BAR ASSOCIATION OF NASSAU COUNTY
COMMITTEE ON PROFESSIONAL ETHICS
Opinion No. 1996-13
(Inquiry No. )
Extent of attorney’s obligation to honor liens asserted by health rare providers over proceeds of personal injury actions.
When a lawyer receives proceeds from a personal injury action, DR 9-102(C)(1) requires the attorney to “notify” every third party who has asserted a lien over the proceeds. In response to the notice, the third parties will presumably advise the attorney of the amounts to which they believe they are entitled for their services. If the client does not dispute the amount of a particular third party’s claim, then DR 9-102(C)(4) requires the attorney to “promptly pay” the undisputed amount to the third party. If the client does dispute the amount of the claim, then the attorney may either continue to bold the funds in escrow until the dispute is resolved or may institute an action to determine the amount to which the client and the third party claimants are entitled.
The inquiring attorney handles personal injury cases. Occasionally, he receives letters from health care providers asserting liens upon the anticipated recovery in a personal injury action. The liens purport to secure payment for both past and future medical services to the inquiring attorney’s clients. Because the liens cover future medical expenses, the amount of the required payment cannot be ascertained until the case is concluded.
The inquiring attorney would prefer not to serve as a “collection agent” for health care providers. For one thing, he does not want to be “saddled with the extra burden of ascertaining the precise amount due to a particular health care provider at the time a case is settled.” For another thing, he does not want to find himself “in the middle of any possible dispute between a client and a health care provider.”
The inquiring attorney’s normal practice is “to attempt to ascertain the existence of any outstanding and unpaid medical bills, and to arrange for the satisfaction of same,” with the client’s consent, upon the conclusion of a matter. However, the inquiring attorney does not want to be personally liable if he inadvertently fails to arrange for payment of an asserted lien. He would therefore prefer to avoid any involvement in these lien situations.
What are an attorney’s professional rights and obligations when a health care provider asserts a lien, covering past and future medical expenses, over the anticipated eventual recovery in a personal injury suit?
An attorney holding proceeds of a personal injury recovery is a fiduciary and must honor undisputed claims by third parties who have an interest in the proceeds.
This situation is covered by DR 9-102(A) and DR 9-102(C)(1) & (4), which provide as follows (with emphasis added):
DR 9-102 Preserving Identify of Funds and Property of Others; Fiduciary Responsibility; Maintenance of Bank Accounts; Record keeping; Examination of Records.
(A) Prohibition Against Commingling.
A lawyer in possession of any funds or other property belonging to another person, where such possession is incident to his or her practice of law, is a fiduciary, and must not commingle such property with his or her own.
(C) Notification of Receipt of Property; Safekeeping; Rendering Accounts; Payment or Delivery of Property.
A lawyer shall:
(1) Promptly notify a client or third person of the receipt of funds, securities, or other properties in which the client or third person has an interest.
(4) Promptly pay or deliver to the client or third person as requested by the client or third person the funds, securities, or other properties in the possession of the lawyer which the client or third person is entitled to receive.
Thus, DR 9-102(A) designates a lawyer as a “fiduciary,” and DR 9-102(C)(1) & (4) expressly require a lawyer to notify a third person that the lawyer has received funds in which the third “has an interest” and to promptly pay to the third person the funds that the third person is “entitled to receive.”
Whether a third person “has an interest” in particular escrow funds or is “entitled to receive” those funds are questions of law that this Committee cannot answer. However, under DR 9-102(C)(2) and (4), a lawyer must make a reasonable effort to ascertain whether a third party has an interest in or is entitled to receive funds that come into the lawyer’s possession. These obligations may be onerous, but a lawyer cannot escape them. Indeed, the New York Court of Appeals recently cautioned that a lawyer who fails to abide by DR 9-102(C) may incur personal liability to third parties. In Leon v. Martinez, 84 fq.Y.2d 83; 638 N.E.2d 511 (N.Y. 1994), Martinez had assigned part of his prospective recovery in a personal injury action to a man named Leon, who had cared for Martinez after an accident rendered Martinez a quadriplegic. The law firm handling the personal injury action knew about the assignment to Leon because it had drafted the papers effecting the assignment. When the law firm received the settlement check, however, it sent the proceeds directly to Martinez, without notifying Leon. Martinez refused to pay Leon. Leon then sued the law firm, alleging that it had a duty to honor the assignment. The law firm argued that complying with the assignment would have breached its duties under DR 9-102. The Court of Appeals rejected this argument, stating:
[D]efendants’ argument falls for two reasons. First, the cited rule mandates only that an attorney pay to the client those funds in the possession of the attorney “which the client … is entitled to receive” … which is not the case to the extent that the client has conveyed a right to those funds by an enforceable assignment. Second, DR 9-102 explicitly creates ethical duties running to third parties as to funds in the possession of the attorney to which those third parties are entitled.
The Court of Appeals further said that if there was an enforceable assignment by Martinez, then the lawyer for Martinez “was then ethically obligated not only to notify the plaintiffs upon his receipt of the funds but also to pay the funds to the plaintiffs as the persons entitled to receive them”
The Leon decision is supported by a 1996 California appellate decision that appears to be directly on point here. In Kaiser Foundation Health Plan Inc. v. Aguiluz, No. A070477 (Calif. App., 1st Dist., July 10, 1996), a personal injury lawyer disbursed the entire amount of a settlement to his client even though the attorney knew that the client had agreed to repay his health care provider out of anticipated settlement proceeds. The court therefore held that the attorney was personally liable to the health care provider, and upheld a $23,000 judgment that the health care provider had obtained against the attorney in the trial below. The court made clear that the health care provider’s case against the attorney would have been even stronger if the provider had served the attorney with a formal lien.
Under the interpretation of DR 9-102 found in Leon, a lawyer who knows of a valid lien by a health care provider must notify the health care provider when the lawyer receives the settlement proceeds and must pay the health care provider the amount that the health care provider is entitled to receive under the lien.
This interpretation of DR 9-102 is consistent with several recent opinions by the Committee regarding DR 9-102.
In Nassau Ethics Op. 94-2 (1994), this Committee opined that when a client asks her attorney to distribute funds received in settlement litigation, DR 9-102(C) requires the attorney to do so unless the attorney has been given notice of a lien on the proceeds.
In Nassau Ethics Op. 94-19 (1994), this Committee opined that when a dispute arises as to the amount a hospital is entitled to receive out of the proceeds from an arbitration award that have been deposited into an attorney’s escrow account, the attorney must promptly pay any undisputed amount to the hospital. If the attorney cannot determine to whom the escrow funds belong, “he may refrain from disbursing the escrow funds in the absence of an enforceable agreement or court order.” The attorney has no duty to institute an interpleader action to determine the precise amount to which the hospital is entitled, but the attorney is not free to ignore the hospital’s interest in the funds just because the exact amount due to the hospital is not known.
In Nassau Ethics Op. 95-6 (1995), this Committee opined that under DR 9-102(C)(4) an attorney must pay a third party any undisputed portion of escrow funds can demand. If the attorney cannot determine the amount to which the third person is entitled, then the attorney may either continue to hold the funds in escrow or take action to determine the rights of the third party claimants to the funds.
The essence of these opinions is that an attorney holding settlement proceeds in escrow may not disburse any disputed proceeds until the dispute is resolved one way or another. It is beyond the jurisdiction of this Committee to determine whether a given lien is valid, because the validity of a lien is a question of law. It is also beyond the jurisdiction of this Committee to determine whether a lawyer would incur personal liability for disbursing settlement proceeds directly to a client despite the attorney’s knowledge of a third party’s purported lien on the proceeds. However, an attorney who is tempted to ignore a third party’s lien should carefully study the Leon and Kaiser opinions summarized above. Even if the client denies that the third party is entitled to any payment and insists on receiving all of the proceeds, the attorney must reject the client’s instruction as long as the third party asserts a claim and the dispute remains unresolved.
Applying DR 9-102(C) to the present inquiry, it is clear that the inquiring attorney cannot avoid serving as a kind of “collection agent” for health care providers who assert liens against the anticipated future settlement proceeds in a personal injury action. Upon receipt of the settlement proceeds, DR 9-102(C)(1) requires the inquiring attorney to “notify” every third party who has asserted a lien over the proceeds. The health care providers will then advise the inquiring attorney of the amounts to which they claim they are entitled for their services. If the client does not dispute the amount of a particular provider’s claim, then DR 9-102(C)(4) requires that the attorney must “promptly pay” the undisputed amount to the provider. If the client does dispute the amount of the claim, then the inquiring attorney may either continue to hold the funds in escrow until the dispute is resolved or may institute an action to determine the amount to which the client and the third party claimants are entitled. However, the inquiring attorney may not disburse disputed proceeds to the client (or to the health care provider) until the dispute is resolved.
(Approved by the Executive Subcommittee on 10/15/96; approved by the Full Committee on 10/30/96)