State Bar of Arizona Ethics Opinions

98-06: Liens; Creditors of Clients; Client Funds and Property; Settlements
6/1998

This opinion addresses an attorney’s obligations to a third party who claims an interest in funds.  [ER 1.15]

FACTS[1]

The Committee on the Rules of Professional Conduct of the State Bar received several requests for formal opinions, as well as numerous requests for informal or telephonic opinions, concerning the ethical duties of any attorney in a personal injury case who holds settlement funds in which a medical provider claims an interest by reason of a lien, assignment, letters, billings or on some other basis. In order to avoid addressing these inquiries on a piecemeal basis, the Committee determined that a comprehensive opinion on these issues is required.  This opinion addresses the most commonly raised questions concerning an attorney's ethical duties to the client and to the providers in the myriad of circumstances where a provider, as well as the client, purports to claim an interest in personal injury settlement proceeds in the hands of an attorney.

Questions Presented

What are an attorney's ethical duties where:

1. A client has retained the attorney on an hourly basis to enter into settlement negotiations with an insurance company for settlement of a personal injury claim.  When the client contacts the attorney, the client has already obtained directly from all medical providers all medical bills and records, and has provided them to the attorney.  The attorney never has any direct contact with any medical provider.  The client, in a written agreement with the attorney, agrees that the client will pay all doctor and medical fees.  The attorney negotiates a settlement with the insurance company, and the insurance company draft is made payable to the attorney and the client.  The attorney executes the draft and gives it to the client.  The attorney has no contingency interest in settlement money.  The client executes the draft and deposits the draft in the client's bank account.  The client then pays the attorney's bill for hourly services.

2. The client, but not the attorney, has signed a lien in favor of a medical provider, and the attorney has notice of the lien, but the client has instructed the attorney not to honor the lien.  The lien is not filed with the County Recorder.

3. A lien in favor of a medical provider has been signed by both the client and by the attorney.

4. The attorney orally agrees with a  medical provider to reimburse the provider out of settlement funds, and attorney had express or apparent authority to make such an agreement.

5. The attorney has received a lien form from a medical provider which the provider asked the client and the attorney to sign.  The attorney and client do not sign the lien form, and no lien has been recorded by the provider.

6. The medical provider has presented a statutory lien that is facially incomplete or untimely, but has been recorded with the County Recorder.

7. The medical provider has simply sent copies of the client's medical bills to the attorney.

8. The medical provider, without sending copies of the bills, and absent a lien or assignment, simply sends a letter to the attorney demanding payment for medical bills for the client's accident-related treatment.

9. The attorney has knowledge that a particular provider has treated the client for accident-related injuries arguably connected to the conduct which is the subject of this representation, but the doctor has no lien or assignment and has taken no other "demand" action with regard to the bills.

10. The attorney and/or the client have signed a "letter of protection" in favor of the medical provider.

11. The client has signed an assignment in favor of the medical provider and the attorney has notice of the assignment.

12. Both the client and the attorney have signed an assignment in favor of the medical provider.

Relevant Ethical Rules

Terminology:

· "Knowingly," "known," or "knows" denotes actual knowledge of the fact in question.  A person's knowledge may be inferred from circumstances.

· "Belief" or "believes" denotes that the person involved actually supposed the fact in question to be true.  A person's belief may be inferred from circumstances.

· Reasonable "belief" or "reasonably believes," when used in reference to a lawyer, denotes that the lawyer believes the matter in question and that the circumstances are such that the belief is reasonable.

· "Reasonably should know," when used in reference to a lawyer, denotes that a lawyer of reasonable prudence and competence would ascertain the matter in question.

ER 1.1 Competence

A lawyer shall provide competent representation to a client.  Competent representation requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation.

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 . . .

* * * * *

ER 1.7 Conflict of Interest: General Rule

* * * * *

(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  . . .

* * * * * *

ER 1.15 Safekeeping Property . . .

* * * * *

(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.

PRIOR ETHICS OPINIONS

Arizona Formal Opinion 97-02 contains a discussion of the "interests" of health plans of federal employees under ER 1.15.  The Committee found that a health insurance contract issued under the Federal Employees Health Benefits Act (FEHBA), 5 U.S.C. § 8901, et seq., gave the plan a cognizable "interest" in the client's personal injury settlement such that the attorney must comply with ER 1.15(b).  Specifically, the opinion holds that a federal health plan's contractual right to subrogation is a cognizable, matured "interest" under ER 1.15(b); that an attorney cannot ethically counsel a client to sign a release that might extinguish the health plan's subrogation claim unless the attorney intends to honor his obligation to the plan under ER 1.15 by paying the plan's claim; that an attorney may not ethically disburse all the settlement proceeds to the client; rather, under ER 1.15(b) the attorney must notify the plan of the settlement and disburse directly to the plan any funds to which it is entitled.  Further, the opinion finds that, under this plan, an attorney has fiduciary duties to a third party in addition to the fiduciary duties owed to the client and that ER 1.15(b) is clear in requiring the attorney to promptly notify the plan and to promptly deliver to the plan any funds to which it is entitled.

Arizona Formal Opinion 88-02 contains a general discussion of the ethical questions presented by medical liens, the disclosures required, the conflict of interest analysis an attorney must engage in under ER 1.7(b), and, finally, the steps that an attorney must take if there is a dispute concerning the funds.  Specifically, the opinion holds that if the attorney is "satisfied" that either the client or the health care provider is legally entitled to the funds that the attorney is holding, he should disburse them accordingly.  If the lawyer has any "good faith doubt" as to the proper recipient, he should hold the disputed monies in trust, pending a resolution of the dispute. 
Finally, if the attorney's own interests are implicated--for example, if the attorney would like to
have the medical provider paid to maintain good relations--the attorney must comply with ER 1.7(b).

Arizona Formal Opinion 88-06 amplified on the holding of Opinion 88-02, concluding that a lawyer retaining disputed funds in trust may not simply wait until the client and the medical provider resolve the dispute.  Rather, after waiting a reasonable period of time, the attorney should interplead the funds.

OPINION

We begin by noting that the jurisdiction of the Committee on the Rules of Professional Conduct is limited solely to ethical questions; the Committee has no authority to review legal issues.  Whether the providers here have an ER 1.15(b) "interest" in the funds held by the inquiring attorney is not a legal question, or at most involves mixed questions of law and ethics.  This opinion will therefore analyze these issues in an attempt to provide some guidance to the Bar.

A. Actual Knowledge Required

We now turn to the issue of what kind of notice or knowledge the attorney receiving settlement funds must have for the requirements of notification and disbursement in ER 1.15(b) to be activated.  Interestingly, the rule itself is silent as to what level of belief or knowledge a lawyer must have to trigger the obligation to notify a third party creditor, disburse funds to such a creditor, or interplead such funds to settle any dispute:

(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.

ER 1.15(b).

Two respected commentators, Hazard and Hodes, have noted that "most obligations imposed by the Rules of Professional Conduct involve a level of cognition by a lawyer," and that "[where] no express cognitive standard is provided in the Rules  . . . , the relevant standard must be supplied by interpretation."  G. Hazard and W. Hodes, The Law of Lawyering--A Handbook on the Model Rules of Professional Conduct, Subsections 401 and 402 at lxxiv and lxxvi (1985).

In interpreting a standard for ER 1.15(b), we begin with the Comment to the Rule:

Third parties, such as a client's creditors, may have just claims against funds
or other property in a lawyer's custody.  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.  However, a lawyer should not unilaterally assume to arbitrate a dispute between the client and the third party.  (Emphasis added.)

As the final sentence makes clear, lawyers are not to "unilaterally assume to arbitrate" matters between the client and third party creditors.  This sentence underscores the lawyer's primary responsibility to the client, not the third party creditor.  As the Committee said in Formal Op. 97-02, fn 2, this primary duty to the client was not lost on the Commission on Model Rules.  The language concerning funds in which a third person has an interest was added by amendment to Rule 1.15(b) of the Model Rules of Professional Conduct.  The Commission on Model Rules objected to the wording of the amendment, noting that under certain circumstances it would be inappropriate for an attorney to disburse funds to a third party since the attorney's primary obligation is owed to the client.  The Commission contended that the amendment did not make this point clear.  ABA Center for Professional Responsibility, The Legislative History of the Model Rules of Professional Conduct: Their Development in the ABA House of Delegates, at 99 (1987).

The comment's language is strong evidence that a lawyer must have "actual knowledge" of a third party's interest before acting under ER 1.15(b).  See In re Burns, 137 Ariz. 487, 491, 679 P.2d 510, 514 (1984) (a disciplined attorney had actual knowledge of third party lien on settlement proceeds).[2]"Actual knowledge" or "knows" means actual knowledge of the fact in question, and a lawyer's knowledge may be inferred from the circumstances.  Terminology, Preamble to the Model Rules.  Of course, an attorney can gain "actual knowledge" from circumstantial evidence, and her knowledge of the medical provider, or plan, gained from past experience may be quite probative of the attorney's knowledge in a particular case.

B.  Knowledge of Matured Legal or Equitable Claim Required

We turn now to what form of claim or "interest" is necessary for an attorney's duties under ER 1.15(b) to be triggered.  The special protections provided to third parties under ER 1.15 are not implicated by mere knowledge that services have been performed for the client, or by some expectation by a third party that settlement funds will be a source for payment.  Hazard and Hodes have analyzed the knowledge requirement of ER 1.15(b) and stated:

The fact that a third party "expects" funds held by the lawyer to be the source of payment would not justify a lawyer's refusal to obey the instructions of his client to turn over the entire amount.  The Comment to Rule 1.15 uses the phrases "just claims" and "duty under applicable law" to suggest that the third party must have a matured legal or equitable claim in order to quality for special protection.  Only in such cases may it be said that failure to recognize the third party interest is a species of fraud upon creditors or fraud upon the rendering court.

G. Hazard and W. Hodes, The Law of Lawyering--A Handbook on the Model Rules of Professional Conduct, Subsection 1.15:302 at 460 (2nd ed. Supp. 1994).

The Committee concludes that an attorney must have actual knowledge of a "matured legal or equitable claim" to all or part of the funds or other property held by the attorney in order for the special duties of ER 1.15(b) to be invoked.  However, attorneys are cautioned that the standard of "matured legal or equitable claim" does not mean that an attorney can refrain from acting with reasonable diligence, promptness and competence once the attorney is on notice of a third party claim.  ER 1.1 and 1.3.  The Supreme Court in Burns made it clear that once on notice of a third party claim, the attorney must "properly inform himself of the law of a particular case before advising a client."  Burns, 679 P.2d at 514. Failure to do so warranted and supported disciplinary action.  Id. 

Recently, the Supreme Court has reaffirmed that under ER 1.15 the attorney holding funds is acting in a fiduciary capacity toward third parties who have an "interest" in the funds, even when that third party is the opposing party who has tendered funds to satisfy a judgment won by the attorney at a trial.  In re Shannon, 179 Ariz. 52, 66, 876 P.2d 548, 562 (1994) (attorney who received funds to satisfy judgment with condition that satisfaction of judgment be signed prior to check being cashed violated ER 1.15 when he cashed the check without executing the satisfaction of judgment).  If an attorney has any "good faith doubt" as to who is entitled to receive the disputed funds, the attorney must notify the third party, investigate, hold only the disputed funds in trust pending resolution of the dispute, and if necessary, interplead the disputed funds under Ariz. R. Civ. Proc. 22.  Ariz.  Ops. 88-6 and 88-2.  See Also Bonanza Motors, Inc. v. Webb, 104 Idaho 234, 657 P.2d 1102, 1105 (App. 1983) (ethical violation under DR9-109(B)(4) to deliver settlement funds to client once notified of a third party's superior right to the funds through an assignment signed by the client and delivered to the attorney).

Finally, if the attorney's own interests are implicated--such as the attorney's interests in maintaining the medical provider's cooperation by ensuring prompt payment from settlement proceeds on a regular basis--the attorney must comply with ER 1.7(b) to ensure conflict-free representation.  Ariz. Op. 88-2, fn.4.

Question 1
 (Knowledge of medical services provided, but no demand of any kind upon the lawyer)

The inquiring attorney seeks guidance as to exactly when, or upon what kind of notice or knowledge, the requirements of ER 1.15(b) as to third parties come into play.  The Committee recently provided guidance in Formal Opinion No. 97-02 as to what an "interest" means in ER 1.15(b), namely, a matured legal or equitable claim such as a "contractual provision allowing the plan to be subrogated to the injured party's rights."  Op. 97-02 at 5.

In direct answer to Question 1, an attorney is required to notify the medical provider and to pay directly to a medical provider a client's medical expenses from settlement funds delivered to the attorney when the attorney has actual knowledge that the medical provider has an "interest" in such funds, that is a "matured legal or equitable claim" under ER 1.15(b), from those settlement funds.  The inquiring attorney in this scenario has no knowledge of any interest by the medical providers, but has simply been provided with the medical bills by the client.  Under these circumstances, the attorney is not required to notify the medical providers or to disperse funds to them.  Without actual knowledge of a matured legal or equitable claim by a third party, the special protections of ER 1.15(b) are not invoked.

Question 2
(Medical provider lien signed by the client but not the attorney;
 attorney has notice of the lien; lien is not recorded)

Question 3
(Medical provider lien signed by the client and attorney)

A lien is "[a] charge or encumbrance upon property to secure the payment or performance of a debt, duty or other obligation," and it "is distinct from the obligation which it secures."  Matlow v. Matlow, 89 Ariz. 293, 297-98, 361 P.2d 648, 651 (1961) (citing 53 C.J.S. Liens § 1, at 826).  Under Arizona law, a lien can of course be created by statute, but an equitable lien may also arise from an express contract if the parties indicate an attempt to charge particular property as security for an obligation.  Kalmanoff v. Weitz, 8 Ariz.App. 171, 172, 444 P.2d 728 (1968).  Significant to the question at issue here is the following: "The assent of the holder of a fund belonging to another is not essential to the establishment of a lien thereon."  53 C.J.S. Section 4.1 at 460, citing Springer v. J.R. Clark Co., 138 F.2d 722 (8th Cir. 1943).

The inquiring attorney here, having either signed the lien, or been put on notice of the medical lien signed by the client, has an ethical obligation under ER 1.15(b) to honor the medical provider's "interest" in such funds and not to disburse them to the client.[3]Rather, the attorney must notify the medical lien holder, investigate the issue, and disburse the funds to the proper recipient.  In re Augenstein, 177 Ariz. 581, 582, 870 P.2d 399, 400 (1994) (Disciplinary Commission censured attorney for ER 1.15 violation who had executed a medical lien in favor of a doctor on behalf of client, received settlement, but failed to notify or pay a doctor the remaining balance due; attorney ordered to pay restitution to the doctor of balance due ($2,547.71)).[4]If the attorney has any "good faith doubt" as to the proper recipient, or the client objects to disbursement to the lienholder, the attorney should hold only the disputed funds in trust pending resolution of the dispute and then proceed by interpleader in accordance with the prior ethical opinions of this committee. 

Indeed, even the client's direct instruction to the attorney not to pay the provider cannot defeat ER 1.15 once the attorney has actual knowledge of the provider's "matured, legal or equitable claim."  Romero v. Earl, 111 N.M. 789, 791-92, 810 P.2d 808, 810-11 (N.M. 1991) (client's instructions to attorney to ignore valid medical lien signed by client and attorney cannot cancel the earlier lien; attorney obligated to honor lien and disburse funds to lien holder); Leon v. Martinez, 638 N.E. 2d 511 (NY 1994) (assuming an enforceable assignment of recovery funds is proven, client's interest in that portion of recovery was already vested in assignees and lawyer was not only ethically obligated to notify assignees, but also obligated to pay the funds to
assignees pursuant to written assignment executed by client).  See California Formal Ethics Opinion 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); Maryland Ethics Opinion 94-19 (1993) (lawyer must disregard client's instruction not to pay creditor where client had valid agreement with creditor); Ohio Ethics Opinion 95-12 (1995) (lawyer must disregard client's instruction not to pay physician from proceeds when client entered earlier agreement to pay medical expenses from such proceeds); South Carolina Ethics Opinion 94-20 (1994) (lawyer who knows client has executed valid doctor's lien may not comply with client's instruction that lawyer disregard the lien--no principle of client loyalty or confidentiality permits a lawyer to violate ethical obligations to third persons of notification and delivery).

Similarly, in Matter of Hodge, 676 A.2d 1362 (R.I. 1996), the clients had executed valid medical liens which secured payment of medical bills owed to treating physicians on settlement of the client's case.  The attorney involved apparently had not signed the liens but they were provided to him once he took over representation of the clients from a previous attorney.  The attorney then withheld the funds from settlement but failed to notify the providers and in fact converted the funds to his own use.  The court held that when the attorney came into possession of the funds in which a treating physician had an interest secured by a medical lien, the attorney was required under ER 1.15 to withhold those funds and account to the medical lien holder with the care required of a professional fiduciary.  Id. at 1363.  See Aetna Casualty Co. V. Gilbreath, 625 S.W.2d 269 (Tenn. 1981) (lawyer under duty to recognize statutory lien of client's employer on workers' compensation recovery proceeds). 

Finally, the Committee notes that it could be argued that by agreement with the client the attorney could ignore his otherwise mandated duties to account to third parties who have an interest in the settlement proceeds.  ER 1.15 provides in pertinent part: "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 . . . "  (Emphasis added).  The Committee interprets this provision as only allowing the attorney to retain the client's portion of the funds if there is an agreement to that effect between the lawyer and the client (for example, the attorney is to retain all or part of the client's share of the settlement proceeds as a retainer on a subsequent case the attorney has agreed to handle.)  No agreement with the client can override the attorney's duty to third parties who have a valid interest in the settlement proceeds in the hands of the attorney.

Question 4
(Attorney orally agrees to reimburse provider from settlement funds)

Finally, the attorney's oral agreement to reimburse the provider out of the settlement must be honored because the attorney had the apparent or express authority to make the agreement.  While ER 1.15 does not require the attorney to unilaterally arbitrate a dispute between a client and a third party, any agreement made with express or apparent authority must be honored.[5]See Arizona Title Insurance and Trust Co., v. Pace, 8 Ariz. App. 269, 445 P.2d 471 (1968) (where client places attorney in position where third parties of ordinary prudence and discretion are justified in assuming attorney is acting within his authority, client is bound by attorney's acts within scope of his apparent authority.)

Question 5
(Medical provider lien not signed by client or attorney)

Not every claim or assertion of some right to settlement proceeds triggers ER 1.15.  For 1.15(b) to be invoked, the attorney must have actual knowledge of a "matured legal or equitable claim," and an unsigned, unrecorded medical lien is not such a claim.  See Connecticut Informal Ethics Opinion 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).  Indeed, the attorney is well-advised to inform the medical provider to take the matter up with the client.  In short, an unsigned, unrecorded medical lien is not a "matured legal or equitable claim."

Question 6
(The medical provider has presented a statutory lien that is facially incomplete or untimely, but has been recorded with the County Recorder)

Health care providers are entitled to statutory liens under A.R.S. §§ 33-931--936 (1990). Once such a statutory lien has been recorded with the County Recorder, the attorney would be deemed to have notice of the lien, and the lien would represent a "matured legal or equitable claim" under ER 1.15.  Although the lien may be determined later by a court to be invalid because of late recording or incomplete filing, the ethical issue is whether a recorded health care provider lien is an "interest" protected by ER 1.15, and the Committee finds that it is such an interest.  Further, the lien may well not be perfected under A.R.S. § 33-932 such that it has priority over all other liens, and the client may have a legitimate coverage dispute with the provider over whether the provider has been fully compensated by the client's medical insurance plan, but the issue is not whether the lien as a matter of law has efficacy.  The issue is whether the lien represents a "matured" claim which the attorney must investigate and accord protection under ER 1.15 after the attorney is put on actual or constructive notice of the lien.

Because the recording of a lien represents a medical provider's claim for medical services which is written, "verified," and usually filed under oath by the medical provider, it represents a "matured" claim under ER 1.15.  See A.R.S. §§ 33-932, 931 (1990).  To be sure, the attorney may fully contest the medical provider's claim by interpleader, negotiation or arbitration; but in those cases the attorney must hold the disputed funds in trust and notify the medical provider regarding the funds or property received by the attorney.  ER 1.15(b).

Indeed, our prior opinions make clear that upon learning of any third party's claim,  if the attorney has any "good faith doubt" as to who is entitled to receive the disputed funds, the attorney must investigate, notify the third party, hold only the disputed funds and resolve the dispute by negotiation, arbitration or interpleader if necessary.  Formal Ops. 88-6 and 88-2.  Of course, a lawyer who holds settlement funds to resolve any "good faith doubt" is justified under ER 1.15, and is not therefore violating any duty to his client who has interest in the settlement funds.  Id.

Question 7
(The medical provider has simply sent copies of the client's medical bills to the attorney)

Question 8
(The medical provider, without sending copies of the bills and absent a lien or assignment, simply sends a letter to the attorney demanding payment for medical bills for the client's accident-related treatment)

Question 9
(The attorney has knowledge that a particular provider has treated the client for accident-related injuries arguably connected to the conduct which is the subject of the representation, but the doctor has no lien or assignment and has taken no other "demand" action with regard to the bills.)

In none of these instances does the attorney have actual knowledge of a "matured legal or equitable claim" which represents an "interest" under ER 1.15(b).  The comment to ER 1.15 makes it clear that mere debts of the client that come to the attention of the attorney are not the "interests" protected by ER 1.15 because the comment  uses the terms "just claims" and "duty under applicable laws" to describe protected interests.  G. Hazard and W. Hodes, The Law of Lawyering, at 460.  A general unsecured creditor does not have a sufficient interest to impose a duty on an attorney to surrender settlement funds. Scharf v. Statewide Grievance Comm., No. Civ. 94-0536033, 1995 WL 317090 (Conn.Super.Ct. 5/11/95).  Even if the attorney knows that the medical provider has treated the client for accident-related injuries, medical bills and demand letters do not reach the level of a "matured legal or equitable claim."  Maryland Ethics Opinion 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).  One court has held that even where the client had some contractual obligation to the client's insurer, the attorney receiving settlement monies had no obligation to satisfy the contract.  Farmers Ins. Exchange v. Zerin, 61 Cal.Rptr.2d 707, 714 (Cal.App.3d Dist. 1997).  The court went on to note that the attorney had no obligation to pay the client's dry cleaning bill or credit card debts even if on notice to them.  Id.

Conversely, certain federal health care programs have, by statute, the right to recover directly from the tortfeasor who caused the injuries for which the injured party sought medical care through a federal provider.  Under the Federal Medical Care Recovery Act (FMCRA), 42 U.S.C. § 265 et seq. (1982), federal providers such as the Veterans Administration, Champus and the Department of Health and Human Services (Public Health Service) are also subrogated to the rights of the injured person to the extent of the reasonable value of the care provided.[6]Id., § 2651 (a).  The Committee finds, based on the reasoning of Opinion 97-02, that this statutory subrogation claim, like the contractual subrogation provision granted under a Federal Employees Health Benefit Act claim, perforce is a protected interest under ER 1.15 such that the attorney must comply with the requirements of ER 1.15 regarding notice and distribution of settlement monies in which the FMCRA is implicated.

Question 10
(The attorney and/or client have signed a "letter of protection" in favor of the medical provider)

Question 11
(The client has signed an assignment in favor of the medical provider, and the attorney has notice of the assignment)

Question 12
(Both the client and attorney have signed an assignment in favor of the medical provider)

A legal assignment requires "[e]vidence of an intent to assign or transfer the whole or part of some thing, debt, or chose action and the subject matter of the assignment must be described sufficiently to make it capable of being readily identified."[7]  Certified Collectors, Inc. v. Lesnick, 116 Ariz. 601, 603, 570 P.2d 769 (1977).  Assignments are also subject to the same requisites for validity as any other contract: "Mutuality of assent, proper parties with the capacity to make a contract, consideration and legal subject matter."  Id. At 603.  Where notice of the assignment is given to and received by the debtor, he becomes liable to the assignee whether he accepts the assignment or not.  Greene v. Reed, 15 Ariz.App. 110, 486 P.2d 222, (App. 1971).

A "letter of protection" is an informal lien used by plaintiffs in personal injury cases whereby medical providers defer payment until after judgment or settlement, and the arrangement is memorialized by a letter of protection to the medical provider signed by the attorney and/or plaintiff.

Based on our prior analysis, it is our conclusion that an assignment or letter of protection of which the attorney has notice, even though the attorney has not signed it, is sufficient to trigger an attorney's duty under ER 1.15 to protect the interests of the medical provider.  The attorney has actual knowledge of a "matured legal or equitable claim" under all three questions, and upon receipt of settlement funds the attorney must notify the third party, investigate the matter under the Burns holding, and disburse the funds to the proper recipient.  If the attorney has any "good faith doubt" as to the proper recipient or the client objects to the disbursement to the medical provider, the attorney should hold only the disputed funds in trust pending resolution of the dispute and, if necessary, interplead the disputed funds.  Ariz. Ops. 97-02, 88-6 and 88-2.  Also Leon v. Martinez, 638 N.E.2d 511 (N.Y. 1994) (lawyer had drafted and client had executed an assignment of part of an anticipated settlement to a third person, and the court held that the lawyer was obligated to protect only so much of the funds as the client was "entitled to receive," with the remainder going to the third person); Bonanza Motors, 657 P.2d at 1105 (law firm violated DR9-109 in paying client funds client had assigned to a creditor); Ohio Ethics Opinion 95-12 (1995) (lawyer must disregard client's repudiation of an earlier signed "letter of protection," hold the disputed funds in trust and take steps to resolve the underlying dispute, including using interpleader if necessary).

The decision in State Farm Mutual Insurance Co. v. St. Joseph's Hospital, 107 Ariz. 498, 489 P.2d 837 (1971), involves facts similar to those presented here.  In St. Joseph's, the client in a personal injury case entered into what the court characterized as an agreement to allow the injured party's attorneys to act as a collection agent for the hospital.  The agreement signed by the injured party noted that, in consideration for the medical services received for accident-related injuries, the injured party authorized her attorney to deduct and pay over to the hospital a specified sum of money out of any proceeds that became payable by reason of the claim, suit, or settlement.  Id. at 499.  The court held that the agreement was not a complete or partial assignment, but rather only authorized the attorneys to act as collecting agent for the hospital.  Id. at 503.  The court went on to note that even though the document did not create an assignment, it did create an interest in the hospital and noted that the hospital's rights were prejudiced where the defendant's insurance company persuaded the injured party to discharge her attorney and settle directly with them.[8]See Brinkman v. Moskowitz, 38 Misc.2d 950, 238 N.Y.S.2d 876 (N.Y.App. Term 1962) (lawyer who had notice of an assignment by client, but who distributed settlement to client in disregard for the assignment, was liable to the assignee).

Ethics opinions from other jurisdictions are in accord.  See, supra, California Formal Ethics Opinion 1988-101; Maryland Ethics Opinion 94-19; Ohio Ethics Opinion 95-12;  South Carolina Ethics Opinion 94-20.  See also Alabama Ethics Opinion 90-48 (1990) (lawyer whose client executed assignment of proceeds to chiropractor but instructed lawyer to disregard the assignment should interplead the disputed funds); Alaska Ethics Opinion 92-3 (1992) (lawyer may not follow client's instruction to disregard facially valid assignment or statutory lien in favor of the client's creditors but should advise client that he will withhold the disputed funds until the dispute in resolved).

Although beyond the scope of this opinion, the Committee notes that the law in legal malpractice has remained active in the area of third party interests.[9]

CONCLUSION

An attorney's obligations to a third party under ER 1.15 are triggered when an attorney has actual knowledge of that third party's "interest" in the funds.  A third party has an "interest" in the funds if the party has a "matured legal or equitable claim" to the funds.  Once on notice, the attorney has these duties:

1) to promptly notify the third person;

2) to promptly deliver to the client and third person only funds or property the party is entitled to receive; and

3) if the attorney has any "good faith doubt" as to who is entitled to receive any disputed funds, the attorney must notify the third party, investigate with reasonable diligence, promptness and competence, hold only the disputed funds in trust pending resolution of the dispute, and resolve the dispute by negotiation, arbitration or, if necessary, by filing an interpleader action.
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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 1998.

[2] Our previous opinions have intimated an actual knowledge standard.  In Formal Op. No. 88-02, p. 5, the Committee stated that "[i]f, in the circumstances (including the factual background and the attorney's assessment of the applicable law), the attorney is satisfied that either the client or the health care provider is entitled to receive the funds, the attorney should pay the funds accordingly" (emphasis supplied).  The Committee also noted that if the attorney had any "good faith doubt as to who is entitled to receive the funds," the attorney should hold and interplead the funds.  Id.

In Formal Op. No. 88-06, pp. 2-3, the Committee reviewed the language of Formal Op. 71-6 in which The Committee used a "belief" standard, but concluded that the appropriate standard was "satisfied."  The Committee believes that use of the phrase "satisfied that either the client or the lien claimant was entitled to receive the funds" means an actual knowledge standard.

[3] We assume for the purposes of this discussion that the lien signed by the client is a valid lien.  However an invalid lien, which is nonetheless signed by the client such that a medical provider would rely on the lien, would be a "matured legal or equitable claim" and thus an interest under ER 1.15(b).

[4] Cases from other jurisdictions generally support the proposition that an attorney who fails to protect a third party's interest in funds in the hands of an attorney is liable to that party for the improperly disbursed funds. See, e.g., Kaiser Foundation Health Plan, Inc.v. Aguiluz, 54 Cal.Rptr.2d 665 (Cal.Ct.App. 1996) (where attorney knew client had agreed to repay medical provider from settlement proceeds, but attorney paid entire amount to client, attorney held liable for amount client owed provider); Leon v. Martinez, 638 N.E.2d 511 (N.Y. 1994) (if enforceable assignment is proven, client's interest in that portion of the recovery was already vested in assignees and lawyer was not only ethically obligated to notify assignees but also held liable to pay them assigned amount as damages); Frontier Enterprises, Inc. v. Anchor Co., 404 Mass. 506, 536 N.E.2d 352 (1989) (attorney may be liable to pay funds "earmarked" for third party); Butler v. Commission for Lawyer Discipline, 928 S.W. 2d 659 (Tex. App. 1996) (attorney suspended for six months for failure to pay criminal lawyer from workers' compensation settlement in violation of Model Rule 1.15); In re DeBerry, 59 Bankr. 891 (E.D.N.Y. 1986) (lawyer who obtained funds properly belonging to client's bankruptcy estate personally obligated to satisfy turnover order after client absconded with the funds).  But see Gianetti v. Donahue, 1996 WL 589232 (Conn.Supr. 1996) (attorney who agreed to protect a doctor's fee out of settlement proceeds found not liable only because the attorney limited his obligations to those of an agent). 

[5] We decline to address the issue of whether the oral agreement might be unenforceable under the statute of frauds, A.R.S. 44-101 (1994), as it raises purely a legal question.  We would note that an attorney who orally agrees to pay a medical provider out of the client's settlement proceeds, but who intends to attempt to void that agreement under A.R.S. 44-101 would be violating ER 4.1 by making a false or misleading statement to a third party.

[6] The Federal Medical Care Recovery Act (FMCRA) was the statutory provision involved in In Re Burns, 139 Ariz. 487, 679 P.2d 510 (1984).   That opinion characterized the FMCRA claim as a lien.  Id. at 491, 679 P.2d at 514.  In any event the result is the same - the interests of the federal medical provided must be accorded the protections of ER 1.15.

[7] Arizona law is not always consistent on the differences between a lien and an assignment.  In Millsap v. Sparks, 21 Ariz. 317, 320, 188 P. 135, 136 (1920), a lien is defined as a charge on the property while an assignment is said to create an interest in property.  Yet in Barnes v. Shattuck, 13 Ariz. 338, 343, 114 P. 952, 954 (1911), aff'd, 34 S.Ct. 276, 232 U.S. 117, 58 L.Ed. 530, the court characterized an equitable assignment as a lien.

[8] In Allstate Insurance Co. V. Druke, 118 Ariz. 301, 576 P.2d 489, the court held that a subrogation provision in a medical payments insurance policy constituted an interest in a recovery against a third party for bodily injury and noted that such an arrangement, made or contracted for prior to settlement or judgment, is legally equivalent to an assignment and therefore unenforceable.  Id. At 303-304.  Whether an assignment in favor of a medical provider against personal injury settlement funds in the hands of an attorney is enforceable in Arizona is an unsettled question.  We assume, for purposes of this discussion, that a court would either characterize the document as something other than an assignment, as did the St. Joseph's court, or would uphold the assignment based on public policy.  In this regard, see "Dishonored Medical Liens," Arizona Attorney at 17, n.4 (June, 1989).  After noting that the Druke line of cases does not involve medical liens, the article concluded that, based on the public policy considerations set forth in Druke, it is arguable that medical liens would survive a challenge to their validity.  Id. at n.4.         

[9] E.g., Frontier Enterprises, Inc. V. Anchor Co., 404 Mass. 506, 536 N.E.2d 352 (1989) (attorney may be liable to pay funds "earmarked" for third party); Gianetti v. Donahue, 1996 WL 589232 (Conn.Supr. 1996) (attorney who agreed to protect a doctor's fee out of settlement proceeds found not liable only because the attorney limited his obligations to those of an agent); Butler v. Commission for Lawyer Discipline, 928 S.W.2d 659 (Tex.App. 1996) (attorney suspended for six months for failure to pay criminal lawyer from workers' compensation settlement in violation of Model Rule 1.14); In re DeBerry, 59 Bankr. 891 (E.D.N.Y. 1986) (lawyer who obtained funds properly belonging to client's bankruptcy estate personally obligated to satisfy turnover order after client absconded with the funds).