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2000 Formal Ethics Opinion 4

January 18, 2001

Acknowledging a Finance Company's Interest in a Client's Recovery

Opinion rules that a lawyer may sign a statement acknowledging a finance company's interest in a client's recovery subject to certain conditions.

Inquiry #1:

Attorney represents Plaintiff in a personal injury action. Plaintiff needed money for living expenses. In exchange for a cash advance, Plaintiff entered into an agreement with Finance Company whereby the company received a partial interest in any recovery Plaintiff might obtain in the personal injury action. Repayment of Finance Company is contingent upon Plaintiff's recovery by settlement or judgment. The interest Finance Company holds in the potential recovery is a fixed dollar amount but Attorney is familiar with other agreements in which a finance company is granted a percentage of the recovery. The agreement does not give Finance Company any right to control or direct the lawsuit. Attorney has no contractual relationship with Finance Company.

Plaintiff provided Attorney with a copy of the agreement with Finance Company and requested Attorney sign a statement acknowledging that Attorney received a copy of the assignment and agreeing to remit payment to Finance Company, pursuant to Plaintiff's agreement, from any recovery realized for Plaintiff. May Attorney sign the statement?

Opinion #1:

Although a lawyer may find a client's assignment of the proceeds of a personal injury recovery to a lender to be repugnant, this may be the only way for an indigent client to obtain the funds necessary for living expenses during the pendency of the client's claim and lawsuit. Therefore, a lawyer may cooperate subject to the requirements of the Revised Rules of Professional Conduct and the dictates of competent representation.

In Charlotte-Mecklenburg Hosp. v. First Georgia Insurance Co. , 340 N.C. 88, __S.E.2d ___ (1995), the North Carolina Supreme Court held that an assignment of the proceeds of a personal injury claim to a medical provider to pay for medical services was valid and could be enforced. The Court found that the statement in the assignment authorizing any one having notice of the assignment to pay the assignee "should alleviate any doubt that the assignment required the defendants [an insurance company and insurance adjusting company] to pay the assigned money to the [assignee]."

Although the Ethics Committee cannot interpret the law, a lawyer who receives notice of an assignment of the proceeds of a personal injury claim should take care to examine the applicable law to determine if the assignment is valid and enforceable. If the assignment appears to be illegal or otherwise unenforceable, the lawyer may not acknowledge or honor the assignment. See, e.g. , Rule 1.2(d). Moreover, competent representation dictates that the lawyer provide the client with legal advice about the client's recourses or refer the client to appropriate legal counsel.

Rule 1.1.

Rule 1.15-2(h) generally requires a lawyer to disburse settlement proceeds in accordance with the client's instructions.

The only exception to this rule arises when the medical provider has managed to perfect a valid physician's lien. In such a situation the lawyer is relieved of any obligation to pay the subject funds to his or her client, and may pay the physician directly if the claim is liquidated, or retain in his or her trust account any amounts in dispute pending resolution of the controversy. 

RPC 69.

Assuming that Attorney determines that assignment in this inquiry is valid (or, if the law is not clear, Attorney believes that the assignment is probably valid) and the effective equivalent of a contractual lien on the recovery proceeds, Attorney may sign an acknowledgment of the assignment subject to certain conditions.

A lawyer must exercise independent professional judgment on behalf of the client. See  Rule 1.7 and comment. If Attorney's ability to represent Plaintiff will be compromised by the extent of Finance Company's interest in the outcome of the case, Attorney should not participate in the arrangement and he should counsel the client on the risks to the representation. Attorney must also preserve the right to re-examine the legality and enforceability of the assignment.

A lawyer may not participate in an agreement that commits the lawyer to act in a way that is adverse to the client's interests. See  Rule 1.7. In addition, a lawyer is prohibited from making a false statement of material fact or law to a third person. Rule 4.1. Therefore, Attorney's written acknowledgment must disclose that, if it is subsequently determined that the assignment does not create a valid lien on the recovery proceeds, Attorney must disburse the recovery funds as instructed by Plaintiff. The acknowledgment must also disclose that, even where Finance Company obtains a valid lien on the recovery proceeds, in the event Plaintiff disputes that the debt is owed (or disputes the amount of the debt), Attorney may hold the disputed funds in his or her trust account until the dispute is resolved, a court orders the release of the funds, or Attorney interpleads the funds.

Finally, RPC 228 prohibits a lawyer from executing an agreement to indemnify the tortfeasor's liability insurance carrier against the unpaid liens of medical providers. At the time the claim is resolved, Attorney must refuse to execute an indemnification agreement for any unpaid lien of Finance Company as well as the unpaid liens of medical providers.

Inquiry #2:

May Attorney remit payment to Finance Company if there is a recovery?

Opinion #2:

Ordinarily, Attorney must disburse the recovery proceeds according to the instructions of Plaintiff. If Plaintiff instructs Attorney to pay Finance Company at the time of disbursement, Attorney must comply with this instruction. See  opinion #1 above. If Plaintiff instructs Attorney to pay the money to Plaintiff instead of Finance Company, Attorney may ignore this instruction only if there is a valid lien against the proceeds or other valid legal assignment of the rights in the proceeds. If Attorney determines that the assignment is valid (or arguably valid) and creates a lien against the proceeds, Attorney may remit payment to Finance Company only if Plaintiff concedes that the debt is owed. If Plaintiff contests the debt, or the amount of the debt, Attorney must avoid the conflict between the interest of the client and interest of Finance Company. See  Rule 1.7. Attorney should hold the disputed funds in the trust account until the dispute is resolved, a court orders disbursement, or Attorney interpleads the funds to the court.

Inquiry #3:

May Attorney refer a client to Finance Company?

Opinion #3:

Yes, if Attorney is satisfied that the company's financing arrangement is legal, Attorney receives no consideration from Finance Company for making the referral, and, in Attorney's opinion, the referral is in the best interest of the client.

Inquiry #4:

May Attorney disclose confidential client information about Plaintiff's claim to assist Finance Company in evaluating the claim? May Attorney provide Finance Company with an opinion on the value of the claim?

Opinion #4:

A lawyer may disclose confidential client information, such as an opinion as to the value of a claim, with a client's consent. Rule 1.6(d)(2). However, given the potential risk that disclosure to a third party, such as Finance Company, may waive the client-lawyer privilege with regard to the information, Attorney should counsel Plaintiff about the potential risk in order that the client's consent to disclosure will be informed.

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