When must a New Jersey lawyer pay a lien out of a client's settlement, and when can the money go to the client?

Plain-English summary

The Committee answered hotline inquiries about whether RPC 1.15 (Safekeeping Property) obligates a lawyer to pay, out of settlement or award proceeds, liens the lawyer has been made aware of, such as liens for outstanding medical bills, child support, or prior judgments unrelated to the matter. The Committee held that a lawyer must honor three categories: (1) valid and undisputed statutory liens, including those arising under child support laws and those pertaining to the representation arising under ERISA, Medicare, Medicaid, and workers' compensation laws; (2) liens the lawyer expressly agreed to pay from the proceeds, such as promises to a medical provider reflected in a letter of protection; and (3) liens the client expressly agreed to pay from settlement or judgment proceeds, where the client so notified the lawyer.

For other liens brought to the lawyer's attention, the Committee concluded the lienholder is not "entitled to receive" the monies under RPC 1.15(b). The lawyer may release the monies to the client but must inform the client about the lien and provide appropriate advice about potential liability. The opinion adds, in a footnote, that court orders and writs of execution applicable to the funds must of course be honored.

The Committee grounded the analysis in RPC 1.15(b), which requires prompt delivery of funds a client or third person "is entitled to receive," and in the policy that lawyers must deal fairly with third parties and not hand money to an insistent client when it rightfully belongs to another. It relied on its own Opinion 727 (September 2013) (an ERISA lien must be safeguarded and honored), the discipline case In re Kernan, 118 N.J. 361 (1990), the Disciplinary Review Board's decision in In re Burns (DRB 18-390, August 12, 2019), and Virginia Legal Ethics Opinion 1865 (November 16, 2012), with which the Committee expressly agreed. The Committee also noted that medical bills sometimes do not represent monies the provider is entitled to receive, for example where the provider is balance billing, billed health insurance instead of PIP, or billed for services unrelated to the accident; absent an express agreement, the lawyer has no ethical obligation to pay such liens from the proceeds.

In practice

The opinion holds that, under RPC 1.15(b), a New Jersey lawyer must honor only three categories of lien out of client funds: valid undisputed statutory liens (child support, ERISA, Medicare, Medicaid, workers' compensation), liens the lawyer expressly agreed to pay (such as a letter of protection), and liens the client expressly agreed to pay and disclosed to the lawyer. Per the opinion, for any other claimed lien the lienholder is not "entitled to receive" the funds, so the lawyer may release them to the client, but must first inform the client about the lien and advise about potential liability. The opinion notes that court orders and writs of execution against the funds must be honored regardless.

Common questions

Q: A medical provider sent me a lien notice on my client's settlement. Do I have to pay it?

A: Not automatically. Per the opinion, unless it is a valid statutory lien, a lien you agreed to pay (such as in a letter of protection), or one your client agreed to pay and told you about, the provider is not "entitled to receive" the funds; you may release them to the client after explaining the lien and the client's potential liability.

Q: Which liens must I always honor?

A: The opinion lists valid and undisputed statutory liens, including child support liens and liens pertaining to the representation arising under ERISA, Medicare, Medicaid, and workers' compensation laws, plus any lien the lawyer or client expressly agreed to pay.

Q: What if there is a court order or writ of execution on the funds?

A: The opinion states in a footnote that court orders or writs of execution applicable to the funds in the lawyer's possession must, of course, be honored.

Q: My client wants the full settlement now, but a creditor claims part of it. Can I just pay the client?

A: Only if the creditor's claim is not one of the three categories the lawyer must honor. The opinion stresses that lawyers must deal fairly with third parties and should not give money to an insistent client when it rightfully belongs to another person.

Background and rules framework

The opinion interprets New Jersey RPC 1.15 (Safekeeping Property), the analogue of Model Rule 1.15, focusing on RPC 1.15(b). That paragraph requires a lawyer who receives funds in which a client or third person has an interest to notify that person promptly and to deliver promptly any funds the person "is entitled to receive." The Committee read "entitled to receive" to limit a lawyer's mandatory-payment duty to perfected statutory liens and to liens the lawyer or client agreed to pay, distinguishing mere claims of which the lawyer has been made aware.

Citations and references

Rules of Professional Conduct:

• Model Rule 1.15 (Safekeeping Property)
• New Jersey RPC 1.15(b) (Safekeeping Property)

Statutes:

• Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C.A. Section 1001 et seq.

Cases:

• In re Kernan, 118 N.J. 361 (1990), lawyer not obligated to pay a medical bill absent definitive instructions or an independent duty
• In re Burns, DRB 18-390 (August 12, 2019), no knowing misappropriation where the lawyer had not agreed to act as escrow agent for a lienholder

Other opinions cited:

• NJ ACPE Opinion 727 (September 2013): obligation to safeguard and honor an ERISA lien
• Virginia Legal Ethics Opinion 1865 (November 16, 2012): lawyer's primary duty is to the client where a third party has not perfected its lien

See also

• NJ ACPE Op. 747: procedure for disputed funds held by a lawyer
• Virginia Ethics Op. 1865: third-party claims to funds held by a lawyer
• Alabama Ethics Op. 2003-02: honoring a commitment to pay a client's creditors
• Alabama Ethics Op. 2011-01: indemnifying defendants for unpaid liens
• NY State Bar Op. 946: paying settlement proceeds to a third party at client direction

Source

• Landing page: https://www.njcourts.gov/notices/acpe-opinion-748-rpc-115-safekeeping-property-lawyers-obligations-honor-liens
• Original PDF: https://www.njcourts.gov/sites/default/files/notices/2024/09/n241007b.pdf

Original opinion text

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

Issued by the Advisory Committee on Professional Ethics
September 17, 2024

ADVISORY COMMITTEE ON PROFESSIONAL ETHICS
Appointed by the Supreme Court of New Jersey

OPINION 748

RPC 1.15 (Safekeeping Property): Lawyers' Obligations to Honor Liens

The Advisory Committee on Professional Ethics received several inquiries through the attorney ethics research assistance hotline about Rule of Professional Conduct (RPC) 1.15 (Safekeeping Property) and lawyers' obligations to honor liens. Some hotline callers have asked whether they are obligated to pay, out of settlement or award proceeds, certain liens that they have been made aware of, such as liens for outstanding medical bills, child support payments, or prior judgments unrelated to the case the lawyer is handling.

The Committee finds that, in accordance with RPC 1.15, a lawyer must honor: (1) valid and undisputed statutory liens, including liens arising under child support laws and liens pertaining to the representation and arising under ERISA[1], Medicare, Medicaid, and Workers Compensation laws; (2) liens that the lawyer has expressly agreed to pay from proceeds of the case, such as promises to pay medical providers that are reflected in a letter of protection; and (3) liens that the client has expressly agreed to pay from the proceeds of settlement or judgment, when the client has so notified the lawyer.[2] With regard to other liens that are brought to the lawyer's attention, the lienholder is not "entitled to receive" the monies from the lawyer; the lawyer may release the monies to the client but must inform the client about the lien and provide appropriate advice about potential liability.

RPC 1.15 (Safekeeping Property), provides, in part:

(b) 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.

Hence, if a lawyer is aware that a third person "has an interest" in monies held by the lawyer, the lawyer shall deliver to the third person funds that he/she/they "is entitled to receive." RPC 1.15(b) furthers the policy that lawyers must deal fairly with third parties and lawyers should not, for example, give monies to an insistent client when those monies rightfully belong to another person.

[1] Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C.A. Section 1001 et seq.

[2] Court orders or writs of execution applicable to the funds in the lawyer's possession are, of course, required to be honored by the lawyer holding the funds.

The Committee previously considered these issues in a published opinion and an informal, unpublished response to an inquiry. In Opinion 727 (September 2013), the Committee reminded lawyers that they have an obligation to safeguard monies when they are aware there is an ERISA lien on the proceeds of a matter. The lawyer must honor that lien.

In an informal, unpublished matter, the Committee considered an inquiry of a lawyer who asked whether he had an ethical duty under RPC 1.15 to safeguard, in his trust account, settlement proceeds in a personal injury matter when he was aware that some of his client's medical bills had not been paid but he had not issued a letter of protection to the medical provider and had not been notified by the client or provider of a lien on those monies. The Committee found that, in those circumstances, the inquirer lawyer was not required, under RPC 1.15(b), to hold the monies in trust.

There are several New Jersey cases on the subject. In the discipline case In re Kernan, 118 N.J. 361 (1990), the lawyer Kernan was retained by the client after a personal injury matter was settled. The client's prior lawyer sent Kernan a portion of the settlement monies that would cover unpaid medical bills. Kernan sought to negotiate compromises for these unpaid medical bills and paid all bills except one. He had contacted this last doctor, did not succeed in reducing the bill, and did not pay him. Kernan took a fee and forwarded the balance to the client.

The Supreme Court found that the instructions from the prior lawyer to Kernan about paying the remaining medical bills were ambiguous and it was not clear that Kernan "was under definitive instructions that clearly directed him to pay [the doctor's] bill." Id. at 366. "[W]ithout explicit instructions or a clear understanding to [pay this remaining bill] and, in the absence of any independent, antecedent duty to [this doctor], he was not obligated to do so." Id. at 367. The Court noted that Kernan "acted unwisely and improperly in unilaterally determining how to dispose of the escrow moneys without clarifying his client's wishes" but decided that the ethics charges were not proven. Id. at 367-68.

The Disciplinary Review Board, in In re Burns, Docket No. DRB 18-390 (August 12, 2019), found that a lawyer did not knowingly misappropriate monies when she failed to pay a lien from settlement proceeds. The DRB did not discuss RPC 1.15(b), as the special master had found that this failure to pay the lien was knowing misappropriation and RPC 1.15(b) was not charged. The DRB stated:

Although [the lienholder] issued a notice of lien to respondent, directing her to satisfy its lien prior to the disbursement of any other funds from [the client's] settlement monies, the record does not contain evidence that respondent agreed to serve as an escrow agent for, or to assume a fiduciary duty to, [the lienholder]. Moreover, the notice of lien notwithstanding, we cannot find, as a matter of law, that respondent had a duty to ensure that [the client] complied with her contractual obligation to [the lienholder]. Were we to do so, every attorney would be placed in the role of an escrow agent for any party who unilaterally claimed a lien against proceeds due to the client. We, thus, determine that respondent did not knowingly misappropriate funds that [the client] owed to [the lienholder].

[In re Burns, supra, pages 23-24.]

Other jurisdictions have also discussed lawyers' obligations to honor liens. Virginia issued an ethics opinion that states:

[I]f the third party has not taken the steps necessary in order to perfect its lien or claim to the funds in the lawyer's possession, or has no contract, order or statute establishing entitlement to the funds, the lawyer's primary duty is to the client. Under those circumstances, the lawyer may ethically follow the client's direction to disregard the third party claim and deliver the funds to the client. Of course, if the lawyer releases the funds to the client, the lawyer should inform the client of the risks involved in disregarding a third person's claim. For example, the lawyer should explain that while the lawyer may not have an ethical duty under the rules to deliver funds to the third party, the third party may nonetheless have a civil claim or other remedies against the client that may be pursued after the funds have been released to the client.

[Virginia Legal Ethics Opinion 1865 (November 16, 2012).]

The Committee agrees with this Virginia ethics opinion.

Further, lawyers often receive bills from medical care providers that, after review, may not comprise monies that the providers are entitled to receive. The medical provider may be attempting to "balance bill," may have improperly billed health insurance instead of Personal Injury Protection (PIP), or may have billed for medical provider services not related to the underlying accident. While these may be valid liens, a lawyer has no ethical obligation to pay them from the proceeds of settlement or judgment absent an express agreement with the client or medical provider.

Hence, pursuant to RPC 1.15, a lawyer must honor: (1) valid and undisputed statutory liens, including liens arising under child support laws and liens pertaining to the representation and arising under ERISA, Medicare, Medicaid, and Workers Compensation laws; (2) liens that the lawyer has expressly agreed to pay from proceeds of the case, such as promises to pay medical providers that are reflected in a letter of protection; and (3) liens that the client has expressly agreed to pay from the proceeds of settlement or judgment, when the client has so notified the lawyer. With regard to other liens that are brought to the lawyer's attention, the lienholder is not "entitled to receive" the monies from the lawyer; the lawyer may release the monies to the client but must inform the client about the lien and provide appropriate advice about the client's potential liability.