Opinion 2006-2
(April 2006)

The inquirer represents an individual whose parents (now deceased) were allegedly victims of a fraudulent estate planning and annuities scheme. A lawsuit has been filed against the insurance company, among others. Although the lawsuit has been pending for about one year, the insurance company has been making payments on the annuity and has continued to do so.


The redemption of the annuity called for the inquirer’s client to receive quarterly payments until the annuity and accrued interest was repaid. The insurance company has been making monthly payments. The inquirer advises that the complaint contains facts which put the insurance company on notice of the nature and the amount of the claim against the insurance company and the amount of the periodic payments that the insurance company was to be making to inquirer’s client. The payments made and retained thus far by inquirer’s client have been sufficient to fully compensate him for all damages sustained plus attorney’s fees and costs through the filing of the Complaint.

Since that time, the payments have been placed in a joint interest bearing escrow account pending the adjudication of the claim against the insurance company.

The inquirer has requested an opinion as to whether he has an affirmative obligation to inform counsel for the insurance company that monthly payments continue to be made over and above the compensatory damages claim. In addition he asks whether disbursements can be made from the escrow account for additional compensatory damages that become liquidated.

Pennsylvania Rule of Professional Conduct (the “Rules”) 1.6 Confidentiality of Information provides in part that:
(c)  A lawyer may reveal such information to the extent that the lawyer reasonably believes necessary:

(2)  to prevent the client from committing a criminal act that the lawyer believes is likely to result in substantial injury to the financial interests or property of another;

(3)  to prevent, mitigate or rectify the consequences of a client’s criminal or fraudulent act in the commission of which the lawyer’s services are being or had been used;

Rule1.15 Safekeeping Property provides in part that: (c) When in connection with a client-lawyer relationship a lawyer is in possession of property in which two or more persons, … claim an interest, the property shall be kept separate by the lawyer until the dispute is resolved. The lawyer shall promptly distribute all portions of the property as to which the interests are not in dispute.

Rule 3.3 Candor Toward the Tribunal provides in part that: (a) A lawyer shall not knowingly:

(1) Make a false statement of material fact or law to a tribunal or fail to correct a false statement of material fact or law previously made to the tribunal by the lawyer;

Rule 3.4 Fairness to Opposing Party and Counsel provides in part that: A lawyer shall not:

(a) unlawfully obstruct another party’s access to evidence or unlawfully alter, destroy, or conceal a document or other material having potential evidentiary value or assist another person to do any such act.

Rule 4.1 Truthfulness in Statements to Others provides that: In the course of representing a client a lawyer shall not knowingly:

(a) make a false statement of material fact to a third person; or
(b) fail to disclose a material fact to the third person when disclosure is necessary to avoid aiding and abetting a criminal or fraudulent act by a client, unless disclosure is prohibited by Rule 1.6.

That Rule’s comments state that with respect to misrepresentation

[1] A lawyer is required to be truthful when dealing with others on a client’s behalf but generally has no affirmative duty to inform an opposing party of relevant facts.

Rule 3.3 requires a lawyer to correct any misstatement of material fact. If the complaint is no longer accurate with respect to the claims, the inquirer may have an obligation to amend pursuant to the Pennsylvania Rules of Civil Procedure. Also, to the extent that representations have been made to the tribunal that are inaccurate, the inquirer is under an obligation to correct these misstatements. This would include discovery as well. If the issue arises at a deposition or in response to discovery requests, the inquirer must ensure that the information regarding payments made and the amounts of those payments is disclosed. Should this issue have already been addressed during discovery, the inquirer also has an affirmative obligation to amend or supplement any such discovery if the responses are no longer accurate.

Looking at Rule 3.4, in this case, it is the insurance company itself that is the best source for information regarding payments and amounts of payments. Therefore, counsel for the insurance company has access to the best source for this evidence and the inquirer is not obstructing access to evidence regarding payment amounts or the schedule of payments by not making disclosure of the additional payments.

The provisions of Rule 4.1 may have a significant impact on the inquirer’s situation. To the extent that the continued payments have been made in error, the criminal law on conversion, including but not limited to Pa. C.S.A. Title 18 §3924, may be implicated where the inquirer and/or his client know the payments were made by mistake but have nevertheless retained the payments. If the retention of this money paid in error is, in fact, considered criminal, then Rule 4.1(b) is implicated and disclosure to the carrier is necessary to avoid aiding and abetting a criminal or fraudulent act. Under these circumstances, disclosure would be specifically allowed by the exceptions to confidentiality as contained in Rules 1.6 (c)(2) and (c)(3).

Whether the attorney can release monies to his client as additional compensatory damages become liquidated is governed by Rule 1.15. Here, the insurance company has made payments of an annuity plus accrued interest. Pursuant to the agreement entered into by Plaintiff’s parents, the insurance was to pay a certain amount of money quarterly to Plaintiff. While it is unclear whether the agreement contemplated that the payments might be made on a more frequent schedule in order to pay off the annuity more quickly, additional payments over and above the total amount due under the agreement have been and continue to paid. Whether the carrier is making the additional payments as a strategy to address any punitive damages claim or by mistake is not known. While it appears from the inquiry that no claim has been asserted by the insurance company with respect to the excess payments it is making to the plaintiff, it is clear to the Committee that the insurance company may have a claim to the payments made in excess of the amounts stated in the original annuity agreement. The Committee advises that Rule 1.15(c) requires the placement of the excess funds in escrow and that distributions from those funds not be made. In fact, to disburse payments made in error to the inquirer’s client might be aiding and abetting a criminal act.

CAVEAT: The foregoing opinion is advisory only and is based upon the facts set forth above. The opinion is not binding upon the Disciplinary Board of the Supreme Court of Pennsylvania or any other Court. It carries only such weight as an appropriate reviewing authority may choose to give it.