If a personal injury client tells the lawyer to pay her all the settlement money but a medical provider has a letter of protection or an assignment, must the lawyer pay the client?

Plain-English summary

The opinion starts from the general rule that settlement funds belong to the client, who decides how they are disbursed, unless a valid lien or assignment attaches to the funds. The committee restates this from RPC 69, RPC 75, and RPC 125 and from Rule 1.15-2(m), which requires the lawyer to disburse in accordance with the client's instructions. If a medical provider has perfected a valid physician's lien or holds a valid assignment, the lawyer is relieved of the duty to pay the funds to the client and may pay the provider on a liquidated claim or hold disputed amounts in trust.

The new question the committee addresses is what the lawyer does when there is no valid lien or assignment but the lawyer, with the client's knowledge and authorization, signed a "letter of protection" promising the provider that its bill would be paid from any settlement. The opinion concludes that such a representation should be honored, pointing to Rule 4.1, which bars a lawyer from knowingly making a false statement of material fact to a third party.

The committee resolves the tension by directing the lawyer not to act as the judge of the competing claims. If a dispute arises between the client and the provider after the letter of protection is given, the lawyer may not unilaterally decide whose money it is. Instead the lawyer holds the contested portion in the trust account until the parties agree, a court orders disbursement, or the lawyer interpleads the funds under G.S. section 1A-1, Rule 22. The opinion states that to the extent it is inconsistent with prior opinions, those prior opinions are overruled.

In practice

The opinion holds that, under the North Carolina rule as it stood at the time, a client's instruction to pay over all settlement proceeds controls only where no valid lien, valid assignment, or authorized payment representation stands against the funds. Where the lawyer signed a letter of protection with the client's authorization, the opinion treats the disputed portion as funds the lawyer may neither pay to the client over the provider's claim nor pay to the provider over the client's objection; the lawyer holds them in trust pending resolution.

The committee also directs that, to keep providers from being misled, any letter of protection or assurance of payment given to a provider explain that the lawyer will hold disputed funds in trust if the client later instructs the lawyer not to pay the provider.

Common questions

Q: Does a personal injury client get to decide how settlement money is disbursed?

A: As a starting point, yes. The opinion restates from RPC 69, RPC 75, RPC 125, and Rule 1.15-2(m) that settlement funds belong to the client, who directs their disbursement unless a valid lien or assignment attaches.

Q: If a medical provider has a written assignment, must the lawyer pay it over the client's objection?

A: Only if the assignment creates a valid lien against the proceeds. The opinion directs the lawyer to determine whether the assignment is valid and creates a lien; if so, the lawyer may hold the funds in trust or pay a liquidated claim over the client's objection.

Q: What if the lawyer signed a letter of protection but there is no valid lien?

A: The opinion concludes the representation should be honored and that the lawyer may not unilaterally decide the dispute. The lawyer holds the disputed portion in trust until the client and provider resolve the impasse by agreement, court order, or interpleader under G.S. section 1A-1, Rule 22.

Q: Can the lawyer just pay the client to avoid a fight?

A: Not where an authorized letter of protection was given and the provider's claim is disputed. The opinion treats paying the funds out to the client in that situation as inconsistent with the representation made under Rule 4.1, and directs the lawyer to hold the contested amount in trust instead.

Background and rules framework

The opinion interprets North Carolina Rule 1.15-2 (safekeeping and disbursement of entrusted property), the analogue to Model Rule 1.15, together with Rule 4.1 (truthfulness in statements to others), the analogue to Model Rule 4.1. It also relies on prior North Carolina ethics opinions RPC 69, RPC 75, and RPC 125 and on Revised 2000 FEO 4 for the proposition that the lawyer may disregard a client's disbursement instruction only where a valid lien or assignment exists. The interpleader procedure it references is G.S. section 1A-1, Rule 22.

Citations and references

Rules of Professional Conduct:

• MR 1.15 (safekeeping property) / NC Rule 1.15-2(m) (disbursement in accordance with client instructions)
• MR 4.1 (truthfulness in statements to others) / NC Rule 4.1

Statutes:

• N.C. Gen. Stat. section 1A-1, Rule 22 (interpleader)

Other opinions cited:

• NC RPC 69, RPC 75, RPC 125: settlement funds belong to the client absent a valid lien
• NC Revised 2000 FEO 4: when a lawyer may disregard a client's disbursement instruction

See also

• AL Ethics Op. 2003-02: Honoring Protection Letters
• AL Ethics Op. 1990-48: Interpleading Disputed Funds
• NY State Bar Op. 717: Paying Medical Liens From Settlement
• NY State Bar Op. 567: Retaining Lien and Fee Suits

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/2001-formal-ethics-opinion-11/

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

Inquiry:

Attorney settled Client's personal injury claim. Client is now demanding Attorney disburse all proceeds to her, even though there are outstanding medical bills to be paid. For two medical providers, Client signed written assignments of proceeds in the amount of the providers' bills. For one of these providers, Attorney also signed a "letter of protection," with Client's knowledge and authorization, in which Attorney represented that the provider's bill would be paid from the proceeds of any settlement or liquidated judgment. If Client insists that all of the settlement proceeds be paid to her, what should Attorney do?

Opinion:

Rule 1.15-2(m) generally requires a lawyer to disburse settlement proceeds in accordance with the client's instructions.

The only exception to this rule arises when the medical provider has managed to perfect a valid physician's lien. In such a situation the lawyer is relieved of any obligation to pay the subject funds to his or her client, and may pay the physician directly if the claim is liquidated, or retain in his or her trust account any amounts in dispute pending resolution of the controversy.

RPC 69. A number of ethics opinions hold that settlement funds belong to the client who has the right to determine how to disburse the funds unless there is a valid lien against the funds. See RPC 69, RPC 75, and RPC 125. Thus, if Client instructs Attorney to pay the proceeds to Client rather than the medical providers, Attorney may ignore this instruction if there is a valid lien against the proceeds or other valid legal assignment of the rights in the proceeds. See Revised 2000 FEO 4. Attorney must determine whether the assignments given by Client to the medical providers are valid and whether they create liens against the proceeds. If Attorney determines that liens are created, he may hold the funds in his trust account or pay the providers, over the client's objections, if the providers' claims are liquidated. If the assignments do not create valid liens against the proceeds and no representation of payment was made to the medical provider, then Attorney must give the settlement proceeds to Client.

The ethics opinions have not previously addressed a lawyer's professional responsibility when, in the absence of a valid medical lien or assignment, a client instructs a lawyer to disregard a "letter of protection" or some other specific representation to a medical provider that it will be compensated, in whole or in part, from settlement proceeds or a liquidated judgment. This opinion clarifies when a lawyer may withhold settlement funds from a client in this situation. To the extent that this opinion is inconsistent with previous opinions of the Ethics Committee, the prior opinions are overruled.

When a lawyer makes a representation to a third party with the knowledge and authorization of a client, the representation should be honored. See Rule 4.1 which prohibits a lawyer, in the course of representing a client, from knowingly making a false statement of material fact or law to a third party. However, between the time that a medical provider is told that it will be paid and the time that settlement or judgment proceeds are received, a dispute may arise between the client and the medical provider over the medical bill, or the client may decide to defer payment of the medical provider and instruct the lawyer not to pay the medical provider. In the absence of a liquidated medical lien against the funds, the lawyer may not unilaterally decide whether the funds rightfully belong to the medical provider or to the client. Therefore, the lawyer may hold the portion of proceeds allegedly owed to the medical provider in her trust account until the impasse between the client and the provider is resolved by agreement of the parties, by court order, or by interpleading the funds to the court. See G.S. section 1A-1, Rule 22. To insure that medical providers are not mislead, any "letter of protection" or other assurance of payment given to a medical provider must explain that the lawyer will hold disputed settlement funds in the trust account in the event the client subsequently instructs the lawyer not to pay the medical provider.