Retaining Funds in Trust Account to Pay Disputed Legal Fee
Editor's note: This opinion is not intended to imply that a lawyer for an estate is required to petition the clerk for approval of the lawyer’s fee, however, the personal representative’s commission may be reduced if the Clerk of Court does not approve the lawyer’s fee in advance.
Opinion rules that client funds or the funds of a third party that are placed in the lawyer’s control for the purpose of being safeguarded, managed, or disbursed in connection with a transaction, but which were not designated or identified as funds for the payment of legal fees, may not be retained in the trust account, pursuant to Rule 1.15-2(g), as disputed funds to which the lawyer may be entitled.
Attorney agreed to represent the Estate of E. E was a North Carolina lawyer who conducted his practice through a professional limited liability company (PLLC), in which he was the sole member. Attorney’s representation included collecting the assets and paying the claims of the PLLC with the intention that the PLLC would eventually be dissolved and any remaining assets of the PLLC would be distributed to the estate.
The funds of the estate, approximately $3,000, were deposited in the general trust account for Attorney’s law firm and a ledger card for the estate was established. The funds of the PLLC, in excess of $100,000, were also deposited in the trust account and a separate ledger for the PLLC was established. Attorney billed his work for the PLLC separately from his work for the estate in order that the legal fees for the resolution of the PLLC issues would be paid from funds of the PLLC.
Administrator recently terminated the representation and demanded return of the remaining funds of the estate (approximately $2,500) and of the PLLC (approximately $100,000) held in the general trust account of Attorney’s law firm.
Attorney contends that his firm is owed $29,000 in legal fees for the representation of the PLLC. Administrator contests these legal fees and did not authorize Attorney to pay the fees from any of the money held in trust.
Rule 1.15-2(g) states:
[w]hen funds belonging to the lawyer are received in combination with funds belonging to the client or other persons, all of the funds shall be deposited intact. The amounts currently or conditionally belonging to the lawyer shall be identified on the deposit slip or other record. After the deposit has been finally credited to the account, the lawyer may withdraw the amounts to which the lawyer is or becomes entitled. If the lawyer's entitlement is disputed, the disputed amounts shall remain in the trust account or fiduciary account until the dispute is resolved.
May Attorney retain $29,000 in his firm’s trust account and transfer only the difference to Administrator until the dispute over the legal fees is resolved?
No, the funds must be returned to Administrator and Attorney may file a claim with the Estate for payment for his legal services.
Rule 1.15-2(g) permits a lawyer to withhold only funds to which the lawyer has a claim to entitlement such as funds deposited as a client’s advance payment of a legal fee or funds from a settlement negotiated by the lawyer that, by prior agreement, include a contingent fee. However, client funds or the funds of a third party that are placed in the lawyer’s control for the purpose of being safeguarded, managed, or disbursed in connection with a transaction, but which were not otherwise designated or identified as funds for the payment of legal fees, may not be retained in the trust account as disputed funds pursuant to Rule 1.15-2(g). As explained in Comment  to Rule 1.15, “[a] lawyer is not required to remit to the client funds that the lawyer reasonably believes represent fees owed. However, a lawyer may not hold funds to coerce a client into accepting the lawyer's contention.”
Regardless of whether the funds are identified as funds of the Estate of E or funds of the PLLC, the funds in this inquiry are the property of the Estate of E1 and were delivered to Attorney for the purpose of being managed by Attorney as a part of his legal services to the estate. The funds are subject to legal requirements to pay the claims of the creditors of the PLLC and of the estate.2 Moreover, payment of administrative expenses of an estate from estate assets, including attorney’s fees, is only permitted on the issuance of an order of the clerk of superior court and requires the clerk to exercise judicial discretion in such matters.3 A personal representative must file a petition seeking an order from the clerk enabling the payment of attorney’s fees by an estate.4 These legal restrictions on the assets of an estate demonstrate that Attorney had no claim of entitlement to the funds. Therefore, when the representation ended, Attorney was obliged to deliver all of the funds as directed by Administrator. Rule 1.15-2(m)(a lawyer shall promptly pay or deliver to the client, or to third persons as directed by the client, any entrusted property belonging to the client and to which the client is currently entitled).
Rather than deposit the funds of an estate in a general trust account, estate funds should, in most instances, be deposited in a fiduciary account maintained solely for the deposit of fiduciary funds or other entrusted property of a particular person or entity. Rule 1.15-1(e)(defining “fiduciary account”). In a fiduciary account, the funds can be invested as usually required for prudent management of fiduciary funds. The comment to Rule 1.15 explains that:
[c]lient funds must be deposited in a general trust account if there is no duty to invest on behalf of the client. Generally speaking, if a reasonably prudent person would conclude that the funds in question, either because they are nominal in amount or are to be held for a short time, could probably not earn sufficient interest to justify the cost of investing, the funds should be deposited in the general trust account. In determining whether there is a duty to invest, a lawyer shall exercise his or her professional judgment in good faith and shall consider the following:
a) The amount of the funds to be deposited;
b) The expected duration of the deposit, including the likelihood of delay in the matter for which the funds are held;
c) The rates of interest or yield at financial institutions where the funds are to be deposited;
d) The cost of establishing and administering dedicated accounts for the client's benefit, including the service charges, the costs of the lawyer's services, and the costs of preparing any tax reports required for income accruing to the client's benefit;
e) The capability of financial institutions, lawyers, or law firms to calculate and pay income to individual clients;
f) Any other circumstances that affect the ability of the client's funds to earn a net return for the client.
Generally, the funds of an estate are of sufficient quantity or will be held for a sufficiently long period of time that deposit in a fiduciary account is required.
- N.C. Gen. Stat. §57C-6-01(4) provides that E’s PLLC dissolved by statute on the 90th day following E’s death. E’s PLLC and all of its assets are assets of the estate.
- See N.C. Gen. Stat. §57C-6-05(1) and N.C. Gen. Stat. §28A-19-6.
- See Wachovia Bank & Trust Co. v. Waddell, 237 N.C. 342, 75 S.E. 2d 151 (1953).
- See In re Estate of Longest, 74 N.C. App. 386, 328 S.E. 2d 804, cert. denied and appeal dismissed, 314 N.C. 330, 333 S.E. 2d 488 (1985).