Can a replacement lawyer who knows of a letter of protection the prior lawyer signed to a healthcare provider disburse settlement funds to the client without paying the provider?

Plain-English summary

In a personal injury case, the client's healthcare provider obtained a "Letter of Protection" from the client's first lawyer, promising the provider would be paid directly out of any settlement or verdict for the medical care provided. A second lawyer then replaced the first. Aware of the letter, the second lawyer tried to negotiate down the provider's bill, failed, settled the case, took his fee, and distributed the rest to the client without paying the provider.

The Committee applies Rule 1.14(c), which requires that when a lawyer holds funds in which both the lawyer and another person claim interests, the property be kept separate until there is an accounting and severance of interests, that trust or escrow funds be disbursed only to those entitled to them, and that any disputed portion be kept separate until the dispute is resolved while the undisputed portion is distributed. The Committee observes that whether and to what extent the letter of protection binds the client is a legal question, not one of rule interpretation, but the second lawyer knows the provider is claiming an interest in part of the settlement funds as a result of the letter.

On those facts, the Committee concludes the second lawyer would violate Rule 1.14(c) by distributing to someone other than the provider the portion the provider claims before the validity of the claim is conclusively determined. Drawing on the approach in Comment 2 to Rule 1.14 for lawyer-client fund disputes, it states it would be appropriate to hold the claimed portion in trust and suggest a means for prompt resolution, such as arbitration.

In practice

Under this opinion, and under the Texas rule as it stood at the time, a successor lawyer who knows that a healthcare provider claims an interest in settlement funds through a letter of protection signed by the client's prior lawyer must, under Rule 1.14(c), keep the claimed portion separate until the dispute over it is resolved, and may not disburse that portion to the client instead. The Committee treats the legal question of whether the letter actually binds the client as outside its scope, but holds that the lawyer's knowledge of the provider's claim triggers the duty to safeguard the disputed funds; it points to Comment 2 to Rule 1.14 for holding the funds in trust and suggesting prompt resolution such as arbitration.

Common questions

Q: Can a new lawyer ignore a letter of protection the prior lawyer signed and pay the client?

A: No. Per Opinion 625, because the new lawyer knows the provider claims an interest in the settlement funds under the letter, Rule 1.14(c) requires holding the disputed portion separate; distributing it to the client violates the rule.

Q: Does it matter whether the letter of protection is legally enforceable against the client?

A: The Committee says whether and to what extent the letter binds the client is a legal question, not one of rule interpretation. Even so, the lawyer's knowledge that the provider is claiming an interest is enough to trigger the Rule 1.14(c) duty to safeguard the disputed funds.

Q: What should the lawyer do with the claimed funds?

A: Following Comment 2 to Rule 1.14, the Committee says it would be appropriate to hold the portion the provider claims in trust and to suggest a means for prompt resolution of the dispute, such as arbitration.

Background and rules framework

The opinion interprets Texas Disciplinary Rule 1.14(c) (safekeeping property; holding disputed funds separate until the dispute is resolved and disbursing trust funds only to those entitled; ABA Model Rule 1.15), and draws on Comment 2 to Rule 1.14 for the suggested handling of disputed funds.

Citations and references

Rules of Professional Conduct:

• MR 1.15 (safekeeping property; funds in which a third person claims an interest)
• Texas Disciplinary Rule 1.14(c) (with Comment 2 to Rule 1.14)

See also

• TX Ethics Op. 681: Third-Party Interest in Client Funds Held in Trust
• TX Ethics Op. 701: Subscription Legal Fees, Trust, and Refunds
• TX Ethics Op. 658: Marking Up Expenses and Billing a Firm-Owned Vendor

Source

• Landing page: https://www.legalethicstexas.com/resources/opinions/opinion-625/
• Original PDF: https://tcle-web.s3.amazonaws.com/public/documents/Opinion_625.pdf

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

QUESTION PRESENTED

Is it permissible for a lawyer who replaces a client’s prior lawyer in a litigation matter to distribute funds resulting from settlement of the litigation matter without regard to a promise of payment, of which the second lawyer is aware, given to the client’s healthcare provider in a letter signed by the client’s prior lawyer?

STATEMENT OF FACTS

A client in a personal injury case sought treatment from a healthcare provider for injuries sustained in an accident. Prior to providing treatment, the healthcare provider requested and obtained from the lawyer who initially represented the client with respect to the personal injury case a “Letter of Protection” addressed to the healthcare provider. This “Letter of Protection” promised that for medical care provided to the client the healthcare provider would be paid directly out of any settlement proceeds or payment resulting from a jury verdict in the personal injury case.

Thereafter a second lawyer replaced the client’s first lawyer in the personal injury litigation. The second lawyer, who was aware of the “Letter of Protection,” contacted the healthcare provider and attempted to negotiate a compromise of the amount billed by the healthcare provider for services rendered to the client but the healthcare provider refused to discount the amount previously billed. The second lawyer later settled the case, took his agreed fee, and distributed the remaining funds to the client without paying the healthcare provider any amount for the medical services provided to the client for which payment had been promised in the “Letter of Protection” signed by the client’s first lawyer.

DISCUSSION

Rule 1.14(c) of the Texas Disciplinary Rules of Professional Conduct provides as follows:

“When in the course of representation a lawyer is in possession of funds or other property in which both the lawyer and other person claim interests, the property shall be kept separate by the lawyer until there is an accounting and severance of their interest. All funds in a trust or escrow account shall be disbursed only to those persons entitled to receive them by virtue of the representation or by law. If a dispute arises concerning their respective interests, the portion in dispute shall be kept separated by the lawyer until the dispute is resolved, and the undisputed portion shall be distributed appropriately.”

In the circumstances here considered, Rule 1.14(c) requires that the client’s second lawyer keep settlement proceeds to which the client’s healthcare provider has a claim separate until there is an accounting and severance of the interests claimed in these funds by the healthcare provider. Although it is a legal question, rather than a matter of interpretation of the Texas Disciplinary Rules of Professional Conduct, whether and to what extent the “Letter of Protection” signed by the client’s first lawyer binds the client, the client’s second lawyer is aware that as a consequence of the “Letter of Protection” the healthcare provider is claiming an interest in a portion of the settlement funds. In such circumstances, the second lawyer would violate the requirements of Rule 1.14(c) if, before the validity of the healthcare provider’s claim has been conclusively determined, the lawyer distributed to someone other than the healthcare provider the portion of the funds claimed by the healthcare provider. Following the approach suggested in Comment 2 to Rule 1.14 with respect to a dispute between a client and lawyer as to the disposition of funds, it would be appropriate in these circumstances for the lawyer to hold in trust the portion of the settlement funds claimed by the healthcare provider and to suggest a means for prompt resolution of the dispute, such as arbitration.

CONCLUSION

It is a violation of the Texas Disciplinary Rules of Professional Conduct for a lawyer who replaces a client’s prior lawyer in a litigation matter to distribute funds resulting from settlement of the litigation matter without regard to a promise of payment, of which the second lawyer is aware, given to the client’s healthcare provider in a letter signed by the client’s prior lawyer.

Tex. Comm. On Professional Ethics, Op. 625 (2013)