If a client tells a North Carolina lawyer not to pay a medical provider out of settlement funds, may the lawyer disburse those funds to the client instead when the provider has a perfected statutory lien?

Plain-English summary

A lawyer settled a client's personal-injury case and deposited the proceeds in trust. The client's medical providers had each perfected liens on the recovery under N.C. Gen. Stat. § 44-49. The proceeds did not cover all the medical bills, so the lawyer proposed a pro rata disbursement consistent with the statutory cap in N.C. Gen. Stat. § 44-50 (the lien may not, exclusive of attorney's fees, exceed 50% of the damages recovered). The client refused, directing the lawyer not to pay one provider (Provider A) and to give that provider's share to the client instead.

The committee concludes the lawyer may not do so if Provider A's lien is perfected. Although a lawyer generally must follow a client's directions on disbursing settlement proceeds (Rule 1.15-2(n) requires prompt payment of entrusted property "to which the client is currently entitled"), the perfected lien raises the question whether the client is currently entitled to the disputed share. The opinion relies on comment [15] to Rule 1.15, which recognizes that a third party may have a lawful claim against specific funds in a lawyer's custody and that the lawyer may have a duty under applicable law to protect such claims against wrongful interference by the client; where a third-party claim "is not frivolous under applicable law, the lawyer must refuse to surrender the property to the client until the claim is resolved."

The opinion then traces the lien statutes. Section 44-49 creates the lien and sets the perfection requirements; section 44-50 directs the lawyer to retain enough of the recovery to pay just and bona fide claims and makes a client's contrary disbursement instructions non-binding to the extent they conflict with the lien statutes; and section 44-51 provides that when the client disputes the amount of the claim, payment is not compelled until the claim is fully established as provided by law. The committee directs the lawyer to determine whether Provider A's lien is perfected and, if so, to segregate and retain the disputed funds, inform the client that absent a prompt satisfactory resolution the lawyer will eventually have to deposit the funds with the court, and pay Provider A over the client's objection if a final judgment establishes the claim. The opinion overrules RPC 69 and RPC 125 to the extent they conflict.

In practice

Under the North Carolina rules as they stood at the time of the opinion, the committee holds that when a statute requires a lawyer not to disburse settlement funds to a client, the lawyer must comply with the statute regardless of the client's contrary instructions. The opinion frames the analysis around whether the client is "currently entitled" to the funds under Rule 1.15-2(n): a perfected statutory lien under N.C. Gen. Stat. § 44-49 means the client is not currently entitled to the disputed share, so the lawyer may not pay it to the client.

The opinion directs the lawyer first to determine whether the lien is perfected. If it is, the lawyer must segregate and retain the disputed funds in trust and inform the client that, absent a prompt resolution satisfactory to both sides, the lawyer will eventually be obligated to deposit the funds with the court for disposition. Per the opinion, while the client disputes the claim, N.C. Gen. Stat. § 44-51 does not compel payment until the claim is fully established; but if a final judgment is entered so that the claim is no longer in dispute, N.C. Gen. Stat. § 44-50 requires the lawyer to pay the provider over the client's objection.

Common questions

Q: Can a North Carolina lawyer follow a client's instruction not to pay a medical provider out of settlement funds?

A: No, if the provider's lien is perfected. The opinion holds that a perfected statutory lien under N.C. Gen. Stat. § 44-49 means the client is not currently entitled to the disputed funds, so the lawyer may not disburse them to the client under Rule 1.15-2(n).

Q: What must the lawyer do with the disputed funds?

A: The lawyer must determine whether the lien is perfected and, if so, segregate and retain the funds in the trust account, and tell the client that absent a prompt satisfactory resolution the lawyer will eventually have to deposit the funds with the court.

Q: Does the lawyer ever have to pay the provider over the client's objection?

A: Yes. The opinion states that if a final judgment is entered on the provider's claim so that it is no longer in dispute, N.C. Gen. Stat. § 44-50 requires the lawyer to pay the provider over the client's objection.

Q: What if the client disputes the amount of the claim?

A: Per N.C. Gen. Stat. § 44-51, when the client disputes the amount, payment is not compelled until the claim is fully established and determined in the manner provided by law; in the interim the lawyer holds the disputed funds.

Background and rules framework

The opinion interprets North Carolina's safekeeping-property rule and the state's medical-lien statutes. Rule 1.15 (Model Rule 1.15) governs entrusted property; Rule 1.15-2(n) requires a lawyer to promptly pay or deliver entrusted property to the client, or to third persons as the client directs, to which the client is "currently entitled." Comment [15] to Rule 1.15 recognizes that a third party may have a lawful claim (such as a medical provider's lien) against specific funds in the lawyer's custody and that when the claim is not frivolous the lawyer must refuse to surrender the property to the client until the claim is resolved.

The lien statutes supply the "applicable law": N.C. Gen. Stat. § 44-49 (creation and perfection of the lien on personal-injury recoveries), § 44-50 (the lawyer's duty to retain funds for just and bona fide claims, the 50% cap, and the non-binding effect of contrary client instructions), and § 44-51 (no compelled payment while the client disputes the amount of the claim). The opinion overrules RPC 69 and RPC 125 to the extent they conflict with this opinion.

Citations and references

Rules of Professional Conduct:

• Model Rule 1.15 / NC Rule 1.15-2(n) and cmt. [15] (entrusted property to which the client is currently entitled; protecting non-frivolous third-party claims)

Statutes:

• N.C. Gen. Stat. § 44-49 (lien on personal-injury recovery; perfection requirements)
• N.C. Gen. Stat. § 44-50 (duty to retain funds for just claims; 50% cap; client instructions not binding)
• N.C. Gen. Stat. § 44-51 (no compelled payment while the client disputes the claim)

Other opinions cited:

• RPC 69 and RPC 125: overruled to the extent they conflict with this opinion.

See also

• SC Bar Op. 95-29: Disputed Medical Lien on Settlement Proceeds
• TX Ethics Op. 681: Third-Party Interest in Client Funds in Trust
• Alaska Op. 92-3: Honoring a Third Party's Claim to Client Funds

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/2017-formal-ethics-opinion-4/

Original opinion text

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

Inquiry:

Client was injured in a vehicular collision. Client was not at fault for the collision. Client incurred various medical expenses as a result of the collision. Lawyer represents Client in her personal injury case against the driver who caused the collision. All medical providers perfected liens on Client’s anticipated recovery pursuant to the requirements for perfection of a medical lien on a personal injury settlement set forth in N.C. Gen. Stat. § 44-49. With Client’s consent, Lawyer settled the matter. Lawyer received and deposited Client’s settlement proceeds in his trust account. The settlement proceeds do not cover the entirety of Client’s medical expenses, so Lawyer prepared a proposed pro rata disbursement plan, consistent with N.C. Gen. Stat. §44-50 (lien “shall in no case, exclusive of attorney’s fees, exceed 50% of the amount of damages recovered”), and submits the proposal to Client for approval.

Client disapproves of the proposed disbursement, explaining that she does not want one particular medical provider (Provider A) to receive any funds from the settlement. Lawyer advises Client of Provider A’s perfected lien, but Client instructs Lawyer not to pay Provider A.

May Lawyer disburse Client’s settlement proceeds in accordance with Client’s instructions not to pay Provider A such that the funds designated for Provider A are disbursed to Client instead?

Opinion:

No, if the lien is perfected. Generally, a lawyer must follow a client’s directives as to the disbursement of settlement proceeds. Rule 1.15-2(n) provides that a lawyer “shall promptly pay or deliver to the client, or to third persons as directed by the client, any entrusted property belonging to the client and to which the client is currently entitled.” However, Provider A has perfected a lien against the settlement proceeds pursuant to N.C Gen. Stat. § 44-49. The perfected lien creates a question as to whether Client is “currently entitled” to the share of the settlement proceeds designated for Provider A.

Comment [15] to Rule 1.15 recognizes that a third party may have a lawful claim (such as a medical provider lien) against specific funds in a lawyer’s custody, and a lawyer “may have a duty under applicable law to protect such third-party claims against wrongful interference by the client.”

The applicable law provides that a lien exists upon any sums recovered as damages for personal injury in any civil action. N.C. Gen. Stat. § 44-49(a). The lien is in favor of any provider to whom the injured person may be indebted for any medical attention rendered in connection with the injury. Id. The lien attaches to all funds paid to a lawyer in compensation for or settlement of the personal injury claim. To perfect the lien, the medical provider must furnish an itemized statement, hospital record or medical report, without charge, for the lawyer to use in the resolution of the personal injury claim and give written notice to the lawyer of the lien claim. N.C. Gen. Stat. § 44-49(b).

Before disbursing settlement proceeds subject to a perfected lien, N.C. Gen. Stat. § 44-50 provides that the lawyer “shall retain out of any recovery or any compensation so received a sufficient amount to pay the just and bona fide claims.” Section 44-50 further states that a client’s instructions for the disbursement of settlement proceeds are “not binding on the disbursing attorney” to the extent that the instructions conflict with the requirements of the medical lien statutes. However, when the client disputes the amount of the claim, N.C. Gen. Stat. § 44-51 provides that payment of the claim is not compelled until the claim is “fully established and determined, in the manner provided by law.” Comment [15] to Rule 1.15 provides that when a third-party claim “is not frivolous under applicable law, the lawyer must refuse to surrender the property to the client until the claim is resolved” (emphasis added). Therefore, when a statute requires a lawyer not to disburse settlement funds to a client, the lawyer must comply with the law regardless of any instructions by the client to the contrary.

Lawyer must determine whether Provider A’s lien is perfected. If so, Lawyer must segregate and retain the funds in question in Lawyer’s trust account and inform Client that, absent a prompt resolution of Provider A’s claim that is satisfactory to both parties, Lawyer will eventually be obligated to deposit the funds into the court for disposition. In the interim, if a final judgment is entered on Provider A’s claim such that the claim is no longer in dispute, pursuant to N.C. Gen. Stat. § 44-50, Lawyer must pay Provider A over the client’s objections.

To the extent that RPC 69 and RPC 125 conflict with this opinion, they are overruled.