Liens reduce client recovery, are based on duties owed to third parties rather than clients, and the issues can be complicated. Lien cases also feature prominently in ethics cases and state bar ethics opinions. They are, to put it mildly, an ethical trap.
Counsel's obligation to protect liens comes from several sources. In Maryland, Rule 19-301.15, and Md. Business Occupations and Professions Code § 10-306 (2022) specifically require attorneys to safeguard property and to use a trust account for property that does not belong to the lawyer.
Maryland statutes are another source. In Md. Labor & Emp. Code Ann. Section 9-902, the General Assembly created a lien in favor of the employer/insurer in workers compensation cases. All states have similar laws.
Federal law also creates statutory rights of recovery. Section 111 of the Medicare, Medicaid and SCHIP Extension Act of 2007 ("MMSEA") imposes a statutory obligation to protect Medicare's interests in any settlement. Under 42 U.S.C. § 1395y(b)(2), plaintiff's lawyers and insurers must protect Medicare's right of recovery or face civil liability. Lawyers are presumed to be "on notice" of all statutory liens.
Liens, therefore, create many ethical traps. One concern is whether an attorney must investigate potential claims against a client's recovery? Absent a statutory lien, the answer is no: A lawyer should not seek claims against a client's recovery. By doing so, the lawyer potentially acts adversely to the client's best interests because a claim may reduce the client's recovery.
Another ethics issue can arise when investigating cases and pursuing discovery. For example, in the ordinary course of a case, counsel may send a record request to a health care provider and learn of an assignment signed by the client. The provider may send a letter to the lawyer asserting a lien or hand the lawyer an assignment signed by the client.
In another situation, a lawyer may want to obtain information from a health insurer about treating providers or medical bills that alerts the carrier to the existence of a third-party liability claim. In both cases, the lawyer has unwillingly received notice of a lien. A lawyer with notice of a valid lien has the obligation to protect the lien. See Virginia LEO 1865.
A third concern is discovery related to health insurance payments and liens. While a plaintiff's counsel may be hesitant to provide lien information, insurance carriers have statutory reporting obligations under the MMSEA. Moreover, defense counsel seeks lien information because it provides key information for damages and settlement negotiations. A carrier's evaluation of a case necessarily involves how much will be needed to satisfy liens because that amount affects the plaintiff's ultimate recovery.
A fourth ethical issue involves following client instructions (Md. Rule 19-301.2) and the duty of confidentiality (Md. Rule 19-301.6). In cases involving third-party claims, attorneys must follow client instructions and disburse funds as directed by the client if a third party no longer holds a lien or the claim is not valid. Counsel must maintain Rule 1.6 confidentiality of counsel's actions involving disbursement of the funds and should not communicate with the third party to the client's detriment.
A fifth issue is when a third party's claim is a general debt of the client, rather than one that specifically attaches to the proceeds of a particular settlement. An example is a debt owed by the client to a creditor unrelated to the personal injury claim. The weight of authority is that the claim must be related to the funds held for a 1.15 obligation to attach.
At the end of the day, the resolution of whether a lien must be honored turns on the validity of the lien. In Maryland State Bar Association's Ethics Committee Opinion 2018-03, counsel inquired about the obligation to protect a third-party's claim when counsel had concerns about the validity of the debt. Specifically, the debt owed by the client to the third party may have been invalid for two reasons — the passage of the statute of limitations and the existence of intervening legislation. The committee's advice focused on the lawyer's duty to analyze the issues.
The takeaway: Avoid the trap and analyze the third-party claims that may affect your case. Doing so should protect you.
Craig Brodsky is a partner with Goodell, DeVries, Leech & Dann LLP in Baltimore. For over 25 years, he has represented attorneys in disciplinary cases and legal malpractice cases, and he has served as ethics counsel to numerous clients. His column in The Daily Record appears on the first Thursday of every month. He can be reached at csb@gdldlaw.com.
This article originally appeared in The Daily Record on June 1, 2023.
Goodell DeVries defends various professionals in Maryland, the District of Columbia, and Virginia, including lawyers and law firms. Many of these cases are ethics matters involving Bar Counsel. If you have questions about the above or are a Maryland lawyer facing discipline, please contact us at EthicsHelp@gdldlaw.com.
