State Bar of Arizona Ethics Opinions

03-05: Conflicts of Interest; Settlements; Creditors of Client; Indemnify Releasee; Liens
8/2003

A claimant's attorney may not ethically enter into any settlement agreement that would require the attorney to indemnify or hold the Releasee harmless from any lien claims against the settlement proceeds.

FACTS[1]

According to the inquiring attorneys, defendants in civil cases, through the defense attorney, have demanded, as a condition of settlement, that the claimant's attorney, in addition to the claimant, agree to indemnify the defendant, the defendant's insurer and/or the defendant's attorney, from any claims arising from liens asserted against the claimant's settlement funds.

QUESTION PRESENTED

May an attorney ethically sign a Release or Settlement Agreement that requires the attorney, in addition to the client, to indemnify the Releasees, or to hold the Releasees harmless, from any liens asserted or claimed against the client's settlement funds?

RELEVANT ETHICAL RULES

ER 1.2.     Scope of Representation

(a)     A lawyer shall abide by a client's decisions concerning the objectives of representation, subject to paragraphs (c), (d) and (e), and shall consult with the client as to the means by which they are to be pursued.  A lawyer shall abide by a client's decision whether to accept an offer of settlement of a matter.  In a criminal case, the lawyer shall abide by the client's decision, after consultation with the lawyer, as to a plea to be entered, whether to waive jury trial and whether the client will testify.

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(e)     When a lawyer knows that a client expects assistance not permitted by the Rules of Professional Conduct or other law, the lawyer shall consult with the client regarding the relevant limitations on the lawyer's conduct.

ER 1.7.     Conflict of Interest: General Rule

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(b)     A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer's responsibilities to another client or to a third person, or by the lawyer's own interests, unless:

(1)     the lawyer reasonably believes the representation will not be adversely affected; and

(2)     the client consents after consultation.  When representation of multiple clients in a single matter is undertaken, the consultation shall include explanation of the implications of the common representation and the advantages and risks involved.

ER 1.8.     Conflict of Interest: Prohibited Transactions

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(e)     A lawyer shall not provide financial assistance to a client in connection with pending or contemplated litigation, except that:

(1)     a lawyer may advance court costs and expenses of litigation, provided the client remains ultimately liable for such costs and expenses; and

(2)     a lawyer representing an indigent client may pay court costs and expenses of litigation on behalf of the client.

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ER 1.15.     Safekeeping Property

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(b)     Upon receiving funds or other property in which a client or third person has an interest, a lawyer shall promptly notify the client or third person.  Except as stated in this rule or otherwise permitted by law or by agreement with the client, a lawyer shall promptly deliver to the client or third person any funds or other property that the client or third person is entitled to receive and, upon request by the client or third person, shall promptly render a full accounting regarding such property.

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ER 1.16.     Declining or Terminating Representation

(a)     Except as stated in paragraph (c), a lawyer shall not represent a client or, where representation has commenced, shall withdraw from the representation of a client if:

(1)     the representation will result in violation of the Rules of Professional Conduct or other law;

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(b)     Except as stated in paragraph (c), a lawyer may withdraw from representing a client if withdrawal can be accomplished without material adverse effect on the interest of the client, or if:

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(5)     the representation will result in an unreasonable financial burden on the lawyer  or has been rendered unreasonably difficult by the client;

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ER 2.1.     Advisor

In representing a client, a lawyer shall exercise independent professional judgment and render candid advice.  In rendering advice, a lawyer may refer not only to law but to other considerations such as moral, economic, social and political factors, that may be relevant to the client's situation.

ER 8.4.     Misconduct

It is professional misconduct for a lawyer to:

(a)     violate or attempt to violate the rules of professional conduct, knowingly assist or induce another to do so, or do so through the acts of another;

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RELEVANT ARIZONA ETHICS OPINIONS

There are no prior Arizona Formal Opinions that address this issue.  However, Ariz. Ops. 98-06, 88-02 and 88-06 and the case of In re Augenstein, 177 Ariz. 581, 582, 870 P.2d 399, 400 (1994), set forth an attorney's ethical obligations regarding the retention and disbursement of funds that may be subject to valid or disputed medical liens.

OPINION

An injured client's medical expenses in a civil action may be substantial and represent a significant portion of the claimant's recovery by settlement or judgment.  All or part of those expenses may have to be repaid to a health insurer, government agency or healthcare provider pursuant to a statutory or common law lien.

The settlement of an injury claim is made between the parties, that is, the injured claimant and the alleged tortfeasor (as well as the tortfeasor's insurance carrier, if there is one).  Out of the settlement funds, the claimant must pay his or her own attorneys the agreed-upon fee, and reimburse the costs advanced by the attorneys.  The claimant must also satisfy, by payment in full or compromise, all valid liens out of the claimant's share of the settlement proceeds.

If a claimant refuses to repay a lien, or is unable to do so (for example, because the client has spent the client's share of the properly distributed settlement proceeds), it is possible that a lien holder might make a claim, or file suit, against the Releasees for payment of those liens, as is permitted by A.R.S. § 33-934.  The recourse of the Releasees would ordinarily be against the claimant who signed the settlement agreement and agreed to indemnify or hold the Releasees harmless against any and all lien claims (or it might be against the alleged lien holder if the lien claim was invalid or unenforceable against the Releasees or against the plaintiff's attorney if disputed funds were improperly released to the claimant).

However, the desire of the Releasees not to be involved in subsequent litigation over liens, after settlement of the underlying claim, has led them not only to insist that the claimant hold them harmless, or indemnify them, against such claims as a condition of settlement, but to request or demand that the claimant's attorneys do so as well.

The mere request that an attorney agree to indemnify Releasees against lien claims creates a potential conflict of interest between the claimant and the claimant's attorney.  The attorney's refusal, for ethical reasons, to accede to such a demand as a condition of settlement could prevent the client from effectuating a settlement that the client otherwise desires.

The insistence upon an attorney's agreement to indemnify as a condition of settlement could, for example, cause the lawyer to recommend that the client reject an offer that would be in the client's best interest because it would potentially expose the lawyer to the payment of hundreds of thousands of dollars in lien expenses, or litigation over such lien expenses.

The attorney's acceptance of such a condition would also create a conflict of interest with an existing client under ER 1.7 because the client's failure or refusal to repay a lien could make the client's lawyer its guarantor.

That might materially limit the representation by virtue of the lawyer's own interest in having the client (rather than the lawyer) pay the liens in full.  Even if the lawyer were willing to accept that potential financial burden, and even if the lawyer were ethically permitted to provide such financial assistance, such an agreement might compromise the lawyer's exercise of independent professional judgment and rendering of candid advice in violation of ER 2.1.

While ER 1.2 requires an attorney to abide by a client's decision whether to accept an offer of settlement, a settlement agreement that requires the attorney to indemnify, or hold the Releasees harmless, violates ER 1.8.

Since, under ER 1.8, an attorney cannot ethically provide financial assistance to a client by paying, or advancing, the client's medical expenses before or during litigation, an attorney cannot ethically agree, voluntarily or at the client's or Releasees' insistence, to guarantee, or accept ultimate liability for, the payment of those expenses.

Such financial assistance in the guise of an agreement of indemnification could encourage prospective clients to seek legal counsel for improper reasons, conduct that has resulted in disciplinary measures.  See Matter of Carroll, 124 Ariz. 80, 602 P.2d 461 (1979).  (Suspending attorney from practice for one year for, among other things, contingency fee agreement that relieved client of obligation to repay costs advanced if there was no recovery.)

A client's insistence upon the acceptance of a settlement offer containing such a condition would require the lawyer to withdraw from representation since it would result in a violation of the Rules of Professional Conduct.  ER 1.16(a).

In short, such agreements to indemnify would violate several provisions of the Rules of Professional Conduct.  Both the Kansas State Bar (in Ethics Advisory Committee Op. 01-05 (May 23, 2002)), and the North Carolina State Bar (in Ethics Opinion RPC 228 (July 26, 1996)) have reached the same conclusion.

CONCLUSION

A claimant's attorney may not ethically enter into any settlement that would require the attorney to indemnify or hold the Releasee harmless from any lien claims.

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[1] Formal Opinions of the Committee on the Rules of Professional Conduct are advisory in nature only and are not binding in any disciplinary or other legal proceedings.  © State Bar of Arizona 2003