When can a lawyer claim part of a former client's later settlement, and what must the client's current lawyer tell the client about that adverse claim?

Plain-English summary

The inquiry arose from the aftermath of Mahler v. Szucs, 135 Wn.2d 398, 957 P.2d 632 (1998). Before Mahler, plaintiffs' personal injury attorneys whose contingent fee was a percentage of the gross recovery often did not retain a percentage of the PIP reimbursement paid back to the plaintiff's own insurer. Mahler changed how PIP reimbursement is handled, and after it was applied retroactively, class action lawsuits were filed against insurers for their share of plaintiffs' earlier attorney fees and costs. Some insurers settled, paying the class plaintiffs (the former personal injury clients) a sum representing the insurer's share, with current class counsel taking a fee from that settlement. The question was whether, and when, the original plaintiffs' attorneys are entitled to a portion of those class action settlements.

The committee said whether a former attorney may recover part of a former client's class action settlement depends on a detailed factual and legal analysis of the fee agreement, the final accounting, and the communications between the attorney and the former client at the time of the original settlement, and that such analysis (including defenses like waiver, estoppel, and accord and satisfaction) is outside the Rules and the committee's scope. It identified the only live scenario as one where the former attorney was entitled to a contingent fee on the PIP recovery under the agreement but did not take it at the conclusion of the prior matter.

The committee then set out the ethical duties. The current class action attorneys owe undivided loyalty to their clients, and the former attorneys' interests are adverse to those clients. Under RPC 1.4(b), the current attorneys have an affirmative obligation to advise their clients that a former attorney may assert a claim against their settlement proceeds, that the former attorney's interests are adverse, that there may be defenses to such a claim, and what to do if the claim is asserted (which may include the right to request fee-dispute mediation through the WSBA program). The current attorneys must also examine the scope of their own representation under RPC 1.2 to determine whether helping resolve such claims is within scope or whether they must advise the client to seek other counsel.

For a former attorney who chooses to assert a claim, the committee said it would violate the Rules unless four conditions are met: the original fee agreement entitled the attorney to a contingent fee on the PIP recovery; the agreement was never modified to drop that; the attorney did not take that percentage at the conclusion of the prior matter; and the attorney believes the claim could survive defenses such as waiver, estoppel, or accord and satisfaction. Even then, under RPC 1.7(b) the former attorney's personal interests are adverse, so the attorney may not represent or advise the client on the disbursement dispute. If a former client seeks the attorney's endorsement of a settlement check and the attorney asserts a claim, the attorney must tell the client that the attorney does not represent the client and that the attorney's interests are adverse (RPC 4.3 and RPC 1.7(b)), though the attorney may state that the attorney claims an interest and need not endorse the check. The attorney should promptly determine whether the client is represented and, if so, not discuss the matter directly with the client (RPC 4.2 and 4.3), should not advise the client to release the funds, and under RPC 4.4 should take prompt action to resolve the dispute, such as offering mediation or taking legal action.

Currency note

This opinion was issued in 2000, before the Washington State Bar Association's adoption of the 2006 revisions to the Rules of Professional Conduct. Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here. The safekeeping-of-property rule cited here as RPC 1.14 was renumbered RPC 1.15A in the 2006 revisions; confirm the current rule and citation before relying on it.

Common questions

Q: Can a former attorney claim part of a client's later settlement?

A: The committee said it depends on a fact-specific analysis of the original fee agreement, accounting, and communications, which is outside the Rules. It identified the only viable scenario as one where the attorney was entitled to a contingent fee on the PIP recovery under the agreement but did not take it when the prior matter closed.

Q: What must the current class action attorney tell the client?

A: Under RPC 1.4(b), the current attorney must advise the client that a former attorney may claim against the settlement proceeds, that the former attorney's interests are adverse, that there may be defenses, and what the client should do, including the option of WSBA fee-dispute mediation.

Q: How must a former attorney assert such a claim?

A: The committee said the former attorney may not advise the client on the dispute (RPC 1.7(b)), must tell the client the attorney does not represent the client and is adverse (RPC 4.3), must determine whether the client is represented and, if so, not contact the client directly (RPC 4.2), and must act promptly to resolve the dispute (RPC 4.4).

Q: What conditions must be met before a former attorney's claim is even permissible?

A: The fee agreement must have entitled the attorney to a contingent fee on the PIP recovery; it must never have been modified to drop that; the attorney must not have taken that percentage at the close of the prior matter; and the attorney must believe the claim could survive defenses like waiver, estoppel, or accord and satisfaction.

Background and rules framework

The opinion applied Washington's communication and conflict rules to a fee-claim dispute: RPC 1.4(b) (communication, ABA Model Rule 1.4), RPC 1.2 (scope of representation, ABA Model Rule 1.2), and RPC 1.7(b) (personal-interest conflicts, ABA Model Rule 1.7). It applied the rules on dealing with others, RPC 4.2 (communication with a represented person, ABA Model Rule 4.2), RPC 4.3 (dealing with an unrepresented person, ABA Model Rule 4.3), and RPC 4.4 (respect for the rights of third persons, ABA Model Rule 4.4). It referenced the contingent-fee writing and accounting requirements of RPC 1.5(c)(1) (fees, ABA Model Rule 1.5) and listed RPC 1.14 (safekeeping of property, corresponding to ABA Model Rule 1.15, later RPC 1.15A in Washington). The substantive entitlement to a fee, the committee stressed, is a legal question outside the Rules.

Citations and references

Rules of Professional Conduct:

• ABA Model Rule 1.4 (communication); Washington RPC 1.4(b)
• ABA Model Rule 1.2 (scope of representation); Washington RPC 1.2
• ABA Model Rule 1.7 (conflicts; personal interest); Washington RPC 1.7(b)
• ABA Model Rule 1.5 (fees); Washington RPC 1.5, 1.5(c)(1)
• ABA Model Rule 1.15 (safekeeping property); Washington RPC 1.14
• ABA Model Rule 4.2 (communication with represented persons); Washington RPC 4.2
• ABA Model Rule 4.3 (dealing with unrepresented person); Washington RPC 4.3
• ABA Model Rule 4.4 (respect for rights of third persons); Washington RPC 4.4

Cases:

• Mahler v. Szucs, 135 Wn.2d 398, 957 P.2d 632 (Wash. 1998), insurer's obligation to share in plaintiff's attorney fees on PIP reimbursement.

See also

• WSBA Ethics Op. 1037: Attorney's Lien Across Matters
• WSBA Ethics Op. 1056: Adverse to a Former Client
• WSBA Ethics Op. 1125: Possessory Lien on Client Property

Source

• Landing page: https://ao.wsba.org/print.aspx?ID=1107

Original opinion text

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

Advisory Opinion: 1913
Year Issued: 2000
RPC(s): RPC 1.2; 1.5; 1.7(b); 1.14; 4.3; 4.4
Subject: Mahler case effect on reimbursement of lawyer's fee for PIP coverage representation

A. ISSUE

(1) What are the ethical responsibilities of attorneys who previously settled a personal injury action without taking a contingent fee on the PIP recovery regarding potential claims to a portion of his or her former client’s settlement in a current class action filed against insurers for the insurers’ failure to contribute a proportionate share of their insureds’ legal expenses when the insurer benefited from the settlement of the insured plaintiff’s case by recouping PIP benefits?

(2) What are the ethical considerations of attorneys presently representing class action clients regarding potential claims by the class action clients’ former attorneys?

B. BRIEF ANSWER

Whether or not a plaintiff’s attorney is entitled to recover a portion of a former client’s class action settlement proceeds depends upon a detailed factual and legal analysis of the fee agreement, final accounting and the communication between the attorney and his or her former client at the time of the original settlement. Such analysis is beyond the scope of this committee. However, the current class action plaintiffs’ attorneys have an ethical obligation to advise their clients of the potential adverse claim that may be asserted against their settlement proceeds by their former attorneys and what they should do if such an adverse claim is asserted. The former attorney should not provide any advice to his or her former client, should determine whether the client is represented by counsel, and should promptly act to resolve any dispute over the disbursement of the settlement proceeds.

C. STATEMENT OF FACTS

The situation at issue arises from a plaintiff’s personal injury case, when it is settled and the plaintiff’s attorney receives his/her contingent fee. Usually, the plaintiff’s own insurer has paid the plaintiff’s medical bills under the plaintiff’s own Personal Injury Protection ("PIP") coverage. When plaintiff’s case is settled, the plaintiff’s insurer is entitled to be reimbursed for these medical payments that the insurer advanced out of money recovered from the tortfeasor (or usually the tortfeasor’s insurer). Historically, the plaintiff’s insurer usually did not want the plaintiff’s attorney to represent the insurer in recouping these PIP benefits. Sometimes plaintiff’s insurer’s reimbursement was obtained directly from the tortfeasor’s insurer through inter-company arbitration. As a result, plaintiff’s attorneys whose contingent fee agreement was based on a percentage of the gross recovery and allowed them to retain a percentage of the plaintiff’s recovery, often did not retain a percentage of the PIP reimbursement that went to the plaintiff’s own insurer.

In the case of Mahler v. Szucs, 135 Wn.2d 398, 957 P.2d 632 (1998), the court decided that the plaintiff was entitled to an offset against the PIP benefits its insurer was to receive for a portion of the attorney’s fees and costs plaintiff incurred in successfully resolving the overall case and therefore entitling the insurer to its PIP reimbursement. The court ruled that the insurer was required to pay a portion of plaintiff’s attorney’s fees and costs even when the insurer had specifically placed plaintiff’s counsel on notice that the insurer did not want plaintiff’s counsel to pursue its subrogation rights.

The Mahler decision represented a major change in the manner in which personal injury claims are settled. Now, when plaintiffs’ cases are settled, the plaintiff’s attorney typically retains a percentage of the plaintiff’s insurer’s PIP reimbursement as part of his/her contingent fee. This ethical inquiry arises because the courts have decided to apply the Mahler decision retroactively. Following the Mahler decision, approximately ten class action lawsuits were filed against various insurance companies on behalf of plaintiffs who have settled claims within the past six years (i.e., within the contract statute of limitations). Some of the insurance companies have decided to settle with the class action plaintiffs, and will be paying these plaintiffs an agreed sum representative of the insurer’s share of the plaintiffs’ attorneys’ fees and costs from the earlier personal injury actions. The current attorneys for the class action plaintiffs will be obtaining a fee out of this settlement amount directly from the insurers. The settlement checks are being sent directly to the plaintiffs but, in at least some instances, the settlement checks are being made out to both the plaintiff and his/her former attorney.

The question is whether, and under what circumstances, the original plaintiffs’ attorneys are entitled to a portion of the settlements paid by the insurance companies in the class action lawsuits. The inquiry comes from an attorney interested in the class action who has received a number of inquiries from the plaintiff’s bar asking about their entitlement to some or all of the class action proceeds. The inquirer asks this committee to provide guidance to the plaintiff’s bar.

D. APPLICABLE RULES

RPC 1.2, RPC 1.5, RPC 1.7(b), RPC 1.14, RPC 4.3, and RPC 4.4.

E. ANALYSIS

RPC 1.5(c)(1) indicates that a contingent fee agreement must be in writing and must state the method by which the fee is to be determined and costs recovered. It further indicates that at the conclusion of a contingent fee matter, the lawyer shall provided the client with a written statement expressing the outcome of the matter, the remittance to the client, and the method by which the remittance was determined. Whether or not a plaintiff’s attorney may be entitled to recover a portion of his/her former client’s settlement in the current class action depends, in part, upon the fee agreement and perhaps the final accounting. If the attorney took the entire fee to which he/she was entitled by the terms of the contingent fee agreement at the conclusion of the former case, then the attorney is not entitled to any of his/her former client’s class action settlement. If the contingent fee agreement was limited to a percentage of the net recovery and did not clearly entitle the attorney to a contingent fee on the PIP recovery, then the attorney is not entitled to recover any of his/her former client’s class action settlement. If the fee agreement was modified prior to the conclusion of the original matter so as not to entitle the attorney to retain a contingent fee on the PIP recovery, whether that modification was in writing or oral, then the attorney is not entitled to recover any of his/her former client’s class action settlement. Thus the only remaining question is whether the former attorney is entitled to a portion of the class action settlement in those cases in which the former attorney was entitled to a contingent fee on the PIP recovery according to the fee agreement, but did not take the fee to which he/she was entitled at the time the former matter was concluded. The substantive answer to the latter question depends upon an analysis of the specific fee agreement and final accounting in the prior matter and the facts involved in the settlement of that matter. Legal principles of waiver, estoppel, accord and satisfaction or other defenses to the former attorney’s claim would need to be examined, and such legal analysis is outside the scope of the Rules of Professional Conduct and this committee. However, the RPCs do provide guidance to both the class action plaintiffs’ attorneys and any former attorney who chooses to make a claim for a portion of his/her former client’s class action settlement. Ethical Duty of the Class Action Plaintiffs’ Current Attorneys The current attorneys for the class action plaintiffs owe an undivided loyalty to their clients, the class action plaintiffs. In the current class action, the plaintiffs’ former attorneys’ interests are adverse to their clients’ in that they have a potential claim against the plaintiffs’ settlement proceeds which they may attempt to assert when the plaintiffs attempt to get their endorsement on the settlement checks. Under RPC 1.4(b), a lawyer has an obligation to explain a matter to the extent reasonably necessary to permit the client to make informed decisions. Under the facts as presented in the inquiry, the attorneys representing the plaintiffs in the class action have an affirmative obligation to advise their clients of the following: (1) that their clients’ former attorneys may assert a claim against their settlement proceeds; (2) that their former attorneys’ interests are adverse to them in the current class action; (3) that there may be defenses to any claim their prior attorney may assert against their settlement proceeds; and (4) what the client should do if the client’s former attorney does assert a claim against the settlement proceeds. The latter may include advising clients of their right to request mediation of a fee dispute through the Washington State Bar Association fee dispute mediation program. The class action attorneys must examine the scope of their own representation of the clients under RPC 1.2 and their own interests to determine whether assisting clients in resolving the adverse claims of their former attorneys is required under the scope of their representation, or whether they may, or must, advise clients to seek other legal assistance if a dispute arises between the client and his/her former attorney over the settlement proceeds. Ethical Duty of the Plaintiff’s Former Attorney Who Chooses To Assert A Claim For A Portion of His/Her Former Client’s Class Action Settlement Proceeds It would be a violation of the RPCs for a plaintiff’s attorney who formerly represented a client in a personal injury action that settled to assert a claim against the current class action settlement proceeds of his/her former client unless: (1) the original fee agreement entitled the attorney to retain a contingent fee on the PIP recovery; (2) the fee agreement was never modified (orally or in writing) to indicate that the attorney would not take a percentage of the PIP recovery; (3) the attorney did not take the percentage of the PIP recovery to which the fee agreement entitled him or her; and, (4) the attorney believes that under the specific facts involved, his or her claim could survive such legal defenses as waiver, estoppel, accord and satisfaction or similar defenses. Under such circumstances, it would not be a violation of the RPCs for a plaintiff’s attorney to assert a claim against his or her former client’s settlement proceeds. The assertion of such a claim is tantamount to a fee dispute, and the RPCs place some restrictions on the manner in which such a claim may be asserted. First, it is clear under RPC 1.7(b) that the plaintiff’s former attorney’s personal interests are adverse to the plaintiff’s on this issue so that the former attorney may not represent or advise the client on any dispute over the disbursement of the settlement proceeds. Because the attorney previously represented the client on the personal injury case from which this dispute arises, there is a potential that the client may mistakenly believe that the attorney is representing the client on this issue, may seek the advice of his or her former attorney, or may be unduly influenced by a simple statement by his or her former attorney that the former attorney believes he or she is entitled to a portion of the class action settlement. Therefore, if a former client approaches an attorney seeking the attorney’s endorsement of a class action settlement check and the attorney chooses to assert a claim against the settlement proceeds, the attorney must advise the client that s/he is not representing the client and that the attorney’s interests are adverse to the client’s on this issue. See RPC 4.3 and RPC 1.7(b). However, the attorney is allowed to advise the former client that s/he is asserting an interest in and a claim to a portion of the proceeds, and the attorney is not required to endorse the check. The attorney also should promptly determine whether the client is represented by counsel, and if so, should not discuss the matter directly with the client. See RPC 4.2 and 4.3. Whether or not the client is represented by counsel on this issue, the attorney should not advise the client to permanently release some or all of the settlement funds to the attorney. The attorney may not ethically provide any legal advice to the client on this issue in which s/he has a personal interest. Under RPC 4.4, if an attorney chooses to assert an adverse claim against the class action settlement proceeds of a former client, the attorney should take prompt action to resolve the dispute with his or her client. This obligation could be satisfied by offers to promptly mediate the dispute or by taking prompt legal action to resolve the claim.

F. CONCLUSION

Whether or not a plaintiff’s attorney is entitled to recover a portion of a former client’s class action settlement proceeds depends upon a detailed factual and legal analysis of the fee agreement, final accounting and the communication between the attorney and his or her former client at the time of the original settlement. Such analysis is beyond the scope of the Rules of Professional Conduct committee. However, the current class action plaintiffs’ attorneys have an ethical obligation to advise their clients of the potential adverse claim that may be asserted against their settlement proceeds by their former attorneys and what they should do if such an adverse claim is asserted. The former attorney should not provide any advice to his or her former client, should determine whether the client is represented by counsel, and should promptly act to resolve any dispute over the disbursement of the settlement proceeds.