When a third party (such as a medical-lien holder) claims part of a client's settlement, what must the lawyer holding the funds do, especially if the client says don't pay?

Plain-English summary

The question arises in personal-injury practice: the plaintiff's lawyer has settled, holds the client's funds in trust, and is ready to pay the client, but a third party (often a medical provider claiming a "lien" for care) claims part of the recovery, and sometimes the client expressly tells the lawyer not to pay the creditor. The Committee addressed what the lawyer must do, and whether the lawyer must simply follow the client's instruction to disburse everything to the client. (The opinion carries the bar's note that it is "not citeable as authority" under SCR 123.)

The Committee answered that under SCR 165 the lawyer's duties turn on whether the third party "has" an interest in the funds, as opposed to merely asserting a "claim." The rule does not create third-party interests; it requires the lawyer to honor interests the law already recognizes. A general unsecured creditor's bare claim is not an interest (freezing client funds for a mere claim would amount to an unlawful pre-judgment attachment raising due-process concerns). To rise to an interest, the claim must attach to the particular funds. The opinion gives examples that qualify: a common-law assignment of the funds (enforced in Nevada in Achrem v. Expressway Plaza), an attachment or garnishment on the specific funds, a statutory attorney's lien, a court order on the funds, a "letter of protection" sent to a provider, a non-statutory "medical lien" (an oral or written promise to pay the provider from the recovery), a statutory hospital lien (NRS 108.590), and a subrogation lien.

Where such an interest exists, the lawyer has three duties under SCR 165: promptly notify the client and the third party on receipt of the funds (a duty breached even by an unintentional failure to give notice), promptly deliver funds the client or third party is entitled to receive (no bright-line test for promptness, but an 11-month delay was held not prompt), and render a full accounting on request. The lawyer has no duty to hunt for unknown third-party interests; the duties run only to interest holders of whom the lawyer has actual knowledge, so knowing the client owes bills does not, by itself, create an interest. When the client instructs the lawyer not to pay a third party who appears to have a cognizable interest, a "dispute" exists; the lawyer must not decide who wins, may attempt to mediate, and if the parties do not agree must keep the disputed portion separate until resolution (for example, by interpleading the funds under NRCP 22). Finally, where the competing creditor holds a statutory hospital lien or a non-statutory medical lien, an attorney's lien under NRS 18.015 has priority (NRS 108.600; Michel v. Eighth Judicial District Court), so the lawyer may pay the lawyer's own fee under the fee agreement before the dispute is resolved.

Currency note

This opinion was issued in 2005, before the State Bar of Nevada's adoption of the Nevada Rules of Professional Conduct (effective 2006). It interprets former Supreme Court Rule 165, the predecessor to current NRPC 1.15, which was drawn from ABA Model Rule 1.15. The substance of the safekeeping-of-property duties it describes carried forward into NRPC 1.15, but verify the current rule text, and any statutory lien-priority provisions, before relying on specifics.

In practice

The opinion holds that, under the rules then in force, a lawyer holding settlement funds must distinguish a third party's actual interest in the specific funds from a mere creditor's claim, and may disburse to the client only as to amounts free of any known interest. Where a known interest exists and the client disputes it, the lawyer must notify the interested parties, hold the disputed portion separate (rather than resolve the dispute or follow the client's instruction to pay it all out), and may interplead; the lawyer may still pay the lawyer's own fee given the priority of an NRS 18.015 attorney's lien. These duties now sit under NRPC 1.15; confirm the current rule before acting.

Common questions

Q: If a client tells the lawyer not to pay a medical lien, can the lawyer just pay the client everything?

A: Not necessarily. The opinion concluded that if the lienholder "has" an actual interest in the funds, the lawyer must hold the disputed portion separate until the dispute is resolved and may not simply follow the client's instruction to disburse it all.

Q: Does every creditor's claim against the client tie up the settlement?

A: No. The opinion explains a general unsecured creditor's bare "claim" is not an "interest"; the claim must attach to the specific funds (through an assignment, lien, garnishment, court order, or letter of protection) before the lawyer's duties arise.

Q: Must the lawyer search for third parties who might claim the money?

A: No. The opinion states the lawyer's duties run only to interest holders of whom the lawyer has actual knowledge; there is no duty to affirmatively seek out third parties before paying.

Q: Can the lawyer take the lawyer's own fee while the lien dispute is unresolved?

A: Per the opinion, yes; an attorney's lien under NRS 18.015 has priority over a hospital or medical lien (NRS 108.600; Michel), so the lawyer may pay the fee under the fee agreement before the dispute is resolved.

Background and rules framework

The opinion interprets former SCR 165 (safekeeping property; now NRPC 1.15), drawn from ABA Model Rule 1.15, and the Restatement (Third) of the Law Governing Lawyers sections 44(2) and 45(1), against Nevada's hospital-lien statute (NRS 108.590 et seq.), attorney's-lien statute (NRS 18.015), and lien-priority provision (NRS 108.600).

Citations and references

Rules of Professional Conduct:

• Model Rule 1.15 / Nev. SCR 165 (now NRPC 1.15) (safekeeping property; disputed funds)

Statutes:

• NRS 108.590 et seq. (hospital liens); NRS 18.015 (attorney's lien); NRS 108.600 (lien priority)

Cases:

• Achrem v. Expressway Plaza Ltd., 112 Nev. 737, 917 P.2d 447 (1996), enforceable assignment of recovery
• Michel v. Eighth Judicial District Court, 117 Nev. 145, 17 P.3d 1003 (2001), attorney's-lien priority
• In re Ross, 658 A.2d 209 (D.C. App. 1995), 11-month delay not "prompt"

See also

• NV Ethics Op. 44: disbursing settlement funds from a trust account before the check clears
• NY State Bar Op. 946: paying settlement proceeds to a third party at the client's direction

Source

• Landing page: https://nvbar.org/for-lawyers/ethics-discipline/ethics-opinions/
• Original PDF: https://nvbar.org/wp-content/uploads/opinion_31.pdf