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RE: Advisory
Opinion 95-02
Arkansas
Bar Association
DATE: September 26, 1995
SUBJECT:
Role of a Middleman in the Distribution of Clients'
Funds
This
committee has been presented with the following situation
by a law firm: the law firm performs foreclosure activities
for mortgage companies, in recent years middleman
companies have become involved in the process by referring
foreclosure files to law firms and intervening between
the law firm and the mortgage company. The middleman
company acts as a third party independent contractor
by providing services between the law firm and the
mortgage company. One middleman company has notified
the law firm that in the future, upon the settlement
of a foreclosure lawsuit, all monies associated with
the settlement are to be forwarded directly to the
middleman. The middleman will then distribute the
funds to the mortgage company and to others who are
entitled to a portion. The law firm asks whether it
may comply with the request of the middleman.
Without
doubt the attorney-client relationship is between
the mortgage company and the law firm. The mortgage
company has the right under the substantive law to
bring foreclosure
proceedings. The mortgage company has selected, either
directly or indirectly, the law firm to assert its
claims. The law firm has accepted the offer and agreed
to represent the mortgage company. There is no attorney-client
relationship between the middleman and the law firm.
The
client determines the objectives of representation.
Ark. R. Prof. Cond. 1.2(a). As the Comment emphasizes
"the client has ultimate authority to determine
the purposes to be served by legal representation
. . . [and] the right to consult with the lawyer about
the means to be used in pursuing those objectives."
Although the attorney has responsibility for technical
and tactual issues, the attorney "should defer
to the client regarding such question as the expenses
to be incurred and concern for third persons who might
be adversely affected." All those decisions are
made by the law firm and the client, here the mortgage
company. The middleman participates in those decisions
only upon the request of the client.
By
providing assistance, the middleman plays, at best,
a collateral role to the attorney-client relationship.
The middleman has no authority to exercise any control,
direction or regulation of the law firm's rendition
of legal services for the client. Rule 5.4(c). The
attorney-client relationship also mandates that the
duties of confidentiality and loyalty, see Rules 1.6
and 1.7, are owed to the client, without interference
by the middleman. The client may waive confidentiality,
and such waiver may be necessary if the settlement
is confidential.
The
distribution of settlement funds may be done by a
law firm, but nothing suggests that it falls into
that elusive definition of the practice of law. See
Smith v. National Cashflow Systems, Inc., 309
Ark. 101, 827 S.W. 2d 146 (1992). Distribution does
not necessarily require the giving of legal advice
or the providing of court services, see Undem v.
State Board of Law Examiners, 266 Ark. 683, 587
S.W. 2d 563 (1979), or the preparation of prohibited
legal documents. Pope County Bar Association v.
Suggs, 274 Ark. 250, 624 S.W. 2d 828 (1981). Their
services appear to be ministerial in nature. Accordingly,
Rule 5.5(b) does not bar the firm from forwarding
the settlement proceeds to the middleman.
Rule 1.15 sets forth
the standards for attorney handling of clients' funds.
Section (b) states: "except as stated in this
rule or otherwise permitted by law or by agreement
with the client, a lawyer shall promptly deliver to
the client or third persons any funds or other proper
that the client or third person is entitled to receive.
. . ." The mortgage company has a right to the
proceeds of the foreclosure action, and the attorney
is obligated to forward those funds to the mortgage
company. But as the rule expressly indicates, the
client and the attorney may agree otherwise. This
permissive clause is the governing rule for the question
posed to this committee.
Another
area of the practice of law offers analogous support.
It is not uncommon in personal injury litigation for
the attorney to distribute settlement proceeds to
physicians, hospitals and others with a claim. But
such distribution should only be done with disclosure
to the client and with consent from the client. See
Ark. R. Prof. Cond. 1.4(b).
If
the mortgage company, which is the client, and the
law firm agree that upon settlement of a foreclosure
action, the funds are to be forwarded to a middleman,
that agreement is binding upon the law firm. On the
other hand, in the absence of such an agreement, the
funds are to be forwarded directly to the client.
NOTICE
"This
is an opinion only of the Arkansas Bar Association
which is a voluntary association of attorneys licensed
to practice in the State of Arkansas, and reliance
thereon is voluntary and relieves any Association
member from liability for the content hereof. This
opinion is intended to be the Association's best interpretation
of the Model Rules of Professional Conduct as promulgated
by the Supreme Court of Arkansas as that code applies
to the written facts presented to the Committee."
ARKANSAS BAR ASSOCIATION
By:_______________________________
Howard W. Brill
Reporter for Professional
Ethics
and Grievances Committee
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