Lawyers tend to have a pretty good grasp on the key tenets of their ethical obligations -especially dealing with “The 3 C’s”: confidentiality, conflict of interest and client funds.  Review of decisions of ethics tribunals from around the country, however, suggest that there may not be as good an understanding of the attorney’s duties to non-clients having an interest in funds that come into the attorney’s possession.

Most states have adopted some form of the ABA Model Rules of Professional Conduct.  ABA Model Rule 1.15(d) provides: “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…” (Emphasis added.)

The classic case: an attorney receives a personal injury settlement for the client and places the funds in the attorney’s client trust account. Obviously the attorney must notify and promptly deliver funds to the client.  But the duties to notify and deliver also extend to lienholders.

In cases in which the attorney knew of and acknowledged the existence of a lien against a personal injury settlement -such as a doctor’s lien, sanctioning the attorney for failing to promptly notify the lienholder of the settlement and to pay the lien is understood.

Less obvious are those cases involving reimbursement rights such as those enjoyed by the Centers for Medicare and Medicaid Services (CMS). If Medicare payments were made to treat a client who settles a personal injury claim based on the treated injuries, CMS has an automatic right of reimbursement.

Attorneys clearly have an ethical obligation to notify CMS when settlement funds are received in a case in which Medicare payments were made to treat the underlying injury, and certainly have an obligation to resolve the CMS right to reimbursement. (In Re Gary James Mitchusson, Arkansas CPC Docket 2003-168).

An attorney can violate Rule 1.15 by failing to notify and honor CMS’s reimbursement right even if the attorney was not aware of CMS’s interest since the attorney “should have known” that Medicare would have a lien. (Matter of Riley, 1994 WL 413173 – Cal Bar Ct 1994).

So, add to the attorney’s To Do List to keep the law license in force: Find out if lienholders are involved / Notify lienholder of settlement / Make reimbursement to lienholder.