exam stem in which a lawyer refuses to release a file until the bill is paid turns on one question: is there an ongoing matter in which the client would be hurt by the delay?

The answer changes when an ongoing matter needs the file. If the landlord sues over the lease and the client retains new counsel to defend, the same file is now the record that counsel needs for a pending lawsuit, and the lawyer must release it despite the unpaid $4,000.³¹ The bill is the same and the lawyer's claim to it is just as good. The new fact is that withholding now prejudices the client in an ongoing matter.

Two cautions keep the limit from being over-read. The prejudice limit forbids withholding when withholding would harm an ongoing matter. It does not say that a lawyer may keep a file whenever no harm is visible, and it does not say that the lawyer must hand over everything at once whenever a bill is outstanding. What a lawyer may retain when no prejudice is shown is a question of local law, and the general duty to return the client's documents and file continues to operate alongside it.³² An answer to a file-and-fee problem should therefore start with prejudice, since prejudice is the one fact that forecloses retention outright.