Can a plaintiff's lawyer in West Virginia personally agree, as a condition of settlement, to indemnify and hold the defendant harmless from third-party claims or liens on the settlement funds, and can defense counsel demand it?

Plain-English summary

The Lawyer Disciplinary Board (in an opinion originally numbered L.E.O. 2012-02 when published for public comment) addressed whether it violates the Rules of Professional Conduct for an attorney to personally agree, as a condition of settlement, to indemnify and hold the opposing party harmless from any and all third-party claims to the settlement funds. The Board concludes that such an agreement violates Rules 1.8(e) and 1.7(b).

The Board reasons that Rule 1.8(e) prohibits an attorney from providing financial assistance to a client beyond advancing the costs and expenses of litigation. A personal agreement to indemnify the opposing party from all future claims would have the lawyer undertake an obligation to pay the client's bills, which are not court costs or litigation expenses. The Board further reasons that Rule 1.7(b) prohibits representing a client when the representation will be materially limited by the attorney's own interest: accepting an otherwise favorable settlement that hinges on the attorney assuming personal exposure beyond any to which the attorney may already be obligated may put the attorney's interests in conflict with the client's. Because the agreement would violate Rules 1.8(e) and 1.7(b), the Board also concludes that defense counsel who proposes or requires such a personal indemnification, as a condition of settlement, violates Rule 8.4(a)'s bar on knowingly assisting or inducing another to violate the Rules.

The Board acknowledges that requests for indemnification arise from defendants' legitimate desire to be protected from third-party claims on settlement proceeds, and that proper disbursement of settlement proceeds is among a lawyer's most important responsibilities. It notes that Rule 1.15(b) already requires plaintiff's counsel to protect the lawful interests of third persons (such as medical providers, insurers, or Medicare and Medicaid) and to deliver funds to which they are entitled, and that plaintiff's counsel remains bound by those obligations even when delays in determining the amounts owed strain both the client and the lawyer holding funds in trust. The opinion adds that even where a lawyer is under a legal obligation such as the Medicare Secondary Payer Act to set aside settlement funds, counsel should not enter a personal indemnification agreement and defense counsel should not request one. The Board observes that in Medicare-beneficiary cases plaintiff's counsel already has actual knowledge that Medicare's interests must be protected and existing mechanisms to determine and pay amounts owed, citing United States v. Harris as an example of CMS recovering from a plaintiff's attorney. The Board concludes its position is consistent with the majority of ethics opinions in other states.

In practice

Under this opinion, the conduct addressed (a plaintiff's lawyer personally agreeing to indemnify and hold the opposing party harmless from third-party claims or liens, and defense counsel demanding it as a settlement condition) is treated as a violation of the Rules of Professional Conduct. The opinion holds that the analysis turns on Rule 1.8(e) (the lawyer would be assuming the client's debts, beyond permitted litigation costs) and Rule 1.7(b) (the lawyer's personal exposure may materially limit the representation), with Rule 8.4(a) reaching the defense lawyer who induces the violation.

The opinion distinguishes the prohibited personal indemnification from the lawyer's existing duties. It holds that plaintiff's counsel remains obligated under Rule 1.15(b) to protect and pay third parties with lawful interests in the settlement proceeds, and that obligations such as those under the Medicare Secondary Payer Act continue to apply. Per the opinion, the defect is the lawyer's assumption of personal liability for the client's third-party obligations, not the protection of third-party interests, which the rules already require.

Common questions

Q: Can a plaintiff's lawyer agree to personally indemnify the defendant against liens as part of a settlement?

A: No. The opinion concludes that a personal agreement to indemnify and hold the opposing party harmless from third-party claims or liens violates Rule 1.8(e) (improper financial assistance, assuming the client's debts) and Rule 1.7(b) (the lawyer's personal interest materially limiting the representation).

Q: Can defense counsel require such a hold-harmless clause as a condition of settlement?

A: No. The opinion concludes that because the indemnification agreement would violate Rules 1.8(e) and 1.7(b), defense counsel who proposes or requires it as a condition of settlement violates Rule 8.4(a), which bars knowingly assisting or inducing another to violate the Rules.

Q: Does this relieve the plaintiff's lawyer of any duty to third parties like Medicare?

A: No. The opinion emphasizes that Rule 1.15(b) still requires plaintiff's counsel to protect the lawful interests of third persons and deliver funds they are entitled to, and that obligations such as the Medicare Secondary Payer Act continue to apply; the lawyer simply may not assume personal indemnification.

Background and rules framework

The opinion interprets the West Virginia Rules of Professional Conduct, adopted by the Supreme Court of Appeals of West Virginia. Rule 1.8(e) (Model Rule 1.8(e)) bars financial assistance to a client in connection with litigation beyond advancing court costs and litigation expenses. Rule 1.7(b) (Model Rule 1.7) bars representation that will be materially limited by the lawyer's own interest. Rule 8.4(a) (Model Rule 8.4(a)) bars knowingly assisting or inducing another to violate the Rules. Rule 1.15(b) (Model Rule 1.15) requires safekeeping and proper disbursement of funds, including protecting the lawful interests of third persons with claims on settlement proceeds. The opinion situates the analysis against the Medicare Secondary Payer Act, under which CMS may recover from a plaintiff's attorney.

Citations and references

Rules of Professional Conduct:

• Model Rule 1.8 / WV RPC 1.8(e) (financial assistance to a client limited to court costs and litigation expenses)
• Model Rule 1.7 / WV RPC 1.7(b) (representation materially limited by the lawyer's own interest)
• Model Rule 8.4 / WV RPC 8.4(a) (knowingly assisting or inducing another to violate the Rules)
• Model Rule 1.15 / WV RPC 1.15(b) (protecting and delivering funds to third persons with lawful interests)

Statutes:

• Medicare Secondary Payer Act (MSPA)

Cases:

• United States v. Paul J. Harris, 2009 WL 891931 (N.D. W. Va.), CMS recovered a Medicare reimbursement judgment against a plaintiff's attorney who did not pursue the administrative appeal

Other opinions cited:

• Ohio Ethics Op. 2011-11; North Carolina State Bar Ethics Op. RPC 228; Arizona Ethics Op. 03-05; Illinois Ethics Op. 06-01; Indiana Ethics Op. 1 (2005); Missouri Ethics Op. 125; South Carolina Ethics Op. 08-07; Tennessee Ethics Op. 2010-F-154; Wisconsin Ethics Op. O.E.-87-11; New York City Formal Op. 2010-3; Florida Bar Staff Op. 30310 (2011)

See also

• Alabama Ethics Op. 2011-01: A lawyer's indemnification of defendants for unpaid liens
• Alabama Ethics Op. 2015-01: Lien reduction and double-dipping
• WV LEO 2016-01: Third-party loans to advance litigation costs

Source

• Landing page: https://wvodc.org/Legal-Ethics-Opinion
• Original PDF: https://storage.googleapis.com/msgsndr/Rgd68xOkcVdteTsBkf6O/media/66a7ea7e0fbd7b3277acc1f8.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain; the linked PDF is authoritative.

L.E.O. 2013-01[1]

SETTLEMENT AGREEMENTS CONTAINING "INDEMNIFY AND HOLD HARMLESS" LANGUAGE THAT RESTRICT AN ATTORNEY'S ONGOING REPRESENTATION VIOLATE THE RULES OF PROFESSIONAL CONDUCT

INTRODUCTION

The Lawyer Disciplinary Board has been asked to address the question of whether it is a violation of the Rules of Professional Conduct for an attorney to personally agree, as a condition of settlement, to indemnify and hold harmless the opposing party from any and all claims to the settlement funds by third persons. Several disciplinary authorities have addressed this issue in recent years, and the Lawyer Disciplinary Board sees the need to issue a formal advisory opinion on this topic, as well.

The Lawyer Disciplinary Board finds that such an agreement by an attorney to indemnify the opposing party violates Rules 1.8(e) and 1.7(b) of the West Virginia Rules of Professional Conduct. Rule 1.8(e) prohibits an attorney from providing financial assistance to a client beyond the advancement of costs and expenses of litigation. A personal agreement by a lawyer to indemnify the opposing party from any and all future claims creates a situation wherein the lawyer undertakes an obligation to pay the client's bills which are not considered to be court costs or expenses of the litigation. Rule 1.7(b) prohibits an attorney from representing a client if the representation will be materially limited by the attorney's own interest. Acceptance of an otherwise favorable settlement that hinges upon the assumption by the attorney of personal exposure above any to which the attorney may already be obligated may render the attorney's interests in conflict with those of his client.

In addition, Rule 8.4(a) of the Rules of Professional Conduct provides that a lawyer may not knowingly assist or induce another to violate the Rules of Professional Conduct. Since such an agreement to indemnify the opposing party would violate Rules 1.8(e) and 1.7(b) for the reasons set forth above, the Board finds that it would be a violation of Rule 8.4(a) for defense counsel to propose or require, as a condition of settlement, that the plaintiff's lawyer make a personal agreement to indemnify the opposing party from any and all claims by third persons to the settlement funds.

This Board recognizes that the requests for such indemnification are born out of the desire to protect settling defendants from claims by third parties who have an interest in the settlement proceeds which are being distributed by the plaintiff's counsel. The Board also recognizes that the proper disbursement of settlement proceeds is one of the most important responsibilities for a lawyer under the Rules of Professional Conduct. Lawyers who receive settlement funds are often faced with clients who are in dire need of their funds from the settlement proceeds and who are often insistent on being paid first regardless of whether money is also owed to the attorney or third persons, such as medical providers, insurance carriers, or Medicare and Medicaid. However, Rule 1.15(b) of the Rules of Professional Conduct requires that a plaintiff's lawyer also protect the lawful interests of third persons and deliver to those third persons any funds from the settlement proceeds to which they are entitled. Although delays in the process of determining the amounts to which such third parties are entitled can place a strain on both the client who may need money and the lawyer who is holding the funds in trust, plaintiff's counsel remains ethically bound by his or her obligations to those third parties.

The Lawyer Disciplinary Board also advises that, even if a lawyer is ethically bound or under a legal obligation such as that found in the Medicare Secondary Payer Act ("MSPA") to set aside settlement funds, counsel still should not enter into an agreement to personally indemnify the defendant and defense counsel should not make the request to plaintiff's counsel. While the purpose of this L.E.O. is not to address the legal requirements of the MSPA, it is generally acknowledged that there are notification of settlement requirements under the MSPA and that a plaintiff's counsel must determine if a client is a Medicare beneficiary and, if so, whether there are past or future medical Medicare expenses associated with the claim which is being settled. Furthermore, it is acknowledged that, if a plaintiff's medical bills were or may be paid by Medicare, then plaintiff's counsel generally withholds an amount of the settlement funds which is sufficient to satisfy the client's obligations to Medicare. In addition, plaintiff's counsel will often negotiate with the Centers for Medicare and Medicaid Services ("CMS") regarding the final amount to be paid. Consequently, in cases involving Medicare beneficiaries, the plaintiff's counsel already has actual knowledge that Medicare's interests must be protected and mechanisms by which determinations can be made concerning the amounts to be withheld and eventually paid back. If Medicare is not paid, CMS has a right of action to recover its payments from certain entities, including plaintiff's attorneys, under the MSPA.[2] While the Lawyer Disciplinary Board recognizes the competing interests and concerns among parties and their counsel in these situations, lawyers must remember that they are still bound by the Rules of Professional Conduct and settlement agreements which contain language requiring plaintiffs' counsel to personally indemnify the defendant for a Medicare lien or other future obligation should not be contemplated.

CONCLUSION

The Lawyer Disciplinary Board reviewed ethics opinions from other states and determined that its position on this issue is consistent with the majority of the ethics opinions issued in other states.[3] In conclusion, settlement agreements that require an attorney to make a personal agreement to indemnify and hold harmless the opposing party from subrogation liens and/or third party claims violate the Rules of Professional Conduct.

APPROVED by the Lawyer Disciplinary Board on the 26th day of April, 2013, and ENTERED this 26th day of April, 2013.

John W. Cooper, Chairperson Pro Tem
Lawyer Disciplinary Board

[1] Formerly L.E.O. 2012-02 when draft was published for public comment.

[2] In United States v. Paul J. Harris, 2009 WL 891931 (N.D.W.Va.), the federal government filed a complaint against Mr. Harris for declaratory judgment and money damages owed to CMS. Mr. Harris represented a client in a personal injury matter. His client's medical bills were paid by Medicare and the case was eventually settled for $250,000.00. Mr. Harris notified Medicare concerning the details of the settlement and Medicare determined that it was owed approximately $10,253.59. Mr. Harris was subsequently notified of the lien amount and the request for payment. However, the lien was not paid and the federal government initiated suit against Mr. Harris. The Court, in granting the government's Motion for Summary Judgment, held Mr. Harris responsible for the reimbursement since neither he nor his clients availed themselves of their administrative appeal process after being notified of the request for reimbursement. The Court found that Mr. Harris was now precluded from protesting the reimbursement determination and awarded the government a judgment in the amount of $11,367.78, plus interest.

[3] See, Ohio Ethics Opinion 2011-11; North Carolina State Bar Ethics Opinion RPC 228; Arizona Ethics Opinion 03-05; Illinois Ethics Opinion 06-01; Indiana Ethics Opinion 1 (2005); Missouri Ethics Opinion 125; South Carolina Ethics Opinion 08-07; Tennessee Ethics Opinion 2010-F-154; Wisconsin Ethics Opinion O.E.-87-11; New York City Formal Opinion 2010-3; and Florida Bar Staff Opinion 30310 (2011). However, only Indiana and Florida addressed the issue in terms of Medicare.