2010-F-154 - Require Plaintiff's Attorney to insure payment of medical bills or liens

FORMAL ETHICS OPINION NO. 2010-F-154

Inquiry is made regarding the propriety of requesting or requiring plaintiff’s attorney to enter into agreements or releases which require the attorney to insure payment of medical bills or liens or to indemnify and hold harmless any party being released.

Inquiry is made as follows:

May a plaintiff’s attorney be required to execute a Release which requires that attorney to ensure that medical expenses and liens applicable to his or her client are paid from the settlement proceeds, when the representation is made during settlement negotiations that an agreement with the medical lien holder has been reached and payment will be made from the settlement proceeds?

May an attorney representing a plaintiff in personal injury litigation be required to indemnify and hold harmless any party being released as a result of the settlement negotiations from any medical expenses and/or liens which that attorney has represented will be satisfied and/or settled from applicable settlement proceeds, or which the law requires to be satisfied from any settlement?

It must first be determined to what extent a plaintiff’s attorney is obligated to withhold settlement proceeds from the client to pay outstanding medical bills or liens.

Rules of Professional Conduct (RPC) 1.15(c), as amended July 8, 2009, provides:

(c) Upon receiving funds or other property in which a client or third person has an interest, a lawyer shall promptly notify the client or third person. 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 person any funds or other property that the client or third person is entitled to receive and, upon request by the client or third person, shall promptly render a full accounting regarding such funds or other property. If a dispute arises between the client and a third person with respect to their respective interests in the funds or property held by the lawyer, the portion in dispute shall be kept separate and safeguarded by the lawyer until the dispute is resolved.

(underlining added)

Comment [10] to RPC 1.15 provides:

Third parties, such as a client’s creditors, may have just claims against funds or other property in a lawyer’s custody. A lawyer may have a duty under applicable law to protect such third-party claims against wrongful interference by the client and accordingly may refuse to surrender the property to the client. However, a lawyer should not unilaterally assume to arbitrate a dispute between the client and the third party. If not inconsistent with the interests of the client, the lawyer may file an interpleader action concerning funds in dispute between the client and a third party.

(underlining added)

Tennessee Formal Ethics Opinion 87-F-109, adopted September 16, 1987, considered this issue prior to the adoption of the Rules of Professional Conduct and provided as follows:

This ethics opinion holds that a lawyer who has notice that a creditor of the client has a lien or assignment to the funds held on behalf of the client is ethically obligated to segregate and retain the disputed funds until the dispute is resolved. Payment of the disputed amount into court for a resolution of the matter is permissible after the parties have had a reasonable opportunity to resolve the dispute.

 If there is no legitimate dispute about who is entitled to all or part of the funds in the attorney’s possession, the attorney must disburse the undisputed portion of the funds to the client or the third person as is appropriate. D.C. Ethics Op. 293 (1999); N.Y. State Op. 717 (1999). However, if the attorney is aware that a third person has a “just claim”, the attorney may not ignore the third person’s interest, but is ethically obligated to disregard his client’s demands for the funds in the attorney’s possession and to hold the funds until the dispute is resolved. Id.

As provided in RPC 1.15, cmt. [10], the third person must have a “just claim” as to which “applicable law” imposes “a duty” on the attorney before RPC 1.15 imposes an obligation on the attorney to distribute the settlement funds to the third party or to safeguard the funds until a dispute is resolved. The phrases “just claims” and “duty under applicable law” have been construed to mean that the only type of third party “interest” which the attorney should preserve for a third person for whom the attorney has not agreed to serve as escrow agent is a matured lien on the disputed funds. Pa. Ethics Op. 2003-4 (2003); D.C. Ethics Op. 293 (1999). The term “interest” has been deemed to extend to a valid assignment by the client and to rights created by order of a court. Absent such an interest, the attorney has no ethical duty to withhold the funds from the client Id. Unless the lawyer knows that the third person has a just claim, the attorney should deliver the funds to the client. Id.           

A review of ethics opinions regarding this issue make it clear that the mere assertion by a third person or entity that they are entitled to funds in the possession of the attorney does not obligate the attorney to comply with Rule 1.15 to remit the funds to the third person or to safeguard the funds until the dispute is resolved.[1] A “just claim” which Rule 1.15 obligates the attorney to honor is one which relates to the particular funds in the lawyer’s possession. Ariz. Ethics Op. 98-06 (1998); D.C. Ethics Op. 293 (1999). Mere debts of the client that come to the attention of the attorney are not “interests” protected by Rule 1.15. A lawyer is not required to pay the general unsecured creditors of the client, including judgment creditors, who have not attached or garnished the funds in the lawyer’s possession. Ariz. Ethics Op. 98-06 (1998); D.C. Ethics Op. 293 (1999); Conn. Informal Op. 95-20 (1995) (mere assertion of claim insufficient to create duty). D.C. Ethics Op. 293 (1999) held that the following were “just claims”:

an attachment or garnishment arising out of a money judgment against the client;
 a statutory lien that applies to the proceeds of the suit being handled by the lawyer;
 a court order relating to the specific funds in the lawyer’s possession;
 a contractual agreement, commonly known as an authorization and assignment, made by the client and joined in or ratified by the lawyer

The determination of whether, and to what extent, the third person’s claim rises to the level of a colorable interest worthy of protection under Rule 1.15 is a matter of substantive law. Pa. Ethics Op. 2003-4 (2003). In performing that analysis, one should consider whether the client signed a third party reimbursement form, participation agreement or other document addressing the right of subrogation; whether the right to subrogation is statutory and/or subject to federal pre-emption; whether the right of subrogation is secured or unsecured; and whether the attorney or client has represented to the third party that it would be paid. Id. 

 It is concluded that RPC 1.15(c) does not obligate an attorney to pay the settlement funds to the third person or to safeguard the funds until the dispute is resolved unless one of the following exist: (1) an attachment or garnishment arising out of a valid judgment relating to disposition of the funds; (2) a valid and perfected statutory, contractual or judgment lien against the property; (3) a letter of protection or similar obligation specifically entered into to aid in obtaining the funds; (4) a written assignment or authorization signed by the client, counsel or other individual with authority conveying interest in the funds to the third person or entity; or (5) a court order relating to the funds in the attorney’s possession. See ftnt. 1 at page 3.

Arizona Ethics Op. 98-06 (1998) analyzed this issue with respect to twelve different factual scenarios. The opinion held that in situations: (1) in which the attorney had notice of the medical provider’s lien signed by the client, but not recorded, (2) in which the medical provider’s lien was signed by the client and by the attorney, (3) in which the attorney orally agreed to reimburse the medical provider from settlement proceeds, (4) in which the attorney or client had signed a letter of protection in favor of the medical provider, (5) in which the client had signed an assignment in favor of the medical provider, or (6) in which both the client and the attorney signed an assignment in favor of the medical provider, the attorney was required to comply with Rule 1.15 to protect the interest of the medical provider. In situation (7) in which a statutory lien was facially incomplete or untimely, but had been properly recorded, the attorney was required by Rule 1.15 to protect the provider’s interest by holding the funds in dispute, but could contest the lien by interpleader or other proper means. In situations: (8) in which the attorney was aware of medical services provided by the medical provider because medical bills had been provided to the attorney by the client, but for which the provider had made no demand upon the attorney, (9) in which the medical provider had simply sent copies of the client’s medical bills to the attorney, (10) in which the provider simply sent a letter to the attorney demanding payment for medical bills, (11) in which the attorney simply knew that the medical provider had treated the plaintiff, but the medical provider had no lien nor assignment and had taken no other demand action with regard to the bills, or (12) in which the medical provider’s lien was not signed by the client nor attorney and was not recorded, the attorney was not required to notify nor disburse funds to the medical provider in compliance with Rule 1.15. The determinations made in the Arizona Opinion are consistent with and adopted in this opinion.

An attorney should not disburse the funds in his possession to a third person if the client contests the issue.2 If the attorney has a “good faith doubt” as to who is entitled to receive the disputed funds, the attorney must investigate, notify the third person, hold only the disputed funds and resolve the dispute by negotiation, arbitration or interpleader if necessary.3

If there is a legitimate dispute as to ownership of the funds, an attorney “should not unilaterally assume to arbitrate a dispute between the client and a third party.” RPC 1.15, cmt. [10]. The comment provides that filing an interpleader action is one alternative to resolve the dispute. The Rules of Professional Conduct do not otherwise prescribe the method of resolving the dispute nor impose a duty upon the attorney holding such funds to initiate an action in any particular forum or within a particular time frame. Such issues are controlled by the substantive law governing fiduciaries.  Pa. Ethics Op. 2003-4 (2003).            If the attorney ignores a duty owed to a third person and pays the disputed amount directly to the client, the lawyer may be held liable to the third person. Such liability is a matter of substantive law beyond the scope of this opinion. Aetna Cas. & Sur. Co. V. Gilreath, 625 S.W.2d 269, 274 (Tenn. 1981), citing Motors Ins. Corp. v. Blakemore, 584 S.W.2d 204, 207 (Tenn. App. 1978), held:

… a lawyer will be held civilly liable to a non-client where he knowingly participates in the extinguishment of a subrogation interest of a non-client third party and delivers to his client funds that he knows belong to the third party and knows or should know, that he has thereby placed the funds beyond the reach of the third party …

See also, Hankins v. Seaton, 1998 Tenn. App. LEXIS 419 (Tenn. Ct. App. June 25, 1998) (attorney liable for failure to honor a signed subrogation agreement); Greenwood Mills, Inc., v. Burris, et. al., 130 F.Supp.2d 949 (D.C. Tenn. 2001) (attorney liable for failure to pay ERISA subrogation interest).

Tennessee Formal Ethics Opinion (TFEO) 97-F-141, issued February 4, 1998, addressed clauses proposed by defense attorneys for inclusion in releases to settle personal injury cases. The opinion held, in part:

The attorney’s signature on a release should vouch only for the fact that the client releases the defendant. A requirement that a plaintiff’s attorney become a party to a release might create conflict of interest between plaintiff’s attorney and the plaintiff in violation of DR 5-101(A). Therefore, these clauses are prohibited except in cases where the plaintiff’s attorney releases a claim for attorney fees.

RPC 1.7(b), Conflict of Interest: General Rule, provides in part:

(b)  A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer’s responsibilities to another client or to a third person, or by the lawyer’s own interests, unless:

  (1)  the lawyer reasonably believes the representation will not be adversely affected; and

  (2)  the client consents in writing after consultation.

                             * * *

Comment [8] to RPC 1.7 provides in part:

 The lawyer’s own interests should not be permitted to have an adverse effect on the representation of a client . . . If the probity of a lawyer’s own conduct in a transaction is in serious question, it may be difficult or impossible for the lawyer to give a client detached advice. A lawyer may not allow related business interests to affect representation, for example, by referring clients to an enterprise in which the lawyer has an undisclosed interest.

Arizona Opinion 03-05 (2003) considered the same question posed in the second paragraph of the inquiry herein.  The Arizona opinion held, in part:

The mere request that an attorney agree to indemnify Releasees against lien claims creates a potential conflict of interest between the claimant and the claimant's attorney.  The attorney's refusal, for ethical reasons, to accede to such a demand as a condition of settlement could prevent the client from effectuating a settlement that the client otherwise desires.

The insistence upon an attorney's agreement to indemnify as a condition of settlement could, for example, cause the lawyer to recommend that the client reject an offer that would be in the client's best interest because it would potentially expose the lawyer to the payment of hundreds of thousands of dollars in lien expenses, or litigation over such lien expenses.

The attorney's acceptance of such a condition would also create a conflict of interest with an existing client under ER 1.7 because the client's failure or refusal to repay a lien could make the client's lawyer its guarantor.

That might materially limit the representation by virtue of the lawyer's own interest in having the client (rather than the lawyer) pay the liens in full.  Even if the lawyer were willing to accept that potential financial burden, and even if the lawyer were ethically permitted to provide such financial assistance, such an agreement might compromise the lawyer's exercise of independent professional judgment and rendering of candid advice in violation of ER 2.1.

While ER 1.2 requires an attorney to abide by a client's decision whether to accept an offer of settlement, a settlement agreement that requires the attorney to indemnify, or hold the Releasees harmless, violates ER 1.8.

Since, under ER 1.8, an attorney cannot ethically provide financial assistance to a client by paying, or advancing, the client's medical expenses before or during litigation, an attorney cannot ethically agree, voluntarily or at the client's or Releasees' insistence, to guarantee, or accept ultimate liability for, the payment of those expenses.

 The ethics rules relied upon in the Arizona Opinion are consistent with Tennessee Rules of Professional Conduct 1.7(b), 2.1, 1.2, and 1.8(e) and that opinion’s conclusions are adopted herein.4 It is apparent that requiring a plaintiff’s attorney to enter into agreements posed in the inquiry, particularly requiring that the attorney indemnify and/or hold harmless any party being released or subrogation interest holder from medical expenses or liens, creates a conflict between the interests of the plaintiff’s attorney and those of  their client. Consistent with TFEO 97-F-141, such agreements and/or clauses are prohibited. As discussed herein, the actions which are the subject of the first paragraph of the inquiry are obligations imposed upon the plaintiff’s attorney by RPC 1.15(c). The attorney is obligated to safeguard the funds in his possession until any dispute between the client and the third person regarding the funds is resolved. It is apparent that whether the funds in the attorney’s possession rightfully belong to the client or to the third person or entity may well not be determined at the time that the release resolving the lawsuit is executed. The attorney cannot be required to breach the ethical obligations imposed upon the attorney by RPC 1.15(c) by signing an agreement regarding disposition of the funds prior to the resolution of the dispute. If the  attorney makes misrepresentations in settlement negotiations regarding payment of medical bills or liens, as posed in the inquiries, the attorney’s conduct will be subject to Rules of Professional Conduct, including 4.1(a) and 8.4(c), and/or to liability pursuant substantive law beyond the scope of this opinion.

This 12th day of March, 2010.

 Thomas S. Scott, Jr.       

 Virginia Anne Sharber

William C. Bovender

 

APPROVED AND ADOPTED BY THE BOARD

 

[1] Conn. Informal Ethics Op. 01-08 (2001), a lawyer has a duty to deliver the client’s property to the client upon the client’s demand, despite a third party’s claim to the property, unless the lawyers knows of: (1) a valid judgment relating to disposition of the property; (2) a valid and perfected statutory contractual or judgment lien against the property; (3) a letter of protection or similar obligation specifically entered into to aid the lawyer in obtaining the property; or (4) a written assignment, signed by the client, counsel or other individual with such authority conveying interest in the property to another person or entity. Md. Ethics Op. 97-20 (1997) (lawyer may disburse entire settlement to client where hospital failed to timely submit bills to insurer and thus had no legally valid claim); Ariz. Ethics Op. 88-6 (1988) (third-party claim that is not perfected lien or assignment does not affect client’s right); Colo. Ethics Op. 94 (1993) (lawyer must distribute promptly to client if third person’s claim does not arise out of statutory lien, contract, or court order); Conn. Informal Ethics Op. 95-20 (1995) (lawyer has no duty to act on mere assertions of third-party interests or to investigate whether third persons have interests in the client property); Phila. Ethics Op. 86-134 (1986) (lawyer must disburse to client without retaining anything for physicians who are owed payment, provided that there is no agreement between doctors and client regarding proceeds from settlement); Md. Ethics Op. 94-19 (1993) (lawyer must disregard client instruction not to pay creditor where client had a valid agreement with creditor); Ohio Supreme Court Ethics Op. 95-12 (1995) (lawyer must disregard client’s instruction not to pay physician when client entered earlier agreement to pay medical expenses from such proceeds); S.C. Ethics Op. 94-20 (1994) (if lawyer knows client has executed valid doctor’s lien he may not comply with client’s instruction to disregard it); Ariz. Ethics Op. 98-06 (1998) (“actual knowledge” of assignment, medical lien, statutory lien, and letter of protection can trigger lawyer’s duty to protect nonclient’s interests); Alaska Ethics Op. 92-3 (1992) (lawyer may not follow client’s instruction to disregard facially valid assignment or statutory lien in favor of client’s creditor; lawyer should advise client that he will withhold disputed funds until dispute is resolved); Cal. Formal Ethics Op. 1988-101 (lawyer whose client agreed to pay recovery proceeds to health care provider may not disburse all money to client upon client’s request); Md. Ethics Op. 96-16 (1996) (lawyer whose client instructs him not to pay creditor-despite client’s subrogation agreement with creditor-must hold funds until dispute is resolved); Mich. Informal Ethics Op. RI-61 (1990) (lawyer may not disburse to client if aware of outstanding lien; instead must initiate court proceedings to resolve which portion of funds belong to lien holder and client); R.I. Ethics Op. 95-60 (1996) (lawyer cannot obey client’s instruction to refuse reimbursement to health insurer where insurer has legally enforceable interest in the funds); R.I. Ethics Op. 95-31 (1995) (lawyer, whose client agreed in writing to pay wife one-half of personal injury proceeds, cannot ignore contract and must keep disputed portion of award separate until resolution); S.C. Ethics Op. 93-14 (1993) (attorney who agreed to honor all written statements signed by client regarding lien for medical care provider may not ignore client’s instruction to do otherwise); Iowa Ethics Op. 89-32 (1989) (lawyer may sign agreement to withhold amount client owes his doctor from settlement and submit the money directly to the doctor); Wash. Ethics Op. 185 (if lawyer guaranteed payment to creditor, he must-after advising client of effect of such guarantee-pay creditor unless there is good faith dispute as to amount of debt); N.C. Ethics Op. 2001-11 (2002) (lawyer authorized by client to pay medical provider upon settlement may, when client changes mind, hold disputed funds in trust until impasse resolved by agreement or court order; even though no lien, lawyer should honor representation made to third party); Pa. Ethics Op. 2004-118 (2004) (lawyer who settled client’s suit and escrowed money to satisfy workers’ compensation lien must continue to hold funds notwithstanding client’s demand to give client the money); S.C. Ethics Op. 05-08 (2005) (even in absence of letter of protection, lawyer who knows that insurer has subrogation claim against settlement proceeds may not pay all proceeds to client but must retain sufficient funds to pay subrogation claim); Mo. Ethics Op. 970215 (1997) (lawyer who advised client to agree with creditor to pay outstanding debt out of proceeds of settlement of unrelated matter may not thereafter disburse settlement funds to client without consent of creditor, even if client asks lawyer not to pay creditor; lawyer may hold funds in lawyer’s trust account for reasonable period of time to allow for resolution and should thereafter file interpleader action if necessary).

2 Conn. Informal Ethics Op. 95-20 (1995) (lawyer cannot pay money to third person over client’s objection); Pa. Ethics Op. 92-89 (1992) (lawyer, whose client was ordered to pay arrearage in child support, cannot release escrow proceeds from real estate sale without client consent); R.I. Ethics Op. 2007-02 (2007) (where the client insists that the settlement proceeds be disbursed to the client, and where the inquiring attorney has received no notice of a claim from the health insurer, the inquiring attorney must disburse the settlement funds to the client).

3 Ariz.Ethics Op. 88-6 (1988) (lawyer may disburse money if he has concluded that one party is entitled to it under applicable law; but if good faith doubt, he should deposit into trust account pending resolution of matter and initiate an interpleader action or other proceeding to resolve the dispute); Ariz. Ethics Op. 98-06 (1998) (“actual knowledge” of assignment, medical lien, statutory lien, and letter of protection can trigger lawyer’s duty to protect nonclient’s interests; but good faith doubt requires lawyer to place disputed portion of funds in trust pending resolution of conflicting claims); Ohio Supreme Court Ethics Op. 95-12 (1995) (lawyer should hold disputed portion of funds until resolution by arbitration or court action); Utah Ethics Op. 00-04 (2000) (if client in good faith disputes creditor’s interest and instructs lawyer not to disburse property, counsel must protect property until dispute is resolved); Wash. Ethics Op. 185 (if lawyer guaranteed payment to creditor, he must-after advising client of effect of such guarantee-pay creditor unless there is good faith dispute as to amount of debt).

4 See also: Mo. Formal Op. 125 (2008) (it is a violation for an attorney to propose a settlement that includes a provision that would involve a violation of any of the Rules of Professional Conduct by another attorney); Ill. Adv. Op. 06-10 (2006); Kan. Op. 01-5 (2001).