Opinion ID: 1058572
Heading Depth: 2
Heading Rank: 1

Heading: Tseng's Interest in the Trust Accounts

Text: The Firms argue that Tseng's interest in the trust accounts, into which he deposited his funds under the retainer agreements, was only a bare contract right. They contend Tseng had no property right or ownership interest in the trust account funds. [4] Instead, the Firms argue that they and Tseng were in a debtor-creditor relationship essentially in the same capacity as a commercial bank and a depositor. The Firms posit they only had a legally enforceable contractual obligation . . . to repay Tseng the unearned and unused retainer deposits. Thus, the Firms contend the circuit court's finding that the funds in the trust account remain the property of the client is in error. Our jurisprudence clearly supports the conclusion reached by the circuit court. An attorney who receives funds from a client for the future payment of legal fees for services not yet rendered holds those funds in trust. The funds are the corpus of a trust of which the attorney is the trustee and the client the beneficiary. In re Equip. Servs., 290 F.3d 739, 746 (4th Cir.2002) (citing Indian Motocycle Assocs. v. Massachusetts Housing Fin. Agency, 66 F.3d 1246, 1254-55 (1st Cir.1995)) (the relationship is a trust arrangement in which the attorney holds the retainer for the client and the retainer so held, less any fees charged against it, constitutes the property of the client). Although not a case involving an attorney's trust account, we explained such a general fiduciary relationship, and distinguished it from a debtor/creditor relationship, in Broaddus v. Gresham, 181 Va. 725, 26 S.E.2d 33 (1943). The question frequently arises as to whether the relation created is a trust or a debt. With respect to this distinction, in Scott on Trusts, Vol. 1, section 12.1, p. 86, the author says: A trust involves a duty to deal as fiduciary with some specific property for the benefit of another. A debt involves a merely personal obligation to make payment of a sum of money to another. A creditor as such has merely a personal claim against the debtor. He can enforce his claim by judicial proceedings to reach the debtor's property and subject it to the satisfaction of his claim, but until he does so he has no legal or equitable interest in the property of his debtor.    On the other hand, the beneficiary of a trust has an equitable interest in the trust property. The beneficiary of a trust has something more than a mere chose in action, something more than the merely personal claim which a creditor has against the debtor. He is equitable owner of the trust property. If the trustee transfers the trust property to a person who is not a bona fide purchaser, or if the trustee becomes insolvent, the beneficiary is still entitled to the property. . . .  Id. at 731-32, 26 S.E.2d at 35-36. The Firms were in a fiduciary relationship to Tseng, holding his property (the funds he tendered to the Firms) as the corpus of a trust of which Tseng was the beneficiary. Nothing in either representation agreement evidences any other type of relationship. The Firms were thus under a fiduciary duty to, among other things, return the funds in the fiduciary trust account to Tseng upon his request. This obligation, fiduciary in nature, did not convert the parties' relationship to that of debtor and creditor as to the trust funds although Tseng could have sought many of the same remedies as a creditor had the Firms failed to discharge their fiduciary duty. We reiterated this point in Broaddus: The fact that the trustee may be indebted to the beneficiary in a fixed and definite amount which is due and payable immediately and which may be recovered by the beneficiary in an action at law, is not, as contended by the appellant, determinative of the existing relation. If the trustee is under a duty to pay money immediately and unconditionally to the beneficiary, the beneficiary can maintain an action at law against the trustee to enforce payment. This does not mean, however, that a trustee who is under an immediate and unconditional duty to pay to the beneficiary money held in trust has ceased to be a trustee and has become a debtor. Id. at 732-33, 26 S.E.2d at 36 (quoting Restatement of Torts §§ 198-199) (internal quotation marks omitted). We specifically applied these principles in the context of trust accounts held by an attorney in Virginia State Bar v. Goggin, 260 Va. 31, 530 S.E.2d 415 (2000), and plainly held the client had an ownership interest as a trust beneficiary, not a mere creditor: Clients' funds deposited in an attorney's trust account are funds held in trust. As such, the claim of such clients for return of funds is more than merely a personal claim against the attorney for the payment of the sum of money on deposit. The clients retain an equitable or beneficial ownership interest in the funds. The deposit of one client's funds in an account with funds of other clients does not destroy the beneficial interest of the clients in the funds so deposited. Thus, the clients are entitled to those funds to the extent their equitable ownership interests can be traced. Goggin, 260 Va. at 33, 530 S.E.2d at 416-17 (citing Broaddus, 181 Va. at 731-32, 26 S.E.2d at 35-36); accord Iowa Supreme Court Bd. Of Professional Ethics & Conduct v. Frerichs, 671 N.W.2d 470, 476 (Iowa 2003) (Advance payment for future services represent[s] money that still belongs to the client after it is paid to an attorney and must be deposited in a client trust account.); In re Lochow, 469 N.W.2d 91, 98 (Minn.1991) ([A]dvance payments for future services are client funds until earned. . . . Furthermore, attorney fees for payment of services to be performed in the future must be placed in a trust account and removed only by giving the client notice in writing of the time, amount, and purpose of the withdrawal, together with a complete accounting thereof.). The Firms' analogy to a lawyer's trust account and the relationship between a bank and its depositor is untenable. While a depositor is only a creditor of the bank as to his account in the depository bank, Bennet v. First & Merchants Nat'l Bank, 233 Va. 355, 360, 355 S.E.2d 888, 890-91 (1987) (citing Bernardini v. Central Nat'l Bank, 223 Va. 519, 521, 290 S.E.2d 863, 864 (1982)), that contractual indebtedness is qualitatively and legally distinct from that of the client whose own funds are being held by his attorney. A depositor in a bank retains no ownership interest in the funds deposited, but becomes a general creditor of the bank. Should the bank become insolvent, the depositor is a mere creditor with all others. See First Nat'l Bank v. Commercial Bank & Trust Co., 163 Va. 162, 169, 175 S.E. 775, 777 (1934) (a depositor has no claim upon the assets of the bank superior to that of the bank's general creditors). Should a lawyer's client, having tendered funds into the lawyer's trust account, file a petition in bankruptcy, the funds in the trust account at the time of filing are assets of the client's bankruptcy estate because of the client's ownership interest. E.g., In re U.S.A. Diversified Prods., Inc., 196 B.R. 801, 807 (N.D.Ind.1996) ([T]he funds in [firm's] trust account became the property of the bankruptcy estate upon the filing of the petition.); see also 3 Collier on Bankruptcy ¶ 329.04[1][e] & n. 22 ( Lawrence P. King et al., eds. 15th ed.2007 ) (supplying cases). Conversely, if the attorney holding a client's funds files a petition in bankruptcy, the client's funds in the trust account are not part of the attorney's estate in bankruptcy. Those funds remain the separate property of the client because it is the client who has equitable ownership, not the attorney. We hold that Tseng had an equitable ownership of the funds held by the Firms in trust and was not simply a contractual creditor of the Firms as they contend. The circuit court thus did not err in its holding that the trust account funds were Tseng's property.