Lienholders, Trust Accounts, and You

5.27.15

The Supreme Court’s recent decision in McVey v. M.L.K. Enterprises (2015 IL 118143) lets Illinois lawyers
know the order of things when it comes to disbursing settlement funds in injury
cases, and the lesson is: we may call medical lienholders “third parties,” but
they’re not third in line.

In McVey, the
plaintiff settled her injury claim for $7,500. The only medical lien that was
adjudicated in the case was a hospital lien, in the stipulated amount of
$2,891.64. The circuit court applied the Health Care Services Lien Act, 770
ILCS 23/10, and ordered that the settlement funds be disbursed in the following
amounts: $2,250 to plaintiff’s attorney for attorney fees ($7,500 x 30%);
$2,500 to the hospital; and $2,750 to the plaintiff. McVey, at 2. In so
ordering, the circuit court was attempting to apply the provision of the Act
that requires no one medical lienholder to receive more than one third of the
total settlement. The court also found, though, that that provision of the Act
was in conflict with the Fifth District Appellate Court’s holding in Stanton
v. Rea
, 2012 IL App (5th) 110187
. In that case, the Appellate Court held
that the amount of a settlement available to health care providers should
exclude costs associated with bringing the case to trial and securing payment
of the judgment. Id. at 2-3. The circuit court in McVey deferred to the Act and to the Supreme Court’s decision in Wendling
v. Southern Illinois Hospital Services
, 242 Ill. 2D 261 (2011), and did not
deduct attorney’s fees and costs from the plaintiff’s settlement prior to
determining the amount owed to the hospital. Id. at 3. The appellate
court reversed based on Stanton, and directed that attorney fees and
costs be deducted prior to determining the hospital’s lien.

The Supreme Court reversed the appellate court and affirmed
the trial court. It held that the Act requires that the “hospital could not ‘receive
more than one-third of the verdict, judgment, award, settlement, or compromise’…[and]
this one-third calculation, and all other calculations contained in section 10,
are to be based upon the ‘verdict, judgment, award, settlement or compromise.’”
McVey, at 5. The Court found no language in the Act that would
specifically allow attorney’s fees and costs to be deducted before computing
the hospital lien, and without that specific authorization, it declined to
allow the deduction. It considered the plaintiff to be “asking us to improperly
shift some of her attorney fees and litigation costs onto the hospital.” Id., at 7.

What does this all have to do with attorneys’ ethical
obligations? Quite a bit. Rule 1.15 of the Rules of Professional Conduct
requires lawyers to hold not just client funds separate from their own funds,
but also those funds due to lienholders or other third parties. It also
requires the lawyer to “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), and where the ownership of any portion of funds held by the
lawyer is in dispute, the lawyer must disburse the non-disputed portion
promptly and hold the rest separate from other funds.

Lawyers’ handling of lienholders’
funds has always been subject to these rules, but the McVey decision throws particular light on the situation by
highlighting the competing interests that various parties can have in
settlement funds. After receiving settlement funds, a lawyer must make sure to
calculate the lienholders’ portions of the settlement correctly, with the
client’s interests in mind but also without shortchanging any third parties. If
anyone disputes the calculation – even and especially the lawyer’s client – the
lawyer must take care to hold any disputed amount in a trust account for as
long as the dispute continues.

But the lawyer need not disadvantage herself in accounting for the
settlement proceeds. The Court’s holding in McVey
does not restrain the lawyer from calculating her fee and cost reimbursement based
on the whole settlement, without deductions for anyone else’s share. The lawyer
and the lienholder would appear to occupy the same position or have the same
priority. This could cause a client – disaffected perhaps by receiving less
of a settlement than anticipated – to complain to the ARDC, which could then
ask the lawyer to respond by providing full records of the disbursement of the
settlement. In that case, the lawyer should be ready not just to provide those
records, but to explain how and why the calculation and disbursements were
consistent with McVey, the Health
Care Services Lien Act, and the Attorney’s Lien Act (770 ILCS 5/1 et seq.).

The client’s complaint in that
situation might not form the basis for further
ARDC inquiry or prosecution. But the ARDC does not shy away from intensive
inquiry into allegations regarding the handling of funds, even if the client’s
actual complaint is misguided. Inquiries that do not result in formal
proceedings can be costly and burdensome; a full-blown disciplinary complaint,
of course, is even more so. Moreover, of the 41 complaints filed by the ARDC in
2014 alleging that lawyers violated Rules 1.15(a) or (d) by mishandling client
funds (as opposed to violating the rules by not keeping appropriate records), at
least 34 – 82% – incorporated
allegations that the lawyer’s conduct in doing so was not just improper but
dishonest. Charges like that multiply the lawyer’s expense, difficulty, and
stress. The best way for lawyers to avoid that is to read and study cases like McVey, and to make sure that their
recordkeeping and trust account disbursement practices are in order.

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