Settlement Funds Subject to Statutory Lien
Opinion rules that a lawyer is prohibited from disbursing settlement funds pursuant to the client’s directive if the funds are subject to a perfected lien.
Client was injured in a vehicular collision. Client was not at fault for the collision. Client incurred various medical expenses as a result of the collision. Lawyer represents Client in her personal injury case against the driver who caused the collision. All medical providers perfected liens on Client’s anticipated recovery pursuant to the requirements for perfection of a medical lien on a personal injury settlement set forth in N.C. Gen. Stat. § 44-49. With Client’s consent, Lawyer settled the matter. Lawyer received and deposited Client’s settlement proceeds in his trust account. The settlement proceeds do not cover the entirety of Client’s medical expenses, so Lawyer prepared a proposed pro rata disbursement plan, consistent with N.C. Gen. Stat. §44-50 (lien “shall in no case, exclusive of attorney’s fees, exceed 50% of the amount of damages recovered”), and submits the proposal to Client for approval.
Client disapproves of the proposed disbursement, explaining that she does not want one particular medical provider (Provider A) to receive any funds from the settlement. Lawyer advises Client of Provider A’s perfected lien, but Client instructs Lawyer not to pay Provider A.
May Lawyer disburse Client’s settlement proceeds in accordance with Client’s instructions not to pay Provider A such that the funds designated for Provider A are disbursed to Client instead?
No, if the lien is perfected. Generally, a lawyer must follow a client’s directives as to the disbursement of settlement proceeds. Rule 1.15-2(n) provides that a lawyer “shall promptly pay or deliver to the client, or to third persons as directed by the client, any entrusted property belonging to the client and to which the client is currently entitled.” However, Provider A has perfected a lien against the settlement proceeds pursuant to N.C Gen. Stat. § 44-49. The perfected lien creates a question as to whether Client is “currently entitled” to the share of the settlement proceeds designated for Provider A.
Comment  to Rule 1.15 recognizes that a third party may have a lawful claim (such as a medical provider lien) against specific funds in a lawyer’s custody, and a lawyer “may have a duty under applicable law to protect such third-party claims against wrongful interference by the client.”
The applicable law provides that a lien exists upon any sums recovered as damages for personal injury in any civil action. N.C. Gen. Stat. § 44-49(a). The lien is in favor of any provider to whom the injured person may be indebted for any medical attention rendered in connection with the injury. Id. The lien attaches to all funds paid to a lawyer in compensation for or settlement of the personal injury claim. To perfect the lien, the medical provider must furnish an itemized statement, hospital record or medical report, without charge, for the lawyer to use in the resolution of the personal injury claim and give written notice to the lawyer of the lien claim. N.C. Gen. Stat. § 44-49(b).
Before disbursing settlement proceeds subject to a perfected lien, N.C. Gen. Stat. § 44-50 provides that the lawyer “shall retain out of any recovery or any compensation so received a sufficient amount to pay the just and bona fide claims.” Section 44-50 further states that a client’s instructions for the disbursement of settlement proceeds are “not binding on the disbursing attorney” to the extent that the instructions conflict with the requirements of the medical lien statutes. However, when the client disputes the amount of the claim, N.C. Gen. Stat. § 44-51 provides that payment of the claim is not compelled until the claim is “fully established and determined, in the manner provided by law.” Comment  to Rule 1.15 provides that when a third-party claim “is not frivolous under applicable law, the lawyer must refuse to surrender the property to the client until the claim is resolved” (emphasis added). Therefore, when a statute requires a lawyer not to disburse settlement funds to a client, the lawyer must comply with the law regardless of any instructions by the client to the contrary.
Lawyer must determine whether Provider A’s lien is perfected. If so, Lawyer must segregate and retain the funds in question in Lawyer’s trust account and inform Client that, absent a prompt resolution of Provider A’s claim that is satisfactory to both parties, Lawyer will eventually be obligated to deposit the funds into the court for disposition. In the interim, if a final judgment is entered on Provider A’s claim such that the claim is no longer in dispute, pursuant to N.C. Gen. Stat. § 44-50, Lawyer must pay Provider A over the client’s objections.
To the extent that RPC 69 and RPC 125 conflict with this opinion, they are overruled.