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self-study / Torts

Jan. 18, 2019

Ethical pitfalls to avoid with personal injury liens

Lars C. Johnson

Mediator, Signature Resolution

Fax: (818) 348-7921

Lars was a litigator for 20 years before joining Signature as a full-time mediator. He has extensive experience handling high-stakes catastrophic injury and wrongful death cases, as well as insurance coverage disputes.


If you handle personal injury cases, there is one thing for certain: You will be confronted with liens. Whether you represent people injured in accidents or defend these cases, you need to understand your ethical obligations regarding liens. Failing to properly address a lien could prove embarrassing or even cost you the right to practice law. This is very important stuff.

Among the ethical obligations related to personal injury liens are the duty to act competently (California Rules of Professional Conduct, Rule 1.1), the duty to uphold the law (Business and Professions Code Section 6068(a)), the duty to avoid acts of dishonesty or moral turpitude (B&P Section 6106), and the duty to safekeep funds of clients "and other persons" (CRPC 1.15). Discipline may also be imposed for failing to properly supervise subordinates handling trust accounting duties. CRPC 5.1, 5.3.

In many situations, the attorney's ethical obligations are fairly straightforward. For example, where an attorney has signed a lien agreement with a medical professional who provided care to the client "on a lien basis," the attorney has a clear ethical obligation to satisfy the lien before distributing settlement proceeds to the client. See, e.g., Matter of Riley, 3 Cal. State Bar Ct. Rptr. 91, 113-14 (Rev. Dept. 1994). Likewise, where an attorney receives notice of a Medi-Cal lien, the attorney must resolve the lien when settling the case. See Matter of P, 2 Cal. State Bar Ct. Rptr 622, 632 (Rev. Dept. 1993); Matter of Nunez, 2 Cal. State Bar Ct. Rptr. 196, 200 (Rev. Dept.1992).

But what about the situations that are less clear? For example, in the case of contractual liens, what if the attorney is not a party to the lien agreement? What if the attorney is unaware of a lien until after the proceeds have been disbursed? What if the client refuses to consent to payment of a lien? Or what if there is a genuine dispute regarding the lienholder's rights? These and other scenarios can make the analysis more difficult.

In Matter of Riley, an attorney was charged with violating numerous ethical rules regarding a variety of liens affecting several clients over a number of years. The case provides some good guidance for practitioners.

Matter of Riley

Ignorance of a Lien Claim. In two instances involving Medi-Cal liens (Mooney/Griffith), attorney Riley claimed he did not violate the duty to uphold the law because he never knew his clients were Medi-Cal recipients until after settlement proceeds were disbursed. The court rejected this defense. The court held that an attorney has an affirmative obligation to investigate who paid for his client's care to determine if there might be a lien claim. In Riley, "[Riley] did not present any evidence that he made any effort whatsoever to determine how his clients' medical bills had been paid. On the contrary, respondent admitted in his testimony in this matter that at the time he represented Mooney and Griffith, his office did not have a practice of interviewing clients regarding the source of payment for their medical care."

Ignorance of the Law. The attorney suggested he failed to address one Medi-Cal lien because he thought the lien did not apply to his client's first-party recovery. Rejecting this assertion, the court noted: "Respondent admitted at trial in this disciplinary matter that this theory was incorrect. He presented no evidence that it was based on any legal research, advice, or inquiry. Unlike the attorney in Respondent P, respondent here made no effort whatsoever to communicate with DHS about its claimed lien, and had no basis to believe that DHS had received or would receive reimbursement from a source other than the settlement which respondent obtained for Johnson. Accordingly, unlike in Respondent P, respondent here acted at best with gross negligence, rather than on the basis of a good faith negligent belief." The court affirmed the finding that Riley violated his duty to uphold the law.

Note that even in Respondent P, where the attorney was found to have made a "good faith" mistake about his legal obligations, the attorney was deemed to have violated his duty to promptly pay over funds of another. This was based on a finding that the attorney's failure was "willful," even if done in good faith. See Respondent P, Cal. State Bar Ct. Rptr. at 633.

"Inherent" Fiduciary Duty to Statutory Lienholders. With regard to five different statutory liens (Mooney, Tittle, Mack, Griffith and Johnson), including Medi-Cal, Medicare and a county lien, attorney Riley argued he had no duty to protect non-client lien claimants. The court rejected this defense too. Specifically, the court held that an attorney has an "inherent" fiduciary duty to address statutory liens. The Riley court said "such a duty is inherent in the attorney's role as a fiduciary with respect to the entrusted funds." The court noted that failing to address these liens put the attorney's clients in jeopardy.

Contractual Liens. In one instance (Jackson), the attorney failed to pay an "express contractual lien" for medical care provided to one of his clients. Notwithstanding that there was no record explaining why the lien had not been paid, the court found the attorney violated his ethical obligations based on a determination that his failure to satisfy the lien was "willful." Notably, the inference of willfulness was based on "the mere fact that payment was not made."

While there is no known case finding an attorney violates his ethical duties when failing to satisfy a contractual lien in which the attorney was not a party, there is at least one bar opinion that suggests it would be a violation to pay the client any portion of settlement proceeds to which he is not entitled. See Los Angeles Bar Ass'n Form. Opn. 478 (1994).

Lien Disputes. In one instance, attorney Riley attempted to negotiate a lien but was unsuccessful. When his efforts failed, the attorney simply held the disputed amount in his trust account. The court found this constituted an ethics violation. Once it became clear that the lien holder would not reduce its lien, the attorney had an obligation to act. The Riley court held "only that current rule 4-100(B)(4) is violated where, after it has become clear that negotiations with the lienholder will not be productive, the attorney neither promptly pays the lien in full, nor takes appropriate steps to resolve the dispute promptly."

Competing Obligations

An attorney may be faced with a situation where the client and the third-party lien holder make conflicting demands. This issue has been addressed in at least a couple published ethics opinions.

In Los Angeles Bar Association Formal Opinion No. 478 (1994), the bar association addressed a scenario where the client signed a "lien acknowledgement" form with his health plan related to care arising from an accident. The attorney received notice of the lien from the health plan along with a copy of the lien acknowledgement form signed by the client. When the case settled, the client demanded the entire net proceeds. The client agreed to be personally responsible for the lien. The attorney was faced with conflicting obligations -- the client demanding the settlement proceeds while the lienholder had a claim for a portion of those proceeds. According to the opinion, the attorney could not pay the full settlement proceeds to the client (because the attorney owed a duty to the lienholder), nor could he pay off the lien (because the client did not consent). The attorney had two viable options: (a) with both the client's and the health plan's consent, the attorney could maintain the disputed funds in his trust account until the issue was resolved, or (b) the attorney could interplead the funds with the court. The attorney could not just sit on the funds.

The same guidance has been provided by the State Bar under similar facts. See Cal. State Bar Form. Opn. 1988-101.

Defense Counsel Obligations

What about defense counsel? Does defense counsel have ethical obligations to address personal injury liens?

Rule 1.15 of the California Rules of Professional Responsibility relates to the situation where an attorney is holding funds in trust for the client or "other person." On its face, the rule does not seem to apply to defense counsel in a personal injury matter. However, to the author's knowledge, this has never been tested. For example, one could imagine a scenario where the defense attorney is holding settlement proceeds in her trust account, which proceeds are subject to a reimbursement or lien claim. It is possible that the State Bar might determine Rule 1.15 applies under these circumstances (i.e., the attorney would be deemed to be holding funds "belonging to another person," to whom the attorney has a "contractual, statutory or other legal duty").

Further, an attorney representing a party and/or the party's insurer has a duty to act competently. CRPC 1.1. This duty seemingly includes an obligation to inform the client about potential liability, and to protect the client from unnecessary exposure to liability. In the context of liens, there are instances where failing to address a lien could expose a defendant and/or a defendant's insurer to liability. See, e.g., Karpinski v. Smitty's Bar, Inc., 246 Cal. App. 4th 456, 462 (2016) (acknowledging potential liability of defendant or defendant's insurer when Medicare has not been reimbursed from personal injury settlement proceeds); Levin v. Gulf Insurance Group, 69 Cal. App. 4th 1282 (1999) (acknowledging potential liability of defendant's insurer for failing to satisfy prior attorney lien in connection with personal injury settlement). Might the failure to protect the client under those circumstances constitute a violation of the duty to act competently?

If you are going to handling personal injury cases -- either on the plaintiff or defense side -- it is imperative that you understand your ethical obligations regarding liens.

For plaintiff's counsel, you should exercise due diligence to identify all potential liens, and make sure you understand you and your client's legal obligations to address those liens including, in some instances, to notify the potential lienholder about a third-party claim and any impending settlement. With respect to statutory liens, the attorney will be charged with notice concerning the pertinent statutory requirements. With respect to contractual liens, the attorney has an ethical obligation to satisfy such liens, particularly if the attorney is a signatory to the lien agreement. If there is a dispute with a lienholder, the attorney has an affirmative duty to act including, when appropriate, to interplead the funds and withdraw from the case.

For defense counsel, the failure to address a lien may raise ethical considerations as well. At a minimum, consistent with standards of competence, the attorney needs to advise the client about potential exposure from third-party liens or reimbursement claims, and to make sure those claims are addressed.

The good news is that, in most cases, the attorney's obligations are often quite clear. The scope of potential scenarios involving lien claims is somewhat limited, and there is significant guidance in the form of ethics opinions and case law for the practitioner to reference. Knowing your obligations, and then implementing a system to make sure you meet them (including with respect to attorneys under your supervision), should keep you and your client out of hot water.


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