State Bar of Arizona Ethics Opinions
88-06: Conflict of Interest; Diligence
Circumstances in which a lawyer may disburse settlement proceeds obtained on behalf of a client against which a third party is asserting a lien. Obligation of lawyer to initiate formal proceedings to have the validity if the lien determined.
The inquiring lawyer represents a client in connection with a motor vehicle accident in which the client was injured while riding in an automobile being driven by a co-employee. The client has been paid certain benefits by the employer’s workmen's compensation insurance carrier. The lawyer has also obtained a settlement from the co-employee's automobile liability insurance carrier. The lawyer wishes to disburse the proceeds of this settlement to the client, but the employer's workmen's compensation insurance carrier is asserting that it has a lien on these proceeds to the extent of the benefits it has paid. Based on the lawyer's assessment of applicable law, the lawyer disputes the carrier's lien claim.
1. Under what circumstances may a lawyer disburse settlement proceeds obtained on behalf of a client against which a third party is asserting a lien?
2. If the lawyer concludes that the proceeds should not be disbursed until there has been a determination of the validity of the lien, does the lawyer have an affirmative obligation to initiate formal proceedings to have the validity of the lien determined?
ETHICAL RULES INVOLVED
ER 1.3. Diligence
A lawyer shall act with reasonable diligence and promptness in representing a client.
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.
Questions solely of law are beyond the scope of this committee's jurisdiction, Therefore, this opinion will not attempt to resolve any legal issues such as when workmen's compensation insurance carriers may have enforceable liens against settlement proceeds obtained from third persons or their liability insurance carriers. As discussed below, however, the lawyer's ethical duty depends in part upon the lawyer's assessment of the law applicable to the situation.
In some situations of the type presented by this inquiry, the lawyer's own interests may potentially affect the representation. For example, the lawyer may be concerned about the lawyer's own potential liability to the lien claimant if the lawyer disburses the disputed funds to the client; or, conversely, the fee agreement with the client may result in the lawyer's benefitting financially if the lawyer concludes that the funds should be disbursed to the client. In such circumstances, the lawyer must comply with ER 1.7(b) before proceeding to represent the client in connection with the disbursement of the disputed funds. That is, the lawyer must reasonably believe that the representation will not be adversely affected by the lawyer's own interests, and the client must consent after consultation.
Two prior opinions of this committee are relevant to the questions presented. In Opinion No. 71-6, this committee considered a situation in which a lawyer was in possession of settlement proceeds which the lawyer believed were subject to a valid lien by the State Compensation Fund, but as to which proceeds the client desired that the lawyer not honor the lien. Applying DR 9-102(B)(4) of the former Code of Professional Responsibility, which is substantially similar to a portion of the second sentence of ER 1.15(b), the committee concluded that if the lawyer was "satisfied" that a valid lien existed, the lawyer should pay the funds to the State; and that, if the lawyer had "any doubt" about the validity of the lien, the lawyer should hold the funds pending a final determination of the validity of the lien (which the committee suggested might be accomplished by an interpleader action).
In our Opinion No. 88-02, we considered, among other things, a lawyer's ethical duty under ER 1.15(b) with respect to proceeds of a personal injury claim as to which a health care provider was asserting a lien. In that opinion, the committee concluded that, if the lawyer was satisfied that either the client or the lien claimant was entitled to receive the disputed funds, the lawyer should pay the funds accordingly; but that, if the lawyer had any good faith doubt as to who was entitled to receive the disputed funds, the lawyer should hold the funds in trust pending resolution of the dispute or, if necessary, should formally interplead the funds.
The first question presented is controlled by Opinion No. 88-02. Thus, it is the opinion of the committee that if, in the circumstances (including the factual background and the lawyer's assessment of the applicable law), the lawyer is satisfied that either the client or the lien claimant is entitled to receive the funds, the lawyer should pay the funds accordingly; but, if the lawyer has any good faith doubt as to who is entitled to receive the funds, the lawyer should hold the disputed funds in trust pending resolution of the dispute or, if necessary, should commence an interpleader action or other formal proceeding to resolve the dispute.
No ethical rule or prior opinion of this committee directly addresses the second question. ER 1.3, however, directs the lawyer to "act with reasonable diligence and promptness" in representing the client, and ER 1.15(b) generally directs the lawyer to pay funds in the lawyer's possession to the person entitled to receive them. Moreover, as noted above, Opinion No. 71-6 suggests that the validity of a disputed lien might be resolved by initiating an interpleader action, and Opinion No. 88-02 indicates that the funds should be formally interpleaded if necessary. Based on these authorities, it is the opinion of the committee that, as a general rule, the lawyer's obligations do not permit the lawyer to hold the disputed funds in trust indefinitely without taking some action to resolve the dispute. Therefore, absent special circumstances, the lawyer may wait a reasonable period (the length of which will depend on the facts of each situation) to determine if the dispute can be informally resolved; but, if the dispute has not been informally resolved within a reasonable period (and the third person claiming an entitlement has not already initiated formal proceedings), the lawyer should take the initiative to have the dispute resolved by an interpleader action or other formal proceeding.
One member of the committee submitted the following views in partial dissent:
To the extent that the proposed opinion in this matter relates strictly to statutory liens, I concur. If, however, this opinion refers to non-statutory liens, I respectfully dissent. Especially in situations where the attorney is not a party to the lien (see Opinion No. 88-02), the proposed opinion seems to relate more to legal questions than ethical ones. For this reason, I believe such issue is, or should be, without the jurisdiction of this committee.
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 proceeding. This opinion is based on the Ethical Rules in effect on the date the opinion was published. If the rules change, a different conclusion may be appropriate.
© State Bar of Arizona 1988