Thursday, October 10, 2013

Kentucky Amends Rule 1.15 --Third Party Protections Deleted

I have just received an e-mail advising me that Kentucky has amended its ethical rule regarding safekeeping of entrusted property (Rule 1.15).

The rule change is found on page 9 of the document linked above.

The effect of the rule change is to remove any protection for non-clients in that the Model Rule references to the rights of third parties has been entirely removed.

The third-party protection is a fundamental aspect of the rule, as recognized by the commentary to the Model Rule:

Paragraph (e) also recognizes that third parties may have lawful claims against
specific funds or other property in a lawyer's custody, such as a client's
creditor who has a lien on funds recovered in a personal injury action. A lawyer
may have a duty under applicable law to protect such third-party claims against
wrongful interference by the client. In such cases, when the third-party claim
is not frivolous under applicable law, the lawyer must refuse to surrender the
property to the client until the claims are resolved. A lawyer should not
unilaterally assume to arbitrate a dispute between the client and the third
party, but, when there are substantial grounds for dispute as to the person
entitled to the funds, the lawyer may file an action to have a court resolve the
dispute.

Now, presumably, Kentucky attorneys are free to disregard agreements to pay medical providers out of litigation proceeds, cheat non-clients in probate and real estate matters, and engage in all sorts of financial chicanery so long as the entrusted funds do not belong to a client.

Sickening.

I eagerly await an explanation/justification for this pro-lawyer/anti-public interest rule change. (Mike Frisch)

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Comments

“Sickening”? Does this not restore the law to the condition before the MRPC? Were lawyers sickeningly immoral before that time?

I’ll make a stab at explanation/justification, though I can’t speak for the legal establishment that made this change. First, in those cases where the underlying substantive law requires the lawyer to protect a party who is adverse to the client, the remedies available for violating the law already sanction the lawyer for failing to pay the creditor. Violation of some of them may warrant ethical sanctions as well under other provisions. But in those cases where the substantive law does not require that the lawyer protect the party adverse to the client, why should the rules of ethics do so?

Take your examples. “Kentucky attorneys are free to disregard agreements to pay medical providers out of litigation proceeds.” Whose agreement? If the attorney agreed to pay the provider, then substantive contract law would apply its sanctions, and ethics provisions of Rules 4.1 and 8.4 address honest dealings with third parties. If the attorney did not agree to pay the provider, and it is only the client’s agreement, why should the attorney be bound on pain of disbarment to enforce that agreement at all, and certainly against the client? Shouldn’t the obligation to comply with that agreement be the client’s obligation only? If the obligation extends to the attorney, why not to the client’s spouse, or family? The client’s bank or employer? Are they all sickeningly immoral if they do not stand with the creditor to ensure its payment by the client? If not, why should the lawyer be punished if the client breaches the client’s contract? Shouldn’t lawyers who counsel their large corporate clients on the effects of breaching a contract be disbarred too? Would counseling debtors on bankruptcy be equally immoral?

“Cheat non-clients in probate and real estate matters.” The same analysis would apply. Rules 4.1 and 8.4 address many aspects of “cheating.” Substantive law doubtlessly imposes significant obligations on a lawyer who holds trust funds that actually belong to third parties while in the lawyer’s possession or who holds them by virtue of an undertaking to distribute them to such third parties. But if the substantive law does not require the lawyer to turn over funds to those non-clients in probate and real estate matters, and if the obligation exists only when the client obtains the funds, why again should the lawyer be punished for failing to pre-enforce the client’s obligations? Why should the lawyer be made an unpaid bill-collector against the client for the benefit of parties adverse to the client?

So, the basic justification for the change in the rule would probably be that everything that should be sanctioned is already sanctioned, and the rule adds nothing to those existing sanctions. Deleting the rule removes its misuse to coerce attorneys to take positions against their clients where the substantive law does not require them to do so.

Posted by: Charles Cork | Oct 11, 2013 2:46:49 AM

I will see what I can find out, but I am pretty much a stranger to the KBA these days.

Posted by: Rick Underwood | Oct 11, 2013 4:31:31 PM

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