If a personal injury lawyer believes a hospital's claimed lien or assignment on the settlement is invalid and frivolous, must the lawyer still hold back funds to protect it?

Plain-English summary

A personal injury lawyer disputed the validity of an alleged assignment claimed by a hospital that treated the injured client, believing the assignment was invalid and the hospital's claim frivolous. The question was whether the lawyer could refuse to protect that claim out of the recovery.

The opinion concludes the lawyer may refuse. It applies Rule 1.15(e), which requires a lawyer holding property claimed by two or more persons to keep it separate until the dispute is resolved, and Comment 4, which says that "when the third-party claim is not frivolous under applicable law, the lawyer must refuse to surrender the property to the client until the claims are resolved." Reading that language, the committee reasons that if the lawyer believes in good faith the claim is frivolous, the lawyer may refuse to protect the third party's claim.

The opinion frames the validity of the assignment as a matter of law, not ethics, and adds its own caution: "since there is much room for debate given the above language, a lawyer who refuses to protect the third party claim based on his view that it is frivolous may be placing himself at risk."

In practice

Under this opinion, and under the South Carolina rule as it stood in 2016, Rule 1.15(e)'s duty to hold disputed funds attaches when a third party's claim is not frivolous. The opinion holds that a lawyer who concludes in good faith that a claimed lien or assignment is frivolous or without substantial grounds is not required by the rule to protect it. The committee identifies the good-faith frivolousness judgment as the pivot, and flags that the judgment carries risk because the underlying validity question is one of law.

Common questions

Q: Must a lawyer hold back settlement money for every claimed medical lien?

A: No. Rule 1.15(e) and Comment 4 require protecting a third party's claim only when it is not frivolous; the opinion holds a lawyer may refuse to protect a claim believed in good faith to be frivolous.

Q: Is whether the assignment is valid an ethics question?

A: No. The opinion treats the validity of the assignment as a matter of law, separate from the Rule 1.15(e) ethics question of when funds must be held.

Q: Is there any downside to refusing to protect the claim?

A: The committee notes there is much room for debate in the rule's language, so a lawyer who refuses based on a view that the claim is frivolous may be placing himself at risk.

Background and rules framework

The opinion interprets South Carolina Rule of Professional Conduct 1.15(e) (Model Rule 1.15(e)), which governs property in a lawyer's possession claimed by more than one person. Comment 4 to the rule recognizes that third parties may hold lawful claims, such as a creditor's lien on personal injury funds, and directs the lawyer to refuse to surrender disputed property to the client when the third-party claim "is not frivolous under applicable law," while cautioning the lawyer not to unilaterally arbitrate the dispute.

Citations and references

Rules of Professional Conduct:

• MR 1.15 / SC RPC 1.15(e) (safekeeping property claimed by two or more persons)

See also

• SC Bar Ethics Op. 13-02: No duty to pay a court-appointed investigator from client funds
• SC Bar Ethics Op. 12-01: Applying a trust surplus to another matter

Source

• Landing page: https://www.scbar.org/for-lawyers/quicklinks/legal-resources/ethics-advisory-opinions/ethics-advisory-opinion-16-01/
• Original PDF: https://www.scbar.org/media/f2uihia3/16-01.pdf

Original opinion text

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

UPON THE REQUEST OF A MEMBER OF THE SOUTH CAROLINA BAR, THE ETHICS ADVISORY COMMITTEE HAS RENDERED THIS OPINION ON THE ETHICAL PROPRIETY OF THE INQUIRER'S CONTEMPLATED CONDUCT. THIS COMMITTEE HAS NO DISCIPLINARY AUTHORITY. LAWYER DISCIPLINE IS ADMINISTERED SOLELY BY THE SOUTH CAROLINA SUPREME COURT THROUGH ITS COMMISSION ON LAWYER CONDUCT.

Ethics Advisory Opinion 16-01

SC Rule of Professional Conduct: 1.15(e)

Facts:

There is a dispute as to the validity of an alleged assignment between an attorney handling a personal injury case and the hospital that treated the patient. The attorney for the injured party believes that the assignment is invalid, and that the hospital's claim is frivolous.

Question Presented:

Does the personal injury attorney have the right to refuse to protect the hospital's claim if that attorney believes in good faith that the hospital's claim is frivolous?

Summary:

Whether or not a valid assignment exists is a matter of law. The personal injury lawyer may refuse to honor the hospital's claim if that lawyer believes in good faith that the hospital's claim is frivolous or without substantial grounds.

Discussion:

Rule 1.15(e) of the Rules of Disciplinary Conduct is unclear as to the definitions of

"property" and "interests ." The Rule states:

"When in the course of representation a lawyer is in possession of property in which two or more persons (one of whom may be the lawyer) claim interests, the property shall be kept separate by the lawyer until the dispute is resolved."

Comment 4 provides:

"Paragraph (e) also recognizes that third parties may have lawful claims against specific funds or other property in a lawyer's custody, such as a client's creditor who has a lien on funds recovered in a personal injury accident. A lawyer may have a duty under applicable law to protect such third-party claims against wrongful interference by the client. In such cases, when the third- party claim is not frivolous under applicable law, the lawyer must refuse to surrender the property to the client until the claims are resolved. A lawyer should not unilaterally assume to arbitrate a dispute between the client and the third-party, but, when there are substantial grounds for dispute as to the person entitled to the funds, the lawyer may file an action to have a court resolve the dispute."

If the lawyer believes in good faith that it is frivolous, then the lawyer may refuse to protect the claim of the third party.

However, since there is much room for debate given the above language, a lawyer who refuses to protect the third party claim based on his view that it is frivolous may be placing himself at risk.