When a client disputes a medical lien on settlement proceeds, can the lawyer set a deadline for the lienholder to act and then pay the client?

Plain-English summary

A client had assigned rights in litigation proceeds to a medical provider, or allowed a lien against them, then directed his lawyer to disregard the assignment or lien because of a dispute with the provider. The lawyer asked whether he could tell the provider he would pay the client unless the provider gave formal notice of an enforcement action within a set time, and whether he could disburse to the client if the provider did not respond. The committee answered no to both.

The committee reasoned that Rule 1.15 requires a lawyer to promptly deliver to a third party any funds to which the party is entitled, and that Rule 1.15(b) creates an ethical duty to third parties with an interest in the proceeds, regardless of the lawyer's role in creating the encumbrance. Assuming the lien is valid and the assignment irrevocable, the lawyer may neither disregard the third party's rights at the client's direction nor impede the provider's interest by imposing a time limit on enforcement.

At the same time, the committee explained the lawyer must balance that duty against loyalty to the client, which prevents paying the third party over the client's objection, and noted that a valid defense to the assignment permits the lawyer to withhold the proceeds because the client "may be correct." Releasing funds to the client despite the encumbrance could expose the lawyer to personal liability, so the lawyer must hold the proceeds until the client-provider dispute is resolved. Because a lawyer should not unilaterally arbitrate the dispute, the committee identified options: seek a declaratory judgment, pursue mediation or arbitration at the client's expense, or have the settlement draft made jointly payable to the client and the assignee; absent resolution, the lawyer must hold the funds indefinitely.

Currency note

This opinion was issued in 1995, before the South Carolina Bar's adoption of the 2005 revisions to the Rules of Professional Conduct. Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Can a lawyer pay a client over a valid medical lien at the client's direction?

A: The committee concluded no. Rule 1.15(b) creates a duty to the third party, so the lawyer may not disregard a valid lien or assignment even at the client's direction.

Q: Can the lawyer give the lienholder a deadline to act, then release the funds?

A: The committee concluded the lawyer may not impede the provider's interest by imposing a time limit on its ability to enforce its rights.

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

A: The committee said the lawyer must hold the proceeds until the dispute is resolved, and may seek a declaratory judgment, pursue mediation or arbitration at the client's expense, or have the draft made jointly payable.

Background and rules framework

The opinion applied Rule 1.15 (safekeeping property, including the Rule 1.15(b) duty to deliver funds to third parties entitled to them) and Rule 1.2 (scope of representation, supporting the lawyer's decision to disregard a client directive that would impair a valid assignment), corresponding to the like-numbered Model Rules, and relied on the committee's prior Adv. Ops. 94-20 and 93-14.

Citations and references

Rules of Professional Conduct:

• South Carolina RPC 1.15 / Model Rule 1.15: safekeeping property; duty to third parties with an interest in funds.
• South Carolina RPC 1.2 / Model Rule 1.2: scope of representation.

Other opinions cited:

• SC Bar Adv. Op. 94-20: lawyer liability for releasing encumbered funds to clients.
• SC Bar Adv. Op. 93-14: balancing duties to client and third-party claimants on proceeds.

See also

• SC Bar Ethics Op. 96-05: Withdrawal and Quantum Meruit Fees
• SC Bar Ethics Op. 95-30: Side Business Under the Firm Name

Source

• Landing page: https://www.scbar.org/for-lawyers/quicklinks/legal-resources/ethics-advisory-opinions/ethics-advisory-opinion-95-29/

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 95-29

Where a client has assigned his rights to litigation proceeds to a medical provider or allowed for a lien to be placed against them, and subsequently directs his lawyer to disregard the assignment or lien due to a dispute with the medical provider, may the lawyer notify the medical provider that he will disburse the funds to his client if he does not receive formal notice of an action on the assignment within a specified time period? May the lawyer disburse the funds to the client if the medical provider is non-responsive to his request for formal notice of an action to resolve the dispute between client and provider?

Summary:
A lawyer who knows his client has made a valid assignment of or allowed for a lien against settlement proceeds to a medical provider may not ethically impair the assignee or lienholder's rights to the proceeds by placing a limit on the timeframe in which the medical provider can enforce its rights, nor may he disburse the funds to the client if the medical provider does not respond to his call for action.

Opinion:
Rule 1.15 provides that a lawyer shall promptly deliver to a third party any funds to which the party is entitled with two exceptions. This Committee recognized in S.C. Bar Ethics Advisory Opinion 94-20 that Rule 1.15(b) creates an ethical duty owed to third parties by a lawyer when the third party has an interest in proceeds the lawyer receives for his client, irrespective of the lawyer's participation in creating the encumbrance on the proceeds. See also Rule 1.15 Comment; accord S.C. Bar Ethics Advisory Opinion 93-14. Consequently, assuming the lien is valid and the assignment irrevocable, the lawyer may not disregard a third party assignee or lienholder's rights to the proceeds notwithstanding a client's directive to do so because both encumbrances create an interest in the proceeds in the medical provider. The lawyer also may not ethically impede the medical providers interest by imposing a time limit upon its ability to enforce its rights.

Nevertheless, a lawyer must balance his duty to the medical provider with the duty of loyalty owed to his client, which prevents him from paying the money to the assignee or lienholder over the client's objection. S.C. Bar Ethics Advisory Opinion 93-14. Also, Rule 1.15 provides that a valid defense to the assignment permits the lawyer to refrain from delivering the proceeds to the third party.1 After all, "[t]he client may be correct for some reason ... and the provider may have no interest and not be entitled to payment." S.C. Bar Ethics Advisory Opinion 93-14.

Regardless of the merits of the client's defense against the medical provider, releasing the funds to the client absent the resolution of the assignment or lien may subject a lawyer to personal liability for the proceeds to the third party. See generally the cases discussed in Advisory Opinion 94-20 in which the lawyers were held personally liable for releasing the funds to their clients at their clients' requests. Consequently, the lawyer must hold the proceeds until the dispute between the client and the third party is resolved. S.C. Bar Ethics Advisory Opinion 93-14.

Because the lawyer "should not unilaterally assume to arbitrate a dispute between the client and the third party," Rule 1.15 Comment, the lawyer may seek either a declaratory judgment allowing him to release the funds to his client, or pursue mediation or arbitration at the client's additional expense. Alternatively, the lawyer can direct the drawer of the settlement draft to execute the draft to both the client and the assignee, jointly. Excepting the resolution of the assignment or lien, the lawyer must hold the funds indefinitely.

1 The second exception to disbursement to a third party is by agreement with the client. However, a party cannot unilaterally revoke an assignment of rights, for example, unless the assignment is expressly revocable or gratuitous. Consequently, an attorney's decision to disregard the client's directive is in accordance with Rule of Professional Conduct 1.2.