Ethics Hotline & Opinions

ETHICS DOCKET NO. 2009-03

MARYLAND STATE BAR ASSOCIATION, INC.

COMMITTEE ON ETHICS

ETHICS DOCKET NO. 2009-03

Whether and How an Attorney May Take Contingent Fee when Client Is Refusing to sign Insurance Release and/or Settlement Check


Two similar requests for opinions have been considered by the Committee on Ethics of the Maryland State Bar Association.
 
            In Request A, the Attorney offers the following scenario and related questions: 

  1. Attorney represents a Client regarding the Client’s auto accident.  Client agrees to a 33% contingency fee.
  2. After lengthy negotiations, the Client’s insurance company offers the full amount of coverage.  The Client has no underinsured or UIM coverage, and so there are no other proceeds that could possibly provide coverage.
  3. The Client unequivocally agrees to settle the case for the full amount of coverage offered by the insurance company.  The Client signs a Release and the insurance company issues a check made payable to the Attorney and the Client.
  4. The Client thereafter refuses to sign the settlement check.  The Attorney attempts to persuade the Client to sign the check, but the Client continually refuses.
  5. The Attorney would like to obtain the 33% contingency fee from the settlement proceeds, but cannot negotiate the settlement check without the Client’s consent.

Attorney has asked for the Committee’s comments or guidance on how he can obtain his fee in light of the Client’s refusal to endorse the settlement check.  The Committee concludes that it would be appropriate for Attorney to file a civil action to adjudicate his right to a portion of the settlement proceeds and to obtain the right to negotiate the check for the purpose of obtaining his fee and distributing the remainder of the proceeds.

In Request B, the Attorney offers the following scenario and related question:

  1. Attorney represents Clients (a husband and wife) regarding the Clients’ auto accident.  Although the fee arrangement is not clear from the Attorney’s request, it appears that the Clients agreed to a contingency fee.
  2. The Clients agreed to arbitrate the case after Attorney fully informed them of the nature of binding arbitration.  Furthermore, on the day of the arbitration, the Clients and the defendant insurance company entered into a high-low agreement.  At the arbitration, the Arbitrator fully explained to the parties the nature of binding arbitration.
  3. The Arbitrator made an award that dissatisfied the Clients.  The award was enrolled by the Circuit Court and the insurance company issued a settlement check.
  4. The Clients refused to sign the settlement check, and it was returned to the insurance company.  The insurance company issued a second settlement check, which the Clients likewise refuse to sign it.
  5. The Attorney’s fee is to be paid from the settlement check, as well as the fee of prior counsel, which will be deducted from the Attorney’s fee.  In addition, health-care providers hold liens on portions of the settlement.

Attorney has asked for the Committee’s opinion as to what he should do with the settlement check.  

Md. Code, Bus. Occ. & Prof. § 10-501 provides for an attorney’s charging lien, which applies to the proceeds of a settlement that was obtained through the attorney’s legal services:

  1.  Subject to subsection (b) of this section, an attorney at law has a lien on:
    1.  a cause of action or proceeding of a client of the attorney at law from the time the cause of action arises or the proceeding begins; and
    2.  a settlement, judgment, or award that a client receives as a result of legal services that the attorney at law performs.
  2.   A lien under this section attaches only if, and to the extent that, under a specific agreement between an attorney at law and a client, the client owes the attorney at law a fee or other compensation for legal services that produced the settlement, judgment, or award.
  3.  A lien under this section is subordinate only to:
    1.  a prior lien for wages due to an employee of the client for work related to the settlement, judgment, or award; or
    2.  a lien for taxes that the client owes the State.
  4.   An attorney at law may retain property subject to a lien under this section and bring an action for execution under the lien only in accordance with rules that the Court of Appeals adopts.

            Thus, under the set of facts presented to us in Requests A and B, the Attorney has a statutory lien on the settlement proceeds.

            Md. Rule of Prof. Conduct 1.15 requires an attorney to promptly notify a client of the attorney’s receipt of funds to which the client is entitled, but also recognizes an attorney’s right to retain disputed funds:

 

(d) 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 deliver promptly 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 render promptly a full accounting regarding such property.
 
(e) When a lawyer in the course of representing a client is in possession of property in which two or more persons (one of whom may be the lawyer) claim interests, the property shall be kept separate by the lawyer until the dispute is resolved. The lawyer shall distribute promptly all portions of the property as to which the interests are not in dispute.
 
Md. Rule of Prof. Conduct 1.15(d)-(e).1

            In Comment [4] to Md. Rule of Prof. Conduct 1.15, the Court of Appeals recognized that “[l]awyers often receive funds from which the lawyer’s fee will be paid,” and clarified that “[t]he lawyer is not required to remit the client funds that the lawyer reasonably believes represent fees owed.”  The Court of Appeals further suggested that “[t]he disputed portion of the funds must be kept in a trust account and the lawyer should suggest means for prompt resolution of the dispute, such as arbitration.  The undisputed portion of the funds shall be promptly distributed.”2

            In the scenarios described in both Request A and Request B, the Attorney has a lien on the settlement check in the amount of his contingency fee, and is not required to remit that amount to the client.  On the other hand, the Attorney is unable to retain his fee and distribute the undisputed portion to the client and other lien holders, because the client refuses to negotiate the check and receive any amount.

            The Committee addressed a similar scenario in Ethics Docket 2004-22.  In that opinion, we addressed how an attorney should proceed when the attorney is holding a settlement check (which was a result of binding arbitration) that the client refused to endorse because the client’s portion of the settlement was subject to a child-support lien.  Various parties had interests in portions of the settlement, including the attorney, the child-support lien holder, and health-care providers.  We advised that the attorney could file an appropriate civil action to adjudicate his or her right to a portion of the settlement proceeds and to obtain the necessary authority to negotiate the check:

[The attorney], the lien holder[,] and various health care providers all claim some portion of the funds.  The Committee believes that Rule 1.15 allows you to file an action to properly adjudicate the entitlement of all parties to the proceeds of the recovery and to seek authority to negotiate the check and sign the releases necessary to consummate the arbitration. 

Ethics Dock. 2004-22.

            In Ethics Docket 2004-22, and, previously, in Ethics Docket 2000-30, we concluded that an interpleader action filed by counsel is the appropriate vehicle for an attorney holding funds to resolve a dispute between the client and a third party.

            It is unclear from Request A on what basis the Client refuses to negotiate the settlement check.  The Client might dispute the terms or validity of the settlement agreement,3 or the terms or validity of the Attorney’s fee.4  See, e.g., Vermont Ethics Op. 97-10 (noting that where an attorney states that the client will not communicate with him following the attorney’s receipt of a settlement check, “we must assume that the client disputes one or more of the following: the terms of the settlement; the terms of the fee agreement; or the validity or size of one or more of the liens”).  In Request B, it appears that the Clients are simply dissatisfied with the amount of the arbitration award.  Under both scenarios, it is imperative that there be an adjudication of the Attorney’s right to a portion of the settlement proceeds. 5     The establishment of that right must be the basis for any concomitant right to negotiate the settlement check and thereby obtain the fee.6

            If the Client contends that the settlement the Attorney negotiated was not authorized, this makes the Attorney potentially a material witness on the issue of the enforceability of the settlement.  Under these circumstances, the Attorney should advise the client in writing of his or her right to independent counsel.

We express no opinion as to what the appropriate civil action is under the circumstances of this case, i.e. interpleader, declaratory judgment action, action to enforce lien, etc.  That may be a matter of substantive law and/or legal strategy.7  In response to Requests A and B, however, we conclude that, when a client refuses to negotiate a settlement check that is in the possession of an attorney, the attorney may file a civil action to adjudicate his or her right to a portion of the settlement and to negotiate the settlement check. 

The attorney may also file an attorney-lien action under Md. Rule 2-652 to protect his or her fee.  Also, the attorney may be a material witness on the issue of the existence of a binding settlement agreement. Under either of those circumstances, the attorney is adverse to the client’s interests and may not continue to represent the client’s interests, should advise the client in writing of the need for independent counsel, and should withdraw from any pending matter involving the client.

We hope that this response has addressed your inquiries and we thank you for your interest.
 

 

 

  1  Furthermore, Md. Rule of Prof. Conduct 1.5(c) requires that, “[u]pon conclusion of a contingent fee matter, the lawyer shall provide the client with a written statement stating the outcome of the matter, and, if there is a recovery, showing the remittance to the client and the method of its determination.”  See, e.g., Attorney Grievance Comm’n v. Sapero, 400 Md. 461, 929 A.2d 483 (2007). 

  2  Note, however, that the “a lawyer may not hold funds to coerce a client into accepting the lawyer’s contention.”  Md. Rule of Prof. Conduct 1.15, comm. [4].


  3  If the Client disputes the terms or validity of the settlement agreement, the Attorney might be bound to act on behalf of the Client in attempting to rescind the agreement.  See Md. Rule of Prof. Conduct 1.2(a) (requiring that “a lawyer shall abide by a client’s decisions concerning the objectives of the representation”).   However, the attorney will often be a material witness to the settlement, and accordingly, should withdraw.


  4  If the Client disputes the terms or validity of the fee agreement, the Attorney might be obligated to terminate his representation of the Client and pursue his claim for fees.  See Md. Rules of Prof. Conduct 1.16.


  5  Under a variety of circumstances, a lawyer may be required to obtain approval from a judicial authority before taking his or her fee.  See Attorney Grievance Comm’n v. Nichols, 405 Md. 207, 217-18, 950 A.2d 778, 785 (2008) (imposing an indefinite suspension for, inter alia, a lawyer’s failure to obtain the proper authorization from the Bankruptcy Court before taking his fee from a personal-injury case settlement) (and cases cited therein).


  6  Ethics Committees in other states have opined that it is appropriate for an attorney to negotiate a power of attorney authorizing the attorney to endorse any settlement check on behalf of the client.  See California Ethics Op. No. 2002-160;New York Ethics Op. 760.  You have not indicated to us that you entered into any such agreement with the client in this case.


  7  In Comment [4] to Md. Rule of Prof. Conduct 1.15, the Court of Appeals stated that, when an attorney is in possession of disputed funds, he or she should contact the client and “suggest means for prompt resolution of the dispute, such as arbitration.”  In Ethics Dock. 2004-22, we opined that an interpleader action would not violate the Rules of Professional Conduct.  See also Rhode Island Ethics Op. No. 91-66 (stating that an interpleader action would be appropriate and instructing that, “[p]ending the court’s decision, the attorney should not take the legal fee or do anything to diminish the proceeds in any respect”).  Md. Rule 2-652 sets forth the procedure for adjudication of an attorney’s lien under Md. Code, Bus. Occ & Prof. § 10-501.  Any or all of the above actions, as well as others, might be an appropriate means of resolving the dispute and/or obtaining the attorney’s fee.


DISCLAIMER: Opinions of the Maryland State Bar Association (MSBA) Ethics Committee are an uncompensated service of the MSBA. This Committee’s opinions are not binding on the Maryland Court of Appeals, Maryland Attorney Grievance Commission, MSBA or this Committee. The reader is advised that subsequent judicial opinions, revisions to the rules of professional conduct, and future opinions of this Committee may render the Opinions stated herein outdated. As such, the Committee’s opinions are advisory only and neither the Committee nor the MSBA assumes any liability whatsoever with respect thereto. Accordingly, reliance upon the opinions of this Committee is solely at the risk of the user.