What must a Virginia lawyer do with settlement funds when a third party such as a medical provider or insurer claims a lien on them?

Plain-English summary

The opinion addresses a lawyer's duty under Rule 1.15(b)(4) and (5) when funds held for a client may be subject to a third party's claim. The governing distinction is whether the third party is "entitled" to the specific funds. Drawing on Comment [4] to Rule 1.15, the committee explains that the rule does not require protecting the client's general creditors who have no valid claim to the specific funds; the third party's interest must come from a source outside Rule 1.15, such as a statutory lien (medical, workers' compensation, attorney's lien), a judgment lien, a court order, or an assignment or lien-protection letter the client signed and the lawyer knows about. A mere assertion of an unsecured claim does not create an interest in the funds.

Where a valid third-party interest exists, Rule 1.15(b)(4) and (5) require the lawyer either to deliver the funds to the third party or, if the claim is disputed, to safeguard the contested funds until the dispute is resolved. The lawyer may not unilaterally arbitrate the dispute by releasing the funds to the client, and must not release them where the client has a non-frivolous dispute with the third party; the lawyer should hold the disputed funds in trust for a reasonable time or interplead them into court (citing LEO 1747 and VSB v. Johnson). Conversely, where the third party has not perfected its claim and has no contract, order, or statute, the lawyer's primary duty is to the client and the lawyer may follow the client's direction to disburse, after explaining the risks of disregarding the claim. The committee notes that the rule generally requires actual knowledge of the third party's lawful claim, though some federal and state laws (Medicare, Va. Code § 8.01-66.5) may create entitlement without a separate lien notice, a question of law beyond its purview.

The committee applies these principles to three hypotheticals involving health-plan reimbursement. It concludes the lawyer has no duty to affirmatively investigate an unasserted ERISA plan claim without the client's authorization, because contacting the plan could prompt it to perfect a claim and could be detrimental to the client under Rule 1.6(a); the lawyer must consult the client and obtain informed consent before investigating, and should confirm in writing any client direction not to investigate, while advising of the potential civil liability (Rules 1.2 and 1.4). Where a plan has asserted a claim but fails to respond to reasonable, diligent requests for documentation, the lawyer who has acted reasonably and in good faith may, after consulting the client, disburse the funds without holding back a reimbursement, because the duty of diligence (Rule 1.3) and the "promptly pay or deliver" requirement do not allow holding funds indefinitely.

In practice

Under the Virginia rule as it stood when the opinion issued, a lawyer holding settlement funds must protect a third party's interest in the specific funds only where that interest is valid, that is, grounded in a statute, perfected lien, court order, or a client-signed assignment the lawyer knows about; a mere unsecured claim does not trigger the duty. The opinion holds that, when a valid claim is disputed, the lawyer must not unilaterally release the funds to the client and should hold them in trust or interplead them. It holds that the lawyer is not required to affirmatively investigate an unasserted potential claim without the client's informed consent, particularly where contacting the claimant could harm the client under Rule 1.6(a). It holds that a lawyer who acts reasonably and in good faith to determine the validity and amount of an asserted claim, and gets no response, may, after consulting the client, disburse the funds without violating Rule 1.15(b). The opinion states that whether the lawyer faces civil liability for failing to protect a third-party claim is a legal question beyond the committee's purview.

Common questions

Q: When does a third party's claim require me to hold back settlement funds?

A: When the third party is actually entitled to the specific funds, the opinion identifies a statutory lien, judgment lien, court order, or a client-signed assignment or lien-protection letter the lawyer knows about. A mere unsecured claim by a creditor does not create an interest in the funds.

Q: The client tells me to ignore a medical lien and pay everything to her. Can I?

A: Only if the lien is not valid or perfected. The opinion concludes that if a third party has a valid statutory, consensual, or court-ordered interest, the lawyer may not disburse the funds to the client even at the client's direction; if the claim is disputed or uncertain, the lawyer should hold the funds in trust or interplead them.

Q: Do I have to investigate whether a health plan has a reimbursement claim before I pay the client?

A: The opinion concludes there is no duty to affirmatively investigate an unasserted plan claim without the client's authorization, because contacting the plan could be detrimental to the client under Rule 1.6(a). The lawyer must consult the client, obtain informed consent to investigate, and advise the client of the potential civil liability of disbursing without reimbursing.

Q: A plan asserted a claim but won't send documentation or respond. Can I disburse?

A: The opinion concludes that a lawyer who has exercised reasonable diligence and good faith to determine the validity and amount of the claim, and receives no response, may, after consulting the client, disburse the funds without holding back a reimbursement; the lawyer need not hold funds indefinitely (Rules 1.3 and 1.15(b)(4)).

Background and rules framework

The opinion interprets Rule 1.15 of the Virginia Rules of Professional Conduct (Model Rule 1.15), specifically paragraphs (b)(4) and (b)(5) and Comment [4], on safekeeping funds in which a client and a third party both claim an interest. It applies the confidentiality rule, Rule 1.6(a), when investigating a claim could harm the client, the competence and diligence rules, Rules 1.1 and 1.3, the communication and scope rules, Rules 1.2 and 1.4, and the honesty-to-third-parties rules, Rules 4.1 and 8.4(c), when a lawyer gives an assurance of payment. The committee builds on LEO 1747 and the discipline case Virginia State Bar v. Johnson, and surveys numerous out-of-state opinions and cases.

Citations and references

Rules of Professional Conduct:

• Model Rule 1.15 / Va. Rule 1.15(b)(4), (5) (safekeeping property; third-party claims)
• Model Rule 1.6 / Va. Rule 1.6(a) (confidentiality)
• Model Rules 1.1, 1.3 / Va. Rules 1.1, 1.3 (competence; diligence)
• Model Rules 1.2, 1.4 / Va. Rules 1.2, 1.4 (scope; communication)
• Model Rules 4.1, 8.4(c) / Va. Rules 4.1, 8.4(c) (honesty toward third parties)

Statutes:

• Va. Code § 38.2-3405 (anti-subrogation statute for health insurers)
• Va. Code § 8.01-66.5 (notice of lien not required for care paid by the Commonwealth)
• 42 U.S.C. § 1395y; 42 C.F.R. § 411.37 (Medicare secondary payer recovery)

Cases:

• Pickus v. Virginia State Bar, 232 Va. 5, 348 S.E.2d 202 (1986), fiduciary duty extends to protecting third-party funds
• Marcus, Santoro & Kozak v. Wu, 274 Va. 743, 652 S.E.2d 777 (2007), judgment-lien creditor may garnish trust funds
• Virginia State Bar v. Johnson, CL09-2034 (Richmond Cir. Ct. 2009), discipline for unilateral disbursement against a known lien

Other opinions cited:

• Va. LEO 1747 (rev. 2000): lawyer may not ignore a valid third-party interest in settlement funds

See also

• VSB Ethics Op. 1864: Withholding Discovery Materials From a Client
• VSB Ethics Op. 1872: Virtual Law Office and Executive Office Suites

Source

• Landing page: https://vsb.org/Site/about/rules-regulations/leo-opinions.aspx
• Original PDF: https://www.vsb.org/common/Uploaded%20files/LEOs/1865.pdf

Original opinion text

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

LEGAL ETHICS OPINION 1865

OBLIGATIONS OF A LAWYER IN HANDLING
SETTLEMENT FUNDS WHEN A THIRD
PARTY LIEN OR CLAIM IS ASSERTED

In this opinion the Committee revisits a lawyer’s ethical responsibilities when, in the
course of representing a client, the lawyer receives funds for the client that may be subject to a
third party’s claim to a portion of the funds held by the lawyer. The applicable rule of conduct is
Rule 1.15(b), which requires a lawyer to:
(4) promptly pay or deliver to the client or another as requested by such person
the funds, securities, or other properties in the possession of the lawyer that such
person is entitled to receive; and
(5) not disburse funds or use property of a client or third party without their
consent or convert funds or property of a client or third party, except as directed
by a tribunal.
Comment 4 to Rule 1.15 provides helpful guidance on the lawyer’s ethical duty when faced with
third party claims asserted against the funds that the lawyer is handling:
Paragraphs (b)(4) and (b)(5) do not impose an obligation upon the lawyer to
protect funds on behalf of the client’s general creditors who have no valid claim to
an interest in the specific funds or property in the lawyer’s possession. However, a
lawyer may be in possession of property or funds claimed both by the lawyer’s
client and a third person; for example, a previous lawyer of the client claiming a
lien on the client’s recovery or a person claiming that the property deposited with
the lawyer was taken or withheld unlawfully from that person. Additionally, a
lawyer may have a duty under applicable law to protect such third-party claims
against wrongful interference by the client, and accordingly may refuse to
surrender the property to the client. For example, if a lawyer has actual knowledge
of a third party’s lawful claim to an interest in the specific funds held on behalf of
a client, then by virtue of a statutory lien (e.g., medical, workers’ compensation,
attorneys’ lien, a valid assignment executed by the client, or a lien on the subject
property created by a recorded deed of trust) the lawyer has a duty to secure the
funds claimed by the third party. Under the above described circumstances,
paragraphs (b)(4) and (b)(5) require the lawyer either to deliver the funds or
property to the third party or, if a dispute to the third party’s claim exists, to
safeguard the contested property or funds until the dispute is resolved. If the client
has a non-frivolous dispute with the third party’s claim, then the lawyer cannot
release those funds without the agreement of all parties involved or a court
determination of who is entitled to receive them, such as an interpleader action. A
lawyer does not violate paragraphs (b)(4) and (b)(5) if he has acted reasonably and
in good faith to determine the validity of a third-party’s claim or lien.
When Is a Third Party “Entitled” to Funds Held By the Lawyer?
Rule 1.15 (b) requires that a third party be “entitled” to funds in the lawyer’s possession.
Although Rule 1.15 (b) does not make the third party a “client” of the lawyer, the lawyer’s duty
with respect to funds to which the third party is entitled is the same as if the person were a

LEO 1865
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client.1 As Comment 4 states, a third party must have a valid claim to an interest in the specific
funds held by the lawyer. In the absence of a valid third party interest in the funds, the lawyer
owes no duty to a creditor of the client and must act in the best interests of the client.2 The mere
assertion of an unsecured claim by a creditor does not create an “interest” in the funds held by
the lawyer.3 Therefore, claims unrelated to the subject matter of the representation, though just,
are not sufficient to trigger duties to the creditor without a valid assignment or perfected lien.
All ethics opinions and legal authorities agree that an “interest” in the funds held by the
lawyer include a statutory lien, a judgment lien and a court order or judgment affecting the
funds.4 Likewise, agreements, assignments, lien protection letters or other similar documents in
which the client has given a third party an interest in specific funds trigger a duty under Rules
1.15 (b)(4) and (5) even though the lawyer is not a party to such agreement or has not signed any
document, if the lawyer is aware that the client has signed such a document.5 In other words, a
third party’s interest in specific funds held by the lawyer is created by some source of obligation
other than Rule 1.15 itself.6 Whether they create binding contractual obligations, assurance of
payment from the lawyer may also create ethical duties to third parties under Rule 1.15. 7 The
basis for such duties is the fundamental duty of lawyers to deal honestly with third parties. Rules
4.1 and 8.4(c). Before the lawyer may give a third party an assurance of payment, the lawyer
should discuss the matter with the client, because it is ultimately a matter for the client to
decide.8 If the lawyer is asked to sign a document assuring payment, the lawyer should explain
to the client the ramifications, including the lawyer’s potential ethical and civil liability, ensure
that the client is competent to understand the explanation, and obtain the client’s informed
consent.9
1

Oklahoma Bar Assn. v. Taylor, 4 P.3d 1242 (Okla. 2000); Utah Bar Advisory Op. No. 00-04; Advance Finance
Co. v. Trustees of Client’s Security Trust Fund of Bar of Maryland, 652 A.2d 660 (Md. App. 1995) (holding that
since Rule 1.15 imposed fiduciary obligations to maintain funds for benefit of clients or creditors, the state fund that
pays for lawyers’ violations of fiduciary obligations was liable to a creditor).

2

Klancke v. Smith, 829 P.2d 464 (Colo. App. 1991); Alaska Bar Assn. Ethics Comm. Op. 92-3.

3

Silver v. Statewide Grievance Comm., 679 A.2d 392 (Conn. App. 1996), cert. dismissed, 699 A.2d 151 (Conn.
1997).

4

For example, a judgment lien creditor of a client may garnish funds held in a lawyer’s trust account. Marcus,
Santoro & Kozak v. Wu, 274 Va. 743, 652 S.E.2d 777 (2007) (lien of a writ of fieri facias validly executed against
lawyers’ trust accounts by client’s judgment lien creditor to whom lawyers directed to pay funds).

5

See, e.g., Virginia State Bar v. Timothy O’Connor Johnson, CL 09-2034-4 (August 11, 2009) (while Respondent
did not sign the agreement, his client did, and Respondent was aware that his client had directed that his chiropractor
be paid directly out of settlement proceeds administered by his lawyer). See also LEO 1747 and Comment 4.

6

Alaska Bar Ass’n Ethics Comm., Op. 92–3 (1992); Colo. Bar Ass’n Ethics Comm., Op. 94–94 (1993); Conn.
Comm. on Prof ’l Ethics, Informal Op. 02–04 (2002) and Informal Op. 95–20 (1995); Utah Ethics Advisory Op.
Comm., Op. 00–04 (2000).

7

R.I. Ethics Advisory Panel, Op. 94–46 (1994) (lawyer’s response to hospital’s inquiry about status of the personal
injury case that the payment of bills was ‘‘contingent upon a ‘successful’ outcome’’ was sufficient to raise Rule 1.15
duties).

8

Colo. Bar Ass’n Ethics Comm., Op. 94–94 (1993). Va. Rule 1.2, Comment 1 (lawyer should defer to client
regarding expenses to incurred).

9

ABA Standing Comm. on Ethics and Prof ’l Responsibility, Informal Op. 1295 (1974).

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The Committee understands that there will be occasions when a lawyer may not be able
to determine whether a third party is entitled to funds held by the lawyer, for example, when
there exists a dispute between the client and the third party over the third party’s entitlement.
Legal and factual issues may make the third party’s claim to entitlement or the amount claimed
uncertain. Rule 1.15 (b)(4) and (5) does not require the lawyer to make that determination.
When faced with competing demands from the client and third party the lawyer must be careful
not to unilaterally arbitrate the dispute by releasing the disputed funds to the client.10
Conversely, a lawyer should not disburse the client's funds to a third party if the client has a nonfrivolous dispute with the third party.11 When the client and a third party have a dispute over
entitlement to the funds, the lawyer should hold the disputed funds in trust for a reasonable
period of time or interplead the funds into court.12 To avoid or reduce the occurrence of such
conflicts, the Committee recommends that at the outset of the representation, preferably in the
engagement letter or contract, the lawyer clearly explain that medical liens will be protected and
paid out of the settlement proceeds or recovery.
Does Rule 1.15(b) Require that the Lawyer Have Actual Knowledge of a Third Party’s Lien or
Claim to the Funds Held by the Lawyer?
Rules 1.15(b)(4) and (5) and Comment 4 appear to require that a lawyer have “actual
knowledge” of a third party’s interest in funds held by the lawyer. Comment 4 states in pertinent
part:
[a]dditionally, a lawyer may have a duty under applicable law to protect such
third-party claims against wrongful interference by the client, and accordingly
may refuse to surrender the property to the client. For example, if a lawyer has
actual knowledge of a third party’s lawful claim to an interest in the specific funds
held on behalf of a client, then by virtue of a statutory lien (e.g., medical,
workers’ compensation, attorney’s lien, a valid assignment executed by the client,
or a lien on the subject property created by a deed of trust), the lawyer has a duty
to secure the funds claimed by the third party. (emphasis added)
Other authorities have likewise adopted the view that Rule 1.15(b)(4) and (5) requires
that the lawyer have actual knowledge of a third party’s lawful claim to an interest in the specific
funds held by the lawyer. Arizona Ethics Op. 98-06; Conn. Bar. Op. 95-20. However, in some
situations under federal and state law, the lawyer need only be aware that the client received
medical treatment from a particular provider or pursuant to a health care Plan. In those
instances, notice of lien or a lien letter may not be required in order for that third party to claim

10

Virginia State Bar v. Timothy O’Connor Johnson, supra (lawyer acted unethically by making unilateral decision
to disburse to client’s chiropractor funds less than the full amount of the lien); LEO 1747.

11

See In re Smith, 625 So. 2d 476 (La. 1993) (lawyer disciplined for improperly withholding client's money to pay
outstanding medical bills); see also Connecticut Informal Ethics Op. 95-20 (1995) (lawyer cannot pay money to
third person over client's objection); Pennsylvania Ethics Op. 92-89 (1992) (lawyer, whose client was ordered to pay
arrearage in child support, cannot release escrow proceeds from real estate sale without client consent).

12

Ariz. Comm. On Rules of Prof ’l Conduct, Formal Op. 98–06 (1998); Ga. State Disciplinary Bd., Advisory Op.
94–2 (1994); Va. Standing Comm. on Legal Ethics, Op. 1747 (2000)

LEO 1865
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entitlement to funds held by lawyer.13 The effect of such state and federal laws on a lawyer’s
obligation to a third party is a question of law beyond the purview of this Committee. The
lawyer will need to know and understand the law in order to determine whether it creates a valid
interest in the funds held by the lawyer.14
Prior Opinions
In Legal Ethics Opinion 1747 (rev. 2000), the Committee opined that if a third party has a legal
interest in settlement funds by virtue of a statutory lien, consensual lien, contract or court order,
the lawyer may not ignore that third party’s interest in the funds held by the lawyer and disburse
those funds to the client, even if the client so directs.15 As this Committee observed in Legal
Ethics Opinion 1747:
Well before LEO 1413 was issued, the Virginia Supreme Court concluded, in the
context of a settlement attorney handling a real estate closing, that the lawyer's
fiduciary duties under Canon 9 extended to protecting funds owed to or claimed
by third parties, and not simply the client. Pickus v. Virginia State Bar, 232 Va.
5, 348 S.E.2d 202 (1986) (decided under former DR 9-102). Pickus, a new
attorney, allowed a coercive client, the seller, to receive directly the settlement
proceeds without having determined whether a prior deed of trust lien on the
subject real estate had been released. As things turned out, the prior lien had not
been satisfied. The Court upheld the disciplinary board's finding that DR 9-102
had been violated, holding that DR 9-102 was promulgated to protect third parties
as well as clients. 232 Va. at 14.
13

A written notice of lien is not required if the lawyer is on notice that the client’s medical care was provided or
paid for by the Commonwealth of Virginia. Va. Code §8.01-66.5(A). Medicare liens do not require notice and
there is no statute of limitations. See 42 U.S.C. §§ 1395y(b)(1) & (2), 2651-2653. Beginning January 1, 2011,
personal injury claims from Medicare-eligible claimants are required to be reported to Medicare. Further, Medicare
is entitled to 100% recovery of the benefits it paid during treatment for the injury minus its pro rata share of the
client’s legal fees and expenses and will seek reimbursement from any settlement or payment for the claim. Failure
to comply with the reporting or reimbursement requirements can result in a $1,000 daily fine per claimant, interest,
and double damages. For more information see 42 U.S.C. 1395y, 42 CFR § 411.37 (2009), and the webpage for the
Centers for Medicare and Medicaid Services (CMS), the federal agency that oversees Medicare, at
http://www.cms.hhs.gov/MandatoryInsRep/.

14
15

Phila. Bar Ass’n Prof ’l Guidance Comm., Op. 2000–3 (2000).

See Aetna Cas. & Sur. Co. v. Gilreath, 625 S.W.2d 269 (Tenn. 1981) (lawyer has duty to honor employer's
statutory workers' compensation lien); Alaska Bar Ass’n Ethics Op. 92-3 (1992) (lawyer may not follow client’s
instruction to disregard facially valid assignment or statutory lien in favor of third party; lawyer should advise client
that he will hold disputed funds in trust until dispute is resolved).California Formal Ethics Op. 1988-101 (lawyer
whose client agreed to pay recovery proceeds to health care provider may not ignore agreement and disburse all
money to client upon client's request); Connecticut Informal Ethics Op. 06-09 (2006) (firm that drafted promissory
note in which client promised to pay third party out of settlement may not give all proceeds to client despite
unsuccessful effort to locate third party; firm must continue to hold money in interest-bearing account until third
party is found or until firm receives copy of judgment, stipulation, or binding decision stating that it shall release
funds); Maryland Ethics Op. 94-19 (1993) (lawyer must disregard client instruction not to pay creditor where client
had valid agreement with creditor); Ohio Supreme Court Ethics Op. 95-12 (1995) (lawyer must disregard client's
instructions not to pay physician from proceeds when client entered earlier agreement to pay medical expenses from
such proceeds); South Carolina Ethics Op. 94-20 (1994) (if lawyer knows client has executed valid doctor's lien he
may not comply with client's instruction that lawyer disregard it; no principle of client loyalty or confidentiality
permits lawyer to violate ethical obligations to third persons of notification and delivery).

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On the other hand, if 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.16 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.17 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. With these basic principles in hand, the Committee turns to three
hypothetical situations in which the ethical obligations of the lawyer in handling funds claimed
by a third party are discussed.
Hypothetical One – Duty to Investigate Potential Lien
A client retains a lawyer to pursue a claim for personal injuries. The client advises the
lawyer that at least some of his medical bills were paid by an employer-sponsored health Plan
(“the Plan”).18 The lawyer is aware that Virginia has an anti-subrogation statute that bars health
insurers from asserting subrogation rights. Va. Code § 38.2-3405. The lawyer is also aware that
some health Plans are self-funded ERISA Plans that may preempt state law.19 The lawyer does
16

Janson v. Cozen & O'Connor, 676 A.2d 242 (Pa. Super. Ct. 1996) (lawyer who holds client's funds in escrow
owes no special fiduciary duty to third person who makes claim against funds where there is no agreement between
client and third person regarding those funds); Farmers Ins. Exch. v. Zerin, 61 Cal. Rptr.2d 707 (Cal. Ct. App. 1997)
(lawyer who recovered tort settlement on clients' behalf is not legally obligated to clients' medical insurer to
withhold portion of funds from distribution to ensure insurer's reimbursement); Maryland Ethics Op. 97-20 (1997)
(lawyer may disburse entire settlement to client where hospital failed to timely submit bills to insurer and thus had
no legally valid claim). See also Arizona Ethics Op. 88-6 (1988) (third-party claim that is not perfected lien or
assignment does not affect client's right, and lawyer should advise claimant to take issue up with client); Colorado
Ethics Op. 94 (1993) (lawyer must distribute promptly to client if third person's claim against client property does
not arise out of statutory lien, contract, or court order); Connecticut Informal Ethics Op. 95-20 (1995) (lawyer has no
duty to act on mere assertions of third-party interests or to investigate whether third persons have interests in client
property); Maine Ethics Op. 116 (1991) (lawyer who represents client in both real estate transaction and divorce
must turn real estate proceeds over to client even if lawyer reasonably believes that client does not intend to comply
with divorce order); Maryland Ethics Op. 97-9 (1997) (settlement money may be disbursed to client even though
two lawyers assert claim to proceeds for services in other, unrelated matters); Philadelphia Bar Ass,n Ethics Op. 86134 (1986) (lawyer must disburse to client without retaining anything for physicians who are owed payment,
provided that there is no agreement between doctors and client regarding proceeds from settlement); South Carolina
Ethics Op. 89-13 (1989) (lawyer not required to pay half of injury settlement to client's ex-wife under divorce decree
where lawyer was not served with process as required by decree). See generally 1 G. Hazard & W. Hodes, The Law
of Lawyering §19.6 (3d ed. 2001 & Supp. 2005-2) (lawyer not a “neutral observer” and “must favor the client when
the other party's claims are not solid”).

17

Cleveland Ethics Op. 87-3 (1988); South Carolina Ethics Op. 93-31 (1993).

18

Most employer-sponsored health care Plans are governed by the Employment Retirement Income Security Act of
1974 (“ERISA”), 29 U. S. C. §1001 et seq.

19

The pivotal issue is whether the client has received medical care paid under an insured Plan—in which case the
Plan may be subject to the anti-subrogation statute, or a self-funded Plan—in which case the ERISA laws may
preempt state law and the anti-subrogation statute may not apply. Thus, ascertaining the nature of the employersponsored Plan is a critical step in determining whether the Plan is entitled to funds held in settlement of the client’s
case. If the Plan is self-funded, the terms of the Plan documents control the extent of its claimed right
of subrogation or reimbursement. If the Plan is not self-funded, but fully insured, the Virginia anti-subrogation
statute bars subrogation in contracts of health insurance.

LEO 1865
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not know if the client’s Plan is self-funded and even if it is self-funded, the lawyer does not
know if the Plan provides for reimbursement rights. The lawyer does not know if the Plan’s
administrator is aware of the client’s personal injury claim.
Do the Rules of Professional Conduct permit the lawyer to disburse the settlement
proceeds to the client without investigating whether the Plan is entitled to assert a claim against
the client’s settlement?
Under the circumstances presented in Hypothetical 1, the Committee believes that the
answer is a qualified “yes.” The facts presented in the instant hypothetical are quite different
from those in the cited authorities requiring the lawyer to protect a third party’s claim to the
funds being administered by the lawyer. A lien or claim has not been asserted and the lawyer
has insufficient information to know whether a valid lien or claim even exists. Here, the lawyer
would have to affirmatively investigate both the facts and the law to determine whether the Plan
has a lien on or entitlement to a portion of the funds held by the lawyer. In so doing, it is likely
that the lawyer would have to communicate with the Plan to determine if the Plan is exempt from
Virginia’s anti-subrogation statute. The lawyer would also have to find out if the Plan has a right
of reimbursement and, if so, the amount to which the Plan claims to be entitled. 20 By having
these communications with the Plan the lawyer would be disclosing to the Plan’s agents that a
Plan beneficiary is seeking a recovery or settlement against a third party. Communication with
the Plan could remind or encourage the Plan to perfect a lien or claim to the client’s settlement of
which the Plan was not aware. Depending on the circumstances, such a disclosure could be
detrimental to the client and contrary to the client’s interests. Rule 1.6(a) prohibits a lawyer from
disclosing information that the client has requested not be disclosed “or the disclosure of which
would be likely to be detrimental to the client, unless the client consents after consultation. . . .”
A lawyer faced with the circumstances presented in Hypothetical 1 must first consult
with the client about whether to have communications with the Plan, explaining to the client both
the risks and benefits of having such communication and obtain the client’s informed consent to
affirmatively investigate the Plan’s possible claim to an interest in the client’s settlement. If after
warning the client of the possible consequences of not reimbursing the Plan, the client directs the
lawyer to not communicate or further investigate the Plan’s right of reimbursement, the lawyer
should confirm in writing the client’s direction and the possible consequences of that course of
action.21 Although the lawyer will not violate Rules 1.15(b)(4) or (b)(5) and is therefore not
subject to professional discipline by the bar, the lawyer and/or the client may suffer civil liability
under federal law if the Plan seeks reimbursement of medical expenses that have not been paid
out of the settlement. Therefore, the lawyer has an ethical duty to advise the client of the
potential liability of disbursing the funds without preserving any funds to reimburse the Plan.
See Rules 1.2 and 1.4.

20

In Hypotheticals 1 and 2 the Committee assumes that the client has not executed any writing creating a
contractual obligation to reimburse the Plan.

21

Possible consequences that the lawyer should consider discussing with the client include the fact that the Plan
documents might contain a requirement that the client notify the Plan of third party recovery actions and that the
Plan might have the right to refuse payment of future medical expenses if the Plan is not reimbursed, as well as to
hold the client civilly liable for non-payment.

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While a lawyer may not knowingly disregard a lien or third party claim that has been
properly asserted against the settlement funds, the question raised in this hypothetical is whether
the lawyer has an ethical duty, without authorization from the client, to actively investigate a
third party’s potential claim against the settlement funds. The Committee believes that, under
the circumstances presented in the first hypothetical involving ERISA Plan claims, the Rules of
Professional Conduct do not impose such a duty on the lawyer unless the client has authorized
further communication with the Plan and further investigation of the Plan’s unasserted right of
reimbursement.
Hypothetical Two – Reasonable Effort to Determine Validity of Claim
Assume now that the Plan administrator has sent to the lawyer a letter asserting
subrogation rights. The lawyer has responded in writing requesting documents to determine
whether the Plan has a meritorious claim to portions of the settlement funds. Specifically, the
lawyer has requested documentation that the Plan is self-funded and documentation that the Plan
has a right of reimbursement. The lawyer has requested the documentation in thirty days. After
waiting thirty days with no response, the lawyer sends a second request to the health Plan
administrator notifying the Plan administrator that if the requested documents are not received in
fifteen days the lawyer will disburse the settlement without preserving any funds to reimburse
the Plan.
If the Plan administrator does not respond to the lawyer’s second request within fifteen
days, do the Rules of Professional Conduct permit the lawyer to disburse the settlement funds to
the client without preserving any funds to reimburse the health Plan?
A lawyer owes an ethical duty to act with reasonable diligence and competence in
handling a client’s legal matter. Rules 1.1 and 1.3. The Rules of Professional Conduct are rules
of reason.22 A lawyer cannot be reasonably expected to hold or preserve funds indefinitely on
the possibility that the Plan might at some point in the future demonstrate its entitlement to the
funds it claims. Most opinions hold that the lawyer may not sit on the funds for a prolonged
period of time because of the lawyer’s obligation to act diligently under Rule 1.3 and Rule
1.15(b)(4)’s requirement that the lawyer “promptly pay or deliver” funds to the client or third
party.23 As stated in Comment [4] to Rule 1.15, “[p]aragraphs (b)(4) and (b)(5) do not impose an
obligation upon the lawyer to protect funds on behalf of the client’s general creditors who have
no valid claim to an interest in the specific funds or property in the lawyer’s possession.”
In this hypothetical, the lawyer has exercised reasonable diligence to determine whether
the Plan has a valid subrogation claim or lien but the Plan has not responded to the lawyer’s
inquiries. The lawyer still does not know whether the Plan has a valid claim or lien. Comment
[4] to Rule 1.15 provides further: “[a] lawyer does not violate paragraphs (b)(4) and (b)(5) if he
has acted reasonably and in good faith to determine the validity of a third-party’s claim or lien.”
As discussed in the Committee’s analysis of Hypothetical 1, the lawyer must first consult with
the client regarding the course of action to take, informing the client to the fullest extent possible
22
23

Preamble to Virginia Rules of Professional Conduct (Scope).

The Dishonored Medical Lien: A New Trend in Bar Complaints, 25 Ariz. Att’y 17 (1989) at 17; Attorneys’
Ethical Obligations to the Clients’ Creditors, 67 N.Y. St. B.J. 40 (1995); Phila. Bar Ass’n Prof ’l Guidance Comm.
Op. 91–6 (1991).

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of the risks and benefits of further communication with the Plan to determine the existence and
extent of the Plan’s claim; or, alternatively, disregarding the Plan’s claim and releasing the funds
to the client. Under the circumstances presented in hypothetical 2, the Committee believes that
the lawyer has acted reasonably and in good faith to determine if the Plan has a claim to or
interest in the funds in the lawyer’s custody or control and may, after consultation with the client,
disburse the settlement funds to the client without holding back funds to reimburse the Plan.
Hypothetical Three – Reasonable Effort to Determine Validity and Amount of Claim
Another question is raised by a different hypothetical. Lawyer represents an 80 year
client who fell at a hospital and sustained a hip fracture. She had a Medicare Advantage (MA)
Plan which paid most of the medical bills. The lawyer settled with the hospital in
mediation. The lawyer sent the Plan’s lawyer an email indicating that the lawyer does not
believe it has subrogation rights, based on the written health Plan, which is silent on subrogation,
and the relevant case law. Lawyer received a written response from the Plan’s lawyer asserting
subrogation rights and citing to the federal regulations.24 The letter did not provide the lawyer
with the amount of its claim. The letter invited the lawyer to provide cases and the Plan language
the lawyer was relying upon to challenge the Plan’s right of subrogation. The lawyer promptly
emailed a letter back to the Plan, citing cases in support of the lawyer’s position and referencing
the absence of a subrogation provision in the health Plan. The lawyer specifically requested the
amount of the claim and any legal authority the Plan relies upon to counter the cases cited by the
lawyer. A month has now passed since the lawyer replied to the health Plan and the lawyer has
not received a response back from the Plan’s lawyer even though the lawyer has sent at least 3
follow-up emails and left a voicemail message with the Plan’s lawyer.
Under these circumstances, has the lawyer exercised reasonable diligence and good faith
to determine both the validity and amount of the Plan’s claim such that the Rules of Professional
Conduct permit the lawyer to disburse the settlement funds to the client without preserving any
funds to reimburse the health Plan?
As in hypothetical 2, the Committee believes that the lawyer has exercised reasonable
diligence and good faith to determine both the validity and the amount of the Plan’s claim, such
that the lawyer may, after consultation with the client, disburse the settlement funds to the client
without preserving any funds to reimburse the health Plan.

Conclusion
The mere assertion of a claim by a third party to funds held by the lawyer does not
necessarily entitle the third party to such funds. A lawyer must exercise competence and
reasonable diligence to determine whether a substantial basis exists for a claim asserted by a
third party.25 If no such basis exists, or if the third party has failed to take the steps required by
24

42 C.F.R. 422.108 (Medicare secondary payer (MSP) procedures).
The Committee acknowledges with great concern the increasing complexity of the task a lawyer faces in
resolving liens. This is caused in part by more recent state and federal laws and regulations in this area. The time
and expense necessary to handle such matters properly has increased dramatically over the years. As one expert
has noted:

25

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law to perfect its entitlement to the funds, a lawyer may release those funds to the client, after
appropriate consultation with the client regarding the consequences of disregarding the third
party’s claim.
If the lawyer reasonably believes that the third party has an interest in the funds held by
the lawyer, the lawyer may not disburse to the client funds claimed by the third party, even if the
client so directs. In prior opinions this Committee has held that a lawyer may not disregard the
valid claims of a third party,26 and lawyers have been subject to discipline for disbursing to the
client funds to which a third party claimed entitlement.27 When the client has a non-frivolous
dispute over the third party’s entitlement to funds, or the lawyer cannot determine, as between
the client and the third party, who is entitled to the funds, the lawyer should hold the disputed
funds in trust until the dispute is resolved or interplead them into court. A lawyer who chooses
to hold or interplead the disputed funds instead of releasing the funds to the client does not
violate Rule 1.15(b). A lawyer who acts in good faith and exercises reasonable diligence to
determine the validity of a third party’s claim or lien is not subject to discipline under Rule
1.15(b). Whether the lawyer faces civil liability for failing to protect a third party lien or claim is
a legal issue beyond the purview of this Committee.28

The phenomenon has spawned a whole new industry with many companies taking on the task of
“lien resolution” and providing an alternative to the personal injury bar. Personal injury attorneys
may now hire experts in these complex areas. It may be cost effective and result in a better
outcome for the client if these issues are contracted out to firms or companies with knowledge and
expertise in these issues. Additionally, the increased recovery actions by governmental agencies
has had another impact on this area. It has and will continue to delay the ability to settle the claims
that exist as the government agencies become flooded with more and more of these claims. It can
tie up the resources of plaintiffs’ attorneys and result in funds languishing in non-interest bearing
or IOLTA accounts for extended periods of time.
Pi-Yi Mayo, Medicare and Medicaid Claims: State Bar of Texas Advanced Personal Injury Law Course (2011) at
3.
26

Va. Legal Ethics Op. 1747 (2000) (unethical for lawyer to disburse funds to client when client had agreed to pay
third party medical group out of the settlement proceeds held by lawyer; lawyer owed duty to hold funds if third
party claim was in dispute or interplead the disputed funds into court if client would not authorize disbursement to
medical group).

27

Virginia State Bar v. Timothy O’Connor Johnson, Case No. CL09-2034 (Richmond Cir. Ct. August 11, 2009).
Lawyer violates former Rule 1.15 (c)(4) when refusing to honor chiropractor’s consensual lien with client, directing
client’s lawyer to pay total amount owed to chiropractor out of settlement of client’s personal injury case. Although
lawyer was not a party to the assignment of benefits, lawyer knew that client had contracted with chiropractor to pay
the medical bill out of settlement. When the chiropractor refused to reduce his bill, lawyer unilaterally arbitrated the
dispute by disbursing to chiropractor an amount less than what was owed. Lawyer owed a duty to either pay the full
amount owed to chiropractor or hold the amount in dispute in trust until client and chiropractor could resolve their
dispute, or interplead the disputed funds into court. The court cited with approval Legal Ethics Opinion 1747 and
comment [4] to Rule 1.15 and affirmed the District Committee’s finding of misconduct.

28

For a lawyer’s civil liability under such circumstances, see, e.g., Kaiser Found. Health Plan, Inc. v. Aguiluz, 54
Cal. Rptr. 2d 665 (Ct. App. 1996) (attorney who knew client had agreed to repay medical provider from settlement
proceeds was liable for amount client owed provider); Shelby Mut. Ins. Co. v. Della Ghelfa, 513 A.2d 52 (Conn.
1986) (insurer could enforce lien against lawyer who disbursed proceeds to insured); Unigard Ins. Co. v. Fremont,
430 A.2d 30 (Conn. Super. Ct. 1981) (lawyer liable for conversion because of failure to honor a statutory insurer’s
lien); Bonanza Motors, Inc. v. Webb, 657 P.2d 1102 (Idaho Ct. App. 1983) (law firm liable for failing to honor
assignment that client, but not firm, had signed); W. States Ins. Co. v. Louise E. Olivero & Assocs., 670 N.E.2d 333
(Ill. App. Ct. 1996) (firm’s failure to honor subrogation lien constituted conversion); Roberts v. Total Health Care,
Inc., 709 A.2d 142 (Md. 1998) (liability based on lawyer’s knowledge of statutory lien or valid assignment); Leon v.

LEO 1865
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This opinion is advisory only and not binding on any court or tribunal.
Committee Opinion
November 16, 2012

Martinez, 638 N.E.2d 511 (N.Y. 1994) (if enforceable assignment is proven, lawyer is liable to pay the creditor the
assigned amount); Prewitt v. City of Dallas, 713 S.W. 2d 720 (Tex. App. 1986) (a lawyer’s constructive notice of
the city’s right to the first money paid to the firm’s client rendered the law firm liable after it paid those monies
out to its client).