Opinion 2003-4
(April 2003)

The inquirer represents the plaintiff in a motor vehicle personal injury case. Counsel for his client's Health Maintenance Organization asserts that inquirer has a duty to hold all settlement proceeds in escrow, pending resolution of a dispute as to whether the HMO has a subrogation lien on those proceeds. Inquirer has shown us a letter from the HMO's counsel, arguing that the provisions of the Motor Vehicle Financial Responsibility Law, 75 Pa.C.S.A. §§1720, et seq., which abrogate certain subrogation rights, are inapplicable to HMOs. Inquirer believes that in the absence of Pennsylvania case law supporting the HMO's position, he has no obligation to place the funds in escrow, and he adds that no interest has been perfected at this point.

This Committee has been asked to render an opinion as to inquirer's duty to hold the funds in his escrow account pending resolution of the dispute, and further asks:

1. How long should they be maintained in escrow?
2. Who, if anyone, has the duty to resolve the issue?
3. In what forum is the issue to be resolved?
4. What protection is available to inquirer from a malpractice claim in the event that the money is wrongly disbursed?

The essential question raised by this fact pattern is as follows: "Where a lawyer reasonably believes that a third party has no colorable claim to a specific fund that the lawyer receives for the benefit of his client, but the third party nevertheless asserts such a claim, what is the nature and extent of the ethical duty, if any, that the lawyer owes to the third party with respect to the disputed portion of the funds?"

The applicable rule, Pa. Rule of Professional Conduct 1.15, provides in pertinent part as follows:

(a) A lawyer shall hold property of clients or third persons that is in a lawyer's possession in connection with a representation separate from the lawyer's own property--

(b) 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 promptly deliver 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 promptly render a full accounting regarding such property.

(c) When in the course of representation a lawyer is in possession of property in which both the lawyer and another person claim interest--

The Comment to Rule 1.15 provides in pertinent part:

"A lawyer should hold property of others with the care required of a professional fiduciary--third parties, such as a client's creditors, may have just claims against funds or other property in a lawyer's custody. A lawyer may have a duty under applicable law to protect such third-party claims against wrongful interference by the client, and accordingly, may refuse to surrender the property to the client. However, a lawyer should not unilaterally assume to arbitrate a dispute between the client and the third party." (N.B. While the Supreme Court of Pennsylvania has never adopted the comments to the Rules, the comments are used to assist in and clarify the interpretation of the Rules.)

Subsection (b) of Rule 1.15 appears to address scenarios involving funds owed to either a client or third person with respect to which there is no dispute. That subsection refers to the funds in which each such person "has" an interest, and provides for prompt notice and disbursement of each person's share. In contrast, subsection (c) appears to address disputes in which the lawyer (not the client) and a third person "claim" an interest. Here, the inquirer does not claim an interest in the portion of the fund that the HMO seeks to collect, and therefore subsection (c) does not apply.

The use of the phrases "just claims" and "duty under applicable law" have been construed to mean that the only type of third party "interest" that the lawyer should preserve on behalf of a non-client for whom he has not agreed to serve as escrow agent is a matured lien on, as opposed to an unsecured interest in, the disputed funds. Similarly, the term "interest" has been deemed to extend to a valid assignment by the insured, and to rights created by order of a court. See, 1 G. Hazard & W. Hodes, The Law of Lawyering: A Handbook on the Model Rules of Professional Conduct (3d ed. 2003), vol. 1, §19.6, Supp. at 19-11. Absent such an interest, the lawyer has no ethical duty to hold back the disputed funds. Id. ("[T]he third party must have a matured legal or equitable claim in order to trigger the lawyer's duty to hold the funds apart from either claimant, pending resolution of the dispute-- Only where there is such a perfected interest might it be said that failure to recognize the third party interest is a species of fraud upon creditors or fraud upon the rendering court.").

This Committee's prior opinions are consistent with that view. See Phila. Professional Guidance Opinions 2000-3; 97-1 (re: duties with respect to a statutory lien e.g., a Department of Public Welfare Lien); 90-4 (holding that a contractual obligation pursuant to an assignment of benefits may constitute 'an interest,' under R.P.C. 1.15(b) so as to trigger a lawyer's obligations under R.P.C. 1.15(b)); and 92-18--("If you are of the opinion that the claimant X has no legal interest in the funds that you are about to receive and that you are under no other legal duty to notify X by virtue of applicable law, Rule 1.15(b) would not impose such a duty--There being no dispute between you [the attorney] and a third person with respect to the fund, you do not have an obligation under 1.15(c) to keep the funds separate until resolution of the dispute between your client and claimant X. The foregoing is based upon the assumption that (a) you have determined that there is no duty under applicable law [see Comment to Rule 1.15 quoted above] to protect the claims of claimant X and (b) no portion of your fee is the subject of a dispute with claimant X.")

The determination of whether, and to what extent, the HMO's claim rises to the level of a colorable interest worthy of protection under Rule 1.15 is a matter of substantive law for the inquirer to determine (see Opinion 2000-3, supra and 92-2), as is the question of whether inquirer may be liable to the HMO for conversion, fraud, money had and received, or otherwise, for release of the disputed funds to the client. See Hazard treatise, supra, 3d ed., §19.6 at p. 19-10 ("If the lawyer turns all of the funds over to the client and they are dissipated or concealed, the third party medical providers might have an action against the lawyer"), citing Restatement of the Law Governing Lawyers §45, comment d. In performing that analysis, inquirer should consider, inter alia, whether the client signed a third party reimbursement form, participation agreement or other document addressing the right of subrogation, whether the HMO plan is an employee benefit plan under ERISA (thereby invoking federal pre-emption), whether the right of subrogation is secured or unsecured, and whether inquirer has represented to the HMO that it would be paid.

Absent a colorable "interest" by the HMO, inquirer may not only be permitted to disburse the client's settlement share to the client immediately, without withholding the unsecured amount that the HMO allegedly is entitled to receive, but may indeed have an affirmative duty to do so. Under those circumstances, inquirer also may have a duty under Rule 1.6 not to reveal the fact of settlement to the third party, absent client consent or circumstances which amount to a crime or fraud. See, Hazard treatise, supra, Illustration 19-1; Colorado Bar Association Ethics Committee, Formal Opinion No. 94 (1993)("Where the third party does not hold an interest as a result of a statutory lien or a contract or a court order, the property should be promptly distributed to the client."); Silver v. Statewide Grievance Committee, 242 Conn. 186, 699 A.2d 151, 156 (1997) (concurring opinion); compare, Connecticut Informal Opinion 95-20 (analyzing different obligations under different scenarios); Opinion 2000-3, supra (re: Rule 1.6). But see contra: Pa. Bar Opinion 92-140 (advising that there is an ethical impediment to distributing funds to a client in the face of a reimbursement claim by conservator for treating hospital, despite absence of lien or assignment).

If, on the other hand, the HMO has a colorable interest, and the client disputes that interest, the disputed portion of the funds must be held and disclosed in accordance with the provisions of Rule 1.15.

In either event, inquirer in his dealings with the HMO's counsel must comply with Rule 4.1, governing Truthfulness in Statements to Others, if and when applicable.

With regard to whether the HMO has an "interest" in the funds of inquirer's client, we note in passing that the HMO's counsel only has cited authorities in support of the proposition that Pennsylvania's statutory limitations on subrogation liens in motor vehicle cases do not apply to HMOs. The HMO offers no support in its letter for the conclusion that it possesses anything more than a common law right of subrogation which has yet to be exercised. Assuming that the funds are held in escrow, the Rules of Professional Conduct do not prescribe any particular method of resolving the dispute, do not address potential defenses to claims arising from wrongful disbursement, nor do they impose a duty upon the attorney holding such funds to initiate an action in any particular forum or in any particular time frame. Those issues would be controlled by the substantive law governing conduct by fiduciaries. Commencing an action for interpleader in a forum having jurisdiction over the fund and the HMO would be one option that inquirer could consider.

Whatever conclusions inquirer reaches regarding the foregoing issues ought to be discussed with the client, consistent with a lawyer's obligations under Rule 1.4.




The Philadelphia Bar Association's Professional Guidance Committee provides, upon request, advice for lawyers facing or anticipating facing ethical dilemmas. Advice is based on the consideration of the facts of the particular inquirer's situation and the Rules of Professional Conduct as promulgated by the Supreme Court of Pennsylvania. The Committee's opinions are advisory only and are based upon the facts set forth. The opinions are not binding upon the Disciplinary Board of the Supreme Court of Pennsylvania or any other Court. They carry only such weight as an appropriate reviewing authority may choose to give it.